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EX-99.01 - EX-99.01 - NEWBRIDGE BANCORP | g22505exv99w01.htm |
EX-99.02 - EX-99.02 - NEWBRIDGE BANCORP | g22505exv99w02.htm |
EX-31.01 - EX-31.01 - NEWBRIDGE BANCORP | g22505exv31w01.htm |
EX-21.01 - EX-21.01 - NEWBRIDGE BANCORP | g22505exv21w01.htm |
EX-23.01 - EX-23.01 - NEWBRIDGE BANCORP | g22505exv23w01.htm |
EX-32.01 - EX-32.01 - NEWBRIDGE BANCORP | g22505exv32w01.htm |
EX-31.02 - EX-31.02 - NEWBRIDGE BANCORP | g22505exv31w02.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 2009 | 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 Blvd., Suite 400 | ||
Greensboro, North Carolina | 27410 | |
(Address of principal executive offices) | (Zip Code) |
(336) 369-0900
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Name of each exchange | ||
Title of each class | on which registered | |
Common Stock, par value $5.00 per share | Nasdaq Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405
of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by reference to Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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 o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the Registrants voting and nonvoting common equity held by
non-affiliates of the Registrant, based on the average bid and asked price of such common equity on
the last business day of the Registrants most recently completed second fiscal quarter, was
approximately $31.2 million. As of March 10, 2010 (the most recent practicable date), the
Registrant had 15,655,868 shares of Common Stock outstanding.
Documents incorporated by reference Portions of the Proxy Statement for the 2010 Annual Meeting
of Shareholders of NewBridge Bancorp (the Proxy Statement) are incorporated by reference into
Part III hereof.
The Exhibit Index begins on page 88.
NewBridge Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 2009
Table of Contents
Annual Report on Form 10-K for the fiscal year ended December 31, 2009
Table of Contents
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EX-23.01 | ||||||||
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EX-99.01 | ||||||||
EX-99.02 |
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements represent expectations and
beliefs of NewBridge Bancorp (hereinafter referred to as Bancorp or the Company) including but
not limited to Bancorps 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 Annual Report on Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Readers should not place undue
reliance on forward-looking statements as a number of important factors could cause actual results
to differ materially from those in the forward-looking statements. These forward-looking
statements involve estimates, assumptions, risks and uncertainties that could cause actual results
to differ materially from current projections depending on a variety of important factors,
including without limitation:
| revenues are lower than expected; |
||
| credit quality deterioration which could cause an increase in the
provision for credit losses; |
||
| competitive pressure among depository institutions increases
significantly; |
||
| changes in consumer spending, borrowings and savings habits; |
||
| our ability to successfully integrate acquired entities or to
achieve expected synergies and operating efficiencies within expected
time-frames or at all; |
||
| technological changes and security and operations risks
associated with the use of technology; |
||
| the cost of additional capital is more than expected; |
||
| a change in the interest rate environment reduces interest
margins; |
||
| asset/liability repricing risks, ineffective hedging and liquidity risks; |
||
| counterparty risk; |
||
| general economic conditions, particularly those affecting real
estate values, either nationally or in the market area in which we do or
anticipate doing business, are less favorable than expected; |
||
| the effects of the FDIC deposit insurance premiums and
assessments; |
||
| the effects of and changes in monetary and fiscal policies and
laws, including the interest rate policies of the Federal Reserve Board; |
||
| volatility in the credit or equity markets and its effect on the
general economy; |
||
| demand for the products or services of the Company and the Bank,
as well as their ability to attract and retain qualified people; |
||
| the costs and effects of legal, accounting and regulatory
developments and compliance; and |
||
| regulatory approvals for acquisitions cannot be obtained on the
terms expected or on the anticipated schedule. |
Bancorp cautions that the foregoing list of important factors is not exhaustive. See also Risk
Factors which begins on page 13. Bancorp undertakes no obligation to update any forward-looking
statement, whether written or oral, that may be made from time to time, by or on behalf of Bancorp.
3
Table of Contents
PART I
Item 1. | Business |
General
Bancorp is a bank holding company incorporated under the laws of the State of North Carolina (NC)
and registered under the Bank Holding Company Act of 1956, as amended (the BHCA). Bancorps
principal asset is stock of its banking subsidiary, NewBridge Bank (the Bank). Accordingly,
throughout this Annual Report on Form 10-K, there are frequent references to the Bank. The
principal executive offices of Bancorp and the Bank are located at 1501 Highwoods Boulevard, Suite
400, Greensboro, NC 27410. The telephone number is (336) 369-0900 and its website is
www.newbridgebank.com. The Bank maintains operations facilities in Lexington and Reidsville, NC.
Bancorp is the successor entity to LSB Bancshares, Inc., which was incorporated on December 8, 1982
(LSB). On July 31, 2007, FNB Financial Services Corporation (FNB), a bank holding company,
also incorporated in NC and registered under the BHCA, merged with and into LSB in a merger of
equals (the Merger). LSBs name was then changed to NewBridge Bancorp.
The Bank, a NC chartered non-member bank, is the successor entity to Lexington State Bank (LSB
Bank), which was incorporated on July 5, 1949. As a result of the Merger, Bancorp acquired FNB
Southeast, a NC chartered bank, the sole banking subsidiary of FNB. On November 12, 2007, FNB
Southeast merged with and into LSB Bank (the Bank Merger) and the surviving bank changed its name
to NewBridge Bank.
Business of Bank and Other Subsidiaries
Through its branch network, the Bank provides a wide range of banking products to individuals,
small to medium-sized businesses and retail clients in its market areas, including interest bearing
and noninterest bearing demand deposit accounts, certificates of deposits, 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
production and secured and unsecured loans. On December 31, 2009, the Bank expanded its mortgage
production business through its acquisition of the assets of Bradford Mortgage Company, an
established community mortgage company operating principally in the Piedmont Triad Region of NC.
As of December 31, 2009, 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 $2.8 million of loans
outstanding as of December 31, 2009, 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.
Bancorp has one non-bank subsidiary, FNB Financial Services Capital Trust I (FNB Trust), a
Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. Prior
to the Merger, FNB Trust was a subsidiary of FNB. FNB Trust is not consolidated in Bancorps
financial statements.
As part of its operations, Bancorp regularly holds discussions and evaluates the potential
acquisition of, or merger with, various financial institutions and other businesses. Bancorp also
regularly considers the potential disposition of certain assets, branches, subsidiaries, or lines
of business. As a general rule, Bancorp only publicly announces any material acquisitions or
dispositions once a definitive agreement has been reached.
Bancorp operates one reportable segment, the Bank. Reference is made to Item 8 Financial
Statements and Supplementary Data. Management believes that
Bancorp is not dependent upon any
single customer, or a few customers, the loss of any one or more of which would have a material
adverse effect on Bancorps operations.
4
Table of Contents
Market Areas
The Banks primary market area is the Piedmont Triad Region of NC. On December 31, 2009, the Bank
operated 38 branch offices and two loan production offices in its three markets: the Piedmont Triad
Region and Coastal Region of NC and the Shenandoah
Valley Region of Virginia (VA). The following
table lists the Banks branch offices, categorized by region and city.
Piedmont Triad Region:
|
Piedmont Triad Region (continued): |
|
Greensboro (five offices)
|
Madison |
|
Lexington (five offices) (1)
|
Midway |
|
Reidsville (three offices) (1)
|
Rural Hall (1) |
|
Winston-Salem (three offices) (1)
|
Tyro |
|
Thomasville (two offices)
|
Walkertown |
|
Archdale
|
Wallburg |
|
Clemmons
|
Welcome |
|
Danbury |
||
Eden
|
Coastal Region: |
|
High Point
|
Wilmington (two offices) |
|
Jamestown
|
Burgaw |
|
Kernersville |
||
King
|
Shenandoah Valley Region: |
|
Harrisonburg (two offices) (2) |
(1) | During the first quarter of 2010, the Bank closed two branches in
Lexington and one branch each in Winston-Salem, Reidsville and Rural Hall, as part of a plan to
restructure operations in the Piedmont Triad Region. |
|
(2) | On January 27, 2010, the Bank announced that it will close one of its
branches in Harrisonburg, VA during the second quarter of 2010. |
As of December 31, 2009, the Bank operated 33 branches and two loan production offices in the
Piedmont Triad region of North Carolina. The Piedmont Triad region is a 12 county area, located in
the rapidly growing interstate corridor between Charlotte, NC and the Research Triangle Park, and
has a combined population of approximately 1.6 million people. The Piedmont Triad Region includes
the cities of Greensboro, Winston-Salem and High Point, respectively the third, fourth and eighth
largest cities in NC.
The Piedmont Triad Region economy, traditionally centered on the textile, furniture and tobacco
industries, has transitioned to a more service-oriented economy; successfully diversifying into
areas related to transportation, logistics, health care, education and technology. Benefiting the
Piedmont Triad Regions economy are decisions by FedEx to locate a national hub at Piedmont Triad
International Airport (PTIA), and by Honda Aircraft Company to locate its world headquarters at
PTIA.
In addition to its strategic proximity to key markets, the Piedmont Triad Region has a well defined
transportation infrastructure, providing access to both global and national markets. Interstates
I-40, I-85 and I-77 provide both North-South and East-West routes. In addition, local
manufacturers and distribution hubs will have direct access to both Midwest markets and additional
Southeast ports when Interstates I-73 and I-74, which will bisect the Piedmont Triad Region, are
completed. Moreover, extensive rail services are offered by major carriers, Norfolk Southern, CSX
and Amtrak as well as a number of short-line railroads.
The Piedmont Triad Region is home to numerous institutions of higher education, including Wake
Forest University, Wake Forest University Medical Center, North Carolina School of the Arts, Salem
College and Winston-Salem State University (Winston-Salem), High Point University (High Point), two
members of the University of North Carolina system located in Greensboro; the University of North
Carolina at Greensboro and North Carolina A&T State University, and Elon University (Elon). The
Piedmont Triad Region is also home to several well respected private institutions, as well as many
community colleges and technical schools. All are recognized for academic excellence and enhance
the Piedmont Triad Regions business development efforts, particularly in the field of
biotechnology.
5
Table of Contents
As of June 30, 2009, the Bank was the largest community bank in the Piedmont Triad Region, based on
deposit market share.
As of December 31, 2009, the Bank operated three branches in the Coastal Region, which includes
Pender County and New Hanover County, located on the Southeast coast of NC. Wilmington is the
county seat and industrial center of New Hanover County. A historic seaport and a popular tourism
destination, Wilmington has diversified and developed into a major resort area, a busy sea port
(one of NCs two deep water ports), a light manufacturing center, a chemical manufacturing center
and the distribution hub of southeastern NC. During the past 20 years, the Wilmington area has
experienced extensive industrial development and growth in the service and trade sectors.
Industries in the Wilmington region produce fiber optic cables for the communications industry;
aircraft engine parts; pharmaceuticals; nuclear fuel components; and various textile products. The
motion picture industry has a significant presence in the Wilmington area. Wilmington also serves
as a regional retail center, a regional medical center and the home of the University of North
Carolina at Wilmington.
The total population of New Hanover County is approximately 190,000. The County is served by
Interstate 40 and U.S. Highways 17 and 74, major rail connections and national and regional
airlines through facilities at the New Hanover International Airport, located near Wilmington.
As of December 31, 2009, the Bank operated two branches and one loan production office in its
Shenandoah Valley Region, serving the counties of Rockingham and Augusta, VA. Harrisonburg is the
county seat of Rockingham County, centrally located in the Shenandoah Valley in west central VA.
With a population of approximately 40,000, Harrisonburg is an important educational, industrial,
retail, tourism, commercial, agricultural and governmental center, and is home to five colleges and
universities, including James Madison University. Interstate 81, several primary U.S. highways,
the Shenandoah Valley Regional Airport and a major rail connection serve the area.
The following table reflects the Banks deposits and branch locations by region at December 31,
2009, and the Banks rank, by deposit market share as of June 30, 2009 (deposits in thousands):
Deposit Market Share and Branch Locations
December 31, 2009
December 31, 2009
Number of | Deposit Market | |||||||||||
Region | Deposits | Branches | Share Rank (1) | |||||||||
Piedmont Triad |
$ | 1,320,357 | 33 | 1 | ||||||||
Coastal |
109,941 | 3 | 3 | |||||||||
Shenandoah Valley |
69,012 | 2 | 4 |
(1) | As of June 30, 2009. Rank for community financial institutions;
excludes banks greater than $10 billion in assets. |
Deposits
The Bank offers a variety of deposit products to small and medium-sized businesses and retail
clients at interest rates generally competitive with local market conditions. The table below sets
forth the mix of depository accounts at the Bank as a percentage of total deposits of the Bank at
the dates indicated.
As of December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Noninterest-bearing demand |
10.4 | % | 9.0 | % | 10.8 | % | ||||||
Savings,
NOW, MMI |
44.6 | 36.9 | 39.2 | |||||||||
Certificates of deposit |
45.0 | 54.1 | 50.0 | |||||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||
6
Table of Contents
The Bank accepts deposits at its banking offices, all of which have automated teller machines
(ATMs). Its memberships in multiple ATM networks allow customers access to their depository
accounts from ATM facilities throughout the United States. Competitive fees are charged for the use
of its ATM facilities by customers not having an account with the Bank. Deposit flows are
controlled primarily through the pricing of such deposits.
At December 31, 2009, the Bank had $239.1 million in certificates of deposit of $100,000 or more.
The Bank is a member of an electronic network that allows it to post interest rates and attract
certificates of deposit nationally. It also utilizes brokered deposits and deposits obtained
through the Promontory InterFinancial Network, also known as CDARS, to supplement in-market deposit
growth. The accompanying table presents the scheduled maturities of time deposits of $100,000 or
more at December 31, 2009.
Scheduled maturity of time deposits of $100,000 or more | ||||
(In thousands) | ||||
Less than three months |
$ | 105,231 | ||
Three through six months |
55,213 | |||
Seven through twelve months |
56,367 | |||
Over twelve months |
22,246 | |||
Total time deposits $100,000 or more |
$ | 239,057 | ||
See also Note 7 in the Notes to Consolidated Financial Statements of this Annual Report on
Form 10-K.
Marketing
The Bank focuses its marketing efforts on small- to medium-sized businesses and retail clients, and
on achieving certain strategic objectives, including increasing non-interest income and growing
core deposits and loans. The Bank promotes its brand through its association with the Greensboro
minor league baseball team and stadium (NewBridge Bank Park), traditional advertising and
promotions, sponsorship of local events and other community-focused campaigns.
Competition
Commercial banking in North Carolina and Virginia is extremely competitive, due in large part to
intrastate and interstate branching laws. Many of Bancorps competitors are significantly larger
and have greater resources. Bancorp 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. Bancorp
competes in its market areas with some of the largest banking organizations in the Southeast and
nationally, several of which have numerous branches in NC and VA. Bancorps competition is not
limited to financial institutions based in NC and VA. The enactment of federal legislation
authorizing nationwide interstate banking has greatly increased the size and financial resources of
some of Bancorps competitors. Consequently, many of its competitors have substantially higher
lending limits due to their greater total capitalization, and many perform functions for their
customers that Bancorp generally does not offer. Bancorp primarily relies on providing quality
products and services at a competitive price within its market areas. As a result of interstate
banking legislation, Bancorps market is open to future penetration by banks located in other
states, provided that the other states also permit de novo branching and acquisitions by NC and VA
banking institutions, thereby increasing competition.
In the
Piedmont Triad Region, as of June 30, 2009, Bancorp competed with 33 commercial banks and
savings institutions, as well as numerous credit unions. As of that date, Bancorp competed with 19
commercial banks and savings institutions, and several credit unions, in the Coastal Region and 16
commercial banks and several credit unions in the Shenandoah Valley Region.
7
Table of Contents
Employees
At December 31, 2009, Bancorp and its subsidiaries had 494 full time equivalent employees, all of
whom were compensated by the Bank or its subsidiaries. None of Bancorps employees are represented
by a collective bargaining unit, and Bancorp has not recently experienced any type of strike or
labor dispute. Bancorp considers its relationship with its employees to be good.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under both federal and state
law. The following is a brief summary of certain statutes and rules and regulations that affect or
will affect Bancorp, the Bank and the Banks subsidiaries. This summary is qualified in its
entirety by reference to the particular statute and regulatory provisions referred to below, and is
not intended to be an exhaustive description of the statutes or regulations applicable to the
business of Bancorp and the Bank. Supervision, regulation and examination of Bancorp and the Bank
by the regulatory agencies are intended primarily for the protection of depositors rather than
shareholders of Bancorp. Statutes and regulations which contain wide-ranging proposals for
altering the structures, regulations and competitive relationship of financial institutions are
introduced regularly. Bancorp cannot predict whether, or in what form, any proposed statute or
regulation will be adopted or the extent to which the business of Bancorp and the Bank may be
affected by such statute or regulation.
General. There are a number of obligations and restrictions imposed on bank holding companies and
their depository institution subsidiaries by law and regulatory policy that are designed to
minimize potential loss to the depositors of such depository institutions and the Federal Deposit
Insurance Corporation (the FDIC) insurance fund in the event the depository institution becomes
in danger of default or in default. For example, to avoid receivership of an insured depository
institution subsidiary, a holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become undercapitalized with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking agency up to the
lesser of (i) an amount equal to 5% of the banks total assets at the time the bank became
undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the
bank into compliance with all acceptable capital standards as of the time the bank fails to comply
with such capital restoration plan. Bancorp, as a registered bank holding company, is subject to
the regulation of the Board of Governors of the Federal Reserve System (Federal Reserve). Under
a policy of the Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in circumstances where it might
not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to
require a bank holding company to terminate any activity or to relinquish control of a non-bank
subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserves determination
that such activity or control constitutes a serious risk to the financial soundness and stability
of any bank subsidiary of the holding company.
As a result of Bancorps ownership of the Bank, Bancorp is also registered under the bank holding
company laws of North Carolina. Accordingly, Bancorp is subject to supervision and regulation by
the North Carolina Commissioner of Banks (the Commissioner).
U.S. Treasury Capital Purchase Program. Pursuant to the U.S. Department of the Treasury (the
U.S. Treasury) Capital Purchase Program (the CPP), on December 12, 2008, Bancorp issued and
sold to the U.S. Treasury (i) 52,372 shares of Bancorps Fixed Rate Cumulative Perpetual Preferred
Stock, Series A (the Series A Preferred Stock) and (ii) a warrant (the Warrant) to purchase
2,567,255 shares of Bancorps common stock, par value $5.00 per share, for an aggregate purchase
price of $52,372,000 in cash. The Securities Purchase Agreement, dated December 12, 2008, pursuant
to which the securities issued to the U.S. Treasury under the CPP were sold, currently restricts
Bancorp, without the prior approval of the U.S. Treasury, from increasing dividends payable on its
common stock from the last quarterly cash dividend per share ($0.05) declared on the common stock
prior to October 14, 2008, limits Bancorps ability to repurchase shares of its common stock (with
certain exceptions, including the repurchase of its common stock to offset share dilution from
equity-based compensation awards), grants the holders of the Series A Preferred Stock, the Warrant
and the common stock of Bancorp to be issued under the Warrant, certain registration rights, and
subjects Bancorp to certain of the
8
Table of Contents
executive compensation limitations included in the Emergency Economic Stabilization Act of 2008
(EESA), the American Recovery and Reinvestment Act of 2009 (ARRA) and subsequent regulations
issued by the U.S. Treasury.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve has adopted capital
adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve
System and have consolidated assets of $150 million or more. Bank holding companies subject to the
Federal Reserves capital adequacy guidelines are required to comply with the Federal Reserves
risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to
risk-weighted assets is 8%. At least half of the total capital is required to be Tier I capital,
principally consisting of common stockholders equity, noncumulative perpetual preferred stock, and
a limited amount of cumulative perpetual preferred stock less certain goodwill items. The
remainder (Tier II capital) may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock and a limited amount of
the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company
must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3%
in the case of a bank holding company which has the highest regulatory examination rating and is
not contemplating significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum.
Bancorp exceeded all applicable minimum capital adequacy guidelines as of December 31, 2009.
Capital Requirements for the Bank. The Bank, as a NC commercial bank, is required to maintain a
surplus account equal to 50% or more of its paid-in capital stock. As a FDIC insured commercial
bank that is not a member of the Federal Reserve, the Bank is also subject to capital requirements
imposed by the FDIC. Under the FDICs regulations, state nonmember banks that (a) receive the
highest rating during the examination process and (b) are not anticipating or experiencing any
significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated
assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated
minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable
minimum capital requirements as of December 31, 2009.
Dividend and Repurchase Limitations. Bancorps participation in the CPP limits our ability to
repurchase shares of our common stock (with certain exceptions, including the repurchase of our
common stock to offset share dilution from equity-based compensation awards), except with the prior
approval of the U.S. Treasury. See Supervision and RegulationU.S. Treasury Capital Purchase
Program. Additionally, Bancorp must obtain Federal Reserve approval prior to repurchasing common
stock for consideration in excess of 10% of its net worth during any 12-month period unless Bancorp
(i) both before and after the redemption satisfies capital requirements for a well capitalized
bank holding company; (ii) received a one or two rating in its last examination; and (iii) is not
the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by Bancorp are subject to certain
requirements and limitations of NC corporate law, except as set forth in this section, neither the
Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of
Bancorp to pay dividends and repurchase shares.
The ability of Bancorp to pay dividends or repurchase shares is dependent upon Bancorps receipt of
dividends from the Bank. NC commercial banks, such as the Bank, are subject to legal limitations
on the amounts of dividends they are permitted to pay. NC commercial banks may only pay dividends
from undivided profits, which are determined by deducting and charging certain items against actual
profits, including any contributions to surplus required by NC law. The Bank is currently
restricted from paying dividends to Bancorp unless it receives advance approval from the FDIC and
the Commissioner. Also, an insured depository institution, such as the Bank, is prohibited from
making capital distributions, including the payment of dividends, if, after making such
distribution, the institution would become undercapitalized (as such term is defined in the
applicable law and regulations).
During 2008, the Company first reduced its quarterly cash dividend, and later suspended the payment
of cash dividends. As a result of the Companys participation in the CPP, the Company currently
requires prior approval
9
Table of Contents
of the U.S. Treasury to increase dividends payable on its common stock to more than the last
quarterly cash dividend ($0.05 per share) declared prior to October 14, 2008.
Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC.
Under current law, the insurance assessment to be paid by members of the Deposit Insurance Fund,
such as the Bank, is specified in a schedule required to be issued by the FDIC. In 2009, FDIC
assessments for deposit insurance ranged from 12 to 50 basis points per $100 of insured deposits,
depending on the institutions capital position and other supervisory factors. During the first
quarter of 2009, the FDIC instituted a one-time special assessment equal to 5 cents per $100 of
domestic deposits on FDIC insured institutions, which resulted in an additional $970,000 in FDIC
insurance expense for 2009. The assessment rate schedule can change from time to time at the
discretion of the FDIC, subject to certain limits. On November 12, 2009, the FDIC adopted a rule
requiring banks to prepay three years worth of estimated deposit insurance premiums by December
31, 2009. The FDIC exempted the Bank from this rule, and the Bank continues to pay premiums on a
quarterly basis.
Federal Home Loan Bank System. The Federal Home Loan Bank (FHLB) system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required
to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% of the Banks
total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. At December 31, 2009, the Bank was in compliance with these
requirements.
Community Reinvestment. Under the Community Reinvestment Act (CRA), as implemented by
regulations of the FDIC, an insured institution has a continuing and affirmative obligation,
consistent with its safe and sound operation, to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit an institutions
discretion to develop, consistent with the CRA, the types of products and services that it believes
are best suited to its particular community. The CRA requires the federal banking regulators, in
connection with their examinations of insured institutions, to assess the institutions records of
meeting the credit needs of their communities, using the ratings outstanding, satisfactory,
needs to improve, or substantial noncompliance, and to take that record into account in its
evaluation of certain applications by those institutions. All institutions are required to make
public disclosure of their CRA performance ratings. The Bank received a satisfactory rating in
its last CRA examination, which was completed during June 2008.
Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the
problems of insured depository institutions. The extent of these powers will depend upon whether
the institution in question is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, or critically undercapitalized. Under the regulations, an
institution is considered well capitalized if it has (i) a total risk-based capital ratio of 10%
or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5%
or greater, and (iv) is not subject to any order or written directive to meet and maintain a
specific capital level for any capital measure. An adequately capitalized institution is defined
as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based
capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in
the case of an institution with the highest examination rating). An institution is considered (A)
undercapitalized if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I
risk-based capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the
case of an institution with the highest examination rating); (B) significantly undercapitalized
if the institution has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier I
risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C)
critically undercapitalized if the institution has a ratio of tangible equity to total assets
equal to or less than 2%. At December 31, 2009, the Bank had the requisite capital levels to
qualify as well capitalized.
Changes in Control. The BHCA prohibits Bancorp from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings
bank or merging or consolidating with another bank or financial holding company or savings bank
holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval
(or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of
Bancorp. Control is conclusively presumed to exist if,
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among other things, a person acquires more than 25% of any class of voting stock of Bancorp or controls in any manner the election of a majority of the directors of Bancorp. Control is presumed to exist if a
person acquires more than 10% of any class of voting stock, the stock is registered under Section
12 of the Securities Exchange Act of 1934 (the Exchange Act), and the acquiror will be the
largest shareholder after the acquisition.
Federal Securities Law. Bancorp has registered its common stock with the SEC pursuant to Section
12(g) of the Exchange Act. As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to Bancorp.
Transactions with Affiliates. Under current federal law, depository institutions are subject to
the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to
directors, executive officers and principal shareholders. Under Section 22(h), loans to directors,
executive officers and shareholders who own more than 10% of a depository institution (18% in the
case of institutions located in an area with less than 30,000 in population), and certain
affiliated entities of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the institutions loans to one borrower limit (as
discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and shareholders who own more than 10% of
an institution, and their respective affiliates, unless such loans are approved in advance by a
majority of the board of directors of the institution. Any interested director may not
participate in the voting. The FDIC has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director approval is required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant
to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and
principal shareholders be made on terms substantially the same as offered in comparable
transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on
the amount a bank can loan to an executive officer.
Loans to One Borrower. The Bank is subject to the loans to one borrower limits imposed by the
Commissioner, which are substantially the same as those applicable to national banks. Under these
limits, no loans and extensions of credit to any borrower outstanding at one time and not fully
secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired
surplus of the Bank. At December 31, 2009, this limit was $32.3 million. Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired
capital and unimpaired surplus, or $21.5 million.
Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act, enacted in 1999 (the GLB Act),
dramatically changed various federal laws governing the banking, securities and insurance
industries. The GLB Act expanded opportunities for banks and bank holding companies to provide
services and engage in other revenue-generating activities that previously were prohibited to them.
In doing so, it increased competition in the financial services industry, presenting greater
opportunities for our larger competitors which were more able to expand their service and products
than smaller, community-oriented financial institutions, such as the Bank.
USA Patriot Act of 2001. The USA Patriot Act of 2001 was enacted in response to the terrorist
attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The
Act was intended to strengthen the ability of U.S. law enforcement and the intelligence community
to work cohesively to combat terrorism on a variety of fronts. The impact of the Act on financial
institutions of all kinds has been significant and wide ranging. The Act contains sweeping
anti-money laundering and financial transparency laws and requires various regulations, including
standards for verifying customer identification at account opening, and rules to promote
cooperation among financial institutions, regulators, and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (SOX) was signed into law in 2002 and
addresses accounting, corporate governance and disclosure issues. The impact of SOX is
wide-ranging as it applies to all public companies and imposes significant requirements for public
company governance and disclosure requirements.
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In general, SOX established new corporate governance and financial reporting requirements intended
to enhance the accuracy and transparency of public companies reported financial results. It
established new responsibilities for corporate chief executive officers, chief financial officers
and audit committees in the financial reporting process and created a new regulatory body to
oversee auditors of public companies. It backed these requirements with new SEC enforcement tools,
increased criminal penalties for federal mail, wire and securities fraud, and created new criminal
penalties for document and record destruction in connection with federal investigations. It also
increased the opportunity for more private litigation by lengthening the statute of limitations for
securities fraud claims and providing new federal corporate whistleblower protection.
The economic and operational effects of SOX on public companies, including the Company, have been
and will continue to be significant in terms of the time, resources and costs associated with
compliance with its requirements.
Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of
insured depository institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such depository
institutions normal market area. Under these regulations, well capitalized depository
institutions may accept, renew or roll-over such deposits without restriction, adequately
capitalized depository institutions may accept, renew or roll-over such deposits with a waiver
from the FDIC (subject to certain restrictions on payments of rates) and undercapitalized
depository institutions may not accept, renew, or roll-over such deposits. Definitions of well
capitalized, adequately capitalized and undercapitalized are the same as the definitions
adopted by the FDIC to implement the prompt corrective action provisions discussed above.
Taxation. Federal Income Taxation. Financial institutions such as the Bank are subject to the
provisions of the Internal Revenue Code of 1986, as amended (the Code), in the same general
manner as other corporations. The Bank computes its bad debt deduction under the specific
charge-off method.
State Taxation. Under NC law, the Bank is subject to corporate income taxes at a 6.90% rate and an
annual franchise tax at a rate of 0.15%.
Other. Additional regulations require annual examinations of all insured depository institutions
by the appropriate federal banking agency, with some exceptions for small, well-capitalized
institutions and state chartered institutions examined by state regulators, and establish
operational and managerial, asset quality, earnings and stock valuation standards for insured
depository institutions, as well as compensation standards.
The Bank is subject to examination by the FDIC and the Commissioner. In addition, it is subject to
various other state and federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit, equal credit and fair credit reporting laws and laws relating to
branch banking. The Bank, as an insured NC commercial bank, is prohibited from engaging as a
principal in activities that are not permitted for national banks, unless (i) the FDIC determines
that the activity would pose no significant risk to the Deposit Insurance Fund and (ii) the Bank
is, and continues to be, in compliance with all applicable capital standards.
Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering
the structures, regulations and competitive relationships of financial institutions, are introduced
regularly. Neither Bancorp nor the Bank can predict whether or what form any proposed statute or
regulation will be adopted or the extent to which the business of Bancorp or the Bank may be
affected by such statute or regulation.
Available Information
Bancorp makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports available free of charge on its internet website
www.newbridgebank.com, as soon as reasonably practicable after the reports are electronically filed
with the SEC. Any materials that Bancorp files with the SEC may be read and/or copied at the SECs
Public Reference Room at 100 F Street, NE,
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Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SECs website at
www.sec.gov.
Additionally,
Bancorps corporate governance policies, including the charters
of the Audit and Risk Management,
Compensation, and Corporate Governance and Nominating Committees, the Corporate Governance
Guidelines, Code of Business Conduct and Ethics, and Code of Business Conduct and Ethics
for CEO and Senior Financial Officers may also be found under the Investor Relations section of
Bancorps website. A written copy of the foregoing corporate governance policies is available upon
written request to Bancorp.
Item 1A. | Risk Factors |
An investment in Bancorps common stock is subject to risks inherent in Bancorps business. The
material risks and uncertainties that management believes affect Bancorp are described below.
Before making an investment decision, you should carefully consider these risks and uncertainties,
together with all of the other information included or incorporated by reference in this Annual
Report on Form 10-K. These risks and uncertainties are not the only ones facing Bancorp. Additional
risks and uncertainties that management is not aware of or focused on, or that management currently
deems immaterial may also impair Bancorps business operations. This report is qualified in its
entirety by these risk factors.
If any of the following risks actually occur, Bancorps financial condition and results of
operations could be materially and adversely affected. If this were to happen, the value of
Bancorps common stock could decline significantly, and you could lose all or part of your
investment.
Risks Related to Recent Economic Conditions and Governmental Response Efforts
Our business has been and may continue to be adversely affected by current conditions in the
financial markets and economic conditions generally. The global, U.S. and North Carolina economies
are continuing to experience significantly reduced business activity and consumer spending as a
result of, among other factors, disruptions in the capital and credit markets that first occurred
during 2008. Since 2008, dramatic declines in the housing market, with falling home prices and
increasing foreclosures and unemployment, have resulted in significant write-downs of asset values
by financial institutions, including government-sponsored entities and major commercial and
investment banks. A sustained weakness or weakening in business and economic conditions generally
or specifically in the principal markets in which we do business could have one or more of the
following adverse effects on our business:
| a decrease in the demand for loans or other products and services
offered by us; |
||
| a decrease in the value of our loans or other assets secured by
consumer or commercial real estate; |
||
| a decrease in deposit balances due to overall reductions in the
accounts of customers; |
||
| an impairment of certain intangible assets or investment
securities; |
||
| a decreased ability to raise additional capital on terms
acceptable to us or at all; or |
||
| an increase in the number of borrowers who become delinquent,
file for protection under bankruptcy laws or default on their loans or other
obligations to us. An increase in the number of delinquencies, bankruptcies or
defaults could result in a higher level of nonperforming assets, net charge-offs
and provision for credit losses, which would reduce our earnings. |
Until conditions improve, we expect our business, financial condition and results of operations to
continue to be adversely affected.
Increases in FDIC insurance premiums may adversely affect Bancorps net income and profitability.
Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC
and depleted the deposit insurance fund. In addition, the FDIC instituted two temporary programs to
further insure customer deposits at FDIC insured banks: deposit accounts are now insured up to
$250,000 per customer (up from $100,000) and noninterest-bearing transactional accounts are
currently fully insured (unlimited coverage). These
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programs have placed additional stress on the deposit insurance fund. In order to maintain a strong
funding position and restore reserve ratios of the deposit insurance fund, the FDIC has increased
assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a
rule requiring banks to prepay three years worth of estimated deposit insurance premiums by
December 31, 2009. The FDIC exempted the Bank from this prepayment requirement, and the Bank
continues to pay these premiums on a quarterly basis. Bancorp is generally unable to control the
amount of premiums that the Bank is required to pay for FDIC insurance. If there are additional
bank or financial institution failures, or the cost of resolving prior failures exceeds
expectations, the Bank may be required to pay even higher FDIC premiums than the recently increased
levels. These announced increases and any future increases or required prepayments of FDIC
insurance premiums may adversely impact Bancorps earnings and financial condition.
The capital and credit markets have experienced unprecedented levels of volatility. During the
economic downturn, the capital and credit markets experienced extended volatility and disruption.
In some cases, the markets produced downward pressure on stock prices and credit capacity for
certain issuers without regard to those issuers underlying financial strength. If these levels of
market disruption and volatility continue, worsen or abate and then arise at a later date,
Bancorps ability to access capital could be materially impaired. Bancorps inability to access the
capital markets could constrain the Banks ability to make new loans, to meet the Banks existing
lending commitments and, ultimately jeopardize the Banks overall liquidity and capitalization.
Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA
or other legislation or regulations intended to strengthen the U.S. financial system, could
adversely affect us. Recent government efforts to strengthen the U.S. financial system, including
the implementation of ARRA, EESA, the TLGP and special assessments imposed by the FDIC, subject
participants to additional regulatory fees and requirements, including corporate governance
requirements, executive compensation restrictions, restrictions on declaring or paying dividends,
restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions
against golden parachute payments. These requirements, and any other requirements that may be
subsequently imposed, may have a material and adverse affect on our business, financial condition,
and results of operations.
Our participation in the CPP imposes restrictions and obligations on us that limit our ability to
increase dividends, repurchase shares of our common stock and access the capital markets. On
December 12, 2008, we issued and sold (i) 52,372 shares of Series A Preferred Stock and (ii) a
Warrant to purchase 2,567,255 shares of Bancorps common stock, par value $5.00 per share, to the
U.S. Treasury as part of its CPP. Prior to December 12, 2011, unless we have redeemed all of the
Series A Preferred Stock or the U.S. Treasury has transferred all of the Series A Preferred Stock
to a third party, the Securities Purchase Agreement pursuant to which such securities were sold,
among other things, limits the payment of dividends on our common stock to a maximum quarterly
dividend of $0.05 per share without prior regulatory approval, limits our ability to repurchase
shares of our common stock (with certain exceptions, including the repurchase of our common stock
to offset share dilution from equity-based compensation awards), and grants the holders of such
securities certain registration rights which, in certain circumstances, impose lock-up periods
during which we would be unable to issue equity securities. In addition, unless we are able to
redeem the Series A Preferred Stock during the first five years, the dividends on this capital will
increase substantially at that point, from 5% to 9%. Depending on market conditions at the time,
this increase in dividends could significantly impact our liquidity.
The limitations on incentive compensation contained in the ARRA and subsequent regulations may
adversely affect our ability to retain our highest performing employees. In the case of a company
such as Bancorp that received CPP funds, the ARRA, and subsequent regulations issued by the U.S.
Treasury, contain restrictions on bonus and other incentive compensation payable to the companys
senior executive officers. As a consequence, we may be unable to create a compensation structure
that permits us to retain our highest performing employees and attract new employees of a high
caliber. If this were to occur, our businesses and results of operations could be adversely
affected.
The soundness of other financial institutions could adversely affect us. Since mid-2007, the
financial services industry as a whole, as well as the securities markets generally, have been
materially and adversely affected by
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significant declines in the values of nearly all asset classes and by a serious lack of liquidity.
Financial institutions in particular have been subject to increased volatility and an overall loss
in investor confidence.
Our ability to engage in routine funding transactions could be adversely affected by the actions
and commercial soundness of other financial institutions. Financial services companies are
interrelated as a result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers and dealers, commercial
banks, and other institutional clients.
From time to time, we utilize derivative financial instruments, primarily to hedge our exposure to
changes in interest rates, but also to hedge cash flow. By entering into these transactions and
derivative instrument contracts, we expose ourselves to counterparty credit risk in the event of
default of our counterparty or client. When the fair value of a derivative contract is in an asset
position, the counterparty has a liability to us, which creates credit risk for us. We attempt to
minimize this risk by selecting counterparties with investment grade credit ratings, limiting our
exposure to any single counterparty and regularly monitoring our market position with each
counterparty. Nonetheless, defaults by, or even rumors or questions about, one or more financial
services companies, or the financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other institutions. In addition, our
credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated
at prices not sufficient to recover the full amount of the loan due us. There is no assurance that
any such losses would not materially and adversely affect our businesses, financial condition or
results of operations.
Market developments may adversely affect our industry, business and results of operations.
Significant declines in the housing market, with falling home prices and increasing foreclosures
and unemployment, have resulted in significant write-downs of asset values by many financial
institutions, including government-sponsored entities and major commercial and investment banks.
These write-downs, initially of mortgage-backed securities but spreading to credit default swaps
and other derivative securities, caused many financial institutions to seek additional capital, to
merge with larger and stronger institutions and, in some cases, to fail. Bancorp has experienced
significant challenges, its credit quality has deteriorated and its net income and results of
operations have been adversely impacted. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and institutional investors have
reduced, and in some cases, ceased to provide funding to borrowers including other financial
institutions. Although to date Bancorp and the Bank remain well capitalized, and have performed
better than many of their peers, we are part of the financial system and a systemic lack of
available credit, a lack of confidence in the financial sector, increased volatility in the
financial markets and/or reduced business activity could materially adversely affect our business,
financial condition and results of operations.
Risks Associated with Our Business
We rely on dividends from the Bank for most of our revenue. Bancorp is a separate and distinct
legal entity from the Bank. Bancorp receives substantially all of its revenue from dividends
received from the Bank. These dividends are the principal source of funds to pay dividends on
Bancorps common and preferred stock, and interest and principal on its outstanding debt
securities. Various federal and/or state laws and regulations limit the amount of dividends that
the Bank may pay to Bancorp. In the event the Bank is unable to pay dividends to Bancorp, Bancorp
may not be able to service debt, pay obligations, or pay dividends on Bancorps common stock. The
inability to receive dividends from the Bank could have a material adverse effect on Bancorps
business, financial condition and results of operations. See Item 1 Business Supervision and
Regulation and Note 19 of the Notes to the Consolidated Financial Statements.
The Bank is exposed to risks in connection with the loans it makes. A significant source of risk
for Bancorp and the Bank arises from the possibility that losses will be sustained by the Bank
because borrowers, guarantors and related parties may fail to perform in accordance with the terms
of their loans. The Bank has underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for loan losses, that it believes are
appropriate to minimize this risk by assessing the likelihood of nonperformance,
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tracking loan performance and diversifying its loan portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could adversely affect the Banks results of
operations.
Our allowance for loan losses may be insufficient. All borrowers carry the potential to default
and our remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.)
may not fully satisfy money previously lent. We maintain an allowance for loan losses, which is a
reserve established through a provision for loan losses charged to expense, which represents
managements best estimate of probable credit losses that have been incurred within the existing
portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for
estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan
losses reflects managements continuing evaluation of industry concentrations; specific credit
risks; loan loss experience; current loan portfolio quality; present economic, political, and
regulatory conditions; and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan losses inherently involves a high
degree of subjectivity and requires us to make significant estimates of current credit risks using
existing qualitative and quantitative information, all of which may undergo material changes.
Changes in economic conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans, and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. In addition, bank regulatory
agencies periodically review our allowance for loan losses and may require an increase in the
provision for loan losses or the recognition of additional loan charge offs, based on judgments
different than those of management. An increase in the allowance for loan losses results in a
decrease in net income, and possibly risk-based capital, and may have a material adverse effect on
our financial condition and results of operations.
If the value of real estate in the markets we serve were to decline materially, a significant
portion of our loan portfolio could become under-collateralized, which could have a material
adverse effect on us. At December 31, 2009, our loans secured by real estate totaled $1.22
billion, or 83.4% of total loans. With these loans concentrated within our three markets, the
Piedmont Triad Region, Coastal Region and Shenandoah Valley Region, a decline in local economic
conditions in these markets could adversely affect the value of the real estate collateral securing
our loans. A decline in property values would diminish our ability to recover on defaulted loans by
selling the real estate collateral, making it more likely that we would suffer losses on defaulted
loans. See Allocation of Allowance for Credit Losses in the accompanying Managements Discussion
and Analysis of Financial Condition and Results of Operations for further discussion related to the
Banks process for determining the appropriate level of the allowance for possible credit losses.
Additionally, a decrease in asset quality could require additions to our allowance for loan losses
through increased provisions for loan losses, which would negatively impact our profits. Also, a
decline in local economic conditions may have a greater effect on our earnings and capital than on
the earnings and capital of financial institutions whose real estate loan portfolios are more
geographically diverse. Real estate values are affected by various factors in addition to local
economic conditions, including, among other things, changes in general or regional economic
conditions, governmental rules or policies, and natural disasters.
Our commercial real estate lending may expose us to risk of loss and hurt our earnings and
profitability. We regularly make loans secured by commercial real estate. These types of loans
generally have higher risk-adjusted returns and shorter maturities than traditional one-to-four
family residential mortgage loans. Further, loans secured by commercial real estate properties are
generally for larger amounts and involve a greater degree of risk than one to four family
residential mortgage loans. Payments on loans secured by these properties are often dependent on
the income produced by the underlying properties which, in turn, depends on the successful
operation and management of the properties. Accordingly, repayment of these loans is subject to
adverse conditions in the real estate market or the local economy. In addition, many economists
believe that deterioration in income producing commercial real estate is likely to worsen as
vacancy rates continue to rise and absorption rates of existing square footage continue to decline.
Because of the current general economic slowdown, these loans represent higher risk, could result
in an increase in our total net-charge offs and could require us to increase our allowance for loan
losses, which could have a material adverse effect on our financial condition or results of
operations. At December 31, 2009, our loans secured by commercial real estate totaled $636.5
million, which represented 43.5% of total loans, which is below the average percentage
concentration for our peer group. For the year ended December 31, 2009, we had net charge-offs of
loans secured by commercial real estate of $18.9 million, an increase of $8.7 million when compared
to the same year-ago period. While we seek to minimize
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these risks in a variety of ways, there can be no assurance that these measures will protect
against credit-related losses.
Our construction loans and land development loans involve a higher degree of risk than other
segments of our loan portfolio. A portion of our commercial real estate portfolio described above
is comprised of construction loans and land development loans. Construction financing typically
involves a higher degree of credit risk than other commercial real estate lending. Risk of loss on
a construction loan is largely dependent upon the accuracy of the initial estimate of the
propertys value at completion of construction and the bid price and estimated cost (including
interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be
required to advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to
the maturity of the loan, with a project whose value is insufficient to assure full repayment. When
lending to builders, the cost of construction breakdown is provided by the builder, as well as
supported by the appraisal. Although our underwriting criteria are designed to evaluate and
minimize the risks of each construction loan, there can be no guarantee that these practices will
safeguard against material delinquencies and losses to our operations. Construction and land
development loans are dependent on the successful completion of the projects they finance, however,
in many cases such construction and development projects in our primary market areas are not being
completed in a timely manner, if at all. At December 31, 2009, we had loans of $177.3 million, or
12.1% of total loans, outstanding to finance construction and land development, which is below the
average percentage concentration for our peer group. For the year ended December 31, 2009, we had
net charge-offs of construction and land development loans of $11.6 million, an increase of $4.4
million when compared to the same year-ago period.
Our lending on unimproved land may expose us to a greater risk of loss and may have an adverse
effect on results of operations. A portion of our residential and commercial lending is secured by
unimproved land. Loans secured by unimproved land are generally more risky than loans secured by
improved property for one to four family residential mortgage loans. Since unimproved land is
generally held by the borrower for investment purposes or future use, payments on loans secured by
unimproved land will typically rank lower in priority to the borrower than a loan the borrower may
have on their primary residence or business. These loans are susceptible to adverse conditions in
the real estate market and local economy. At December 31, 2009, loans secured by unimproved
property totaled $44.7 million, or 3.1% of our loan portfolio.
If the Bank loses key employees with significant business contacts in its market areas, its
business may suffer. The Banks success is largely dependent on the personal contacts of our
officers and employees in its market areas. If the Bank loses key employees temporarily or
permanently, this could have a material adverse effect on the business. The Bank could be
particularly affected if its key employees go to work for competitors. The Banks future success
depends on the continued contributions of its existing senior management personnel, many of whom
have significant local experience and contacts in its market areas. The Bank has employment
agreements or non-competition agreements with several of its senior and executive officers in an
attempt to partially mitigate this risk.
Bancorps growth strategy may not be successful. As a strategy, Bancorp seeks to increase the size
of its franchise by pursuing business development opportunities. Bancorp can provide no assurance
that it will be successful in increasing the volume of Bancorps loans and deposits at acceptable
risk levels and upon acceptable terms, expanding its asset base while managing the costs and
implementation risks associated with this growth strategy. There can be no assurance that any
expansion will be profitable or that Bancorp will be able to sustain its growth, either through
internal growth or through successful expansions of its banking markets, or that Bancorp will be
able to maintain sufficient levels of capital to support its continued growth. If further
deterioration of the Banks credit quality should occur, the need to preserve capital levels above
the minimum to be deemed well capitalized could further restrict the Banks ability to pursue a
growth strategy.
The Bank is subject to interest rate risk. The Banks earnings and cash flows are largely dependent
upon its net interest income. Net interest income is the difference between interest income earned
on interest-earning assets such as loans and investment securities and interest expense paid on
interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly
sensitive to many factors that are beyond the Banks control,
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including general economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest
rates, could influence not only the interest the Bank receives on loans and investment securities
and the amount of interest it pays on deposits and borrowings, but such changes could also affect
(i) the Banks ability to originate loans and obtain deposits, (ii) the fair value of the Banks
financial assets and liabilities, and (iii) the average duration of certain of the Banks
interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other
borrowings increase at a faster rate than the interest rates received on loans and other
investments, the Banks net interest income and therefore earnings, could be adversely affected.
Earnings could also be adversely affected if the interest rates received on loans and other
investments fall more quickly than the interest rates paid on deposits and other borrowings. In
addition, there are costs associated with the Banks risk management techniques, and these costs
could be material. Fluctuations in interest rates are not predictable or controllable and,
therefore, there can be no assurances of the Banks ability to continue to maintain a consistent,
positive spread between the interest earned on the Banks earning assets and the interest paid on
the Banks interest-bearing liabilities. See Item 7A Quantitative and Qualitative Disclosures
about Market Risk for further discussion related to Bancorps management of interest rate risk.
We may face increasing deposit-pricing pressures, which may, among other things, reduce our
profitability. Checking and savings account balances and other forms of deposits can decrease when
our deposit customers perceive alternative investments, such as the stock market or other
non-depository investments, as providing superior expected returns or seek to spread their deposits
over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes
have made it more convenient for bank customers to transfer funds into alternative investments,
including products offered by other financial institutions or non-bank service providers.
Additional increases in short-term interest rates could increase transfers of deposits to higher
yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including
deposit pricing, can increase our costs. When bank customers move money out of bank deposits in
favor of alternative investments or into higher yielding deposits, or spread their accounts over
several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding
costs.
Bancorps operating results and financial condition would likely suffer if there is deterioration
in the general economic condition of the areas in which the Bank does business. Unlike larger
national or other regional banks that are more geographically diversified, the Bank primarily
provides services to customers located in the Piedmont Triad Region and Coastal Region in NC and
the Shenandoah Valley Region in VA. Because the Banks lending and deposit-gathering activities are
concentrated in these markets, particularly the Piedmont Triad Region, the Bank will be affected by
the business activity, population, income levels, deposits and real estate activity in these
markets. Adverse developments in local industries have had and could continue to have a negative
affect on the Banks financial condition and results of operations. Even though the Banks
customers business and financial interest may extend well beyond these market areas, adverse
economic conditions that affect these market areas could reduce the Banks growth rate, affect the
ability of the Banks customers to repay their loans and generally affect Bancorps financial
condition and results of operations. A further decline in general economic conditions in the
Banks market areas, caused by inflation, recession, unemployment or other factors which are beyond
the Banks control would also impact these local economic conditions and could have an adverse
affect on Bancorps financial condition and results of operations.
Bancorp and the Bank compete with much larger companies for some of the same business. The banking
and financial services business in our market areas continues to be a competitive field and it is
becoming more competitive as a result of:
| Changes in regulations; |
||
| Changes in technology and product delivery systems; and |
||
| The accelerating pace of consolidation among financial services
providers. |
We may not be able to compete effectively in our markets, and our results of operations could be
adversely affected by the nature or pace of change in competition. We compete for loans, deposits
and customers with various bank and nonbank financial services providers, many of which are much
larger in total assets and capitalization, have greater access to capital markets and offer a
broader array of financial services.
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Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and
capital from negative public opinion, is inherent in our business. Negative public opinion could
adversely affect our ability to keep and attract customers and expose us to adverse legal and
regulatory consequences. Negative public opinion could result from our actual or alleged conduct in
any number of activities, including lending practices, corporate governance, regulatory compliance,
mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information,
and from actions taken by government regulators and community organizations in response to that
conduct.
The Bank is subject to environmental liability risk associated with lending activities. A
significant portion of the Banks loan portfolio is secured by real property. During the ordinary
course of business, the Bank may foreclose on and take title to properties securing certain loans.
In doing so, there is a risk that hazardous or toxic substances could be found on these properties.
If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require the Bank to incur
substantial expenses and may materially reduce the affected propertys value or limit the Banks
ability to use or sell the affected property. In addition, future laws or more stringent
interpretations of enforcement policies with respect to existing laws may increase the Banks
exposure to environmental liability. Although the Bank has policies and procedures to perform an
environmental review before initiating any foreclosure action on real property, these reviews may
not be sufficient to detect all potential environmental hazards. The remediation costs and any
other financial liabilities associated with an environmental hazard could have a material adverse
effect on Bancorps financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers
and counterparties. In deciding whether to extend credit or enter into other transactions, we may
rely on information furnished by or on behalf of customers and counterparties, including financial
statements, credit reports, and other financial information. We may also rely on representations of
those customers, counterparties, or other third parties, such as independent auditors, as to the
accuracy and completeness of that information. Reliance on inaccurate or misleading financial
statements, credit reports, or other financial information could cause us to enter into unfavorable
transactions, which could have a material adverse effect on our financial condition and results of
operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition,
results of operations and cash flows. Liquidity is essential to our business. Our ability to
implement our business strategy will depend on our ability to obtain funding for loan originations,
working capital, possible acquisitions and other general corporate purposes. An inability to raise
funds through deposits, borrowings, securities sold under repurchase agreements, the sale of loans
and other sources could have a substantial negative effect on our liquidity. We do not anticipate
that our retail and commercial deposits will be sufficient to meet our funding needs in the
foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances,
securities sold under agreements to repurchase and other wholesale funding sources to obtain the
funds necessary to implement our growth strategy.
Our access to funding sources in amounts adequate to finance our activities or on terms which are
acceptable to us could be impaired by factors that affect us specifically or the financial services
industry or economy in general, including a decrease in the level of our business activity as a
result of a downturn in the markets in which our loans are concentrated or adverse regulatory
action against us. Our ability to borrow could also be impaired by factors that are not specific to
us, such as a disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets. To the extent we are not
successful in obtaining such funding, we will be unable to implement our strategy as planned which
could have a material adverse effect on our financial condition, results of operations and cash
flows.
Changes in our accounting policies or in accounting standards could materially affect how we report
our financial results and condition. Our accounting policies are fundamental to understanding our
financial results and condition. Some of these policies require use of estimates and assumptions
that may affect the value of our assets or liabilities and financial results. Some of our
accounting policies are critical because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain and
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because it is likely that materially different amounts would be reported under different conditions
or using different assumptions.
From time to time the Financial Accounting Standards Board (the FASB) and the SEC change the
financial accounting and reporting standards or the interpretation of those standards that govern
the preparation of our external financial statements. These changes are beyond our control, can be
hard to predict and could materially impact how we report our results of operations and financial
condition. We could be required to apply a new or revised standard retroactively, resulting in our
restating prior period financial statements in material amounts.
Impairment of investment securities, certain other intangible assets, or deferred tax assets could
require charges to earnings, which could result in a negative impact on our results of operations.
In assessing the impairment of investment securities, management considers the length of time and
extent to which the fair value has been less than cost, the financial condition and near-term
prospects of the issuers, and the intent and ability of Bancorp to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the
near term. Under current accounting standards, certain other intangible assets with indeterminate
lives are no longer amortized but, instead, are assessed for impairment periodically or when
impairment indicators are present. Assessment of certain other intangible assets could result in
circumstances where the applicable intangible asset is deemed to be impaired for accounting
purposes. Under such circumstances, the intangible assets impairment would be reflected as a
charge to earnings in the period during which such impairment is identified. In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The impact of each of these impairment matters
could have a material adverse effect on our business, results of operations, and financial
condition.
Core processing system conversion planned. The Bank plans to convert its core processing
system during 2010 in order to enhance its level of customer service and internal efficiency. The
replacement of our core processing systems has wide-reaching impacts on our internal operations and
business. We can provide no assurance that the amount of this investment will not exceed our
expectations and result in materially increased levels of expense or asset impairment charges.
There is no assurance that this initiative will achieve the expected cost savings or result in a
positive return on our investment. Additionally, if our new core system does not operate as
intended, or is not implemented as planned, there could be disruptions in our business which could
adversely affect our financial condition and results of operations.
Technological advances impact Bancorps business. The banking industry continues to undergo
technological changes with frequent introductions of new technology-driven products and services.
In addition to improving customer services, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Bancorps future success will depend, in part,
on our ability to address the needs of the Banks customers by using technology to provide products
and services that will satisfy customer demands for convenience as well as to create additional
efficiencies in operations. Many competitors have substantially greater resources to invest in
technological improvements. The Bank may not be able to effectively implement new technology-driven
products and services or successfully market such products and services to its customers.
We rely on other companies to provide key components of our business infrastructure. Third party
vendors provide key components of our business infrastructure such as internet connections, network
access and core application processing. While we have selected these third party vendors carefully,
we do not control their actions. Any problems caused by these third parties, including as a result
of their not providing us their services for any reason or their performing their services poorly,
could adversely affect our ability to deliver products and services to our customers and otherwise
to conduct our business. Replacing these third party vendors could also entail significant delay
and expense.
Our information systems may experience an interruption or breach in security. We rely heavily
on communications and information systems to conduct our business. Any failure, interruption, or
breach in security or operational integrity of these systems could result in failures or
disruptions in our customer relationship management, general ledger, deposit, loan, and other
systems. While we have policies and procedures designed
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to prevent or limit the effect of the failure, interruption, or security breach of our
information systems, we cannot assure you that any such failures, interruptions, or security
breaches will not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures, interruptions, or security breaches of our information systems could
damage our reputation, result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any of which could
have a material adverse effect on our financial condition and results of operations.
Government regulations may prevent or impair Bancorps ability to pay dividends, engage in mergers
or operate in other ways. Current and future legislation and the policies established by federal
and state regulatory authorities will affect our operations. The Bank is subject to supervision and
periodic examination by the FDIC and the Commissioner. Bancorp is subject to regulation by the
Federal Reserve and the Commissioner. Banking regulations, designed primarily for the protection of
depositors, may limit the growth and the return to Bancorps stockholders by restricting certain
activities, such as:
| The payment of dividends to our stockholders; |
||
| Possible mergers with or acquisitions of or by other institutions; |
||
| Our desired investments; |
||
| Loans and interest rates on loans; |
||
| Interest rates paid on our deposits; |
||
| The possible expansion of our branch offices; and |
||
| Our ability to provide securities or trust services. |
The Bank also is subject to capitalization guidelines set forth in federal legislation, and could
be subject to enforcement actions to the extent that it is found by regulatory examiners to be
undercapitalized. Bancorp cannot predict what changes, if any, will be made to existing federal and
state legislation and regulations or the effect that such changes may have on Bancorps future
business and earnings prospects. The cost of compliance with regulatory requirements may adversely
affect our ability to operate profitably.
Unpredictable catastrophic events could have a material adverse effect on Bancorp. The occurrence
of catastrophic events such as hurricanes, tropical storms,
earthquakes, pandemic disease,
windstorms, floods, severe winter weather (including snow, freezing water, ice storms and
blizzards), fires and other catastrophes could adversely affect Bancorps consolidated financial
condition or results of operations. Unpredictable natural and other disasters could have an adverse
effect on the Bank in that such events could materially disrupt its operations or the ability or
willingness of its customers to access the financial services offered by the Bank. The incidence
and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to
mitigate its exposure to certain catastrophic events, these events could nevertheless reduce
Bancorps earnings and cause volatility in its financial results for any fiscal quarter or year and
have a material adverse effect on Bancorps financial condition and/or results of operations.
Risks Related to our Common Stock
Our stock price can be volatile. Stock price volatility may make it more difficult for you to
resell your common stock when you want and at prices you find attractive. Our stock price can
fluctuate significantly in response to a variety of factors including, among other things:
| Actual or anticipated variations in quarterly results of
operations; |
||
| Recommendations by securities analysts; |
||
| Operating results and stock price performance of other companies
that investors deem comparable to us; |
||
| News reports relating to trends, concerns, and other issues in
the financial services industry; |
||
| Perceptions in the marketplace regarding us and/or our
competitors; |
||
| New technology used or services offered by competitors;
|
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| Significant acquisitions or business combinations, strategic
partnerships, joint ventures, or capital commitments by or involving us or our
competitors; and |
||
| Changes in government regulations. |
General market fluctuations, industry factors, and general economic and political conditions and
events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends,
could also cause our stock price to decrease regardless of operating results.
Bancorps trading volume is low compared with larger national and regional banks. Bancorps common
stock is traded on the NASDAQ Global Select Market. However, the trading volume of Bancorps common
stock is relatively low when compared with more seasoned companies listed on the NASDAQ, the NYSE
or other consolidated reporting systems or stock exchanges. Thus, the market in Bancorps common
stock may be limited in scope relative to other larger companies. In addition, Bancorp cannot say
with any certainty that a more active and liquid trading market for its common stock will develop.
Bancorp has issued preferred stock and subordinated debentures, all of which rank senior to our
common stock. Bancorp has issued 52,372 shares of Series A Preferred Stock. This series of
preferred stock ranks senior to shares of our common stock. As a result, Bancorp must make dividend
payments on the preferred stock before any dividends can be paid on the common stock and, in the
event of our bankruptcy, dissolution or liquidation, the holders the preferred stock must be
satisfied before any distributions can be made on the common stock. If Bancorp does not remain
current in the payment of dividends on the Series A Preferred Stock, no dividends may be paid on
the common stock. In addition, Bancorp has issued $25.8 million in subordinated debentures in
connection with its issuance of trust preferred securities. These debentures also rank senior to
the common stock.
Our preferred stock reduces net income available to holders of our common stock and earnings per
common share and the Warrant may be dilutive to holders of our common stock. The dividends declared
on our preferred stock will reduce any net income available to holders of common stock and our
earnings per common share. The preferred stock will also receive preferential treatment in the
event of sale, merger, liquidation, dissolution or winding up of our company. Additionally, the
ownership interest of holders of our common stock will be diluted to the extent the Warrant is
exercised.
There may be future sales of additional common stock or preferred stock or other dilution of our
equity, which may adversely affect the market price of our common stock. We are not restricted from
issuing additional common stock or preferred stock, including any securities that are convertible
into or exchangeable for, or that represent the right to receive, common stock or preferred stock
or any substantially similar securities. The market value of our common stock could decline as a
result of sales by us of a large number of shares of common stock or preferred stock or similar
securities in the market or the perception that such sales could occur.
There may be future issuances of additional subordinated debentures, which may adversely affect the
market price of our common stock. We may issue additional subordinated debentures in connection
with the issuance of additional trust preferred securities. Such additional debentures would rank
senior to the common stock. The market value of our common stock could decline as a result of
future issuances or the perception that such issuances could occur.
Our common stock is not FDIC insured. Bancorps common stock is not a savings or deposit account or
other obligation of any bank and is not insured by the FDIC or any other governmental agency and is
subject to investment risk, including the possible loss of principal. Investment in our common
stock is inherently risky for the reasons described in this Risk Factors section and elsewhere in
this report and is subject to the same market forces that affect the price of common stock in any
company. As a result, holders of our common stock may lose some or all of their investment.
Item 1B. | Unresolved Staff Comments |
None
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Item 2. | Properties |
Bancorp and the Banks executive offices are located at 1501 Highwoods Boulevard in Greensboro, NC.
The Banks principal support and operational functions are located at 38 West First Avenue,
Lexington, NC and 202 South Main Street in Reidsville, NC. On December 31, 2009, the Bank operated
38 branch offices and two loan production offices in its three markets: the Piedmont Triad Region
and Coastal Region of NC and the Shenandoah Valley Region of VA. The location of the Banks
executive and banking offices, their form of occupancy, deposits as of December 31, 2009, and year
opened, is described in the accompanying table:
Location | Owned or Leased | Deposits | Year | |||||||||
(in thousands) | ||||||||||||
1501 Highwoods Boulevard, Greensboro, NC (1) |
Leased | $ | | 2004 | ||||||||
38 West First Avenue, Lexington, NC (2) |
Owned | 183,940 | 1949 | |||||||||
202 South Main Street, Reidsville, NC (3) |
Owned | 71,699 | 1910 | |||||||||
11651-D North Main Street, Archdale, NC |
Owned | 12,450 | 2003 | |||||||||
301 East Fremont Street, Burgaw, NC |
Leased | 36,808 | 1999 | |||||||||
2386 Lewisville-Clemmons Road, Clemmons, NC |
Owned | 20,621 | 2001 | |||||||||
1101 North Main Street, Danbury, NC |
Owned | 20,679 | 1997 | |||||||||
801 South Van Buren Road, Eden, NC |
Owned | 56,276 | 1996 | |||||||||
2132 New Garden Road, Greensboro, NC |
Owned | 81,055 | 1997 | |||||||||
4638 Hicone Road, Greensboro, NC |
Owned | 33,487 | 2000 | |||||||||
3202 Randleman Road, Greensboro, NC |
Owned | 46,231 | 2000 | |||||||||
1702 Battleground Avenue, Greensboro, NC |
Owned | 13,687 | 2008 | |||||||||
201 North Elm Street, Greensboro, NC |
Leased | 46 | 2009 | |||||||||
200 Westchester Drive, High Point, NC |
Owned | 35,806 | 2001 | |||||||||
120 East Main Street, Jamestown, NC |
Owned | 28,215 | 2004 | |||||||||
131 East Mountain Street, Kernersville, NC |
Leased | 18,468 | 1997 | |||||||||
647 South Main Street, King, NC |
Owned | 45,017 | 1997 | |||||||||
1926 Cotton Grove Road, Lexington, NC |
Owned | 33,575 | 1968 | |||||||||
500 South Main Street, Lexington, NC (4) |
Leased | | 2004 | |||||||||
285 Talbert Boulevard, Lexington, NC (5) |
Owned | 18,902 | 1983 | |||||||||
60 New U.S. Highway 64 West, Lexington, NC (5) |
Leased | 30,799 | 1969 | |||||||||
605 North Highway Street, Madison, NC |
Owned | 31,021 | 1997 | |||||||||
11492 Old U.S. Highway 52, Midway, NC |
Owned | 30,944 | 1973 | |||||||||
1646 Freeway Drive, Reidsville, NC |
Owned | 56,658 | 1972 | |||||||||
202 Turner Drive, Reidsville, NC (4) (5) |
Owned | 26,887 | 1969 | |||||||||
8055 Broad Street, Rural Hall, NC (5) |
Owned | 14,408 | 1997 | |||||||||
724 National Highway, Thomasville, NC |
Owned | 24,642 | 1993 | |||||||||
941 Randolph Street, Thomasville, NC |
Owned | 26,763 | 1987 | |||||||||
4481 Highway 150 South, Tyro, NC |
Owned | 20,705 | 2002 | |||||||||
3000 Old Hollow Road, Walkertown, NC |
Owned | 23,529 | 1997 | |||||||||
10335 North NC Highway 109, Wallburg, NC |
Owned | 29,472 | 1992 | |||||||||
6123 Old U.S. Highway 52, Welcome, NC |
Owned | 51,040 | 1958 | |||||||||
161 South Stratford Road, Winston-Salem, NC |
Leased | 46,768 | 1997 | |||||||||
3500 Old Salisbury Road, Winston-Salem, NC |
Owned | 41,263 | 1978 | |||||||||
3384 Robinhood Road, Winston-Salem, NC (5) |
Leased | 18,491 | 1997 |
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Location | Owned or Leased | Deposits | Year | |||||||||
(in thousands) | ||||||||||||
704 South College Road, Wilmington, NC |
Leased | 41,894 | 1997 | |||||||||
1001 Military Cutoff Road, Wilmington, NC |
Leased | 31,239 | 2006 | |||||||||
440 South Main Street, Harrisonburg, VA |
Owned | 48,943 | 1988 | |||||||||
1925 Reservoir Street, Harrisonburg, VA (6) |
Owned | 20,069 | 2003 |
(1) | Executive offices of Bancorp and the Bank since July 2007 and November 2007, respectively. |
|
(2) | Former headquarters of LSB and LSB Bank. Serves as a full service branch as well as an
operations center for the Bank. |
|
(3) | Former headquarters of FNB Southeast. Serves as a full service branch as well as an
operations center for the Bank. |
|
(4) | This location is an express drive through facility that only processes transactions and
does not open customer accounts. |
|
(5) | During the first quarter of 2010 the Bank closed two branches in Lexington and one branch
each in Winston-Salem, Reidsville and Rural Hall, as part of a plan to restructure operations in
the Piedmont Triad Region. |
|
(6) | On January 27, 2010 the Bank announced that it will close one of its branches in
Harrisonburg, VA during the second quarter of 2010. |
Peoples Finance operates from a leased 3,200 square foot, one-story building located at 126
Forest Hill Road, Lexington, NC.
The Bank also operates loan production offices in leased premises in Burlington and Greensboro, NC.
In addition, as of December 31, 2009, the Bank also operated 16 offsite ATM machines in various
locations throughout its markets.
Further, on December 31, 2009 the Bank assumed the leases for five offices in connection with the
acquisition of the business operations of Bradford Mortgage Company.
Item 3. | Legal Proceedings |
In the ordinary course of operations, Bancorp and its subsidiaries are often involved in legal
proceedings. In the opinion of management, neither Bancorp nor its subsidiaries is a party to, nor
is their property the subject of, any material pending legal proceedings, other than ordinary
routine litigation incidental to their business, nor has any such proceeding been terminated during
the fourth quarter of Bancorps fiscal year ended December 31, 2009.
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PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
Market Prices and Dividend Policies
Bancorps common stock is traded on the Global Select Market of the NASDAQ Stock Market
(NASDAQ GSM) under the symbol NBBC. The following table shows the high, low and closing sales
prices of Bancorps common stock on the NASDAQ GSM, based on published financial sources, for each
quarter within the last two fiscal years. The table also indicates the cash dividends paid per
share during each quarter within the last two fiscal years. One cash dividend was paid during each
of the first three fiscal quarters of 2008. No cash dividends have been paid in any of the last
five fiscal quarters.
Quarter ended | High | Low | Close | Dividends Paid | ||||||||||||
December 31, 2009 |
$ | 2.78 | $ | 1.89 | $ | 2.22 | $ | | ||||||||
September 30, 2009 |
3.11 | 1.82 | 2.74 | | ||||||||||||
June 30, 2009 |
2.70 | 1.39 | 2.07 | | ||||||||||||
March 31, 2009 |
3.04 | 0.94 | 2.11 | | ||||||||||||
December 31, 2008 |
$ | 6.00 | $ | 2.01 | $ | 2.38 | $ | | ||||||||
September 30, 2008 |
9.11 | 3.90 | 4.51 | 0.05 | ||||||||||||
June 30, 2008 |
9.60 | 6.76 | 6.90 | 0.17 | ||||||||||||
March 31, 2008 |
10.99 | 8.00 | 8.75 | 0.17 |
As of March 10, 2010, there were approximately 7,300 beneficial owners, including 3,331
holders of record, of Bancorps common stock.
Holders of Bancorps common stock are entitled to receive ratably such dividends as may be declared
by Bancorps Board of Directors out of legally available funds. The ability of Bancorps Board of
Directors to declare and pay dividends on its common stock is subject to the terms of applicable
North Carolina law and banking regulations. Further, except with the U.S. Treasurys approval,
until such time as Bancorp has redeemed all of the Series A Preferred Stock or the U.S. Treasury
has transferred all of the Series A Preferred Stock to a third party, prior to December 12, 2011,
the payment of dividends on its common stock is limited to a maximum quarterly dividend of $0.05
per share. Also, Bancorp may not pay dividends on its capital stock if it is in default or has
elected to defer payments of interest under its junior subordinated debentures. The declaration and
payment of future dividends to holders of Bancorps common stock will also depend upon Bancorps
earnings and financial condition, the capital requirements of Bancorps subsidiaries, regulatory
conditions and other factors as Bancorps Board of Directors may deem relevant. For a further
discussion as to restrictions on Bancorp and the Banks ability to pay dividends, please refer to
Item 1 Supervision and Regulation.
The following table sets forth certain information regarding outstanding options and shares
available for future issuance under equity compensation plans as of December 31, 2009. Individual
equity compensation arrangements are aggregated and included within this table. This table
excludes any plan, contract or arrangement that provides for the issuance of options, warrants or
other rights that are given to Bancorps shareholders on a pro rata basis and any employee benefit
plan that is intended to meet the qualification requirements of Section 401(a) of the Code.
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Number of Shares Remaining Available for Future Issuance under Equity |
||||||||||||
Number of Shares to be | Weighted-Average | Compensation Plans | ||||||||||
Issued Upon Exercise of | Exercise Price of | (excluding shares | ||||||||||
Outstanding Options, | Outstanding Options, | reflected in | ||||||||||
Warrants and Rights | Warrants and Rights | column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity Compensation Plans
Approved by Shareholders (1) |
896,991 | $ | 14.45 | 1,364,718 | ||||||||
Equity Compensation Plans Not
Approved by Shareholders |
| | | |||||||||
Total |
896,991 | $ | 14.45 | 1,364,718 | ||||||||
(1) | Includes 568,925 shares to be issued upon the exercise of outstanding options, warrants and
rights assumed in connection with the Merger and having a weighted average exercise price of
$13.36. |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Bancorp did not repurchase any of its equity securities during 2009.
Recent Sales of Unregistered Securities
Except as previously reported in a Current Report on Form 8-K, Bancorp did not sell any of its
equity securities in the last fiscal year which were not registered under the Securities Act of
1933, as amended.
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Table of Contents
FIVE-YEAR STOCK PERFORMANCE TABLE
The following table illustrates the cumulative total shareholder return on Bancorps common
stock over the five-year period ended December 31, 2009 and the cumulative total return over the
same period of the S&P 500 Index (U.S.) and The Carson Medlin Company Independent Bank Index of 25
independent community banks located in eight southeastern states. The table assumes $100 originally
invested on December 31, 2004 and that all subsequent dividends were reinvested in additional
shares.
NEWBRIDGE BANCORP
Comparison of Cumulative Total Shareholder Return
Years Ended December 31
Comparison of Cumulative Total Shareholder Return
Years Ended December 31
2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
NewBridge Bancorp |
100 | 109 | 108 | 73 | 17 | 16 | ||||||||||||||||||
The Carson Medlin
Companys
Independent Bank
Index1 |
100 | 108 | 125 | 91 | 73 | 85 | ||||||||||||||||||
S&P 500 Index |
100 | 105 | 121 | 128 | 81 | 102 |
1 | The Carson Medlin Companys Independent Bank Index is the compilation of the total return to
shareholders over the past five years of a group of 25 independent community banks located in the
southeastern states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia. The total five year return was calculated for each of the banks in the
peer group taking into consideration changes in stock price, cash dividends, stock dividends and
stock splits since December 31, 2004. The individual results were then weighted by the market
capitalization of each bank relative to the entire peer group. The total return approach and the
weighting based upon market capitalization are consistent with the preparation of the S&P 500 total
return index. |
27
Table of Contents
Item 6. Selected Financial Data
The following table should be read in conjunction with Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operation, and Item 8 Financial Statements and
Supplementary Data, which begin on page 29 and page 54 below, respectively.
Years Ended December 31 | ||||||||||||||||||||
(In thousands, except per share data and performance | ||||||||||||||||||||
measures) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
SUMMARY OF OPERATIONS |
||||||||||||||||||||
Interest income |
$ | 98,500 | $ | 117,286 | $ | 97,621 | $ | 67,323 | $ | 60,425 | ||||||||||
Interest expense |
39,156 | 53,852 | 42,368 | 24,195 | 16,726 | |||||||||||||||
Net interest income |
59,344 | 63,434 | 55,253 | 43,128 | 43,699 | |||||||||||||||
Provision for credit losses |
35,749 | 25,262 | 18,952 | 5,510 | 3,219 | |||||||||||||||
Net interest income after provision for credit losses |
23,595 | 38,172 | 36,301 | 37,618 | 40,480 | |||||||||||||||
Noninterest income |
19,177 | 20,630 | 14,998 | 14,290 | 13,792 | |||||||||||||||
Goodwill impairment |
| 50,437 | | | | |||||||||||||||
Noninterest expense |
69,546 | 72,191 | 62,356 | 43,324 | 39,770 | |||||||||||||||
Income (loss) before income taxes |
(26,774 | ) | (63,826 | ) | (11,057 | ) | 8,584 | 14,502 | ||||||||||||
Income taxes |
(11,641 | ) | (6,924 | ) | (5,394 | ) | 2,584 | 4,865 | ||||||||||||
Net income (loss) |
(15,133 | ) | (56,902 | ) | (5,663 | ) | 6,000 | 9,637 | ||||||||||||
Dividends and accretion on preferred stock |
(2,917 | ) | (170 | ) | | | | |||||||||||||
Net income (loss) available to common shareholders |
$ | (18,050 | ) | $ | (57,072 | ) | $ | (5,663 | ) | $ | 6,000 | $ | 9,637 | |||||||
Cash dividends declared |
$ | | $ | 6,106 | $ | 8,255 | $ | 5,755 | $ | 5,805 | ||||||||||
SELECTED YEAR END ASSETS
AND LIABILITIES |
||||||||||||||||||||
Investment Securities |
$ | 325,339 | $ | 288,572 | $ | 369,423 | $ | 147,129 | $ | 128,159 | ||||||||||
Loans, net of unearned income |
1,463,094 | 1,604,525 | 1,490,084 | 759,978 | 755,398 | |||||||||||||||
Assets |
1,946,526 | 2,078,627 | 2,057,358 | 987,746 | 975,795 | |||||||||||||||
Deposits |
1,499,310 | 1,663,463 | 1,627,720 | 817,683 | 822,173 | |||||||||||||||
Shareholders equity |
164,604 | 179,236 | 193,153 | 89,309 | 91,829 | |||||||||||||||
PERFORMANCE MEASURES |
||||||||||||||||||||
Net income (loss) to average total assets |
(0.88 | )% | (2.72 | )% | (0.40) | % | 0.61 | % | 1.00 | % | ||||||||||
Net income (loss) to average shareholders equity |
(11.75 | ) | (29.38 | ) | (3.76 | ) | 6.47 | 10.49 | ||||||||||||
Dividend payout |
| N/M | N/M | 95.92 | 60.24 | |||||||||||||||
Average shareholders equity to average
total assets |
8.30 | 9.25 | 9.18 | 9.44 | 9.53 | |||||||||||||||
Average tangible shareholders equity to average
tangible total assets |
8.05 | 6.73 | 7.51 | 9.40 | 9.49 | |||||||||||||||
PER SHARE DATA |
||||||||||||||||||||
Earnings (loss) per share: |
||||||||||||||||||||
Basic |
$ | (1.15 | ) | $ | (3.64 | ) | $ | (0.49 | ) | $ | 0.71 | $ | 1.13 | |||||||
Diluted |
(1.15 | ) | (3.64 | ) | (0.49 | ) | 0.71 | 1.12 | ||||||||||||
Cash dividends declared |
| 0.39 | 0.68 | 0.68 | 0.68 | |||||||||||||||
Book value at end of year |
7.17 | 8.10 | 12.30 | 10.60 | 10.77 | |||||||||||||||
Tangible book value at end of year |
6.83 | 7.72 | 9.10 | 10.54 | 10.71 |
28
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following presents managements discussion and analysis of Bancorps consolidated financial
condition and results of operations and should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This
discussion may contain forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from those anticipated in forward-looking statements as a result
of various factors. The following discussion is intended to assist in understanding the
consolidated financial condition and results of operations of Bancorp.
Bancorps principal source of income is from dividends declared and paid by the Bank on its issued
and outstanding capital stock. The majority of Bancorps operations occur at the Bank level.
Throughout this discussion, and elsewhere in this Annual Report on Form 10-K, results of operations
will often be discussed by referring to the Banks operations, unless a specific reference is made
to Bancorp and its operating results apart from those of the Bank.
Executive Overview
The year ended December 31, 2009 was another challenging year for the U.S., including the areas
served by the Bank, which continued to suffer from the effects of the economic down-turn that began
more than a year earlier. A depressed real estate market, increasing numbers of foreclosures,
historically high levels of unemployment, and reduced business activity and consumer spending
resulted in significant write-downs of asset values by financial institutions, in turn causing many
financial institutions to seek additional capital, to merge with larger and stronger institutions
and, in some cases, to fail.
Despite these difficult economic conditions, we experienced a number of successes during 2009,
including:
| Returning to profitability during the fourth quarter of 2009; |
||
| Achieving significant reductions in operating and credit-related costs; |
||
| Establishing an allowance for credit losses that compares favorable with peer
institutions through early recognition of credit losses; |
||
| Completing the acquisition of the business operations of Bradford Mortgage Company; and |
||
| Maintaining Bancorps and the Banks capital levels well above the regulatory levels
required to be considered well capitalized. |
Our goal is to put this adverse credit cycle behind us as quickly as possible, through early
recognition of credit losses. We believe we have been largely successful in identifying and taking
aggressive action with our problem credits, and have positioned Bancorp to take advantage of
opportunities that arise when we emerge from the recession and to reward our shareholders.
Our Community Bank Strategy and Operating Plan
Background. Bancorp was created in July 2007, following the merger of equals between FNB and LSB.
In November, 2007 the subsidiary banks of FNB and LSB, FNB Southeast and LSB Bank, merged to form
NewBridge Bank, which became the largest community bank in the Piedmont Triad Region of North
Carolina. In July 2008 Pressley A. Ridgill was named Chief Executive Officer of Bancorp, having
become President of Bancorp, and Chief Executive Officer and President of the Bank in 2007. Mr.
Ridgill was previously President and Chief Executive Officer of FNB.
During 2008 Mr. Ridgill enhanced his executive management team. The management team members were
selected for their talents, experience and commitment to Bancorps Guiding Principles and basic
concept that Financial Success Begins with Integrity. During 2009 the executive management team
began to re-define and implement our Community Bank Strategy and Operating Plan.
29
Table of Contents
Strategy. As a community bank, we believe that the Banks ability to secure significant returns
for our shareholders can best be achieved through consistent delivery of superior client service to
small- and mid-size businesses and consumers in a manner that the large national and super regional banks are unable or
unwilling to emulate. As of December 31, 2009 all but five of the Banks 38 branch offices are
located in the Piedmont Triad Region, a market with approximately $33 billion of deposits. This
market is dominated by large national and regional banks, with approximately 80% of the markets
deposits residing in banks with more than $10 billion of assets, and only 3% of those balances held
at our Bank. Consequently, our strategy is to focus on growing the Banks market share in the
Piedmont Triad Region, where a relatively small increase in market share has the potential to
deliver extraordinary gains for Bancorp.
Operating Plan. To ensure the effective implementation of our strategy, management developed our
2009 and 2010 Operating Plans to include measurable goals that communicate throughout the
organization the steps needed to improve Bancorps financial results. The Operating Plan
objectives for 2010 include:
| Improve asset quality; |
||
| Manage the net interest margin; |
||
| Increase noninterest income; |
||
| Control noninterest expense; and |
||
| Position the Company to fulfill its Vision and Mission. |
Improve Asset Quality Managements primary objective is to put the adverse affects of the
recession behind us as quickly as possible through early recognition of credit losses. We believe
we have been largely successful in identifying and taking appropriate aggressive action with our
problem credits. We believe that this prudent approach allows us to continue through the remainder
of 2010 with the expectation that our future financial performance will benefit from lower
credit-related costs.
At December 31, 2009 non-performing assets increased $36.9 million to $85.6 million or 4.40% of
total assets, from $48.6 million or 2.34% of total assets at December 31, 2008. Non-performing
loans totaled $58.2 million at December 31, 2009 and were down 9%, or $5.8 million, from their peak
level at June 30, 2009. At December 31, 2009 the allowance for credit losses totaled $35.8
million, or 2.45% of total loans and 62% of non-performing loans. With most specific losses being
recognized directly as charge-offs, the Banks allowance for loan losses consists primarily of
non-specific allowances for loans that are not impaired. Specific impairments have been largely
recognized in net charge-offs that totaled $35.7 million for the twelve months ending December 31,
2009. Since the beginning of the 2008 declining credit cycle, charge-offs have totaled $55
million. Of the remaining $58.2 million of non-performing loans, we believe that losses have
largely been recognized through the $55 million of charge-offs.
Manage the Net Interest Margin Net interest income is the Banks primary source of revenue, and is
the difference between interest income and interest expense. In order to effectively manage our
net interest income, management must manage the Banks net interest margin, which is the net yield
on earning assets less the cost of interest bearing liabilities, as well as its level of earning
assets and funding mix.
During 2009 management began to implement several steps to improve its management and control of
the net interest margin, including:
| Enhance our interest rate risk management tools. Early in 2009 management engaged an
outside consultant to begin preparing managements interest rate risk management tools.
Our selected vendor works with more than 300 banks across the country and has been a leader
in the asset liability management field since the 1980s. |
||
| Reduce the Banks dependence on high-cost time deposits in favor of lower-cost core
accounts, including DDA, NOW checking, money market and savings accounts. |
||
| Price loans consistently while considering relationship pricing for deposit and other
key relationships. |
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| Implement a more disciplined and accountable budget process to include monitoring loan,
investment and deposit yields and balances so that variances are questioned and
controllable items are controlled. |
While net interest income declined $4.1 million in 2009 to $59.3 million, net interest income and
the net interest margin improved steadily throughout 2009. In the fourth quarter of 2009 net
interest income exceeded net interest income during the 2008 fourth quarter by $2.0 million,
totaling $16.5 million for the three months ending December 31, 2009.
The increase in net interest income for the fourth quarter of 2009 was due primarily to a 72 basis
point rise in the Banks net interest margin from 2.91% during the three months ended June 30, 2009
to 3.63% for the three months ended December 31, 2009. The margin improved during the year as the
cost of time deposits fell. The weighted average deposit cost fell 126 basis points to 1.60% for
the quarter ending December 31, 2009, compared to 2.86% for the quarter ending December 31, 2008.
During 2008 the Bank faced irrational deposit pricing pressure from competing financial
institutions. The dramatically increased cost of deposits caused intense margin compression during
late 2008 and the first two quarters of 2009. As management shifted liability strategies,
high-cost time deposits left the Bank for higher rates elsewhere and were replaced with lower-cost
core deposit accounts. NOW checking accounts were featured in the Banks marketing campaigns,
resulting in an increase of $90.7 million, or 50.2%, in NOW account balances between June 30, 2009
and December 31, 2009. At December 31, 2009 DDA, NOW, money market and savings account balances
totaled 55.0% of the Banks deposits compared to 45.9% at December 31, 2008.
Increase Noninterest Income While the Banks primary source of revenue is net interest income,
management is also actively searching for opportunities to diversify revenues through the growth in
fee income which will provide additional value to our clients. We believe market conditions remain
favorable to grow our existing investment services and mortgage banking activities through organic
development and through acquisitions, to the extent that the business models fit with our Vision
and Mission.
Noninterest income declined $1.5 million in 2009 to $19.2 million compared to $20.6 million in
2008. The decline in revenues (excluding one-time events) was due primarily to reduced retail
banking revenues, which was a result of industry-wide trends that we believe are favorable to
consumers as the banking industry implements improved consumer protection processes and policies.
The Bank took steps to increase mortgage banking fees in 2010 through the acquisition on December
31, 2009 of the business operations of Bradford Mortgage Company, an established community mortgage
company operating principally in the Piedmont Triad Region.
Control noninterest expense We believe that the Bank will emerge from the recession as a more
disciplined and efficient business, with greater opportunities for long-term success. Core to the
execution of managements operating plan is the implementation of a disciplined cost management
culture where that which is within our control is controlled. While certain items such as FDIC
insurance costs have proven to be outside our control, the vast
majority of noninterest-related
expenses are controllable.
A key element to changing the Banks cost management culture is the implementation of a line-item
accountable budget process. Our budgets are now built around a philosophy we termed as the CAST
philosophy, which is an acronym for:
| Conservative in forecasts and expectations; |
||
| Accountable on an account by account basis; |
||
| Specific to each individual in the organization so goals and budgets are understood; and |
||
| Timely, so that continued monitoring and adjustments can be made |
In an extraordinary demonstration of this philosophy, the Bank lowered its 2009 noninterest expense
by $8.9 million compared to 2008, excluding one time costs, such as the impairment of goodwill and
losses on disposal of branch locations, and a $3.5 million increase in the cost of FDIC insurance.
We are pleased that our efficiency ratio declined from over 90% early in 2009 to 71% during the
fourth quarter of 2009. The improvement in our efficiency ratio was due in large part to
managements ability to focus the Banks attention
31
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on eliminating excess costs and inefficient products, services and delivery channels from legacy operations. As we continue through 2010 we
believe the improved cost management culture will significantly improve the organizations
financial performance.
Position the Bank to fulfill its Vision and Mission We are keenly aware that the Bank is a
community bank. We live in our communities, serve our communities and take deposits and lend them
back to our communities. Our community bank model encourages growth in our communities. It is
unlike the business model of many large regional and national banks, which take wealth in deposits
from our communities and redeploy this wealth as investments in large metropolitan areas. In order
to position our Bank to fulfill its Vision and Mission, we must ensure the organization has the
right products, people and delivery channels to be able to serve our communities in the manner that
fulfills our Vision and Mission.
In 2009 the Bank made a number of disciplined but difficult decisions, including a thorough
assessment of branch locations. The assessment targeted the elimination of waste, inefficiency and
duplication throughout our franchise. Management developed a methodology that evaluated each
locations pre-tax contributions, age and state of the facility, ease of closure, market
demographics and overall fit within our strategic plan. When the assessment was completed,
management announced that seven low-performing branch offices would eventually be closed, and three
new branch offices would be added to support current and future customers. The first of these new
branches was opened in downtown Greensboro late in 2009.
Finally, capital planning has remained paramount in this environment. Despite a challenging year,
during which reserves grew and loans were charged-off, Bancorps capital levels remain well above
the regulatory levels required to be considered well capitalized. At December 31, 2009 Bancorps
total risk based capital was 12.27%, well above the minimum well capitalized level of 10.00%.
Financial Condition at December 31, 2009 and 2008
Bancorps consolidated assets of $1.95 billion at year end 2009 reflects a decrease of 6.4% from
year end 2008, following an increase of 1.0% during the previous year. The decrease from year end
2008 to year end 2009 is primarily a result of a decline in Bancorps loan portfolio, while the
increase from year end 2007 to year end 2008 was primarily due to loan growth, partially offset by
the write off of goodwill. Total average assets decreased 1.8% from $2.09 billion in 2008, to
$2.05 billion in 2009, while average earning assets increased 0.9%, from $1.91 billion in 2008, to
$1.93 billion in 2009. The decrease in total average assets was also primarily the result of a
decrease in loans outstanding, while the slight increase in average earning assets was driven by an
increase in interest bearing bank balances.
Gross loans decreased $141.4 million during 2009, or 8.8%, compared to increases of 7.7% in 2008
and 96.1% in 2007. The decrease in loans is due primarily to principal repayment on existing loans
coupled with soft loan demand in the current economic down turn. Loans secured by real estate
totaled $1.22 billion in 2009 and represented 83.4% of total loans, compared with 82.3% at year end
2008. Within this category, residential real estate loans decreased 4.4% to $605.0 million and
construction loans decreased 19.0% to $177.3 million. Commercial loans totaled $593.4 million at
year end 2009, a decrease of 3.9% from the end of 2008. Consumer loans decreased 38.3% during
2009, ending the year at $75.5 million. Management believes the Bank is not dependent on any
single customer or group of customers concentrated in a particular industry, the loss of whose
deposits or whose insolvency would have a material adverse effect on operations.
Investment securities (at amortized cost) totaled $317.9 million at year end 2009, a 12.0% increase
from $283.7 million at year end 2008. U.S. Government agency securities totaled $49.0 million, or
15.4% of the portfolio at year end 2009, compared to $56.6 million, or 20.0% of the portfolio one
year earlier. Management believes that the additional risk of owning agency securities over U.S.
Treasury securities is negligible and has capitalized on the favorable spreads available on the
former. Mortgage backed securities totaled $77.4 million, or 24.4% of the portfolio, at December
31, 2009, compared to $97.8 million, or 34.5% of the portfolio at the previous year end. State and
municipal obligations amounted to $105.2 million at year end 2009, and comprised 33.1% of the
portfolio, compared to $115.6 million, or 40.8% of the portfolio a year earlier. During 2009, the
Company also
32
Table of Contents
began investing in corporate bonds and collateralized mortgage obligations (CMOs).
Corporate bonds totaled $34.0 million, or 10.7% of the portfolio, of which $29.1 million were
covered bonds, while CMOs totaled $35.1 million, or 11.0% of the portfolio. The Companys
investment strategy is to achieve acceptable total returns through investments in securities with
varying maturity dates, cash flows and yield characteristics. U.S. Government agency securities
are generally purchased for liquidity and collateral purposes, mortgage backed securities are
purchased for yield and cash flow purposes, and longer maturity municipal bonds are purchased for
yield and income generation. The Company categorizes the majority of its investment portfolio as
Available for Sale, while a small portion is categorized as Held to Maturity. The table,
Investment Securities, presents the composition of the securities portfolio for the last three
years, as well as information about cost, fair value and weighted average yield.
The competition for deposits within the Banks market areas increased significantly during 2008 as
larger national and regional banks increased their rates in an effort to attract deposits and
maintain adequate liquidity. The Bank, which historically has relied on appropriate pricing and
high quality customer service to retain and increase its retail deposit base, was forced to compete
with higher rates offered by the larger national and regional banks in order to satisfy its deposit
requirements. During 2009, the Company shifted its liability strategy, reducing its dependence on
high cost time deposits in favor of lower cost core accounts, including DDA, NOW checking, money
market and savings accounts.
Total deposits decreased $164.2 million to $1.50 billion at December 31, 2009, a 9.9% decrease from
a total of $1.66 billion one year earlier. This change was the result of a reduction in time
deposits, as the interest rates offered by the Bank declined substantially during the year. This
decrease was partially offset by increases in money market deposits, as the Banks new FastForward
Checking product, introduced in the third quarter of 2009, grew to $79.7 million at December 31,
2009.
In order to attract additional deposits when necessary, the Bank uses several different sources
such as membership in an electronic deposit gathering network that allows it to post interest rates
and attract deposits from across the U.S. (bulletin board deposits), brokered certificates of
deposit secured through broker/dealer partnerships and deposits obtained through the Promontory
InterFinancial Network, also known as CDARS. The Banks reliance on bulletin board deposits has
continued to decrease during 2009. Brokered deposits decreased from $37.6 million at year end 2008
to $15.0 million at year end 2009, while CDARS has increased from $51.6 million at year end 2008 to
$58.0 million at year end 2009.
The Bank also has a credit facility available with the FHLB of Atlanta. The Bank utilized a
portion of the approximately $401.5 million credit line with the FHLB of Atlanta to fund earning
assets. FHLB borrowings totaled $165.2 million at year end 2009. In addition to the credit line at
the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $75.5 million, of
which there was $27.6 million outstanding at December 31, 2009. Management believes these credit
lines are a cost effective and prudent alternative to deposit balances, since particular amounts,
terms and structures may be selected to meet current needs.
Financial Condition at December 31, 2008 and 2007
As discussed in Item 1 Business General, Bancorp was created as a result of the Merger of LSB
and FNB, effective July 31, 2007. When reading the following discussion of financial condition at
December 31, 2008 and 2007, note that Bancorps results of operations for the full year 2007 do not
include the operating results for FNB prior to July 31, 2007.
Bancorps consolidated assets of $2.08 billion at year end 2008 reflect an increase of 1.0% over
year end 2007. The increase from year end 2007 to year end 2008 is primarily a result of growth in
Bancorps loan portfolio, partially offset by the write off of goodwill. Total average assets
increased 46.9% from $1.42 billion in 2007, to $2.09 billion in 2008. During 2008, Bancorp
experienced a 45.2% increase in average earning assets, as average earning assets totaled $1.91
billion in 2008, compared to $1.32 billion in 2007. The increases in total average assets and
average earning assets were primarily attributable to the Merger, as the assets of the former FNB
are only included for five months of 2007.
33
Table of Contents
Gross loans increased $114.4 million during 2008, or 7.7%, compared to increases of 96.1% in 2007
and 0.6% in 2006. Loans secured by real estate totaled $851.5 million in 2008 and represented
53.1% of total loans, compared with 55.3% at year end 2007. Within this category, residential real
estate loans increased 10.0% to $632.7 million and construction loans decreased 11.9% to $218.7
million. Commercial loans totaled $617.6 million at year end 2008, an increase of 8.1% from the
end of 2007. Consumer loans increased 33.3% during 2008, ending the year at $122.4 million.
Investment securities (at amortized cost) totaled $283.7 million at year end 2008, a 22.3% decrease
from $365.1 million at year end 2007. U.S. Government agency securities totaled $56.6 million, or
20.0% of the portfolio at year end 2008, compared to $140.8 million, or 38.6% of the portfolio one
year earlier. Management believes that the additional risk of owning agency securities over U.S.
Treasury securities is negligible and has capitalized on the favorable spreads available on the
former. Mortgage backed securities totaled $97.8 million, or 34.5% of the portfolio, at December
31, 2008, compared to $106.8 million, or 29.2% of the portfolio at the previous year end. State
and municipal obligations amounted to $115.6 million at year end 2008, and comprised 40.8% of the
portfolio, compared to $105.7 million, or 29.0% of the portfolio a year earlier.
Total deposits increased $35.7 million to $1.66 billion at December 31, 2008, a 2.2% increase from
a total of $1.63 billion one year earlier. This change was the result of increased time deposits,
partially offset by decreases in demand deposits and money market deposits.
Net Interest Income
Like most financial institutions, the primary component of the Companys earnings is net interest
income. Net interest income is the difference between interest income, principally from loans and
investments, and interest expense, principally on customer deposits and borrowings. Changes in net
interest income result from changes in volume and changes in interest rates earned and paid. Volume
refers to the average dollar level of interest-earning assets and interest-bearing liabilities.
Spread refers to the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities, and margin refers to net interest income divided by
average interest-earning assets. Spread and margin are influenced by the levels and relative mix of
interest-earning assets and interest-bearing liabilities, as well as by levels of
noninterest-bearing liabilities.
Average Balances and Net Interest Income Analysis. The accompanying table sets
forth, for the years 2007 through 2009, information with regard to average balances of assets and
liabilities, as well as the total dollar amounts of interest income from interest-earning assets
and interest expense on interest-bearing liabilities, resultant yields or rates, net interest
income, net interest spread, net interest margin and ratio of average interest-earning assets to
average interest-bearing liabilities. Average loans include nonaccruing loans, the effect of which
is to lower the average yield.
34
Table of Contents
Average Balances and Net Interest Income Analysis
Fully taxable equivalent basis(1) (Dollars in thousands)
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Interest | Interest | Interest | ||||||||||||||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | Average | Income/ | Average | ||||||||||||||||||||||||||||
Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | ||||||||||||||||||||||||||||
Earning assets: |
||||||||||||||||||||||||||||||||||||
Loans receivable(2) |
$ | 1,538,777 | $ | 84,089 | 5.46 | % | $ | 1,575,064 | $ | 101,550 | 6.49 | % | $ | 1,060,522 | $ | 85,460 | 8.06 | % | ||||||||||||||||||
Taxable securities |
197,132 | 9,425 | 4.78 | 191,766 | 10,229 | 5.33 | 175,139 | 8,560 | 4.89 | |||||||||||||||||||||||||||
Tax exempt securities |
109,622 | 6,754 | 6.16 | 113,480 | 6,539 | 5.76 | 60,717 | 3,415 | 5.62 | |||||||||||||||||||||||||||
FHLB stock |
11,177 | 4 | 0.04 | 10,281 | 368 | 3.58 | 7,512 | 467 | 6.22 | |||||||||||||||||||||||||||
Interest-bearing bank balances |
54,667 | 186 | 0.34 | 10,189 | 267 | 2.62 | 3,829 | 209 | 5.41 | |||||||||||||||||||||||||||
Federal funds sold |
18,751 | 46 | 0.25 | 11,187 | 114 | 1.02 | 9,077 | 424 | 4.72 | |||||||||||||||||||||||||||
Total earning assets |
1,930,126 | 100,504 | 5.21 | 1,911,967 | 119,067 | 6.23 | 1,316,796 | 98,535 | 7.48 | |||||||||||||||||||||||||||
Non-earning assets: |
||||||||||||||||||||||||||||||||||||
Cash and due from banks |
24,120 | 41,829 | 38,845 | |||||||||||||||||||||||||||||||||
Premises and equipment |
42,889 | 45,415 | 29,583 | |||||||||||||||||||||||||||||||||
Other assets |
97,936 | 124,075 | 54,067 | |||||||||||||||||||||||||||||||||
Allowance for credit losses |
(40,584 | ) | (31,020 | ) | (15,516 | ) | ||||||||||||||||||||||||||||||
Total assets |
$ | 2,054,487 | $ | 2,092,266 | $ | 1,423,775 | ||||||||||||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||||||||||||||
Savings deposits |
$ | 40,703 | $ | 41 | 0.10 | % | $ | 41,430 | $ | 65 | 0.16 | % | $ | 35,688 | $ | 121 | 0.34 | % | ||||||||||||||||||
NOW deposits |
195,626 | 778 | 0.40 | 170,221 | 802 | 0.47 | 146,843 | 1,041 | 0.71 | |||||||||||||||||||||||||||
Money market deposits |
390,042 | 4,327 | 1.11 | 429,322 | 10,145 | 2.36 | 337,413 | 13,070 | 3.87 | |||||||||||||||||||||||||||
Time deposits |
853,100 | 26,746 | 3.14 | 838,205 | 33,660 | 4.02 | 499,802 | 22,454 | 4.49 | |||||||||||||||||||||||||||
Other Borrowings |
75,462 | 2,559 | 3.39 | 92,296 | 3,697 | 4.01 | 38,677 | 1,048 | 2.69 | |||||||||||||||||||||||||||
Borrowings
from Federal Home Loan Bank |
149,559 | 4,706 | 3.15 | 148,206 | 5,483 | 3.70 | 90,201 | 4,634 | 5.15 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
1,704,492 | 39,157 | 2.30 | 1,719,680 | 53,852 | 3.13 | 1,148,624 | 42,368 | 3.69 | |||||||||||||||||||||||||||
Other liabilities and shareholders
equity: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
158,436 | 164,712 | 132,066 | |||||||||||||||||||||||||||||||||
Other liabilities |
20,988 | 14,223 | 12,320 | |||||||||||||||||||||||||||||||||
Shareholders equity |
170,571 | 193,651 | 130,765 | |||||||||||||||||||||||||||||||||
Total liabilities and
shareholders equity |
$ | 2,054,487 | $ | 2,092,266 | $ | 1,423,775 | ||||||||||||||||||||||||||||||
Net interest income and net
interest margin(3) |
$ | 61,347 | 3.18 | % | $ | 65,215 | 3.41 | % | $ | 56,167 | 4.27 | % | ||||||||||||||||||||||||
Interest rate spread(4) |
2.91 | % | 3.10 | % | 3.79 | % | ||||||||||||||||||||||||||||||
(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 $2,004 for 2009, $1,781 for 2008, and $914 for 2007. |
|
(2) | Average loans receivable include non-accruing loans. Amortization of loan fees, net
of deferred costs, of $1,449, $2,231, and $2,224 for 2009, 2008 and 2007, respectively, are
included in interest income. |
|
(3) | Net interest margin is computed by dividing taxable-equivalent net interest income
by average earning assets. |
|
(4) | Interest rate spread is computed by subtracting interest-bearing liability rate from
earning asset yield. |
35
Table of Contents
Volume and Rate Variance Analysis
The following table analyzes the dollar amount of changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing liabilities. The table
identifies (i) changes attributable to volume (changes in volume multiplied by the prior periods
rate), (ii) changes attributable to rate (changes in rate multiplied by the prior periods volume),
and (iii) net change (the sum of the previous columns). The change attributable to both rate and
volume (changes in rate multiplied by changes in volume) have been allocated, based on the absolute
value, between changes attributable to volume and changes attributable to rate.
Volume and Rate Variance Analysis
Fully taxable-equivalent basis(1) (in thousands)
2009 | 2008 | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
Variance(2) | Variance(2) | Variance | Variance(2) | Variance(2) | Variance | |||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Loans receivable |
$ | (2,214 | ) | $ | (15,247 | ) | $ | (17,461 | ) | $ | 35,696 | $ | (19,606 | ) | $ | 16,090 | ||||||||
Taxable investment securities |
278 | (1,082 | ) | (804 | ) | 857 | 812 | 1,669 | ||||||||||||||||
Tax exempt investment securities |
(228 | ) | 443 | 215 | 3,037 | 87 | 3,124 | |||||||||||||||||
FHLB stock |
29 | (393 | ) | (364 | ) | 138 | (237 | ) | (99 | ) | ||||||||||||||
Interest-bearing bank balances |
320 | (401 | ) | (81 | ) | 207 | (149 | ) | 58 | |||||||||||||||
Federal funds sold |
49 | (117 | ) | (68 | ) | 83 | (393 | ) | (310 | ) | ||||||||||||||
Total interest income |
(1,764 | ) | (16,799 | ) | (18,563 | ) | 40,018 | (19,486 | ) | 20,532 | ||||||||||||||
Interest expense: |
||||||||||||||||||||||||
Savings deposits |
(1 | ) | (23 | ) | (24 | ) | 17 | (73 | ) | (56 | ) | |||||||||||||
NOW deposits |
107 | (131 | ) | (24 | ) | 149 | (388 | ) | (239 | ) | ||||||||||||||
Money market deposits |
(857 | ) | (4,961 | ) | (5,818 | ) | 1,356 | (4,281 | ) | (2,925 | ) | |||||||||||||
Time deposits |
589 | (7,503 | ) | (6,914 | ) | 13,775 | (2,569 | ) | 11,206 | |||||||||||||||
Other borrowings |
(616 | ) | (522 | ) | (1,138 | ) | 1,956 | 693 | 2,649 | |||||||||||||||
Borrowings from FHLB |
49 | (826 | ) | (777 | ) | 2,410 | (1,561 | ) | 849 | |||||||||||||||
Total interest expense |
(729 | ) | (13,966 | ) | (14,695 | ) | 19,663 | (8,179 | ) | 11,484 | ||||||||||||||
Increase (decrease) in net interest income |
$ | (1,035 | ) | $ | (2,833 | ) | $ | (3,868 | ) | $ | 20,355 | $ | (11,307 | ) | $ | 9,048 | ||||||||
(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. |
|
(2) | The volume/rate variance for each category has been allocated on a consistent basis
between rate and volume variances, based on the percentage of rate, or volume, variance to the
sum of the two absolute variances. |
Results of Operations Years Ended December 31, 2009 and 2008
Net Income. Net loss available to common shareholders for 2009 was $18.1 million, representing
a net loss per diluted share of $1.15, compared to net loss to common shareholders of $57.1
million, or $3.64 per diluted share the prior year. Excluding the goodwill impairment, the net loss
available to common shareholders for 2008 was $6.6 million, representing a net loss per diluted
share of $0.42. The decrease in net loss for 2009 is mostly attributed to the write off of $50.4
million of goodwill during 2008, partially offset by an increase in the provision for credit losses
as a result of the continued weakness in the national and regional economies. Net interest income
after provision for credit losses decreased by $14.6 million, or 38.2%, as compared to 2008. The
taxable equivalent net interest margin decreased 23 basis points during 2009, to 3.18%, from 3.41%
for 2008. Noninterest income decreased $1.5 million, or 7.0%, in 2009, while noninterest expense
for 2009 decreased $53.1 million, or 43.3%. The provision for loan losses in 2009 was $35.7
million, up $10.5 million, or 41.5% from $25.3 million in 2008. Return on average assets for 2009
was (0.98)% compared to (2.72)% for 2008. Return on average shareholders equity for 2009 was
(11.75)% compared to (29.38)% in 2008. The Company experienced some balance sheet contraction
during 2009, primarily as a result of a decrease in the loan portfolio. There was a decrease in
loans of $141.4 million, or 8.8%. Consolidated assets in 2009 decreased $132.1 million, or 6.4%
compared to 2008. Consolidated deposits decreased in 2009 by $164.2 million, or 9.9% compared to
2008.
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Table of Contents
Net Interest Income. Net interest income represents the gross profit from the lending and
investment activities of a banking organization and is the most significant factor affecting the
earnings of the Company. Net interest income is influenced by changes in interest rates, volume
and the mix of these various components. Net interest income for 2009, on a taxable-equivalent
basis, decreased $3.9 million, or 5.9%, compared to 2008. This was primarily due to a decline in
net interest margin, which decreased 23 basis points. Average earning assets in 2009 increased
$18.2 million, or 0.9%, to $1.93 billion, compared to $1.91 billion in 2008. Average
interest-bearing liabilities for 2009 decreased $15.2 million, or 0.9%, to $1.70 billion, compared
to $1.72 billion for 2008.
The taxable-equivalent net interest margin for 2009 decreased to 3.18%, compared to 3.41% for 2008,
a decline of 23 basis points. During 2009, the Bank reduced its dependence on high cost time
deposits, and, as a result, net interest income and the net interest margin improved steadily
throughout 2009. In 2009, the average yield on earning assets decreased by 102 basis points while
the average rate on interest-bearing liabilities decreased by 83 basis points, which resulted in a
decrease in the interest rate spread in 2009 of 19 basis points compared to the prior year.
The table, Average Balances and Net Interest Income Analysis, summarizes net interest income and
average yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The
table, Volume and Rate Variance Analysis presents the changes in interest income and interest
expense attributable to volume and rate changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses. The Company recorded a $35.7 million
provision for credit losses during the year ended December 31, 2009, compared to a $25.3 million
provision during the previous year. The increase in 2009 is primarily a result of continued
weakness in asset and credit quality caused by the downturn in the real estate market, disruption
and volatility in the financial markets, and the overall decline in the local and national
economies. In addition, during 2009, the Company has improved its process for identifying and
taking appropriate aggressive action with its problem credits. The Companys allowance for credit
losses remained essentially unchanged from the prior year end and was $35.8 million at December 31,
2009. The allowance for credit losses expressed as a percentage of total loans increased from 2.23%
at December 31, 2008 to 2.45% at December 31, 2009.
Noninterest Income. In 2009, noninterest income decreased $1.5 million, or 7.0%, and totaled $19.2
million compared to $20.6 million in 2008. Fee income from service charges on deposit accounts for
2009 decreased $0.8 million, or 8.6%, compared to 2008. Noninterest income for 2009 includes $0.4
million in gains from the sales of investment securities, compared to $2.5 million of such gains
during the previous year. These declines were partially offset by growth in mortgage banking
revenue and investment services income, which increased 51.8% and 35.7%, respectively from the
previous year. Other income for 2009 includes a $1.1 million gain from the sale of merchant card
services, and also includes $0.6 million of income on an investment in bank-owned life insurance,
compared to $1.1 million of income from bank-owned life insurance in 2008. For the detailed change
in other operating income please see the table Other Operating Income and Expenses in Note 13 of
the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Noninterest Expense. In 2009, noninterest expense was $69.5 million, representing a decrease of
$53.1 million, or 43.3%, from 2008. The decrease was primarily the result of the write off of
$50.4 million of goodwill in 2008. Excluding one time costs, such as the impairment of goodwill,
losses on disposal of branch locations, and a $3.5 million increase in the cost of FDIC insurance,
non-interest expense declined $8.9 million for the twelve months ending December 31, 2009 compared
to the same period in 2008. Personnel expense, consisting of employee salaries and benefits,
decreased $4.3 million, or 12.2%, primarily as a result of headcount reductions taken during the
year. For the detailed changes in other operating expenses, please see the table Other Operating
Income and Expense in Note 13 of the Notes to Consolidated Financial Statements of this Annual
Report on Form 10-K.
Provision for Income Taxes. Bancorp recorded a tax benefit of $11.6 million in 2009, compared to a
tax benefit totaling $6.9 million in 2008. The tax benefits in both years are primarily
attributable to the provisions for credit losses and asset writedowns recorded during those years.
Bancorps effective tax rates were (43.5)% in 2009 and
37
Table of Contents
(10.8)% in 2008. Excluding the goodwill impairment in 2008, the effective rate for 2008 was
(51.7)%. In 2009, the difference between the effective tax rate and the statutory rate was
principally due to tax exempt interest income. In 2008, the difference between the effective rate
and the statutory rate was primarily the result of the write off of goodwill.
Results of Operations Years Ended December 31, 2008 and 2007
Net Income. Net loss available to common shareholders for 2008 was $57.1 million, representing a
net loss per diluted share of $3.64, compared to net loss of $5.7 million, or $0.49 per diluted
share the prior year. Excluding the goodwill impairment, the net loss available to common
shareholders for 2008 was $6.6 million, representing a net loss per diluted share of $0.42. The
increase in net loss for 2008 is mostly attributed to the write off of $50.4 million of goodwill
during 2008, and to an increase in the provision for credit losses as a result of the deterioration
in the national economy during the year, as well as lower net interest margin caused by the Federal
Reserves interest rate reductions. Net interest income after provision for credit losses
increased by $2.5 million, or 7.0%, as compared to 2007. The taxable equivalent net interest
margin decreased 83 basis points during 2008, to 3.41%, from 4.27% for 2007. Noninterest income
increased $5.6 million, or 37.2%, in 2008, while noninterest expense for 2008 increased $60.9
million, or 97.7%. The provision for loan losses in 2008 was $25.3 million, up $6.3 million, or
33.3% from $19.0 million in 2007. Return on average assets for 2008 was (2.72)% compared to
(0.40)% for 2007. Return on average shareholders equity for 2008 was (29.38)% compared to (3.76)%
in 2007. The Company experienced a small amount of balance sheet growth during 2008, primarily as
a result of an increase in the loan portfolio. There was an increase in loans of $114.4 million,
or 7.7%. Consolidated assets in 2008 increased $21.3 million, or 1.0% compared to 2007.
Consolidated deposits increased in 2008 by $35.7 million, or 2.2% compared to 2007.
Net Interest Income. Net interest income represents the gross profit from the lending and
investment activities of a banking organization and is the most significant factor affecting the
earnings of the Company. Net interest income is influenced by changes in interest rates, volume
and the mix of these various components. Net interest income for 2008, on a taxable-equivalent
basis, increased $9.7 million, or 17.2%, compared to 2007. This was primarily due to substantial
increases in both earning assets and interest-bearing liabilities as a result of the Merger,
partially offset by the decline in net interest margin. Average earning assets in 2008 increased
$595.2 million, or 45.2%, to $1.91 billion, compared to $1.32 billion in 2007. Average
interest-bearing liabilities for 2008 increased $571.1 million, or 49.7%, to $1.72 billion,
compared to $1.15 billion for 2007.
The taxable-equivalent net interest margin for 2008 decreased to 3.41%, compared to 4.27% for 2007,
a decline of 83 basis points. The market for deposits continued to be very competitive in 2008,
requiring the Bank to keep deposit rates at a relatively high level in order to attract and retain
deposits, while a series of Federal Reserve interest rate reductions substantially lowered yields
on loans. In 2008, the average yield on earning assets decreased by 122 basis points while the
average rate on interest-bearing liabilities decreased by 56 basis points, which resulted in a
decrease in the interest rate spread in 2008 of 66 basis points compared to the prior year.
The table, Average Balances and Net Interest Income Analysis, summarizes net interest income and
average yields earned and rates paid for the years indicated, on a taxable-equivalent basis. The
table, Volume and Rate Variance Analysis presents the changes in interest income and interest
expense attributable to volume and rate changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses. Bancorp recorded a $25.3 million
provision for credit losses during the year ended December 31, 2008, compared to a $19.0 million
provision during the previous year. The increase in 2008 is primarily a result of weakening asset
and credit quality caused by the downturn in the real estate market, disruption and volatility in
the financial markets, and the overall decline in the local and national economies. Bancorps
allowance for credit losses increased from $30.4 million at December 31, 2007 to $35.8 million at
December 31, 2008. The allowance for credit losses expressed as a percentage of total loans
increased from 2.04% at December 31, 2007 to 2.23% at December 31, 2008.
Noninterest Income. In 2008, noninterest income increased $5.6 million, or 37.2%, and totaled $20.6
million compared to $15.0 million in 2007. Fee income from service charges on deposit accounts for
2008 increased
38
Table of Contents
$1.5 million, or 19.7%, compared to 2007, as a result of the additional deposit accounts acquired
in the Merger. Noninterest income for 2008 includes $2.5 million in gains from the sales of
investment securities. Other operating income for 2008 increased $1.5 million, or 22.1% to $8.4
million, from $6.9 million in 2007. Other income for 2008 includes $1.1 million of income on an
investment in bank-owned life insurance, compared to $462,000 in 2007. For the detailed change in
other operating income please see the table Other Operating Income and Expenses in Note 13 of the
Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Noninterest Expense. In 2008, noninterest expense was $123.3 million, representing an increase of
$60.9 million, or 97.7%, from 2007. The increase was primarily the result of the write off of
$50.4 million of goodwill. Personnel expense, consisting of employee salaries and benefits,
increased $5.1 million, or 16.5%, primarily as a result of the increased personnel due to the
Merger, partially offset by headcount reductions taken during the year. Occupancy expense
increased to $4.5 million for 2008 compared to $2.9 million in 2007, and furniture and equipment
expense increased to $4.7 million for 2008 compared to $3.6 million in 2007, as a result of the
Merger. Other expense includes increases in automated services and advertising expenses during
2008 compared to 2007, also related to the Merger. For the detailed changes in other operating
expenses, please see the table Other Operating Income and Expense in Note 13 of the Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K.
Provision for Income Taxes. Bancorp recorded a tax benefit of $6.9 million in 2008, compared to a
tax benefit totaling $5.4 million in 2007. The tax benefits in both years are primarily
attributable to the provisions for credit losses and asset writedowns recorded during those years.
Bancorps effective tax rates were (10.8)% in 2008 and (48.8)% in 2007. Excluding the goodwill
impairment in 2008, the effective rate for 2008 is (51.7)%. In 2008, the difference between the
effective rate and the statutory rate was primarily the result of the write off of goodwill. In
2007, the difference between the effective tax rate and the statutory rate was principally due to
tax exempt interest income.
Liquidity and Cash Flow
Market and public confidence in our financial strength and in the strength of financial
institutions in general will largely determine our access to appropriate levels of liquidity. This
confidence is significantly dependent on our ability to maintain sound asset quality and
appropriate levels of capital resources. Liquidity management refers to the policies and practices
that ensure the Bank has the ability to meet day-to-day cash flow requirements based primarily on
activity in loan and deposit accounts of the Banks customers. Management measures our liquidity
position by giving consideration to both on- and off-balance sheet sources of, and demands for,
funds on a daily and other periodic bases. Deposit withdrawals, loan funding and general corporate
activity create the primary needs for liquidity for the Bank. Sources of liquidity include cash
and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities,
investments available for sale, loan repayments, loan sales, increases in deposits, and increases
in borrowings from the FHLB secured with pledged loans and securities, and from correspondent banks
under overnight federal funds credit lines and securities sold under repurchase agreements.
Bancorp has sufficient cash and cash equivalents on hand at December 31, 2009 to provide for
Bancorps obligations and service its debt for approximately three years.
The investment portfolio at December 31, 2009 included securities with a par value of approximately
$135.4 million with call features, whereby the issuers of such securities have the option to repay
the security before the contractual maturity date. Bancorp anticipates that a number of these debt
instruments may be called by their issuers during 2010, due to the continued low interest rates
available for short term debt issuance.
The Bank has the ability to manage, within competitive and cost of funds constraints, increases in
deposits within its market areas. The Bank is a member of an electronic network that allows it to
post interest rates and attract certificates of deposit nationally. It also utilizes CDARS and
brokered deposits to supplement in-market deposit growth.
39
Table of Contents
The Bank has established wholesale repurchase agreements with regional brokerage firms. The Bank
can access this additional source of liquidity by pledging investment securities with the brokerage
firms.
Liquidity is further enhanced by a line of credit with the FHLB, amounting to approximately $401.5
million, collateralized by FHLB stock, investment securities, qualifying 1 to 4 family residential
mortgage loans, and qualifying commercial real estate loans. Based upon collateral pledged, as of
December 31, 2009, the borrowing capacity under this line was $263.6 million, with $48.4 million
available to be borrowed. The Bank provides various reports to the FHLB on a regular basis to
maintain the availability of the credit line. Each borrowing request to the FHLB is initiated
through an advance application that is subject to approval by the FHLB before funds are advanced
under the line of credit. In addition to the credit line held at the FHLB, the Bank has borrowing
capacity at the Federal Reserve Bank of Richmond (Federal Reserve Bank) totaling $75.5 million,
of which $27.6 million was outstanding at December 31, 2009.
As presented in the Consolidated Statement of Cash Flows, Bancorp generated $12.1 million in
operating cash flow during 2009, compared to $21.9 million in 2008 and $19.1 million in 2007. The
decrease from 2008 to 2009 was primarily a result of an increase in loans held for sale during 2009
compared to a decrease in loans held for sale during 2008. The increase from 2007 to 2008 is the
result of an increase in the provision for credit losses, as well as an increase in loans held for
sale, which was partially offset by a decline in other assets compared to the previous year.
Cash provided by investing activities was $102.2 million in 2009, compared to cash used for
investing activities of $115.6 million and $45.1 million in 2008 and 2007, respectively. Cash
flows for 2009 included an inflow of $83.9 million related to a decrease in the loan portfolio,
compared to cash outflows of $156.3 million in 2008 as the loan portfolio increased. The increase
in cash used in 2008 compared to 2007 was primarily a result of an increase in loans made to
customers, partially offset by net proceeds from maturities of available for sale securities. In
addition, Bancorp acquired $14.8 million in cash as a result of the Merger in July 2007.
Cash used in financing activities was $115.4 million in 2009, compared to cash provided by
financing activities of $80.8 million in 2008 and $38.2 million in 2007. Cash flows for 2009
included an outflow of $225.8 million related to a decrease in time deposits, while 2008 included
cash inflows of $85.9 million from increases in time deposits. The increase in cash provided from
2007 to 2008 is primarily the result of the proceeds from issuance of preferred stock and warrants.
The cash provided by financing activities in 2007 was reduced by payments to the Federal Home Loan
Bank to reduce outstanding borrowings.
Contractual Obligations and Commitments
In the normal course of business there are various outstanding contractual obligations of Bancorp
that will require future cash outflows. In addition, there are commitments and contingent
liabilities, such as commitments to extend credit, which may or may not require future cash
outflows. Payments for borrowings do not include interest. Payments related to leases are based on
actual payments specified in the underlying contracts. The following table reflects the material
contractual obligations of Bancorp outstanding as of December 31, 2009.
40
Table of Contents
Contractual Obligations
(in thousands)
(in thousands)
Payments Due by Period | ||||||||||||||||||||
One Year | Three Years | After | ||||||||||||||||||
Within One | to Three | to Five | Five | |||||||||||||||||
Year | Years | Years | Years | Total | ||||||||||||||||
Junior subordinated notes and
wholesale repurchase agreements |
$ | 10,000 | $ | 15,000 | $ | | $ | 46,774 | $ | 71,774 | ||||||||||
Federal Home Loan Bank borrowings |
112,500 | 37,700 | 15,000 | | 165,200 | |||||||||||||||
Federal Reserve Bank borrowings |
27,600 | | | | 27,600 | |||||||||||||||
Operating lease obligations |
1,657 | 2,198 | 1,534 | 727 | 6,116 | |||||||||||||||
Purchase obligations |
4,454 | 1,477 | 682 | 580 | 7,193 | |||||||||||||||
Other long-term liabilities |
2,383 | 2,657 | 2,941 | 8,613 | 16,594 | |||||||||||||||
Total contractual cash
obligations excluding deposits |
158,594 | 59,032 | 20,157 | 56,694 | 294,477 | |||||||||||||||
Deposits |
1,415,830 | 76,399 | 6,722 | 359 | 1,499,310 | |||||||||||||||
Total contractual cash obligations |
$ | 1,574,424 | $ | 135,431 | $ | 26,879 | $ | 57,053 | $ | 1,793,787 | ||||||||||
Capital Resources
Banks, bank holding companies, and financial holding companies, as regulated institutions, must
meet required levels of capital. The Federal Reserve and the FDIC have minimum capital regulations
or guidelines that categorize components and the level of risk associated with various types of
assets. Financial institutions are required to maintain a level of capital commensurate with the
risk profile assigned to their assets in accordance with the guidelines. On August 26, 2005, FNB
completed a private placement of trust preferred securities in the amount of $25.0 million, and
contributed $24.0 million of the proceeds to its bank subsidiary as capital to support the banks
growth. See Note 8 of the Notes to the Consolidated Financial Statements for a discussion of FNBs
issuance of trust preferred securities. On December 12, 2008, the Company sold Series A Preferred
Stock and a Warrant to the U.S. Treasury for $52.4 million as part of the CPP. As shown in Note
19 of the Notes to the Consolidated Financial Statements, the Company and the Bank both maintained
capital levels exceeding the minimum levels required to be categorized as well capitalized for
each of the three years presented.
The Companys stock repurchase program expired on May 31, 2009. The Company did not repurchase any
shares under the stock repurchase program during 2009.
On July 31, 2007, the Company issued 7,554,362 shares of its common stock valued at approximately
$117 million in the Merger.
Lending Activities
General. The Bank offers a broad array of lending services, including construction, real estate,
commercial and consumer loans, to individuals and small to medium-sized businesses and retail
clients that are located in or conduct a substantial portion of their business in the Banks market
areas. The Banks total loans at December 31, 2009, were $1.46 billion, or 75.2% of total assets.
At December 31, 2009, the Bank had no large loan concentrations (exceeding 10% of its portfolio) in
any particular industry, other than real estate. The Banks legal lending limit at December 31,
2009 was $32.3 million and the largest credit relationship was approximately $14.2 million.
Loan Composition. The following table summarizes, at the dates indicated, the composition of the
Banks loan portfolio and the related percentage composition. A substantial portion of the
increases from 2006 to 2007 are as a result of the Merger.
41
Table of Contents
Summary of Loan Portfolio
(dollars in thousands)
(dollars in thousands)
December 31 | ||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
% Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
Commercial |
$ | 593,423 | 40.6 | % | $ | 617,591 | 38.5 | % | $ | 571,575 | 38.4 | % | $ | 279,372 | 36.8 | % | $ | 288,240 | 38.1 | % | ||||||||||||||||||||
Real estate construction |
177,285 | 12.1 | 218,741 | 13.6 | 248,222 | 16.6 | 59,959 | 7.9 | 38,179 | 5.0 | ||||||||||||||||||||||||||||||
Real estate mortgage |
605,060 | 41.3 | 632,729 | 39.5 | 575,139 | 38.6 | 357,772 | 47.1 | 354,322 | 46.9 | ||||||||||||||||||||||||||||||
Consumer |
75,469 | 5.2 | 122,412 | 7.6 | 91,826 | 6.2 | 60,953 | 8.0 | 72,336 | 9.6 | ||||||||||||||||||||||||||||||
Other |
11,857 | 0.8 | 13,052 | 0.8 | 3,322 | 0.2 | 1,922 | 0.2 | 2,321 | 0.4 | ||||||||||||||||||||||||||||||
Total |
$ | 1,463,094 | 100.0 | % | $ | 1,604,525 | 100.0 | % | $ | 1,490,084 | 100.0 | % | $ | 759,978 | 100.0 | % | $ | 755,398 | 100.0 | % | ||||||||||||||||||||
The Company has no foreign loan activity.
Real Estate Loans. Loans secured by real estate for a variety of purposes constituted $782.3
million, or 53.5%, of the Banks total loans at December 31, 2009. At year end 2009, the Bank had
real estate loan relationships of various sizes ranging up to $13.1 million and commitments up to
$14.2 million, secured by office buildings, retail establishments, residential development and
construction, warehouses, motels, restaurants and other types of property. Loan terms are
typically limited to five years, with payments through the date of maturity generally based on a
15-20 year (15-30 year for owner-occupied single and multi-family properties) amortization
schedule. Interest rates may be fixed or adjustable, based on market conditions, and the Bank
generally charges an origination fee. Management has attempted to reduce credit risk in the real
estate portfolio by emphasizing loans on owner-occupied office, multi-family and retail buildings
where the loan to value ratio, established by independent appraisals, does not exceed 70% to 80%,
and net projected cash flow available for debt service amounts to at least 120% to 135% of the debt
service requirement. The Bank also often requires personal guarantees and personal financial
statements from the principal owners in such cases.
During the second quarter of 2005, Prince George Court Holdings, Inc, a subsidiary of the Bank,
acquired a partially completed residential condominium development project in Georgetown, South
Carolina by means of a deed-in-lieu of foreclosure in satisfaction of a $3.4 million loan
previously made to develop the project. Writedowns were recorded for $400,000 in 2005 and $1.0
million in 2006. In the first quarter of 2007, the Bank began to build out the project in
preparation for future sale. In the fourth quarter of 2007, management made the property available
for sale, while at the same time continuing to build out the project, and recorded an additional
$2.0 million writedown. A further writedown of $1.3 million was recorded during the fourth quarter
of 2008. As of December 31, 2009, construction of the project is complete, two units have been
sold and marketing of the remaining 14 units continues. The property has a carrying value of
approximately $4.1 million as of December 31, 2009.
The Bank originates fixed and adjustable rate mortgages as well as FHA, VA and USDA Government
supported loans for resale into the secondary market. The Bank provides a bank-held mortgage
product to accommodate qualified borrowers who do not meet all the standards for a conventional
secondary market mortgage. During 2009 the Bank originated $97.4 million of loans in these various
categories. Included in real estate mortgage loans are home equity revolving lines of credit, with
$234.7 million outstanding as of December 31, 2009.
Real Estate Construction Loans. The Banks current lending strategy is to reduce exposure in
this portfolio segment. The Bank expects that the majority of its new construction and development
loans on commercial and residential projects will be in the range of $300,000 to $5.0 million. At
December 31, 2009 and 2008, the Bank held $177.3 million and $218.7 million of such loans. To
reduce credit risk associated with such loans, the Bank emphasizes small commercial centers that
are substantially preleased, or residential projects that are substantially presold and built in
strong, proven markets. The leases on commercial projects must generally result in a loan to
appraised value of 75% to 80% or less and a net cash flow to debt service at no less than 120% to
135%. The Bank typically requires a personal guarantee from the developer or builder. Loan terms
are generally 12-15 months, although the Bank occasionally will make a mini-permanent loan for
purposes of construction and development of up to a five year term. Rates can be either fixed or
variable, and the Bank usually charges an origination fee. The Bank experienced net charge-offs
from real estate loans of $28.5 million in 2009, $12.0 million in 2008, and $3.6 million in 2007.
42
Table of Contents
Commercial Loans. The Bank makes loans for commercial purposes to various types of businesses. At
December 31, 2009, the Bank held $593.4 million of commercial loans, or 40.6% of its total loan
portfolio. Equipment loans are typically made on terms up to five years at fixed or variable
rates, with the financed equipment pledged as collateral to the Bank. The Bank attempts to reduce
its credit risk on these loans by limiting the loan to value percentage to 80%. Working capital
loans are made on terms typically not exceeding one year. These loans may be secured or unsecured,
but the Bank attempts to limit its credit risk by requiring the borrower to demonstrate its
capacity to produce net cash flow available for debt service equal to 120% to 150% of its debt
service requirements. The Bank experienced net charge-offs from commercial loans of $3.4 million
in 2009, $4.1 million in 2008, and $3.3 million in 2007.
Consumer Loans. Using a centralized underwriting process, the Bank makes a variety of loans to
individuals for personal and household purposes, including (i) secured and unsecured installment
and term loans originated directly by the Bank; (ii) unsecured revolving lines of credit, and (iii)
amortizing secured lot loans. Certain of the direct loans are secured by the borrowers
residences. At December 31, 2009, the Bank held $75.5 million of consumer loans. During 2009,
2008, and 2007, the Bank experienced net consumer chargeoffs of $3.9 million, $3.7 million, and
$1.5 million, respectively.
Loan Approval and Review. When the aggregate outstanding loans to a single borrower or related
entities exceed an individual officers lending authority, the loan request must be considered and
approved by an officer with a higher lending limit. All consumer purpose loan decisions are made
by the Banks Central Underwriting Support Group. Area executives can generally approve commercial
relationships up to $750,000. If the lending request exceeds the area executives lending limit,
the loan must be submitted to and approved by a senior credit officer. A senior credit officer has
authority to approve commercial relationships up to $2,500,000 on a secured basis. All loan
relationships in excess of $2,500,000 must be approved by the Chief Credit Officer (CCO), who may
approve loan relationships up to $5,000,000. Loan relationships exceeding $5,000,000 up to
$10,000,000 must be unanimously approved by a committee of a senior credit officer, the CCO, and
the Banks Chief Executive Officer (CEO). Loan relationships over $10,000,000 must be approved
by the Credit Management Committee of the Banks Board of Directors.
The Banks Loan Review Program is headed by the Loan Review Manager, who reports directly to the
Credit Management Committee of the Banks Board of Directors. The Program includes the Annual Loan
Review Coverage Plan which is approved by the Credit Management Committee and which stipulates a
certain number of loan reviews to be completed by the Loan Review Manager and employees under his
or her guidance, and an additional number of loan reviews to be completed by independent loan
review consulting firms. In addition, all loan officers are charged with the responsibility of
reviewing their portfolios and making adjustments to the risk ratings as needed. The Watch Loan
Committee, which includes the CCO, the Special Assets Manager and the Special Assets Officers,
reviews all loans graded special mention, substandard, doubtful and loss on a monthly basis, and
this meeting is observed by the Loan Review Manager and summarized for the Credit Management
Committee, also on a monthly basis.
The Banks credit review system supplements its loan rating system, pursuant to which the Bank may
place a loan on its criticized asset list or may classify a loan in one of various other
classification categories. A specified minimum percentage of loans in each adverse asset
classification category, based on the historical loss experience of the Bank in each such category,
are used to determine the adequacy of the Banks allowance for credit losses monthly. These loans
are also individually reviewed by the Watch Loan Committee of the Bank to determine whether a
greater allowance allocation is justified due to the facts and circumstances of a particular
adversely classified loan.
The Banks loan portfolio is analyzed on an ongoing basis to evaluate current risk levels, and risk
grades are adjusted accordingly. The Banks allowance for credit losses is also analyzed monthly
by management. This analysis includes a methodology that separates the total loan portfolio into
homogeneous loan classifications for purposes of evaluating risk. The required allowance is
calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a
homogenous group. Major loan portfolio subgroups include: risk graded commercial loans, mortgage
loans, home equity loans, retail loans and retail credit lines. The provisions of ASC 310-10-35
Loans that Are Identified for Evaluation or that Are Individually Considered
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Impaired are applied to individually significant loans. Finally, individual reserves may be
recorded based on a review of loans on the watch list. See also Note 5 in the Notes to
Consolidated Financial Statements of this Annual Report on Form 10-K.
Loan Portfolio Maturities and Interest Rate Sensitivities
(in thousands)
(in thousands)
Maturity | Maturity Greater Than One Year | |||||||||||||||||||||||
Over One | Over | Floating or | ||||||||||||||||||||||
One Year | Year to | Five | Fixed Interest | Adjustable | ||||||||||||||||||||
or Less | Five Years | Years | Total | Rate | Rate | |||||||||||||||||||
Commercial |
$ | 125,825 | $ | 378,585 | $ | 89,013 | $ | 593,423 | $ | 355,145 | $ | 112,453 | ||||||||||||
Real estate construction |
95,549 | 56,996 | 24,740 | 177,285 | 59,085 | 22,651 | ||||||||||||||||||
Real estate mortgage |
68,726 | 171,877 | 364,457 | 605,060 | 123,740 | 412,594 | ||||||||||||||||||
Consumer |
26,846 | 44,712 | 3,911 | 75,469 | 44,301 | 4,322 | ||||||||||||||||||
Other |
1,100 | 58 | 10,699 | 11,857 | 725 | 10,032 | ||||||||||||||||||
Total |
$ | 318,046 | $ | 652,228 | $ | 492,820 | $ | 1,463,094 | $ | 582,996 | $ | 562,052 | ||||||||||||
Asset Quality
The Bank considers asset quality to be of primary importance, and employs a formal internal loan
review process to ensure adherence to its lending policy as approved by the Banks Board of
Directors. See Lending Activities Loan Approval and Review. It is the responsibility of each
lending officer to assign an appropriate risk grade to every loan originated. Credit
Administration, through the loan review process, validates the accuracy of the initial risk grade
assessment. In addition, as a given loans credit quality improves or deteriorates, it is the
lending officers responsibility to recommend appropriate changes in the borrowers risk grade.
Currently, the grading process utilized by the Bank is segmented by product type. This methodology
does not provide a direct correlation with groupings utilized in the other tables presenting loan
information.
The Banks loan portfolio consists of loans made for a variety of commercial and consumer purposes.
Because commercial loans are made based to a great extent on the Banks assessment of a borrowers
income, cash flow, character and ability to repay, such loans are generally viewed as involving a
higher degree of credit risk than is the case with residential mortgage loans or consumer loans. To
manage this risk, the Banks commercial loan portfolio is managed under a defined process which
includes underwriting standards and risk assessment, procedures for loan approvals, loan grading,
ongoing identification and management of credit deterioration and portfolio reviews to assess loss
exposure and to ascertain compliance with the Banks credit policies and procedures.
Allocation of Allowance for Credit Losses
(in thousands)
(in thousands)
December 31 | ||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
% Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||||||||||||||||
Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
Commercial |
$ | 10,648 | 40.6 | % | $ | 7,351 | 38.5 | % | $ | 11,185 | 38.4 | % | $ | 2,724 | 36.8 | % | $ | 2,404 | 38.1 | % | ||||||||||||||||||||
Real estate construction |
11,662 | 12.1 | 13,039 | 13.6 | 6,945 | 16.6 | 1,032 | 7.9 | 911 | 5.0 | ||||||||||||||||||||||||||||||
Real estate mortgage |
9,615 | 41.3 | 8,555 | 39.5 | 7,928 | 38.6 | 3,827 | 47.1 | 3,377 | 46.9 | ||||||||||||||||||||||||||||||
Consumer |
3,858 | 5.2 | 6,742 | 7.6 | 4,295 | 6.2 | 1,606 | 8.0 | 1,417 | 9.6 | ||||||||||||||||||||||||||||||
Other |
60 | 0.8 | 118 | 0.8 | 17 | 0.2 | 375 | 0.2 | 331 | 0.4 | ||||||||||||||||||||||||||||||
Total |
$ | 35,843 | 100.0 | % | $ | 35,805 | 100.0 | % | $ | 30,370 | 100.0 | % | $ | 9,564 | 100.0 | % | $ | 8,440 | 100.0 | % | ||||||||||||||||||||
The allowance for credit losses has been allocated on an approximate basis. The entire amount
of the allowance is available to absorb losses occurring in any category. The allocation is not
necessarily indicative of future losses.
In general, consumer loans (including mortgage and home equity) have a lower risk profile than
commercial loans. Commercial loans (including commercial real estate, commercial non real estate
and construction loans) are generally larger in size and more complex than consumer loans.
Commercial real estate loans are deemed less
44
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risky than commercial non real estate and construction
loans, because the collateral value of real estate generally maintains its value better than non
real estate or construction collateral. The Bank has little or no exposure to
subprime lending. Consumer loans, which are smaller in size and more geographically diverse across
the Banks entire primary market areas, provide risk diversity across the portfolio. Because
mortgage loans are secured by first liens on the consumers residential real estate, they are the
Banks lowest risk profile loan type. Home equity loans are deemed less risky than unsecured
consumer loans because home equity loans and lines are secured by first or second deeds of trust on
the borrowers residential real estate. A centralized decision-making process is in place to
control the risk of the consumer, home equity and mortgage loan portfolio. The consumer real estate
appraisal process is also centralized relative to appraisal engagement, appraisal review, and
appraiser quality assessment. These processes are detailed in the underwriting guidelines, which
cover each retail loan product type from underwriting, servicing, compliance issues and closing
procedures.
Management follows a loan review program designed to evaluate the credit risk in its loan
portfolio. Through this loan review process, the Bank maintains an internally classified watch list
that helps management assess the overall quality of the loan portfolio and the adequacy of the
allowance for credit losses. In establishing the appropriate classification for specific assets,
management considers, among other factors, the estimated value of the underlying collateral, the
borrowers ability to repay, the borrowers payment history and the current delinquent status. As a
result of this process, certain loans are categorized as special mention, substandard, doubtful or
loss and reserves are allocated based on managements judgment and historical experience.
The function of determining the allowance for credit losses is fundamentally driven by the risk
grade system. The allowance for credit losses represents managements estimate of the appropriate
level of reserve to provide for probable losses inherent in the loan portfolio. In determining the
allowance for credit losses and any resulting provision to be charged against earnings, particular
emphasis is placed on the results of the loan review process. Consideration is also given to a
review of individual loans, historical loan loss experience, the value and adequacy of collateral
and economic conditions in the Banks market areas. For loans determined to be impaired, the
allowance is based on discounted cash flows using the loans initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant change. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review the Banks allowance for credit losses. Such agencies may require the Bank to
recognize changes to the allowance based on their judgments about information available to them at
the time of their examinations. Loans are charged off when in the opinion of management, they are
deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent
recoveries are added to the allowance.
Management believes the allowance for credit losses of $35.8 million at December 31, 2009 is
adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the
allowance is a process that requires continuous evaluation and considerable judgment. Managements
judgments are based on numerous assumptions about current events which it believes to be
reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses
in future periods will not exceed the current allowance or that future increases in the allowance
will not be required. No assurance can be given that managements ongoing evaluation of the loan
portfolio in light of changing economic conditions and other relevant circumstances will not
require significant future additions to the allowance, thus adversely affecting future operating
results of the Bank.
The following table presents an analysis of the changes in the allowance for credit losses.
45
Table of Contents
Analysis of Allowance for Credit Losses
(in thousands, except ratios)
(in thousands, except ratios)
As of or for the Years Ended | ||||||||||||||||||||
December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Average amount of loans outstanding |
$ | 1,538,777 | $ | 1,575,064 | $ | 1,060,522 | $ | 756,088 | $ | 752,420 | ||||||||||
Amount of loans outstanding |
1,463,094 | 1,604,525 | 1,490,084 | 759,978 | 755,398 | |||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||
Balance on January 1 |
$ | 35,805 | $ | 30,370 | $ | 9,564 | $ | 8,440 | $ | 7,962 | ||||||||||
Loans charged off: |
||||||||||||||||||||
Secured by real estate |
29,870 | 12,335 | 3,793 | 144 | 267 | |||||||||||||||
Commercial |
3,699 | 5,062 | 3,384 | 1,864 | 1,324 | |||||||||||||||
Installment |
4,649 | 4,771 | 2,014 | 3,153 | 1,414 | |||||||||||||||
Credit Card |
276 | 300 | 221 | 286 | 234 | |||||||||||||||
Total charge-offs |
38,494 | 22,468 | 9,412 | 5,447 | 3,239 | |||||||||||||||
Recoveries of loans previously charged off: |
||||||||||||||||||||
Secured by real estate |
1,392 | 338 | 152 | 11 | 66 | |||||||||||||||
Commercial |
316 | 978 | 100 | 406 | 256 | |||||||||||||||
Installment |
1,023 | 1,240 | 603 | 580 | 134 | |||||||||||||||
Credit Card |
52 | 85 | 101 | 64 | 42 | |||||||||||||||
Total recoveries |
2,783 | 2,641 | 956 | 1,061 | 498 | |||||||||||||||
Net loans charged off |
35,711 | 19,827 | 8,456 | 4,386 | 2,741 | |||||||||||||||
Provision for loan losses |
35,749 | 25,262 | 18,952 | 5,510 | 3,219 | |||||||||||||||
Allowance acquired via merger |
| | 10,310 | | | |||||||||||||||
Balance on December 31 |
$ | 35,843 | $ | 35,805 | $ | 30,370 | $ | 9,564 | $ | 8,440 | ||||||||||
Ratio of net charge-offs of loans to average
loans outstanding during the year |
2.32 | % | 1.26 | % | 0.79 | % | 0.58 | % | 0.36 | % | ||||||||||
Ratio of allowance to loans outstanding |
2.45 | % | 2.23 | % | 2.04 | % | 1.26 | % | 1.12 | % | ||||||||||
Ratio of non-performing assets to
loans outstanding |
5.85 | % | 3.03 | % | 1.16 | % | 1.30 | % | 0.54 | % | ||||||||||
Ratio of allowance to non-performing loans |
61.56 | % | 90.52 | % | 234.35 | % | 161.50 | % | 228.35 | % | ||||||||||
Ratio of allowance to non-performing loans,
net of non-performing loans for which the
full loss has been charged off |
104.52 | % | 90.52 | % | 234.35 | % | 161.50 | % | 228.35 | % | ||||||||||
Commercial loans. All commercial loans within the portfolio are risk graded among nine risk
grades based on managements evaluation of the overall credit quality of the loan, including the
payment history, the financial position of the borrower, the underlying collateral value, an
internal credit risk assessment and examination results. There is an increased reserve percentage
for each successively higher risk grade. As a result, the allowance is adjusted upon any migration
of a loan to a higher risk grade within the commercial loan portfolio.
The reserve percentages utilized have been determined by management to be appropriate based on
historical loan loss levels and the risk for each corresponding risk grade. Following the Merger,
the Bank elected to adjust the reserve percentage for certain risk grades, based on its analysis of
the history of the combined loan portfolio and the associated chargeoffs, as well as current
economic conditions. Based on these revisions, approximately $1.4 million was added to the
allowance for credit losses at the end of 2007. The Bank had 76.08% of its total commercial loans
in risk grades that are deemed acceptable or better at year end 2009, compared to 82.14% at year
end 2008.
Mortgage, home equity, and credit lines. Reserves are calculated on mortgage, home equity, and
credit lines based on historical loss experience and current economic conditions. The average
rolling eight quarter net loss percentage is calculated for each of these loan categories. The
reserve requirement also includes a reserve percentage for current economic conditions. The sum of
these two components is applied to the dollar balance of loans in each of these categories to
determine the required reserve.
Retail loans. The retail loans are pooled together to determine the reserve requirement. The
average rolling eight quarter net loss percentage is calculated for this loan category. The
reserve requirement also includes a reserve percentage for current economic conditions. The sum of
these two components is applied to the dollar balance of retail loans to determine the required
reserve for current loans and loans past due less than 90 days. A separate reserve is calculated
for loans past due 90 days or more. A reserve amount equal to 25.0% of all retail
46
Table of Contents
loans past due 90 days or more is added to the above mentioned requirement to determine the total
reserve requirement for retail loans.
Specific impairment. Management evaluates significant loans graded substandard, doubtful and loss
on an individual basis for impairment. The specific allowance is calculated based upon a review of
these loans and the estimated losses at the balance sheet date. At December 31, 2009 and 2008, the
recorded investment in significant loans considered impaired was approximately $47.1 million and
$78.2 million, respectively and the specific allowance for credit losses associated with those
loans was approximately $2.7 million and $9.2 million, respectively. The decrease in the amount of
significant impaired loans held by the Bank and the associated allowance for credit losses
resulted, primary, from the Banks decision to take appropriate aggressive action with our problem
credits through chargeoffs and foreclosure.
Watch list review. Specific allowances may be determined based on a review of specific watch list
loans. Specific losses are estimated at each measurement date. The Bank has established a Watch
List Committee to review all loans placed on the watch list. The watch list primarily consists of
loans classified as special mention, substandard and doubtful. An action plan is established for
each watch list loan. By reviewing these watch list loans, the Bank is able to update original
probable loss amounts in light of developing conditions. This serves to reduce the differences
between estimated and actual observed losses. During 2009, the Bank continued to focus on
reviewing its loan portfolio and reclassifying its loans, as required. Watch list loans increased
to $214.0 million at year end 2009, from $175.0 million at year end 2008. The reserve requirement
for watch list loans totaled $19.9 million and $16.0 million for 2009 and 2008, respectively.
Provision for credit losses. The 2009 provision for credit losses totaled $35.7 million, compared
to $25.3 million in 2008. As of December 31, 2009, nonperforming assets totaled $85.6 million,
comprised of $58.2 million in nonperforming loans and $27.4 million in other real estate owned.
Those figures compare to $39.5 million in nonperforming loans and $9.1 million in other real estate
owned at the end of 2008, totaling $48.6 million in nonperforming assets. Net charge-offs
increased in 2009 to $35.7 million, or 2.32% of average loans outstanding, compared with $19.8
million, or 1.26% of average loans outstanding in the prior year. At December 31, 2009 and 2008
the allowance for credit losses as a percentage of year end loans was 2.45% and 2.23%,
respectively. The 2009 and 2008 results have been impacted by ongoing evaluations of our credit
portfolio, prompted by the continued weakness in the regional and national economies.
Nonperforming Assets
(in thousands, except ratios)
December 31 | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Nonaccrual loans |
$ | 53,337 | $ | 38,029 | $ | 12,236 | $ | 3,686 | $ | 929 | ||||||||||
Restructured loans |
1,442 | 250 | 651 | 133 | 856 | |||||||||||||||
Accruing loans which are contractually
past due 90 days or more |
3,450 | 1,277 | 72 | 2,103 | 1,911 | |||||||||||||||
Total nonperforming loans |
58,229 | 39,556 | 12,959 | 5,922 | 3,696 | |||||||||||||||
Real estate
acquired in settlement of loans |
27,337 | 9,080 | 4,280 | 3,969 | 4,391 | |||||||||||||||
Total nonperforming assets |
$ | 85,566 | $ | 48,636 | $ | 17,239 | $ | 9,891 | $ | 8,087 | ||||||||||
Nonperforming loans to
loans outstanding at end of year |
3.98 | % | 2.47 | % | 0.87 | % | 0.78 | % | 0.49 | % | ||||||||||
Nonperforming assets to
total assets at end of year |
4.40 | % | 2.34 | % | 0.84 | % | 1.00 | % | 0.83 | % |
Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days
or more, restructured loans, and real estate acquired in settlement
of loans. Loans are placed on nonaccrual status 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.
47
Table of Contents
Investment Activities
Our investment portfolio plays a primary role in the management of liquidity and interest rate
sensitivity and, therefore, is managed in the context of the overall balance sheet. In 2009, the
securities portfolio generated a substantial percentage of our interest income and served as a
necessary source of liquidity.
Management attempts to deploy investable funds into instruments that are expected to increase the
overall return of the portfolio given the current assessment of economic and financial conditions,
while maintaining acceptable levels of credit, interest rate and liquidity risk, as well as capital
usage and risk.
The following tables present the carrying values, fair values, and weighted average yields of our
investment portfolio at December 31, 2009, 2008 and 2007 and the interval of maturities or
repricings at December 31, 2009
Investment Securities
(in thousands)
December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||
Amortized | Market | Amortized | Market | Amortized | Market | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
U.S. government agencies obligations |
$ | 49,005 | $ | 49,519 | $ | 56,622 | $ | 57,954 | $ | 140,759 | $ | 142,483 | ||||||||||||
Mortgage backed securities |
77,430 | 81,690 | 97,843 | 102,042 | 106,757 | 109,170 | ||||||||||||||||||
Corporate bonds |
33,978 | 35,604 | | | | | ||||||||||||||||||
Collateralized mortgage obligations |
35,124 | 35,368 | | | | | ||||||||||||||||||
State and municipal obligations |
105,169 | 105,994 | 115,627 | 114,912 | 105,689 | 105,993 | ||||||||||||||||||
Total debt securities |
300,706 | 308,175 | 270,092 | 274,908 | 353,205 | 357,646 | ||||||||||||||||||
Other equity |
17,189 | 17,694 | 13,642 | 13,896 | 11,850 | 11,909 | ||||||||||||||||||
Total securities |
$ | 317,895 | $ | 325,869 | $ | 283,734 | $ | 288,804 | $ | 365,055 | $ | 369,555 |
Investment Securities Portfolio Maturity Schedule
(dollars in thousands)
December 31, 2009 | ||||||||
Weighted | ||||||||
Market | Average | |||||||
Value | Yield(1) | |||||||
U. S. government agencies and mortgage backed obligations: |
||||||||
Within one year |
$ | 4,042 | 1.81 | % | ||||
One to five years |
45,476 | 3.44 | ||||||
Five to ten years |
12,046 | 4.91 | ||||||
After ten years |
105,013 | 5.58 | ||||||
Total |
166,577 | 4.85 | ||||||
Obligations of states and political subdivisions: |
||||||||
Within one year |
1,496 | 4.34 | ||||||
One to five years |
15,633 | 4.02 | ||||||
Five to ten years |
25,602 | 4.06 | ||||||
After ten years |
63,263 | 4.25 | ||||||
Total |
105,994 | 4.17 | ||||||
Corporate Bonds: |
||||||||
Within one year |
| | ||||||
One to five years |
35,604 | 5.25 | ||||||
Five to ten years |
| | ||||||
After ten years |
| | ||||||
Total |
35,604 | 5.25 | ||||||
Total debt securities |
$ | 308,175 | 4.68 | % | ||||
(1) | The yield related to securities exempt from federal income taxes is stated on a
fully taxable-equivalent basis, assuming a federal income tax rate of 35%. |
See also Note 4 in the Notes to Consolidated Financial Statements of this Annual Report on
Form 10-K.
48
Table of Contents
Off-Balance Sheet Arrangements
Information about the Companys off-balance sheet risk exposure is presented in Note 17 in the
Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair values of financial
instruments or other assets caused by changes in interest rates, currency exchange rates, or equity
prices. Interest rate risk is the Companys primary market risk and results from timing
differences in the repricing of assets and liabilities, changes in relationships between rate
indices, and the potential exercise of explicit or embedded options.
For a complete discussion on market risk and how the Company addresses this risk, see Item 7A of
this Annual Report on Form 10-K.
Effects of Inflation
As discussed in Item 7A of this Annual Report on Form 10-K, the effect of interest rate movements
in response to changes in the actual and perceived rates of inflation can materially impact bank
operations, which rely on net interest margins as a major source of earnings. Noninterest expense,
such as salaries and wages, occupancy and equipment cost are also negatively affected by inflation.
Application of Critical Accounting Policies
The Companys accounting policies are in accordance with accounting principles generally accepted
in the United States and with general practice within the banking industry, and are fundamental to
understanding managements discussion and analysis of results of operations and financial
condition. The Companys significant accounting policies are discussed in detail in Note 1 in the
Notes to the Consolidated Financial Statements. The following is a summary of the Banks allowance
for credit losses, one of the most complex and judgmental accounting policies of the Company.
The allowance for credit losses, which is utilized to absorb actual losses in the loan portfolio,
is maintained at a level consistent with managements best estimate of probable credit losses
incurred as of the balance sheet date. The Banks allowance for credit losses is also analyzed
monthly by management. This analysis includes a methodology that separates the total loan
portfolio into homogeneous loan classifications for purposes of evaluating risk. The required
allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of
loans within a homogenous group. Major loan portfolio subgroups include: risk graded commercial
loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management also
analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades
are adjusted accordingly. While management uses the best information available to make
evaluations, future adjustments may be necessary, if economic or other conditions differ
substantially from the assumptions used. See additional discussion under Asset Quality above.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The Companys primary market risk is considered to be the Banks interest rate risk which could
potentially have the greatest impact on operating earnings. The Bank is not subject to other types
of market risk, such as foreign currency exchange rate risk, commodity or equity price risk.
Interest rate risk on our balance sheet arises from the maturity mismatch of interest-earning
assets versus interest-bearing liabilities, as well as the potential for maturities to shorten or
lengthen our interest-earning assets and interest-bearing liabilities. In addition, market risk is
the possible chance of loss from unfavorable changes in market prices and rates. These changes may
result in a reduction of current and future period net interest income, which is the favorable
spread earned from the excess of interest income on interest-earning assets, over interest expense
on interest-bearing liabilities.
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Table of Contents
The Company uses several interest rate risk measurement tools provided by a national asset
liability management consultant to help manage this risk. Management provides key assumptions to
the consultant, which are used as inputs into the measurement tools. Following is a summary of two
different tools management uses on a quarterly basis to monitor and manage interest rate risk.
Earnings Simulation Modeling. Net income is affected by changes in the level of interest rates, the
shape of the yield curve and the general market pressures affecting current market interest rates
at the time of simulation. Many interest rate indices do not move uniformly, creating certain
disunities between them. For example, the spread between a 30 day, prime-based asset and a 30 day,
FHLB advance may not be uniform over time. The earnings simulation model projects changes in net
interest income caused by the effect of changes in interest rates on interest-earning assets and
interest-bearing liabilities. Simulation results are measured as a percentage change in net
interest income compared to the static-rate or base case scenario. The model considers increases
and decreases in asset and liability volumes using prepayment assumptions as well as rate changes.
Rate changes are modeled gradually over a 12 month period, referred to as a rate ramp. The model
projects only changes in interest income and expense and does not project changes in non-interest
income, non-interest expense, provision for loan losses or the impact of changing tax rates. At
December 31, 2009, net interest income simulation showed a
negative 3.02% change from the base case
in a 200 basis point ramped rising rate environment and a positive
1.79% change from the base case
in a 100 basis point ramped declining rate environment. The projected decrease in net interest
income is within the Asset/Liability Committees guidelines in a 200 basis point increasing or 100
basis point decreasing interest rate environment. However, management continually monitors signs of
elevated risks and takes certain actions to limit these risks.
The following table summarizes the results of the Companys income simulation model as of
December 31, 2009.
Change in Net Interest Income | ||||||||
Year 1 | Year 2 | |||||||
Change in Market Interest Rates: |
||||||||
200 basis point ramped increase |
(3.02 | )% | (5.70 | )% | ||||
Base case no change |
| 0.94 | % | |||||
100 basis point ramped decrease |
1.79 | % | 4.74 | % |
Net Portfolio Value Analysis. Net portfolio value (NPV) represents the market value of
portfolio equity and is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained 100 to 200 basis point
increase or decrease in market interest rates with no effect given to any actions management might
take to counter the effect of that interest rate movement. The following is a summary of the
results of the report compiled by the Companys outside consultant using data and assumptions
management provided as of December 31, 2009.
Estimated Change in Net Portfolio Value | ||||||||
Amount in 000s | Percent | |||||||
Change in Market Interest Rates: |
||||||||
200 basis point increase |
$ | (26,052 | ) | (11.79 | )% | |||
Base case no change |
| | ||||||
100 basis point decrease |
$ | (224 | ) | (0.10 | )% |
The preceding table indicates that, at December 31, 2009, in the event of a 200 basis point
increase in prevailing market interest rates, NPV would be expected to decrease by $26.1 million,
or 11.8% of the base case scenario value of $220.9 million. In the event of a decrease in
prevailing market rates of 100 basis points, NPV would be expected to
decline by $0.2 million, or
0.1% of the base case scenario value. The projected decrease in NPV is within the Asset Liability
Committees guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate
environment. However, management continually monitors signs of elevated risks and takes certain
actions to limit these risks.
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Interest rate risk management is a part of the Banks overall asset/liability management process.
The primary oversight of asset/liability management rests with the Banks Asset and Liability
Committee, which is comprised of the Banks CEO, Chief Financial Officer (CFO), CCO, Investment
Officer, Chief Risk Officer and other senior executives. The Committee meets on a monthly basis to
review the asset/liability management activities of the Bank and monitor compliance with
established policies. Activities of the Asset and Liability Committee are reported to the Audit
and Risk Management Committee of the Companys Board of Directors.
A primary objective of interest rate sensitivity management is to ensure the stability and quality
of the Banks primary earnings component, net interest income. This process involves monitoring
the Banks balance sheet in order to determine the potential impact that changes in the interest
rate environment may have on net interest income. Rate sensitive assets and liabilities have
interest rates that are subject to change within a specific time period, due to either maturity or
to contractual agreements which allow the instruments to reprice prior to maturity. Interest rate
sensitivity management seeks to ensure that both assets and liabilities react to changes in
interest rates within a similar time period, thereby minimizing the risk to net interest income.
Interest Sensitivity Analysis
At December 31, 2009
(in thousands, except ratios)
(in thousands, except ratios)
Total | ||||||||||||||||||||
1 90 | 91 365 | Total | Sensitive | |||||||||||||||||
Day | Day | Sensitive Within | Over | |||||||||||||||||
Sensitive | Sensitive | One Year | One Year | Total | ||||||||||||||||
Interest earning assets: |
||||||||||||||||||||
Loans, net of unearned income |
$ | 826,846 | $ | 53,251 | $ | 880,097 | $ | 582,997 | $ | 1,463,094 | ||||||||||
U. S. government agency |
1,001 | 3,041 | 4,042 | 127,167 | 131,209 | |||||||||||||||
State and municipal obligations |
315 | 1,165 | 1,480 | 103,984 | 105,464 | |||||||||||||||
Corporate bonds and
collateralized
mortgage obligations |
| | | 70,972 | 70,972 | |||||||||||||||
Other investment securities |
11,414 | | 11,414 | 6,280 | 17,694 | |||||||||||||||
Overnight funds |
15,166 | | 15,166 | | 15,166 | |||||||||||||||
Total interest earning assets |
854,742 | 57,457 | 912,199 | 891,400 | 1,803,599 | |||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||
NOW |
271,208 | | 271,208 | | 271,208 | |||||||||||||||
MMI |
358,165 | | 358,165 | | 358,165 | |||||||||||||||
Savings |
39,502 | | 39,502 | | 39,502 | |||||||||||||||
Time deposits |
277,583 | 313,332 | 590,915 | 83,480 | 674,395 | |||||||||||||||
Federal Reserve Bank borrowings |
27,600 | | 27,600 | | 27,600 | |||||||||||||||
Junior subordinated notes |
25,774 | | 25,774 | | 25,774 | |||||||||||||||
FHLB borrowings |
63,000 | 69,500 | 132,500 | 32,700 | 165,200 | |||||||||||||||
Wholesale repurchase agreements |
46,000 | | 46,000 | | 46,000 | |||||||||||||||
Total
interest bearing liabilities |
1,108,832 | 382,832 | 1,491,664 | 116,180 | 1,607,844 | |||||||||||||||
Interest sensitivity gap |
$ | (254,090 | ) | $ | (325,375 | ) | $ | (579,465 | ) | $ | 775,220 | $ | 195,755 | |||||||
Ratio of interest sensitive
assets to liabilities |
0.77 | 0.15 | 0.61 | 7.67 | 1.12 |
The measurement of the Banks interest rate sensitivity, or gap, is a technique traditionally
used in asset/liability management. The interest sensitivity gap is the difference between
repricing assets and repricing liabilities for a particular time period. The table, Interest
Sensitivity Analysis, indicates a ratio of rate sensitive assets to rate sensitive liabilities
within one year at December 31, 2009, to be 0.61X. This ratio indicates that a larger balance of
liabilities, compared to assets, could potentially reprice during the upcoming 12 month period.
Included in rate sensitive liabilities are certain deposit accounts (NOW, MMI, and savings) that
are subject to
51
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immediate withdrawal and repricing. These balances are presented in the category that
management believes best identifies their actual repricing patterns. The overall risk to net
interest income is also influenced by the Banks level of variable rate loans. These are loans
with a contractual interest rate tied to an interest rate index, such as the prime rate. A portion
of these loans may reprice on multiple occasions during a one-year period due to changes in the
underlying interest rate index. Approximately 54.4% of the total loan portfolio has a variable
interest rate and reprices in accordance with the underlying rate index subject to terms of
individual note agreements.
In addition to the traditional gap analysis, the Bank also utilizes a computer based interest rate
risk simulation model prepared by an independent consultant. This comprehensive model includes
rate sensitivity gap analysis, net interest income analysis, and present value of equity analysis,
under various rate scenarios. The Bank uses this model to monitor interest rate risk on a
quarterly basis and to detect trends that may affect the overall net interest income of the Bank.
This simulation incorporates the dynamics of balance sheet and interest rate changes and calculates
the related effect on net interest income. As a result, management believes that this analysis
more accurately projects the risk to net interest income over the upcoming 12-month period. The
Banks asset/liability policy provides guidance for levels of interest rate risk and potential
remediations, if necessary, to mitigate excessive levels of risk. The modeling results indicate
the Bank is subject to an acceptable level of interest rate risk.
The table, Market Sensitive Financial Instruments Maturities, presents the Companys financial
instruments that are considered to be sensitive to changes in interest rates, categorized by
contractual maturities, average interest rates and estimated fair values as of December 31, 2009.
Market Sensitive Financial Instruments Maturities
(Dollars in thousands)
(Dollars in thousands)
Contractual Maturities as of December 31, 2009 | ||||||||||||||||||||||||||||
After | ||||||||||||||||||||||||||||
Five Years | ||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Years | Total | ||||||||||||||||||||||
Financial assets: |
||||||||||||||||||||||||||||
Debt securities |
$ | 5,522 | $ | 18,290 | $ | 39,976 | $ | 22,572 | $ | 15,660 | $ | 205,625 | $ | 307,645 | ||||||||||||||
Loans: |
||||||||||||||||||||||||||||
Fixed rate |
83,304 | 67,360 | 156,036 | 161,079 | 70,663 | 127,859 | 666,301 | |||||||||||||||||||||
Variable rate |
229,256 | 46,653 | 43,853 | 68,456 | 38,238 | 370,337 | 796,793 | |||||||||||||||||||||
Total |
$ | 318,082 | $ | 132,303 | $ | 239,865 | $ | 252,107 | $ | 124,561 | $ | 703,821 | $ | 1,770,739 | ||||||||||||||
Financial liabilities: |
||||||||||||||||||||||||||||
NOW |
$ | 271,208 | $ | | $ | | $ | | $ | | $ | | $ | 271,208 | ||||||||||||||
MMI |
358,165 | | | | | | 358,165 | |||||||||||||||||||||
Savings |
39,502 | | | | | | 39,502 | |||||||||||||||||||||
Time deposits |
590,915 | 40,116 | 36,283 | 5,211 | 1,511 | 359 | 674,395 | |||||||||||||||||||||
Wholesale repurchase
agreements |
10,000 | 15,000 | | | | 21,000 | 46,000 | |||||||||||||||||||||
FHLB borrowing |
112,500 | 35,000 | 2,700 | | 15,000 | | 165,200 | |||||||||||||||||||||
Federal Reserve Bank borrowings |
27,600 | 27,600 | ||||||||||||||||||||||||||
Junior subordinated notes |
| | | | | 25,774 | 25,774 | |||||||||||||||||||||
Total |
$ | 1,409,890 | $ | 90,116 | $ | 38,983 | $ | 5,211 | $ | 16,511 | $ | 47,133 | $ | 1,607,844 | ||||||||||||||
52
Table of Contents
Market Sensitive Financial Instruments Maturities (continued)
(Dollars in thousands)
(Dollars in thousands)
Average | ||||||||
Interest | Estimated Fair | |||||||
Rate | Value | |||||||
Financial assets: |
||||||||
Debt securities |
4.68 | % | $ | 308,175 | ||||
Loans: |
||||||||
Fixed rate |
6.50 | 678,291 | ||||||
Variable rate |
4.63 | 796,793 | ||||||
Total |
$ | 1,783,259 | ||||||
Financial liabilities: |
||||||||
NOW |
0.61 | $ | 271,208 | |||||
MMI |
0.92 | 358,165 | ||||||
Savings |
0.10 | 39,502 | ||||||
Time deposits |
1.89 | 679,207 | ||||||
Wholesale repurchase agreements |
4.12 | 46,931 | ||||||
FHLB borrowing |
2.86 | 167,810 | ||||||
Junior subordinated notes |
1.76 | 12,586 | ||||||
Federal Reserve Bank borrowings |
0.50 | 27,600 | ||||||
Total |
$ | 1,603,009 | ||||||
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Table of Contents
Item 8. | Financial Statements and Supplementary Data |
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain of Bancorps consolidated
quarterly financial information. This information is derived from Bancorps unaudited financial
statements, which include all normal recurring adjustments which management considers necessary for
a fair presentation of the results for such periods. This information should be read in conjunction
with Bancorps consolidated financial statements included elsewhere in this report. The results for
any quarter are not necessarily indicative of results for any future period.
Quarterly Financial Data
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
2009 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | ||||||||||||
Interest income |
$ | 23,933 | $ | 24,471 | $ | 24,725 | $ | 25,371 | ||||||||
Interest expense |
7,466 | 9,441 | 10,856 | 11,395 | ||||||||||||
Net interest income |
16,467 | 15,030 | 13,869 | 13,976 | ||||||||||||
Provision for credit losses |
5,569 | 10,808 | 10,853 | 8,518 | ||||||||||||
Net interest income (loss) after provision for
credit losses |
10,898 | 4,222 | 3,016 | 5,458 | ||||||||||||
Noninterest income |
4,884 | 5,555 | 4,726 | 4,014 | ||||||||||||
Noninterest expense |
15,653 | 19,818 | 18,093 | 15,983 | ||||||||||||
Income (loss) before income taxes |
129 | (10,041 | ) | (10,351 | ) | (6,511 | ) | |||||||||
Provision for income taxes |
78 | (4,347 | ) | (4,440 | ) | (2,933 | ) | |||||||||
Net income (loss) |
51 | (5,694 | ) | (5,911 | ) | (3,578 | ) | |||||||||
Dividends and accretion on preferred stock |
(729 | ) | (729 | ) | (729 | ) | (729 | ) | ||||||||
Net income (loss) available to common shareholders |
$ | (678 | ) | $ | (6,423 | ) | $ | (6,640 | ) | $ | (4,307 | ) | ||||
Earnings per share: |
||||||||||||||||
Basic |
$ | (0.04 | ) | $ | (0.41 | ) | $ | (0.42 | ) | $ | (0.28 | ) | ||||
Diluted |
$ | (0.04 | ) | $ | (0.41 | ) | $ | (0.42 | ) | $ | (0.28 | ) |
2008 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | ||||||||||||
Interest income |
$ | 27,428 | $ | 28,468 | $ | 29,956 | $ | 32,110 | ||||||||
Interest expense |
13,014 | 12,913 | 13,280 | 14,645 | ||||||||||||
Net interest income |
14,414 | 15,555 | 16,676 | 17,465 | ||||||||||||
Provision for credit losses |
14,580 | 4,656 | 5,567 | 459 | ||||||||||||
Net interest
income (loss) after provision
for credit losses |
(166 | ) | 10,899 | 11,109 | 17,006 | |||||||||||
Noninterest income |
4,626 | 4,626 | 6,781 | 4,549 | ||||||||||||
Goodwill impairment |
50,437 | | | | ||||||||||||
Noninterest expense |
20,304 | 17,840 | 17,495 | 17,180 | ||||||||||||
Income
(loss) before income taxes |
(66,281 | ) | (2,315 | ) | 395 | 4,375 | ||||||||||
Provision for income taxes |
(7,698 | ) | (726 | ) | 135 | 1,365 | ||||||||||
Net income (loss) |
(58,583 | ) | (1,589 | ) | 260 | 3,010 | ||||||||||
Dividends and accretion on preferred stock |
(170 | ) | | | | |||||||||||
Net income (loss) available to common shareholders |
$ | (58,753 | ) | $ | (1,589 | ) | $ | 260 | $ | 3,010 | ||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | (3.75 | ) | $ | (0.10 | ) | $ | 0.02 | $ | 0.19 | ||||||
Diluted |
$ | (3.75 | ) | $ | (0.10 | ) | $ | 0.02 | $ | 0.19 |
54
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
NewBridge Bancorp
NewBridge Bancorp
We have audited the accompanying consolidated balance sheets of NewBridge Bancorp and Subsidiary as
of December 31, 2009 and 2008, and the related consolidated statements of income, changes in
shareholders equity and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2009. These financial statements are the responsibility of the companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of NewBridge Bancorp and Subsidiary as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2009 in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), NewBridge Bancorps internal control over financial reporting as of December
31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March
18, 2010, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 18, 2010
Raleigh, North Carolina
March 18, 2010
55
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
NewBridge Bancorp
NewBridge Bancorp
We have audited NewBridge Bancorps internal control over financial reporting as of December 31,
2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). NewBridge Bancorps
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying managements report on internal control over financial reporting. Our
responsibility is to express an opinion on NewBridge Bancorps internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion,
NewBridge Bancorp maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of NewBridge Bancorp and Subsidiary as of
December 31, 2009 and 2008, and the related consolidated statements of income, changes in
stockholders equity and comprehensive income, and cash flows for each of the three years in the
period ended December 31, 2009, and our report dated March 18, 2010, expressed an unqualified
opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 18, 2010
Raleigh, North Carolina
March 18, 2010
56
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NewBridge Bancorp and Subsidiary
Consolidated Balance Sheets
December 31, 2009 and 2008
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks. |
$ | 29,674 | $ | 32,993 | ||||
Interest-bearing bank balances. |
15,166 | 12,824 | ||||||
Federal funds sold |
| 42,043 | ||||||
Investment securities: |
||||||||
Held to maturity, market value $20,487 in 2009 and $27,269 in 2008 |
19,957 | 27,037 | ||||||
Available for sale |
305,382 | 261,535 | ||||||
Loans held for sale |
6,568 | 937 | ||||||
Loans |
1,456,526 | 1,603,588 | ||||||
Less allowance for credit losses |
(35,843 | ) | (35,805 | ) | ||||
Net Loans |
1,427,251 | 1,568,720 | ||||||
Premises and equipment, net |
40,406 | 45,253 | ||||||
Real estate acquired in settlement of loans |
27,337 | 9,080 | ||||||
Bank-owned life insurance |
28,614 | 28,084 | ||||||
Deferred tax assets |
26,022 | 21,864 | ||||||
Accrued income and other assets |
26,717 | 29,194 | ||||||
Total assets |
$ | 1,946,526 | $ | 2,078,627 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 156,040 | $ | 149,583 | ||||
Savings, NOW and money market accounts |
668,875 | 613,732 | ||||||
Time deposits |
674,395 | 900,148 | ||||||
Total deposits. |
1,499,310 | 1,663,463 | ||||||
Borrowings from the Federal Home Loan Bank |
165,200 | 139,000 | ||||||
Other borrowings |
99,374 | 76,815 | ||||||
Accrued expenses and other liabilities |
18,038 | 20,113 | ||||||
Total liabilities |
1,781,922 | 1,899,391 | ||||||
Commitments and contingent liabilities |
||||||||
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 |
51,190 | 50,891 | ||||||
Common stock, par value $5.00 per share;
Authorized 50,000,000 shares; issued and outstanding - 15,655,868 |
78,279 | 78,279 | ||||||
Paid-in capital |
86,969 | 86,852 | ||||||
Directors deferred compensation plan |
(634 | ) | (650 | ) | ||||
Retained earnings (deficit) |
(52,477 | ) | (34,427 | ) | ||||
Accumulated other comprehensive income (loss) |
1,277 | (1,709 | ) | |||||
Total shareholders equity |
164,604 | 179,236 | ||||||
Total liabilities and shareholders equity |
$ | 1,946,526 | $ | 2,078,627 | ||||
See notes to consolidated financial statements
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NewBridge Bancorp and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
2009 | 2008 | 2007 | ||||||||||
Interest Income |
||||||||||||
Interest and fees on loans |
$ | 84,089 | $ | 101,550 | $ | 85,259 | ||||||
Interest on investment securities: |
||||||||||||
Taxable |
9,416 | 10,229 | 8,505 | |||||||||
Tax exempt |
4,759 | 4,758 | 2,501 | |||||||||
Interest-bearing bank balances |
190 | 635 | 833 | |||||||||
Federal funds sold |
46 | 114 | 523 | |||||||||
Total interest income |
98,500 | 117,286 | 97,621 | |||||||||
Interest Expense |
||||||||||||
Deposits |
31,891 | 44,672 | 36,686 | |||||||||
Borrowings from the Federal Home Loan Bank |
4,706 | 5,483 | 4,634 | |||||||||
Other borrowings |
2,559 | 3,697 | 1,048 | |||||||||
Total Interest Expense |
39,156 | 53,852 | 42,368 | |||||||||
Net Interest Income |
59,344 | 63,434 | 55,253 | |||||||||
Provision for credit losses |
35,749 | 25,262 | 18,952 | |||||||||
Net interest income after provision for credit losses |
23,595 | 38,172 | 36,301 | |||||||||
Noninterest Income |
||||||||||||
Service charges on deposit accounts |
8,527 | 9,333 | 7,791 | |||||||||
Gain on sales of mortgage loans |
601 | 396 | 366 | |||||||||
Gain (loss) on sales of investment securities |
389 | 2,459 | (38 | ) | ||||||||
Gain on sale of merchant services |
1,177 | | | |||||||||
Other operating income |
8,483 | 8,442 | 6,879 | |||||||||
Total Noninterest Income |
19,177 | 20,630 | 14,998 | |||||||||
Noninterest Expense |
||||||||||||
Personnel |
30,901 | 35,175 | 30,744 | |||||||||
Occupancy |
5,436 | 4,546 | 2,919 | |||||||||
Furniture and equipment |
6,012 | 4,679 | 3,554 | |||||||||
Goodwill impairment |
| 50,437 | | |||||||||
FDIC insurance |
4,528 | 1,037 | 146 | |||||||||
Other operating |
22,669 | 26,754 | 24,993 | |||||||||
Total Noninterest Expense |
69,546 | 122,628 | 62,356 | |||||||||
Loss Before Income Taxes |
(26,774 | ) | (63,826 | ) | (11,057 | ) | ||||||
Income Taxes |
(11,641 | ) | (6,924 | ) | (5,394 | ) | ||||||
Net Loss |
(15,133 | ) | (56,902 | ) | (5,663 | ) | ||||||
Dividends and accretion on preferred stock |
(2,917 | ) | (170 | ) | | |||||||
Net Loss available to common shareholders |
$ | (18,050 | ) | $ | (57,072 | ) | $ | (5,663 | ) | |||
Loss Per Share |
||||||||||||
Basic |
$ | (1.15 | ) | $ | (3.64 | ) | $ | (0.49 | ) | |||
Diluted |
$ | (1.15 | ) | $ | (3.64 | ) | $ | (0.49 | ) | |||
Weighted Average Shares Outstanding basic and
diluted |
15,655,868 | 15,663,719 | 11,485,353 |
See notes to consolidated financial statements
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NewBridge Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except share data)
(Dollars in thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||||||
Directors | Other | Total | ||||||||||||||||||||||||||||||
Preferred | Common Stock | Paid-In | Deferred | Retained | Comprehensive | Shareholders | ||||||||||||||||||||||||||
Stock | Shares | Amount | Capital | Comp Plan | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||
Balances at December 31, 2006 |
$ | | 8,422,610 | $ | 42,113 | $ | 8,177 | $ | (1,390 | ) | $ | 42,669 | $ | (2,260 | ) | $ | 89,309 | |||||||||||||||
Net Loss |
(5,663 | ) | (5,663 | ) | ||||||||||||||||||||||||||||
Change in unrealized gain on securities
available for sale |
3,641 | 3,641 | ||||||||||||||||||||||||||||||
Change in funded status of pension plans |
440 | 440 | ||||||||||||||||||||||||||||||
Comprehensive loss |
(1,582 | ) | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock |
(8,255 | ) | (8,255 | ) | ||||||||||||||||||||||||||||
Stock-based compensation |
149 | 149 | ||||||||||||||||||||||||||||||
Common stock issued in merger |
7,554,362 | 37,771 | 79,094 | 116,865 | ||||||||||||||||||||||||||||
Common stock acquired and cancelled |
(282,904 | ) | (1,414 | ) | (2,008 | ) | 89 | (3,333 | ) | |||||||||||||||||||||||
Balances at December 31, 2007 |
$ | | 15,694,068 | $ | 78,470 | $ | 85,412 | $ | (1,301 | ) | $ | 28,751 | $ | 1,821 | $ | 193,153 | ||||||||||||||||
Net Loss |
(56,902 | ) | (56,902 | ) | ||||||||||||||||||||||||||||
Change in unrealized gain on securities
available for sale |
205 | 205 | ||||||||||||||||||||||||||||||
Change in funded status of pension plans |
(3,735 | ) | (3,735 | ) | ||||||||||||||||||||||||||||
Comprehensive loss |
(60,432 | ) | ||||||||||||||||||||||||||||||
Cash dividends declared on common stock |
(6,106 | ) | (6,106 | ) | ||||||||||||||||||||||||||||
Preferred stock issued, including Warrant |
50,875 | 1,497 | 52,372 | |||||||||||||||||||||||||||||
Dividends and accretion on preferred stock |
16 | (170 | ) | (154 | ) | |||||||||||||||||||||||||||
Stock-based compensation |
93 | 93 | ||||||||||||||||||||||||||||||
Common stock distributed |
651 | 651 | ||||||||||||||||||||||||||||||
Common stock acquired and cancelled |
(38,200 | ) | (191 | ) | (150 | ) | (341 | ) | ||||||||||||||||||||||||
Balances at December 31, 2008 |
$ | 50,891 | 15,655,868 | $ | 78,279 | $ | 86,852 | $ | (650 | ) | $ | (34,427 | ) | $ | (1,709 | ) | $ | 179,236 | ||||||||||||||
Net Loss |
(15,133 | ) | (15,133 | ) | ||||||||||||||||||||||||||||
Change in unrealized gain on securities
available for sale |
1,577 | 1,577 | ||||||||||||||||||||||||||||||
Change in funded status of pension plans |
1,409 | 1,409 | ||||||||||||||||||||||||||||||
Comprehensive loss |
(12,147 | ) | ||||||||||||||||||||||||||||||
Dividends and accretion on preferred stock |
299 | (2,917 | ) | (2,618 | ) | |||||||||||||||||||||||||||
Stock-based compensation |
117 | 117 | ||||||||||||||||||||||||||||||
Common stock distributed |
16 | 16 | ||||||||||||||||||||||||||||||
Balances at December 31, 2009 |
$ | 51,190 | 15,655,868 | $ | 78,279 | $ | 86,969 | $ | (634 | ) | $ | (52,477 | ) | $ | 1,277 | $ | 164,604 | |||||||||||||||
See notes to consolidated financial statements
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NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)
(Dollars in thousands)
2009 | 2008 | 2007 | ||||||||||
CASH FLOW FROM OPERATING ACTIVITIES |
||||||||||||
Net Loss |
$ | (15,133 | ) | $ | (56,902 | ) | $ | (5,663 | ) | |||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
6,968 | 4,737 | 3,192 | |||||||||
Securities premium amortization and discount accretion, net |
591 | 565 | (375 | ) | ||||||||
Gain on sale of loans held for sale |
(601 | ) | (396 | ) | (366 | ) | ||||||
Originations of loans held for sale |
(97,360 | ) | (130,027 | ) | (101,989 | ) | ||||||
Proceeds from sales of loans held for sale |
92,330 | 141,837 | 102,355 | |||||||||
Goodwill impairment |
| 50,437 | | |||||||||
(Increase) decrease in deferred tax assets |
(4,158 | ) | (8,360 | ) | (9,759 | ) | ||||||
(Increase) decrease in income taxes receivable |
(2,560 | ) | (2,800 | ) | 738 | |||||||
(Increase) decrease in interest earned but not received |
700 | 3,014 | (6,199 | ) | ||||||||
Increase (decrease) in interest accrued but not paid |
(1,470 | ) | (572 | ) | 1,414 | |||||||
Net (increase) decrease in other assets |
(115 | ) | (9,849 | ) | 7,455 | |||||||
Net increase (decrease) in other liabilities |
(589 | ) | 4,287 | 8,609 | ||||||||
Provision for credit losses |
35,749 | 25,262 | 18,952 | |||||||||
Stock-based compensation |
117 | 93 | 149 | |||||||||
(Gain) loss on sales of premises and equipment |
572 | 731 | 584 | |||||||||
Net cash provided by operating activities |
15,041 | 22,057 | 19,097 | |||||||||
CASH FLOW FROM INVESTING ACTIVITIES |
||||||||||||
Proceeds from maturities of securities held to maturity |
| | 1,964 | |||||||||
Purchases of securities available for sale |
(108,828 | ) | (128,665 | ) | (105,954 | ) | ||||||
Proceeds from maturities of securities available for sale |
78,325 | 210,355 | 140,110 | |||||||||
Net (increase) decrease in loans |
83,853 | (156,319 | ) | (95,676 | ) | |||||||
Purchases of premises and equipment and expenditures for
improvements to real estate acquired in settlement of loans |
(1,894 | ) | (5,808 | ) | (5,098 | ) | ||||||
Proceeds from sales of premises and equipment |
8,794 | 4,686 | 80 | |||||||||
Cash acquired in merger |
| | 14,803 | |||||||||
Net (increase) decrease in federal funds sold |
42,043 | (39,870 | ) | 4,672 | ||||||||
Net cash provided by (used in) investing activities |
102,293 | (115,621 | ) | (45,099 | ) | |||||||
CASH FLOW FROM FINANCING ACTIVITIES |
||||||||||||
Net increase (decrease) in demand deposits, NOW, money
market and savings accounts |
61,600 | (50,204 | ) | (7,857 | ) | |||||||
Net increase (decrease) in time deposits |
(225,753 | ) | 85,945 | 77,033 | ||||||||
Net increase (decrease) in other borrowings |
22,543 | (22,471 | ) | 9,347 | ||||||||
Net increase (decrease) in borrowings from FHLB |
26,200 | 21,000 | (30,000 | ) | ||||||||
Dividends paid |
(2,917 | ) | (6,260 | ) | (6,983 | ) | ||||||
Stock issuance costs |
| | (10 | ) | ||||||||
Proceeds from issuance of preferred stock and warrants |
| 52,372 | | |||||||||
Common stock distributed (acquired) |
16 | 310 | (3,333 | ) | ||||||||
Net cash provided by (used in) financing activities |
(118,311 | ) | 80,692 | 38,197 | ||||||||
Increase (decrease) in cash and cash equivalents |
(977 | ) | (12,872 | ) | 12,195 | |||||||
Cash and cash equivalents at the beginning of the years |
45,817 | 58,689 | 46,494 | |||||||||
Cash and cash equivalents at the end of the years |
$ | 44,840 | $ | 45,817 | $ | 58,689 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||||||
Cash paid during the years for: |
||||||||||||
Interest |
$ | 40,626 | $ | 54,424 | $ | 40,954 | ||||||
Income taxes |
| 3,500 | 3,885 | |||||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS |
||||||||||||
Transfer of loans to other real estate owned |
$ | 26,216 | $ | 9,963 | $ | 9,009 | ||||||
Unrealized gain on securities available for sale: |
||||||||||||
Change in securities available for sale |
(5,308 | ) | (298 | ) | (5,813 | ) | ||||||
Change in deferred income taxes |
3,731 | 93 | 2,172 | |||||||||
Change in shareholders equity |
1,577 | 205 | 3,641 | |||||||||
Common stock issued in Merger |
| | 116,865 |
See notes to consolidated financial statements
60
Table of Contents
NewBridge Bancorp and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
Note 1 Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of NewBridge Bancorp
(Bancorp or the Company) and its wholly owned subsidiary NewBridge Bank (the Bank). All
significant intercompany balances and transactions have been eliminated in consolidation.
Nature of operations
The Bank provides a variety of financial services to individual and corporate customers in North
Carolina (NC) and Virginia (VA). As of December 31, 2009, the Bank operated 36 branches in the
Piedmont Triad Region and Coastal Region of NC and two branches in the Shenandoah Valley Region of
VA. The majority of the Banks NC clients are located in Davidson, Rockingham, Guilford, Forsyth
and New Hanover Counties. The majority of the Banks VA customers are located in Rockingham and
Augusta Counties. The Banks primary deposit products are noninterest-bearing checking accounts,
interest-bearing checking accounts, money market accounts, certificates of deposit and individual
retirement accounts. Its primary lending products are commercial, real estate and consumer loans.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for credit losses. A majority of the Banks loan portfolio consists
of loans in the geographic areas cited above. The local economies of these areas depend heavily on
the industrial, agricultural and service sectors. Accordingly, the ultimate collectibility of a
large portion of the Banks loan portfolio would be affected by changes in local economic
conditions.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks and interest-bearing bank deposits. Cash
and cash equivalents are defined as cash and short-term investments with maturities of three months
or less at the time of acquisition.
Investment securities
The Bank classifies its investment securities at the time of purchase into three categories as
follows:
| Held to Maturity reported at amortized cost, |
||
| Trading reported at fair value with unrealized gains and losses included in earnings, or |
||
| Available for Sale reported at fair value with unrealized gains and
losses reported in other comprehensive income. |
The Bank is required to maintain certain levels of Federal Home Loan Bank (FHLB) of Atlanta stock
based on various criteria established by the individual issuer. Gains and losses on sales of
securities are recognized when realized on a specific identification basis. Premiums and discounts
are amortized into interest income using methods that approximate the level yield method.
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Other Than Temporary Impairment of Investment Securities
Bancorps policy regarding other than temporary impairment of investment securities requires
continuous monitoring. Individual investment securities with a fair market value that is less than
80% of original cost over a continuous period of two quarters are evaluated for impairment during
the subsequent quarter. The evaluation includes an assessment of both qualitative and quantitative
measures to determine whether, in managements judgment, the investment is likely to recover its
original value. If the evaluation concludes that the investment is not likely to recover its
original value, the unrealized loss is reported as an other than temporary impairment, and the loss
is recorded as a securities transaction on the Consolidated Statement of Income.
Loans
Interest on loans is accrued and credited to income based on the principal amount outstanding. The
accrual of interest on impaired loans is discontinued when, in managements opinion, the borrower
may be unable to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. 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. Interest income is subsequently recognized only to
the extent payments are received. Loans may be returned to accrual status when all principal and
interest amounts contractually due are reasonably assured of repayment within an acceptable period
of time, and there is a sustained period of repayment performance (generally a minimum of six
months) of interest and principal by the borrower in accordance with the contractual terms.
Mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding
commitments from investors or current investor yield requirements, calculated on the aggregate loan
basis.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are capitalized and recognized as an
adjustment of the yield on the related loan.
Impaired loans
A loan is considered impaired, based on current information and events, if it is probable that the
Bank will be unable to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Generally, a loan will be considered impaired if
it exhibits the same level of underlying weakness and probability of loss as loans classified
doubtful or loss.
The impairment evaluation compares the recorded book value of the loan, or loan relationship, to
the present value of the expected future principal, interest and collateral value (if applicable)
cash flows. The expected cash flows are discounted at the contractual interest rate for the
individual note. A specific reserve is established if the present value of expected future cash
flows is less than the recorded book value of the loan.
Allowance for credit losses
The Banks allowance for credit losses is based on managements best estimate of probable loan
losses incurred as of the balance sheet date. Factors impacting estimated probable loan losses
include credit quality trends, past loan loss experience, current economic conditions, and loan
volume among loan categories.
While management uses the best available information to establish the allowance for credit losses,
future additions to the allowance may be necessary based on the factors cited above. In addition,
the allowance is reviewed by regulatory agencies as an integral part of their examination
processes. Such agencies may require the Company to recognize changes to the allowance based on
their judgments about information available to them at the time of their examination.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, through partial or total satisfaction of loans, is
initially recorded at fair market value, less estimated costs to sell, which becomes the propertys
new basis. At the date of acquisition, losses are charged to the allowance for credit losses.
Subsequent write-downs are charged to expense in the period they are incurred.
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Premises and equipment
Premises and equipment are stated at cost (or at fair value for premises and equipment acquired in
business combinations) less accumulated depreciation and amortization. The provision for
depreciation and amortization is computed principally by the straight-line method over the
estimated useful lives of the assets. Useful lives are estimated at 20 to 40 years for buildings
and three to ten years for equipment. Leasehold improvements are amortized over the expected terms
of the respective leases or the estimated useful lives of the improvements, whichever is shorter.
Expenditures for maintenance and repairs are charged to operations, and the expenditures for major
replacements and betterments are added to the premises and equipment accounts. The cost and
accumulated depreciation of premises and equipment retired or sold are eliminated from the
appropriate asset accounts at the time of retirement or sale and the resulting gain or loss is
reflected in current operations.
Income taxes
Provisions for income taxes are based on taxes payable or refundable, for the current year (after
exclusion of non-taxable income such as interest on state and municipal securities and bank owned
life insurance and non-deductible expenses) and deferred taxes on temporary differences between the
tax basis of assets and liabilities and their reported amounts in the financial statements at
currently enacted income tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes.
Per share data
In accordance with GAAP, the Company discloses two earnings per share amounts: basic net income per
share of common stock and diluted net income per share of common stock. Basic net income per share
of common stock is computed by dividing net income available to common shareholders by the weighted
average number of shares of common stock outstanding during each year. Diluted net income per
share of common stock is computed by dividing net income available to common shareholders plus any
adjustments to net income related to the issuance of dilutive potential common shares, comprised of
outstanding options and/or warrants to purchase shares of common stock and restricted stock grants,
by the weighted average number of shares of common stock outstanding during each year plus the
number of potential dilutive common shares.
Sales of loans
Gains and losses on the sales of loans are accounted for by imputing gain or loss on those sales
where a yield rate guaranteed to the buyer is more or less than the contract interest rate being
collected. Such gains or losses are recognized in the financial statements at the time of the
sale.
Off-balance sheet arrangements
In the ordinary course of business, the Bank enters into off-balance sheet financial instruments
consisting of commitments to extend credit, commitments under credit card arrangements, commercial
letters of credit and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or received.
Segment information
The Company reports segment information in accordance with GAAP, which requires that public
business enterprises report certain information about operating segments in their annual financial
statements and in condensed financial statements for interim periods issued to shareholders. It
also requires that public business enterprises report related disclosures and descriptive
information about products and services by significant segments, geographic areas, and major
customers, differences between the measurements used in reporting segment information and those
used in the enterprises general-purpose financial statements, and changes in the measurement of
segment amounts from period to period.
Operating segments are components of an enterprise with separate financial information available
for use by the chief operating decision maker to allocate resources and to assess performance. The
Company has determined that it has one significant operating segment, providing financial services
through the Bank, including banking, mortgage, and investment services, to customers located
principally in Davidson, Rockingham, Guilford, Forsyth
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and New Hanover Counties in NC, and in Rockingham and Augusta Counties in VA, and in the
surrounding communities. The various products are those generally offered by community banks, and
the allocation of resources is based on the overall performance of the Bank, rather than the
individual branches or products.
There are no differences between the measurements used in reporting segment information and those
used in the Companys general-purpose financial statements.
Recent accounting pronouncements
On July 1, 2009, the Financial Accounting Standards Board (FASB) GAAP Codification became
effective as the sole authoritative source of GAAP. This Codification reorganizes current GAAP for
non-governmental entities into a topical index to facilitate accounting research and to provide
users additional assurance that they have referenced all related literature pertaining to a given
topic. Existing GAAP prior to the Codification was not altered in compilation of the GAAP
Codification. The Codification encompasses all FASB Statements of Financial Accounting Standards
(SFAS), Emerging Issues Task Force statements, FASB Staff Positions, FASB Interpretations, FASB
Derivative Implementation Guides, American Institute of Certified Public Accountants Statement of
Positions, Accounting Principals Board Opinions and Accounting Research Bulletins along with the
remaining body of GAAP effective as of June 30, 2009. Financial statements issued for all interim
and annual periods ending after September 15, 2009 need to reference accounting guidance embodied
in the Codification as opposed to referencing the previously authoritative pronouncements.
Accounting literature included in the Codification is referenced by Topic, Subtopic, Section and
paragraph.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, Measuring
Liabilities at Fair Value, which is codified as Accounting Standards Codification (ASC) 820, Fair
Value Measurements and Disclosures. This Update provides amendments to Topic 820-10, Fair Value
Measurements and Disclosures Overall, for the fair value measurement of liabilities. This Update
provides clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using a
valuation technique that uses the quoted price of the identical liability when traded as an asset,
quoted prices for similar liabilities or similar liabilities when traded as assets, or that is
consistent with the principles of Topic 820. The amendments in this Update also clarify that when
estimating the fair value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction that prevents
transfer of the liability. The amendments in this Update also clarify that both a quoted price in
an active market for the identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no adjustments to the quoted
price of the asset are required are Level 1 fair value measurements. The guidance provided in this
Update is effective for the first reporting period (including interim periods) beginning after
issuance. The adoption of this Update did not have a significant impact to the Companys financial
condition, results of operations or cash flows.
The Company adopted ASC 855 Subsequent Events (ASC 855) effective June 30, 2009. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or available to be issued. ASC 855
defines (i) the period after the balance sheet date during which a reporting entitys management
should evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements, and (iii) the
disclosures an entity should make about events or transactions that occurred after the balance
sheet date. The Companys adoption of ASC 855 did not result in any material effect on the
Companys financial position or operating results.
In June 2009 the FASB issued new guidance impacting Transfers and Servicing. The objective of
this guidance is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a transfer of financial
assets; the effects of a transfer on its financial position, financial performance, and cash flows;
and a transferors continuing involvement in transferred financial assets. The Companys adoption
of this new guidance did not result in any material effect on the Companys financial position or
operating results.
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In June 2009, the FASB issued new guidance impacting Consolidation of variable interest entities.
The objective of this guidance is to improve financial reporting by enterprises involved with
variable interest entities and to provide more relevant and reliable information to users of
financial statements. This guidance is effective as of January 1, 2010. The adoption of this
guidance is not expected to be material to the Companys consolidated financial statements.
Reclassification
Certain items for 2008 and 2007 have been reclassified to conform to the 2009 presentation. Such
reclassifications had no effect on net income, total assets or shareholders equity as previously
reported.
Note 2 Merger of Equals
Bancorp is a bank holding company incorporated under the laws of the state of North Carolina (NC)
and registered under the Bank Holding Company Act of 1956, as amended (the BHCA). Bancorp is the
successor entity to LSB Bancshares, Inc. (LSB), which was incorporated on December 8, 1982. On
July 31, 2007, FNB Financial Services Corporation (FNB), a bank holding company, also
incorporated in NC and registered under the BHCA, merged with and into LSB in a merger of equals
(the Merger). LSBs name was then changed to NewBridge Bancorp.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of February 26, 2007 (the
Merger Agreement), by and between LSB and FNB, each share of common stock of FNB outstanding at
the effective time of the Merger was converted into the right to receive 1.07 shares of Bancorps
common stock. The Company issued approximately $117 million of its common stock to FNB
shareholders, based on 7,059,823 shares of FNB common stock outstanding as of July 31, 2007 and the
closing price of the Companys common stock on July 31, 2007.
The Merger was accounted for under the purchase method of accounting and was structured to
qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The Merger
initially resulted in $49.9 million of goodwill and $6.6 million of core deposit intangibles. The
goodwill was not tax deductible. The core deposit intangible was determined by an independent
valuation and is being amortized over the estimated life of 10 years, based on undiscounted cash
flows.
As of December 31, 2008, the Company wrote off $50.4 million of goodwill. At December 31, 2009,
the carrying value of other intangibles was $5.3 million.
Note 3 Restriction on cash and due from banks
The Bank maintains required reserve balances with the Federal Reserve Bank of Richmond. The
amounts of these reserve balances at December 31, 2009 and 2008 were $15,831,000 and $5,115,000,
respectively.
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Note 4 Investment securities
Investment securities at December 31 consist of the following (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
2009: |
||||||||||||||||
Available for sale: |
||||||||||||||||
U.S. government agency securities |
$ | 49,005 | $ | 529 | $ | (15 | ) | $ | 49,519 | |||||||
Mortgage backed securities |
77,430 | 4,260 | | 81,690 | ||||||||||||
State and municipal obligations |
85,212 | 1,747 | (1,452 | ) | 85,507 | |||||||||||
Corporate bonds |
33,978 | 1,626 | | 35,604 | ||||||||||||
Collateralized mortgage obligations |
35,124 | 346 | (102 | ) | 35,368 | |||||||||||
Federal Home Loan Bank stock |
11,414 | | | 11,414 | ||||||||||||
Other equity securities |
5,775 | 725 | (220 | ) | 6,280 | |||||||||||
Total available for sale |
297,938 | 9,233 | (1,789 | ) | 305,382 | |||||||||||
Municipal obligations held to maturity |
19,957 | 550 | (20 | ) | 20,487 | |||||||||||
Total investment securities |
$ | 317,895 | $ | 9,783 | $ | (1,809 | ) | $ | 325,869 | |||||||
2008: |
||||||||||||||||
Available for sale: |
||||||||||||||||
U.S. government agency securities |
$ | 56,622 | $ | 1,332 | $ | | $ | 57,954 | ||||||||
Mortgage backed securities |
97,843 | 4,199 | | 102,142 | ||||||||||||
State and municipal obligations |
88,590 | 1,064 | (2,011 | ) | 87,643 | |||||||||||
Federal Home Loan Bank stock |
9,867 | | | 9,867 | ||||||||||||
Other equity securities |
3,775 | 570 | (316 | ) | 4,029 | |||||||||||
Total available for sale |
256,697 | 7,165 | (2,327 | ) | 261,535 | |||||||||||
Municipal obligations held to maturity |
27,037 | 444 | (212 | ) | 27,269 | |||||||||||
Total investment securities |
$ | 283,734 | $ | 7,609 | $ | (2,539 | ) | $ | 288,804 | |||||||
The aggregate cost of the Companys investment in Federal Home Loan Bank (FHLB) stock
totaled $11,414,000 at December 31, 2009. Because of the redemption provisions of this stock, and
the financial condition of the FHLB of Atlanta, the Company estimates that the fair value equals
the cost of this investment and that it is not impaired.
The following table shows the Companys investments gross unrealized losses and fair value,
aggregated by investment category and length of time that the individual securities have been in a
continuous unrealized loss position, at December 31, 2009 and 2008. The unrealized losses relate to
debt securities that have incurred fair value reductions due to higher market interest rates since
the securities were purchased. The unrealized losses are not likely to reverse unless and until
market interest rates decline to the levels that existed when the securities were purchased. Since
none of the unrealized losses relate to the marketability of the securities or the issuers ability
to honor redemption obligations, and the Company has the intent and ability to hold until recovery,
none of the securities are deemed to be other than temporarily impaired.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
2009 | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
(In thousands) |
||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
U.S. government agency
securities |
$ | 3,985 | $ | 15 | $ | | $ | | $ | 3,985 | $ | 15 | ||||||||||||
Collateralized mortgage
obligations |
17,380 | 102 | | | 17,380 | 102 | ||||||||||||||||||
Other equity securities |
| | 839 | 220 | 839 | 220 | ||||||||||||||||||
State and municipal obligations |
21,479 | 761 | 4,795 | 711 | 26,274 | 1,472 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 42,844 | $ | 878 | $ | 5,634 | $ | 931 | $ | 48,478 | $ | 1,809 | ||||||||||||
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Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Unrealized | ||||||||||||||||||||
2008 | value | losses | value | losses | Fair value | losses | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Investment securities: |
||||||||||||||||||||||||
State and municipal
obligations |
$ | 44,255 | $ | 1,753 | $ | 6,343 | $ | 470 | $ | 50,598 | $ | 2,223 | ||||||||||||
Other equity securities |
523 | 316 | | | 523 | 316 | ||||||||||||||||||
Total temporarily impaired
securities |
$ | 44,778 | $ | 2,069 | $ | 6,343 | $ | 470 | $ | 51,121 | $ | 2,539 | ||||||||||||
The amortized cost and estimated market value of debt securities at December 31, 2009, by
contractual maturities, are shown in the accompanying schedule. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties (in thousands).
Amortized | Estimated | |||||||
Cost | Fair Value | |||||||
Due in one year or less |
$ | 5,485 | $ | 5,538 | ||||
Due after one through five years |
93,983 | 96,713 | ||||||
Due after five through ten years |
36,355 | 37,648 | ||||||
Due after ten years |
164,883 | 168,276 | ||||||
Total debt securities |
$ | 300,706 | $ | 308,175 | ||||
A recap of the maturities of held to maturity securities follows. There were no sales of held
to maturity securities during the years presented (in thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Proceeds from maturities |
$ | | $ | | $ | 1,964 |
A recap of the maturities and sales of available for sale securities follows (in thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Proceeds from sales and maturities |
$ | 10,977 | $ | 210,535 | $ | 140,110 | ||||||
Gross realized gains |
389 | 2,475 | 101 | |||||||||
Gross realized losses |
| 16 | 139 |
Investment securities with amortized costs of approximately $154,352,000 and $187,275,000 and
market values of approximately $158,450,000 and $190,620,000 as of December 31, 2009 and 2008,
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.
Note 5 Loans
Loans are summarized as follows (in thousands):
December 31 | ||||||||
2009 | 2008 | |||||||
Commercial |
$ | 593,423 | $ | 617,591 | ||||
Real estate-construction |
177,285 | 218,741 | ||||||
Real estate-mortgage |
605,060 | 632,729 | ||||||
Consumer |
75,469 | 122,412 | ||||||
Other |
11,857 | 13,052 | ||||||
Total loans, net of unearned income |
$ | 1,463,094 | $ | 1,604,525 | ||||
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As of December 31, 2009 and December 31, 2008, loans totaling approximately $575,108,000 and
$524,441,000, respectively, were pledged to secure the line of credit with the FHLB and Federal
Reserve Bank.
Nonperforming assets are summarized as follows (in thousands):
December 31 | ||||||||
2009 | 2008 | |||||||
Nonaccrual loans |
$ | 53,337 | $ | 38,029 | ||||
Restructured loans |
1,442 | 250 | ||||||
Loans past due 90 days or more |
3,450 | 1,277 | ||||||
Total nonperforming loans |
58,229 | 39,556 | ||||||
Real estate acquired in settlement of loans |
27,337 | 9,080 | ||||||
Total nonperforming assets |
$ | 85,566 | $ | 48,636 | ||||
Impaired loans and related information are summarized in the following tables (in thousands):
December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Loans identified as impaired |
||||||||||||
Commercial and real estate |
$ | 118,771 | $ | 84,422 | $ | 47,133 | ||||||
Consumer |
6,183 | 6,889 | 1,857 | |||||||||
Total |
$ | 124,954 | $ | 91,311 | $ | 48,990 | ||||||
Allowance for credit losses associated with impaired
loans |
$ | 16,723 | $ | 12,768 | $ | 11,128 | ||||||
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Average balances of impaired loans for the years |
$ | 117,777 | $ | 73,349 | $ | 28,554 | ||||||
Interest income recorded for impaired loans |
$ | 905 | $ | 380 | $ | 535 | ||||||
An analysis of the changes in the allowance for credit losses follows (in thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Balances at beginning of years |
$ | 35,805 | $ | 30,370 | $ | 9,564 | ||||||
Provision for credit losses |
35,749 | 25,262 | 18,952 | |||||||||
Loans charged off |
(38,494 | ) | (22,468 | ) | (9,412 | ) | ||||||
Recoveries |
2,783 | 2,641 | 956 | |||||||||
Allowance acquired via acquisition |
| | 10,310 | |||||||||
Balances at end of years |
$ | 35,843 | $ | 35,805 | $ | 30,370 | ||||||
The Banks 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.
Note 6 Premises and equipment
The following is a summary of premises and equipment (in thousands):
December 31 | ||||||||
2009 | 2008 | |||||||
Land |
$ | 15,043 | $ | 13,626 | ||||
Buildings |
21,974 | 23,256 | ||||||
Equipment |
31,081 | 31,535 | ||||||
Leasehold improvements |
2,109 | 2,152 | ||||||
Premises and
equipment, total cost |
70,207 | 70,569 | ||||||
Less, accumulated depreciation |
29,801 | 25,316 | ||||||
Premises and
equipment, net |
$ | 40,406 | $ | 45,253 | ||||
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Depreciation and amortization expense amounting to $4,630,000, $4,737,000 and $3,192,000, for
the years ended December 31, 2009, 2008, and 2007, respectively, is included in occupancy expense
and furniture and equipment expense in the consolidated statements of income.
Note 7 Deposits
The aggregate amount of certificates of deposit of $100,000 or more was approximately $239,057,000
and $347,305,000 at December 31, 2009 and 2008, respectively. The accompanying table presents the
scheduled maturities of total time deposits at December 31, 2009 (in thousands).
Years ending December 31, | ||||
2010 |
$ | 590,915 | ||
2011 |
40,116 | |||
2012 |
36,283 | |||
2013 |
5,211 | |||
2014 |
1,511 | |||
Thereafter |
359 | |||
Total time deposits |
$ | 674,395 | ||
Note 8 Short-term borrowings and long-term debt
The following is a schedule of short-term borrowings and long-term debt (in thousands, except
percentages):
Balance | Interest Rate | Maximum Outstanding | ||||||||||||||||||
as of | as of | Average | Average Interest | at Any | ||||||||||||||||
December 31 | December 31 | Balance | Rate | Monthend | ||||||||||||||||
2009 |
||||||||||||||||||||
Federal funds purchased and
repurchase agreements |
$ | 46,000 | 4.12 | % | $ | 47,220 | 4.03 | % | $ | 53,841 | ||||||||||
Federal Reserve Bank borrowings |
27,600 | 0.50 | % | 2,467 | 0.48 | % | 27,600 | |||||||||||||
Trust preferred securities |
25,774 | 1.76 | % | 25,774 | 2.39 | % | 25,774 | |||||||||||||
FHLB borrowings |
165,200 | 2.86 | % | 149,559 | 3.15 | % | 174,000 | |||||||||||||
Total |
$ | 264,574 | $ | 225,020 | $ | 281,215 | ||||||||||||||
2008 |
||||||||||||||||||||
Federal funds purchased and
repurchase agreements |
$ | 51,041 | 3.78 | % | $ | 64,328 | 3.66 | % | $ | 97,139 | ||||||||||
Trust preferred securities |
25,774 | 5.22 | % | 25,774 | 5.06 | % | 25,774 | |||||||||||||
FHLB borrowings |
139,000 | 3.13 | % | 148,206 | 3.70 | % | 242,860 | |||||||||||||
Total |
$ | 215,815 | $ | 238,308 | $ | 365,773 | ||||||||||||||
At December 31, 2009, the Bank had a $401,520,000 line of credit with the FHLB under which
$165,200,000 was outstanding. This line of credit is secured with FHLB stock, certain pledged
securities and a blanket floating lien on qualifying 1 to 4 family residential mortgage loans and
qualifying commercial real estate. Based upon collateral pledged, as of December 31, 2009, the
borrowing capacity under this line was $263,609,000, with $48,409,000 available to be
borrowed. The outstanding amounts consist of $112,500,000 maturing in 2010, $35,000,000
maturing in 2011, $2,700,000 maturing in 2012 and $15,000,000 maturing in 2014. In addition to the
credit line at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling
$75,471,000, of which there was $27,600,000 outstanding at December 31, 2009, all of which matures
in 2010.
Federal funds purchased represent unsecured overnight borrowings from other financial institutions
by the Bank. Retail repurchase agreements represent short-term borrowings by the Bank, with
overnight maturities collateralized by securities of the United States Government or its agencies.
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FNB Southeast, the banking subsidiary of FNB, sold securities under an agreement to repurchase (a
wholesale repurchase agreement) on December 8, 2006. This $21,000,000 transaction has a maturity
date of December 8, 2016, became callable after one year, and has quarterly calls thereafter at a
fixed rate of 4.03%. The investment securities serving as collateral for this borrowing had a market value of approximately $25,905,000
at December 31, 2009.
FNB Southeast also entered into a wholesale repurchase agreement on June 28, 2007. The $15,000,000
transaction has a maturity date of June 28, 2011, became callable after one year, and has quarterly
calls thereafter. The transaction has a fixed rate of 4.42%. In addition, the Bank entered into a
wholesale repurchase agreement on December 20, 2007. The $10,000,000 transaction has a maturity
date of December 20, 2010, became callable after two years, and has quarterly calls thereafter. The
transaction has a fixed rate of 3.85%. The investment securities serving as collateral for these
two borrowings had a market value of approximately $32,098,000 at December 31, 2009.
FNB and FNB Financial Services Capital Trust I, a Delaware statutory trust (the Trust, now wholly
owned by the Company), issued and sold in a private placement, on August 26, 2005, $25,000,000 of
the Trusts floating rate preferred securities, with a liquidation amount of $1,000 per preferred
security, bearing a variable rate of interest per annum, reset quarterly, equal to 3 month LIBOR
plus 1.46% (the Preferred Securities) and a maturity date of September 30, 2035. The Preferred
Securities become callable after five years. Interest payment dates are March 30, June 30,
September 30 and December 30 of each year. The Preferred Securities are fully and unconditionally
guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable
upon liquidation, redemption or repayment. The entire proceeds from the sale by the Trust to the
holders of the Preferred Securities was combined with the entire proceeds from the sale by the
Trust to the Company of its common securities (the Common Securities), and was used by the Trust
to purchase $25,774,000 in principal amount of the Floating Rate Junior Subordinated Notes (the
Junior Subordinated Notes) of the Company. The Company has not included the Trust in the
consolidated financial statements. FNB contributed $24,000,000 of the proceeds from the sale of
the Junior Subordinated Notes to FNB as Tier I Capital to support FNBs growth. Currently,
regulatory capital rules allow trust preferred securities to be included as a component of
regulatory capital.
The following is a schedule of the components of other borrowings (in thousands):
2009 | 2008 | |||||||
Federal funds purchased |
$ | | $ | 4,600 | ||||
Federal Reserve Bank borrowings |
27,600 | | ||||||
Retail repurchase agreements |
| 441 | ||||||
Wholesale repurchase agreements |
46,000 | 46,000 | ||||||
Junior subordinated notes |
25,774 | 25,774 | ||||||
Total |
$ | 99,374 | $ | 76,815 | ||||
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Note 9 Other assets and other liabilities
The components of other assets and liabilities for the years ended December 31 are as follows (in
thousands):
2009 | 2008 | |||||||
Other assets: |
||||||||
Core deposit intangible |
$ | 5,252 | $ | 5,978 | ||||
Accrued interest receivable |
8,313 | 9,014 | ||||||
Other |
13,152 | 14,202 | ||||||
Total |
$ | 26,717 | $ | 29,194 | ||||
Other liabilities: |
||||||||
Accrued interest payable |
1,534 | 2,823 | ||||||
Accrued compensation |
1,731 | 3,402 | ||||||
Dividends payable |
335 | 177 | ||||||
Retirement plans and deferred compensation |
11,156 | 9,460 | ||||||
Other |
3,282 | 4,251 | ||||||
Total |
$ | 18,038 | $ | 20,113 | ||||
Note 10 Income taxes
The components of income tax expense (benefit) for the years ended December 31 are as follows (in
thousands):
2009 | 2008 | 2007 | ||||||||||
Current tax expense |
||||||||||||
Federal |
$ | (4,808 | ) | $ | (70 | ) | $ | 377 | ||||
State |
(613 | ) | 563 | 426 | ||||||||
Total current |
(5,421 | ) | 493 | 803 | ||||||||
Deferred tax (benefit) expense |
||||||||||||
Federal |
(5,133 | ) | (6,121 | ) | (5,144 | ) | ||||||
State |
(1,087 | ) | (1,296 | ) | (1,053 | ) | ||||||
Total deferred |
(6,220 | ) | (7,417 | ) | (6,197 | ) | ||||||
Total income tax expense (benefit) |
$ | (11,641 | ) | $ | (6,924 | ) | $ | (5,394 | ) | |||
The significant components of deferred tax assets at December 31 are as follows (in
thousands):
2009 | 2008 | |||||||
Deferred tax assets: |
||||||||
Allowance for credit losses |
$ | 14,142 | $ | 14,470 | ||||
Non-qualified deferred compensation plans |
1,441 | 1,063 | ||||||
Accrued compensation |
628 | 699 | ||||||
Writedowns on loans and real estate acquired in settlement of loans |
7,400 | 2,386 | ||||||
Net operating losses |
9,434 | 8,027 | ||||||
Pension plans Other comprehensive income |
2,106 | 3,079 | ||||||
Other |
4,877 | 4,024 | ||||||
Valuation allowance |
(544 | ) | | |||||
Total |
$ | 39,484 | $ | 33,748 | ||||
Deferred tax liabilities: |
||||||||
Depreciable basis of property and equipment |
5,829 | 5,278 | ||||||
Deferred loan fees |
438 | 833 | ||||||
Net unrealized gain on available for sale securities |
3,026 | 1,935 | ||||||
Other |
4,169 | 3,838 | ||||||
Total |
13,462 | 11,884 | ||||||
Net deferred tax assets |
$ | 26,022 | $ | 21,864 | ||||
Management has evaluated the realizability of the recorded deferred tax assets at December 31,
2009. This evaluation included a review of recent improving trends and expected near term levels
in the net interest margin, non performing assets, operating expenses and other factors. It also
included a current forecast of performance
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Table of Contents
for 2010 as well as projections for several years based on managements expectations of
performance, adjusted to assume a continuation of credit quality issues and future net interest
margin erosion. It further included the consideration of the items that have given rise to the
deferred tax assets, as well as tax planning strategies. Management has concluded that, with the
exception of contribution and tax credit carryforwards which begin expiring in three years, it is
more likely than not that the deferred taxes will be realized and therefore, no valuation allowance
is necessary, except for those contribution and tax credit carryforwards.
The provision for income taxes differs from that computed by applying the federal statutory rate of
35% as indicated in the following analysis (in thousands, except percentages):
2009 | 2008 | 2007 | ||||||||||
Tax based on statutory rates |
$ | (9,371 | ) | $ | (22,339 | ) | $ | (3,870 | ) | |||
Increase (decrease) resulting from: |
||||||||||||
Effect of tax-exempt income |
(1,570 | ) | (1,456 | ) | (726 | ) | ||||||
Write off of goodwill |
| 17,653 | | |||||||||
State income taxes, net of federal benefit |
(1,105 | ) | (476 | ) | (407 | ) | ||||||
Income on bank-owned life insurance |
(205 | ) | (386 | ) | (182 | ) | ||||||
Other, net |
610 | 80 | (209 | ) | ||||||||
Total provision (benefit) for income taxes |
$ | (11,641 | ) | $ | (6,924 | ) | $ | (5,394 | ) | |||
Effective tax rate |
(43.5 | %) | (10.8 | %) | (48.8 | %) | ||||||
Note 11 Lease commitments
The minimum annual lease commitments under noncancelable operating leases in effect at December 31,
2009, are as follows (in thousands):
Years Ending December 31 | ||||
2010 |
$ | 1,657 | ||
2011 |
1,271 | |||
2012 |
927 | |||
2013 |
823 | |||
2014 |
711 | |||
Thereafter |
727 | |||
Total lease commitments |
$ | 6,116 | ||
Payments under these leases amounted to approximately $2,671,000, $2,452,000 and $1,677,000
for the years ended December 31, 2009, 2008, and 2007, respectively.
Note 12 Related party transactions
The Bank had loans outstanding to principal officers and directors and their affiliated entities
during each of the past two years. Such loans were made substantially on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with
other borrowers, and, at the time that they were made, did not involve more than the normal risks
of collectibility. The following table summarizes the transactions for the past two years (in
thousands):
2009 | 2008 | |||||||
Balance, beginning of year |
$ | 11,575 | $ | 10,283 | ||||
Amounts removed as a result of director resignations |
(1,801 | ) | | |||||
Advances (repayments), net, during year |
455 | 1,292 | ||||||
Balance, end of year |
$ | 10,229 | $ | 11,575 | ||||
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Note 13 Other operating income and expenses
The components of other operating income and other operating expense for the years ended December
31, 2009, 2008 and 2007 are as follows (in thousands):
Years Ended December 31 | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Other operating income: |
||||||||||||
Bankcard income |
$ | 2,228 | $ | 2,545 | $ | 2,627 | ||||||
Fee income |
4,013 | 3,126 | 1,860 | |||||||||
Investment services commissions |
1,186 | 874 | 862 | |||||||||
Insurance commissions |
78 | 153 | 155 | |||||||||
Trust income |
563 | 571 | 639 | |||||||||
Gain (loss) on sales of real estate |
(591 | ) | (508 | ) | (437 | ) | ||||||
Income on bank-owned life insurance |
587 | 1,103 | 462 | |||||||||
Other income |
419 | 578 | 711 | |||||||||
$ | 8,483 | $ | 8,442 | $ | 6,879 | |||||||
Other operating expenses: |
||||||||||||
Advertising |
$ | 1,428 | $ | 1,940 | $ | 1,144 | ||||||
Automated services |
5,724 | 6,006 | 4,909 | |||||||||
Bankcard expense |
2,225 | 2,413 | 2,256 | |||||||||
Legal and professional fees |
3,460 | 3,448 | 4,920 | |||||||||
Postage |
873 | 1,040 | 908 | |||||||||
Stationery, printing and supplies |
590 | 909 | 1,169 | |||||||||
Other real estate owned expense |
919 | 807 | 674 | |||||||||
Other real estate owned write-downs |
703 | 3,064 | 3,565 | |||||||||
Other expenses |
6,747 | 7,127 | 5,448 | |||||||||
$ | 22,669 | $ | 26,754 | $ | 24,993 | |||||||
Note 14 Stock based compensation
In accordance with GAAP, the Company recorded $117,000, or less than $0.01 per diluted share, of
total stock-based compensation expense during 2009, compared to $93,000, or less than $0.01 per
diluted share, in 2008. The stock-based compensation expense is calculated on a ratable basis over
the vesting periods of the related stock options or restricted stock units. This expense had no
impact on the Companys reported cash flows. The stock-based compensation expense is reported
under personnel expense in the consolidated statements of income.
To determine the amounts recorded in the financial statements, the fair value of each stock option
is estimated on the date of the grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Year Ended December 31, 2008 | ||||
Dividend yield |
7.40 | % | ||
Risk-free interest rate |
2.50 | % | ||
Expected stock volatility |
36.32 | % | ||
Expected years until exercise |
6.25 |
There were no stock options granted during 2009 or 2007.
For restricted stock units, the fair value is considered to be the market price on the date
the restricted stock unit is granted.
As of December 31, 2009, there was $170,000 of total unrecognized compensation expense related to
stock options and restricted stock units granted under the NewBridge Bancorp Amended and Restated
Comprehensive Equity Compensation Plan (formerly the LSB Bancshares Inc. Comprehensive Equity
Compensation Plan for
73
Table of Contents
Directors and Employees) (the Comprehensive Benefit Plan). This expense
will be fully amortized by March of 2013.
As of December 31, 2009, 31,000 restricted stock units granted to certain executive officers were
outstanding. The weighted average fair value of these restricted stock units is $6.58, which was
the weighted average closing price of the Companys common stock on the dates they were granted.
The restricted stock units vest based on certain performance criteria that the Company did not
meet during 2009, and does not expect to meet during 2010. The stock-based compensation expense
for these awards was immaterial for the period ended December 31, 2009.
As of December 31, 2009, the Companys Compensation Committee administered the Companys six
stock-based compensation plans, including two stock-based compensation plans assumed by the Company
pursuant to the Merger.
The Companys Compensation Committee administers the following legacy LSB plans to the extent that
awards remain outstanding and unexercised: (a) the 1986 Employee Incentive Stock Option Plan; (b)
the 1994 Director Stock Option Plan; and (c) the 1996 Omnibus Stock Incentive Plan (collectively,
the Previous Benefit Plans). Each of the Previous Benefit Plans has expired and no additional
awards may be granted thereunder.
At their 2004 annual meeting, LSBs shareholders approved the Comprehensive Benefit Plan. Under the
Comprehensive Benefit Plan, 750,000 shares of common stock are available for issuance to plan
participants in the form of stock options, restricted stock, restricted stock units, performance
units and other stock-based awards.
At their 1996 annual meeting, FNB shareholders approved the FNB Omnibus Equity Compensation Plan
(the 1996 FNB Omnibus Plan). The 1996 FNB Omnibus Plan authorizes the Board of Directors to grant
stock options to directors, executives and key employees. Options granted under the 1996 FNB
Omnibus Plan have a term of up to ten years and generally vest over a four-year period beginning on
the date of the grant. Options under the 1996 FNB Omnibus Plan were granted at a price not less
than the fair market value at the date of grant. The 1996 FNB Omnibus Plan expired in 2006 and no
more options may be granted thereunder.
The FNB Long Term Stock Incentive Plan (the 2006 FNB Omnibus Plan) was approved by FNBs
shareholders at their 2006 annual meeting and authorized the issuance of up to 500,000 shares of
FNB common stock pursuant to the exercise of various rights granted under the 2006 FNB Omnibus
Plan. Under the 2006 FNB Omnibus Plan, participants may be granted or awarded eligible options,
rights to receive restricted shares of common stock and/or performance units. Except with respect
to awards then outstanding, all awards must be granted or awarded on or before May 18, 2016.
Upon the Merger, each option to acquire a share of FNB common stock granted pursuant to the 2006
FNB Omnibus Plan and the 1996 FNB Omnibus Plan that was outstanding and unexercised immediately
prior to the Merger was converted into an option to acquire 1.07 shares of the Companys common
stock.
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Table of Contents
The following is a summary of stock option activity and related information for the years ended
December 31:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Avg. | Avg. | Avg. | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | |||||||||||||||||||
Outstanding
- Beginning of year |
1,052,517 | $ | 14.32 | 1,394,517 | $ | 14.84 | 604,425 | $ | 17.31 | |||||||||||||||
Acquired via merger |
| | | | 866,860 | 13.08 | ||||||||||||||||||
Granted |
| | 24,000 | 9.18 | | | ||||||||||||||||||
Exercised |
| | | | | | ||||||||||||||||||
Forfeited |
(155,526 | ) | 13.55 | (366,000 | ) | 15.96 | (76,768 | ) | 15.21 | |||||||||||||||
Outstanding End
of year |
896,991 | $ | 14.45 | 1,052,517 | $ | 14.32 | 1,394,517 | $ | 14.84 | |||||||||||||||
Exercisable End
of year |
811,041 | $ | 14.41 | 940,517 | $ | 14.23 | 1,247,517 | $ | 14.62 | |||||||||||||||
The following is a summary of information on outstanding and exercisable options at December
31, 2009:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted Average | ||||||||||||||||||||
Remaining | Weighted | Weighted | ||||||||||||||||||
Range of | Contractual | Average Exercise | Average | |||||||||||||||||
Exercise Prices | Number | Life (Years) | Price | Number | Exercise Price | |||||||||||||||
$5.81 10.05 |
212,606 | 2.72 | $ | 8.92 | 198,356 | $ | 8.91 | |||||||||||||
$11.06 15.42 |
290,151 | 4.02 | 14.98 | 290,151 | 14.98 | |||||||||||||||
$15.56 16.93 |
143,109 | 5.01 | 16.40 | 89,609 | 16.90 | |||||||||||||||
$17.10 18.00 |
251,125 | 3.79 | 17.43 | 232,925 | 17.44 | |||||||||||||||
896,991 | 3.81 | $ | 14.45 | 811,041 | $ | 14.41 | ||||||||||||||
Note 15 Net loss per share
The following is a reconciliation of the numerator and denominator of basic and diluted net loss
per share of common stock as required by GAAP (in thousands, except share data):
For the years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Basic and diluted: |
||||||||||||
Net loss available to common shareholders |
$ | (18,050 | ) | $ | (57,072 | ) | $ | (5,663 | ) | |||
Weighted average shares outstanding |
15,655,868 | 15,663,719 | 11,485,353 | |||||||||
Net loss per share, basic and diluted |
$ | (1.15 | ) | $ | (3.64 | ) | $ | (0.49 | ) | |||
No securities were dilutive during any of the periods presented, and therefore, basic and
diluted loss per share are identical for all three years presented above.
On December 31, 2009, there were 896,991 options, 31,000 restricted stock units and a warrant to
purchase 2,567,255 shares outstanding. On December 31, 2008, there were 1,049,517 options, 24,000
restricted stock units and a warrant to purchase 2,567,255 shares outstanding. On December 31,
2007, there were 1,108,264 options outstanding. In each case the options, the restricted stock
units and the warrant were antidilutive as a result of the Companys net loss for each of the three
years.
See Note 22 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K
for a description of the warrant.
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Note 16 Parent company only
The parent companys principal asset is its investment in its subsidiary, the Bank. The principal
source of income of the parent company is dividends received from the Bank. The following presents
condensed financial information of the parent company (in thousands):
2009 | 2008 | |||||||
Condensed balance sheets |
||||||||
Assets |
||||||||
Cash and due from banks |
$ | 9,933 | $ | 26,308 | ||||
Investment in wholly-owned subsidiary |
180,911 | 175,746 | ||||||
Other assets |
1,097 | 4,507 | ||||||
Total assets |
$ | 191,941 | $ | 206,561 | ||||
Trust preferred securities |
$ | 25,774 | $ | 25,774 | ||||
Other liabilities |
1,563 | 1,551 | ||||||
Shareholders equity |
164,604 | 179,236 | ||||||
Total
liabilities and shareholders equity |
$ | 191,941 | $ | 206,561 | ||||
2009 | 2008 | 2007 | ||||||||||
Condensed statements of income |
||||||||||||
Dividends from subsidiary |
$ | | $ | 8,175 | $ | 12,999 | ||||||
Other operating expense |
824 | 51,319 | 944 | |||||||||
Income before equity in undistributed net income
of subsidiary |
(824 | ) | (43,144 | ) | 12,055 | |||||||
Equity in undistributed net loss of subsidiary |
(14,309 | ) | (13,758 | ) | (17,718 | ) | ||||||
Net loss |
$ | (15,133 | ) | $ | (56,902 | ) | $ | (5,663 | ) | |||
Condensed statements of cash flows |
||||||||||||
Cash flows from operating activities |
||||||||||||
Net loss |
$ | (15,133 | ) | $ | (56,902 | ) | $ | (5,663 | ) | |||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||||||
Other changes, net |
3,243 | 49,283 | (2,626 | ) | ||||||||
Change in investment in wholly-owned subsidiary |
14,309 | 13,758 | 17,718 | |||||||||
Net cash provided by operating activities |
2,419 | 6,139 | 9,429 | |||||||||
Cash flows from investing activities |
||||||||||||
Investments in wholly-owned subsidiary |
(16,372 | ) | (26,000 | ) | | |||||||
(Increase) decrease in other assets |
| | 898 | |||||||||
Net cash provided by (used in) investing activities |
(16,372 | ) | (26,000 | ) | 898 | |||||||
Cash flows from financing activities |
||||||||||||
Proceeds from issuance of preferred stock and warrants |
| 52,372 | | |||||||||
Dividends paid |
(2,422 | ) | (6,122 | ) | (6,983 | ) | ||||||
Common stock acquired |
| (341 | ) | (3,422 | ) | |||||||
Increase in other liabilities |
| 38 | (6 | ) | ||||||||
Net cash provided by (used in) financing activities |
(2,422 | ) | 45,947 | (10,411 | ) | |||||||
Increase (decrease) in cash |
(16,375 | ) | 26,086 | (84 | ) | |||||||
Cash at beginning of year |
26,308 | 222 | 306 | |||||||||
Cash at end of year |
$ | 9,933 | $ | 26,308 | $ | 222 | ||||||
Supplemental non-cash financing activities: |
||||||||||||
Common stock issued in acquisition |
| | $ | 116,865 |
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Note 17 Off-balance sheet arrangements
The Companys consolidated financial statements do not reflect various commitments and contingent
liabilities which arise in the normal course of business and which involve elements of credit risk,
interest rate risk and liquidity risk. These commitments and contingent liabilities are
commitments to extend credit and standby letters of credit. A summary of the contractual amounts
of the Banks exposure to off-balance sheet risk at December 31 is as follows (in thousands):
Contractual Amount | ||||||||
2009 | 2008 | |||||||
Loan commitments |
$ | 295,041 | $ | 363,044 | ||||
Credit card lines |
21,790 | 21,213 | ||||||
Standby letters of credit |
3,994 | 3,686 | ||||||
Total commitments and contingent liabilities. |
$ | 320,825 | $ | 387,943 | ||||
The Banks exposure to credit loss in the event of nonperformance by the other party to these
commitments is equal to the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Note 18 Employee benefit plans
The Company has three defined benefit retirement plans as follows:
1) A pension plan, which is the result of the merger of two legacy pension plans. The first
plan was a plan covering substantially all of the former employees of Lexington State Bank,
and which was curtailed in December 2006. The second plan was a plan covering substantially
all of the former employees of FNB Southeast, which was curtailed prior to the Merger.
These two plans were merged into one plan, effective December 31, 2008.
2) A supplemental executive retirement plan (SERP) covering certain executive and former
executive officers, which was curtailed in 2008; and
3) A retiree health benefit plan, which provides partial health insurance benefits for
certain early retired former employees of Lexington State Bank, which was curtailed in 2007.
The disclosures presented represent combined information for all of the employee benefit plans. The
retiree health benefit plan is not a material part of the aggregate information.
The pension plan, the retiree health benefit plan and the SERP provide for benefits to be paid to
eligible employees at retirement based primarily upon years of service with the Company and a
percentage of qualifying compensation during the employees final years of employment.
Contributions to the pension plan were based upon the projected unit credited actuarial funding
method and comply with the funding requirements of the Employee Retirement Income Security Act.
Contributions prior to the curtailments were intended to provide not only for benefits attributed
to service to date but also for those expected to be earned in the future. Plan assets consist
primarily of cash and cash equivalents, U.S. government securities, and securities. The following
tables outline the changes in these pension obligations, assets and funded status for the years
ended December 31, 2009 and 2008, and the assumptions and components of net periodic pension cost
for the two and three years in the period ended December 31, 2009 (in thousands):
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Table of Contents
2009 | 2008 | |||||||
Change in benefit obligation |
||||||||
Projected benefit obligation at beginning of year |
$ | 24,104 | $ | 24,537 | ||||
Service cost |
43 | 213 | ||||||
Interest cost |
1,494 | 1,520 | ||||||
Actuarial (gain) loss |
1,346 | (103 | ) | |||||
Benefits paid |
(1,271 | ) | (1,423 | ) | ||||
Curtailment |
| (640 | ) | |||||
Projected benefit obligation at end of year |
25,716 | 24,104 | ||||||
Change in plan assets |
||||||||
Fair value of plan assets at beginning of year |
14,644 | 20,526 | ||||||
Actual return on plan assets |
4,351 | (4,870 | ) | |||||
Employer contribution |
964 | 411 | ||||||
Benefits paid |
(1,271 | ) | (1,423 | ) | ||||
Fair value of plan assets at end of year |
18,688 | 14,644 | ||||||
Funded status at end of year |
||||||||
Plan assets less projected benefit obligation |
(7,028 | ) | (9,460 | ) | ||||
Unrecognized transitional obligation |
| | ||||||
Pension asset (liability) |
$ | (7,028 | ) | $ | (9,460 | ) | ||
2009 | 2008 | |||||||
Amounts recognized in the consolidated balance sheets consist of: |
||||||||
Pension liability |
$ | (7,028 | ) | $ | (9,460 | ) | ||
Deferred tax asset |
3,256 | 4,142 | ||||||
Accumulated comprehensive income, net |
3,227 | 4,637 | ||||||
Net amount recognized |
$ | (545 | ) | $ | (681 | ) | ||
2009 | 2008 | 2007 | ||||||||||
Components of net periodic pension cost |
||||||||||||
Service |
$ | 43 | $ | 213 | $ | 156 | ||||||
Interest |
1,494 | 1,520 | 1,085 | |||||||||
Expected return on plan assets |
(1,197 | ) | (1,630 | ) | (1,262 | ) | ||||||
Amortization of prior service cost |
1 | 82 | 2 | |||||||||
Amortization of transition obligation |
| | 10 | |||||||||
Amortization of net gain (loss) |
416 | 54 | 5 | |||||||||
Curtailment |
| (241 | ) | | ||||||||
Net periodic pension cost |
$ | 757 | $ | (2 | ) | $ | (4 | ) | ||||
Weighted-average assumptions |
||||||||||||
Discount rate |
6.00 | % | 6.25 | % | 6.25 | % | ||||||
Expected return on plan assets |
8.25 | % | 8.25 | % | 8.25 | % | ||||||
Rate of compensation increases |
2.25 | % | 4.75 | % | 4.75 | % |
Target asset allocations are established based on periodic evaluations of risk/reward under
various economic scenarios and with varying asset class allocations. The near-term and long-term
impact on obligations and asset values are projected and evaluated for funding and financial
accounting implications. Actual allocation and investment performance is reviewed quarterly. The
current target allocation ranges, along with the actual allocation as of December 31, 2009, are
included in the accompanying table.
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Table of Contents
Market Value as of | Actual Allocation | |||||||||||
December 31, 2009 | as of December 31, | Long-Term | ||||||||||
Plan Assets | (in thousands) | 2009 | Allocation Target | |||||||||
Equity securities |
$ | 11,082 | 59.3 | % | 40% - 75 | % | ||||||
Debt securities. |
7,606 | 40.7 | % | 25% - 60 | % | |||||||
Total |
$ | 18,688 | 100 | % | 100 | % | ||||||
The assumed expected return on assets considers the current level of expected returns on
risk-free investments (primarily government bonds), the historical level of risk premium associated
with the other asset classes in the portfolio and the expectation for future returns of each asset
class. The expected return of each asset class is weighted based on the target allocation to
develop the expected long-term rate of return on assets. This resulted in the selection of the
8.25% rate used in 2009 and to be used for 2010. The required contributions for 2009 were
approximately $964,000, and the required contributions for 2010 are expected to be approximately
$859,000. The expected benefit payments for the next ten years are as follows: (1) 2010 -
$1,259,000, (2) 2011 $1,305,000, (3) 2012 $1,352,000, (4) 2013 $1,472,000, (5) 2014 -
$1,469,000, and (6) 2015 through 2019 $8,613,000.
The Company also has a separate contributory 401(k) savings plan covering substantially all
employees. Prior to year end 2007, the separate plans of the two legacy banks were merged into the
current 401(k) savings plan. The 401(k) savings plan allows eligible employees to contribute up to
a fixed percentage of their compensation, with the Bank matching a portion of each employees
contribution. The Banks contributions were $748,000 for 2009, $878,000 for 2008 and $587,000 for
2007. The 401(k) savings plan contribution expense is reported under personnel expense in the
consolidated statements of income.
Three deferred compensation plans allow the directors of the Company to defer compensation. Each
plan participant makes an annual election to either receive that years compensation or to defer
receipt until his or her death, disability or retirement. The deferred compensation balances of
two of these plans are maintained in a rabbi trust. The balances in the trust at December 31, 2009
and 2008 were $3,134,000 and $2,412,000, respectively. The third plan acquires shares of the
Companys common stock in the open market and holds these shares in a trust at cost, as a component
of shareholders equity, until distributed.
Note 19 Regulatory matters
The primary source of funds for the dividends paid by the Company to its shareholders is dividends
received from the Bank. The Bank is restricted as to dividend payout by state laws applicable to
banks and may pay dividends only out of undivided profits. At December 31, 2009, the Bank had
undivided profits of approximately $52.3 million. Additionally, dividends paid by the Company and
the Bank may be limited by minimum capital requirements imposed by banking regulators. During
2008, the Company first reduced its quarterly cash dividend, and later suspended the payment of
cash dividends, based on the highly uncertain economic conditions and in the interest of preserving
capital. As a consequence of the Companys participation in the U.S. Department of the Treasury
(the U.S. Treasury) Capital Purchase Program (the CPP), regulatory approval is currently
required before the Company may increase dividends payable on its common stock to more than the
last quarterly cash dividend ($0.05) declared prior to October 14, 2008.
The Company and the Bank are subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possible additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
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Table of Contents
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital
to average assets (as defined). Management believes that as of December 31, 2009, both the Company
and the Bank meet all capital adequacy requirements to which they are subject.
The most recent notification from the NC Commissioner of Banks categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the Banks category. To be
categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the accompanying table (in thousands, except
percentages).
To Be Well | ||||||||||||||||||||||||
For Capital | Capitalized Under | |||||||||||||||||||||||
Adequacy | Prompt Corrective | |||||||||||||||||||||||
Actual | Purposes | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Total Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 195,658 | 12.3 | % | $ | 127,551 | ³8.0 | % | N/A | |||||||||||||||
Bank |
185,579 | 11.7 | 127,414 | ³8.0 | $ | 159,268 | ³10.0 | % | ||||||||||||||||
Tier 1 Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
175,304 | 11.0 | 63,776 | ³4.0 | N/A | |||||||||||||||||||
Bank |
165,246 | 10.4 | 63,707 | ³4.0 | 95,561 | ³6.0 | % | |||||||||||||||||
Tier 1 Capital (To Average Assets) |
||||||||||||||||||||||||
Consolidated |
175,304 | 8.9 | 78,531 | ³4.0 | N/A | |||||||||||||||||||
Bank |
165,246 | 8.4 | 78,439 | ³4.0 | 98,049 | ³5.0 | % | |||||||||||||||||
December 31, 2008 |
||||||||||||||||||||||||
Total Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
$ | 217,130 | 12.4 | % | $ | 140,110 | ³8.0 | % | N/A | |||||||||||||||
Bank |
187,810 | 10.8 | 139,745 | ³8.0 | $ | 174,681 | ³10.0 | % | ||||||||||||||||
Tier 1 Capital (To Risk Weighted Assets) |
||||||||||||||||||||||||
Consolidated |
194,990 | 11.2 | 70,055 | ³4.0 | N/A | |||||||||||||||||||
Bank |
165,726 | 9.5 | 69,872 | ³4.0 | 104,809 | ³6.0 | % | |||||||||||||||||
Tier 1 Capital (To Average Assets) |
||||||||||||||||||||||||
Consolidated |
194,990 | 9.4 | 83,223 | ³4.0 | N/A | |||||||||||||||||||
Bank |
165,726 | 8.0 | 83,171 | ³4.0 | 103,964 | ³5.0 | % |
Note 20 Fair value of financial instruments
The following methods and assumptions were used to estimate the fair value for each class of the
Companys 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. In accordance with GAAP, 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.
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
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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
were disclosed in Note 17.
The estimated fair values of financial instruments for the years ending December 31 (in thousands):
2009 | 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and short term investments |
$ | 44,840 | $ | 44,840 | $ | 87,860 | $ | 87,860 | ||||||||
Investment securities |
325,339 | 325,869 | 288,572 | 288,804 | ||||||||||||
Loans |
1,463,094 | 1,475,084 | 1,604,525 | 1,585,355 | ||||||||||||
Less allowance for loan losses |
(35,843 | ) | | (35,805 | ) | | ||||||||||
Net loans |
1,427,251 | 1,475,084 | 1,568,720 | 1,585,355 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
1,499,310 | 1,504,123 | 1,663,463 | 1,674,364 | ||||||||||||
Federal funds purchased and retail
repurchase
agreements |
| | 5,041 | 5,041 | ||||||||||||
Federal Reserve Bank borrowings |
27,600 | 27,600 | | | ||||||||||||
Wholesale repurchase agreements |
46,000 | 46,931 | 46,000 | 47,328 | ||||||||||||
Junior subordinated notes |
25,774 | 12,586 | 25,774 | 11,294 | (1) | |||||||||||
FHLB borrowings |
165,200 | 167,810 | 139,000 | 141,693 |
(1) | The 2008 fair value disclosure has been revised to reflect more correct
assumptions. |
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 Companys 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.
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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):
December 31, 2009 Assets measured at fair value, recurring
Quoted prices in | ||||||||||||
active markets for identical assets |
Significant other observable inputs |
Significant unobservable inputs |
||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Available for sale securities |
$ | 219,875 | $ | 85,507 | | |||||||
Real estate acquired in settlement of loans |
| | 27,337 | |||||||||
Core deposit intangible |
| | 5,252 | |||||||||
Mortgage loans held for sale |
| 6,568 | | |||||||||
Total |
$ | 219,875 | $ | 92,075 | 32,589 | |||||||
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):
December 31, 2009 Assets measured at fair value, non-recurring
Quoted prices in | ||||||||||||
active markets for identical assets |
Significant other observable inputs |
Significant unobservable inputs |
||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Impaired loans, net of allowance |
| | $ | 108,231 | ||||||||
Total |
| | $ | 108,231 | ||||||||
Note 21 Pro Forma Financial Statements (unaudited)
Pursuant to the terms of the Merger Agreement, each share of common stock of FNB outstanding at the
effective time of the Merger was converted into the right to receive 1.07 shares of the Companys
common stock. The Company issued approximately $117 million of its common stock to FNB
shareholders, based on 7,059,823 shares of FNB common stock outstanding as of July 31, 2007 and the
closing price of the Companys common stock on July 31, 2007.
The Merger transaction was accounted for under the purchase method of accounting and was
structured to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue
Code. The Merger initially resulted in $49.9 million of goodwill and $6.6 million of core deposit
intangibles. The goodwill acquired was not tax deductible. The Company subsequently wrote off the
goodwill as of December 31, 2008. The core deposit intangible was determined by an independent
valuation and is being amortized over the estimated life of 10 years, based on undiscounted cash
flows.
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A summary of the estimated fair values of assets and liabilities of FNB as of July 31, 2007 is
presented in the table below. The Company acquired the assets and assumed the liabilities as of
that same date (in thousands).
Cash and cash equivalents |
$ | 14,803 | ||
Loans receivable, net of allowance for credit losses |
632,576 | |||
Investment securities |
252,223 | |||
Premises and equipment |
22,523 | |||
Core deposit intangible |
6,613 | |||
Goodwill |
49,947 | |||
Other assets |
50,184 | |||
Deposits |
(734,131 | ) | ||
Borrowings |
(161,044 | ) | ||
Other liabilities |
(13,689 | ) | ||
Investment in subsidiary, net of capitalized acquisition costs |
$ | 120,005 | ||
The Companys consolidated financial statements include the results of operations of FNB only
from the date of acquisition. The following unaudited summary presents the consolidated results of
operations of the Company on a pro forma basis for the year ended December 31, 2007 as if FNB had
been acquired on January 1, 2007. The pro forma summary information does not necessarily reflect
the results of operations that would have occurred if the acquisition had occurred at the beginning
of the period presented, or of results which may occur in the future.
A summary of the pro forma financial statement is as follows (dollars in thousands, except per
share data):
For the Year | ||||
Ended | ||||
December 31, 2007 | ||||
Net interest income |
73,818 | |||
Provision for loan losses |
20,943 | |||
Net interest income after provisions for loan losses |
52,875 | |||
Noninterest income |
22,442 | |||
Noninterest expense |
80,511 | |||
Income (loss) before income tax expense |
(5,194 | ) | ||
Income tax expense |
(2,932 | ) | ||
Net income (loss) |
$ | (2,262 | ) | |
Weighted Average Common Shares: |
||||
Basic |
15,694,068 | |||
Diluted |
15,694,068 | |||
Per Common Share Data: |
||||
Basic income (loss) |
$ | (0.14 | ) | |
Diluted income (loss) |
(0.14 | ) |
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Note 22 U.S. Treasury Capital Purchase Program
Pursuant to the CPP, on December 12, 2008, Bancorp issued and sold to the U.S. Treasury (i) 52,372
shares of Bancorps Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the Series A
Preferred Stock) and (ii) a warrant (the Warrant) to purchase 2,567,255 shares of Bancorps
common stock at an exercise price of $3.06 per share, representing an aggregate market price of
approximately $7.9 million, 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. Subject to
the approval of the federal banking regulators, the Series A Preferred Stock, may be redeemed in
whole or in part, at any time and from time to time. Once an institution notifies the U.S. Treasury
that it would like to repay its investment, the U.S. Treasury must permit repayment subject to
consultation with the federal banking regulators. All such redemptions will be at 100% of the issue
price, plus any accrued and unpaid dividends. 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 holders of
the Series A Preferred Stock are entitled to receive cumulative dividends of 5 percent for the
first five years and 9 percent thereafter.
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Companys management, including its CEO, CFO, and Chief Accounting Officer (CAO), evaluated
the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of December 31, 2009. Based upon that evaluation, the Companys CEO, CFO
and CAO each concluded that as of December 31, 2009, the end of the period covered by this Annual
Report on Form 10-K, the Company effectively maintained disclosure controls and procedures.
Managements Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for the Company. The Companys internal control over financial reporting is a process
designed under the supervision of the Companys CEO, CFO and CAO to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Companys financial
statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States of America. Management has made a comprehensive review, evaluation
and assessment of the Companys internal control over financial reporting as of December 31, 2009.
In making its assessment of internal control over financial reporting, management used the criteria
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
ControlIntegrated Framework. Based on this assessment, management believes that, as of December
31, 2009, the Companys internal control over financial reporting is effective. In accordance with
Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
| Management has implemented a process to monitor and assess both the
design and operating effectiveness of internal control over financial
reporting. |
|
| Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate. |
The Companys independent registered public accounting firm, Grant Thornton LLP, has issued an
audit report on the effectiveness of the Companys internal control over financial reporting as of
December 31, 2009. This Report of Independent Registered Public Accounting Firm is included in
Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Companys CEO, CFO, and CAO,
changes in the Companys internal control over financial reporting during the fourth quarter of
2009. In connection with such evaluation, the Company has determined that there have been no
changes in internal control over financial reporting during the fourth quarter that have materially
affected or are reasonably likely to materially affect, the Companys internal control over
financial reporting.
Item 9B. | Other Information |
None.
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PART III
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
(a) Directors and Executive OfficersThe information required by this Item regarding directors,
nominees and executive officers of Bancorp is set forth under the Proxy Statement sections
captioned Proposal 1 Election of Directors and
Executive Officers of the Company, which sections are incorporated herein by reference.
(b) Section 16(a) Compliance The information required by this Item regarding compliance with
Section 16(a) of the Exchange Act is set forth under the Proxy Statement section captioned Section
16(a) Beneficial Ownership Reporting Compliance, which section is incorporated herein by
reference.
(c) Audit Committee The information required by the Item regarding Bancorps Audit Committee,
including the Audit Committee Finance Expert, is set forth under the Proxy Statement sections
captioned Board Committees Audit Committee and Board Committees Audit Committee Report,
which sections are incorporated by reference.
(d) Code of Ethics The information required by the Item regarding codes of ethics is set forth
under the Proxy Statement section captioned Code of Business Conduct and Ethics, which section is
incorporated by reference.
Item 11. | EXECUTIVE COMPENSATION |
The information required by this Item is set forth under the Proxy Statement sections captioned
Compensation Discussion and Analysis, Grant of Plan-Based Awards, Outstanding Equity Awards at Fiscal Year-End, Option Exercises and
Stock Vested, Pension Benefits, Nonqualified Deferred Compensation, Potential Payments Upon
Termination or Change in Control, Director Compensation,
Director Fees and Practices,
Board Committees Compensation Committee Interlocks and
Insider Participation and Board Committees Compensation Committee Report, which sections are
incorporated by reference.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required by this Item is set forth under the Proxy Statement sections captioned
Security Ownership of Certain Beneficial Owners and How Much Common Stock do our Directors and
Executive Officers Own? and in Item 5 of this Annual Report on Form 10-K, which sections and Item
are incorporated herein by reference.
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is set forth under the Proxy Statement sections captioned
Proposal 1 Election of Directors, Certain Relationships and Related Transactions, Board
Committees and Board Committees Compensation Committee Interlocks and Insider Participation,
which sections are incorporated herein by reference.
Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is set forth under the Proxy Statement section captioned
Proposal 2: Ratification of Appointment of Grant Thornton as Our Independent
Registered Public Accounting Firm for the Fiscal Year Ended
December 31, 2010, which section is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements. The following financial statements and supplementary data are
included in Item 8 of this report.
Financial Statements | Page | |||
54 | ||||
55 | ||||
57 | ||||
58 | ||||
59 | ||||
60 | ||||
61 |
(a)(2) Financial Statement Schedules. All applicable financial statement schedules
required under Regulation S-X have been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
The management contracts and compensatory plans or arrangements required to be filed as exhibits to
this Form 10-K are listed as exhibits 10.1 through 10.37 (excluding exhibits 10.30 and 10.35) in
the Exhibit Index.
(b) The exhibits to the Form 10-K begin on page 94 of this Report.
(c) See 15(a)(2) above.
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Exhibit Index
Exhibit | ||
No. | Description | |
3.1
|
Articles of Incorporation, and amendments thereto, incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046). | |
3.2
|
Articles of Merger of FNB with and into LSB, including amendments to the Articles of Incorporation, as amended, incorporated by reference to Exhibit 3.4 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448). | |
3.3
|
Amended and Restated Bylaws adopted by the Board of Directors on August 17, 2004 and amended on July 23, 2008 (with identified Bylaw approved by the shareholders) incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 8, 2009 (SEC File No. 000-11448). | |
4.1
|
Specimen certificate of common stock, $5.00 par value, incorporated by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448). | |
4.2
|
Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.02 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
4.3
|
Guarantee Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.03 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
4.4
|
Indenture, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.04 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086). | |
4.5
|
Articles of Amendment, filed with the North Carolina Department of the Secretary of State on December 12, 2008, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
4.6
|
Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
4.7
|
Warrant for Purchase of Shares of Common Stock issued by Bancorp to the United States Department of the Treasury on December 12, 2008, incorporated herein by reference to Exhibit 4.3 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
10.1
|
Benefit Equivalency Plan of FNB Southeast, effective January 1, 1994 incorporated herein by reference to Exhibit 10 of the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995, filed with the SEC (SEC File No. 000-13086). | |
10.2
|
1994 Director Stock Option Plan, incorporated herein by reference to Exhibit 4 of the Registration Statement on Form S-8 filed with the SEC on July 15, 1994 (SEC File No. 33-81664). | |
10.3
|
1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995 filed with the SEC on March 28, 1996 (SEC File No. 000-11448). |
88
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Exhibit | ||
No. | Description | |
10.4
|
Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10(B) of the Annual Report on Form 10-KSB40 for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1997 (SEC File No. 000-13086). | |
10.5
|
Amendment to Benefit Equivalency Plan of FNB Southeast, effective January 1, 1998., incorporated herein by reference to Exhibit 10.16 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the SEC on March 25, 1999 (SEC File No. 000-13086) | |
10.6
|
Amendment Number 1 to 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 4.5 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046). | |
10.7
|
Long Term Stock Incentive Plan for certain senior management employees of FNB Southeast incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the SEC on March 27, 2003 (SEC File No. 000-13086). | |
10.8
|
Form of Employment Continuity Agreement effective as of January 1, 2004 between LSB and Robert E. Lineback, Jr. and Philip G. Gibson with a Schedule setting forth the material details in which such documents differ from the document a copy of which is filed, incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 15, 2004 (SEC File No. 000-11448). | |
10.9
|
Form of Stock Option Award Agreement for a Director adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448). | |
10.10
|
Form of Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448). | |
10.11
|
Form of Amendment to the applicable Grant Agreements under the 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448). | |
10.12
|
Form of Amendment to the Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448). | |
10.13
|
Restated Form of Director Fee Deferral Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448). | |
10.14
|
Form of Stock Appreciation Rights Award Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448). | |
10.15
|
FNB Amended and Restated Directors Retirement Policy, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448). | |
10.16
|
Amendment to the FNB Directors and Senior Management Deferred Compensation Plan Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, FNB Southeast and FNB, dated July 31, 2007, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448). | |
10.17
|
Employment and Change of Control Agreement with William W. Budd, Jr. incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 11, 2010 (SEC File No. 000-11448). |
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Exhibit | ||
No. | Description | |
10.18
|
Employment and Change of Control Agreement with Jerry W. Beasley, incorporated herein by reference to Exhibit 99.3 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.19
|
Employment and Change of Control Agreement with Robin S. Hager, incorporated herein by reference to Exhibit 99.4 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.20
|
Employment and Change of Control Agreement with Paul McCombie, incorporated herein by reference to Exhibit 99.5 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.21
|
Employment and Change of Control Agreement with George Richard Webster, incorporated herein by reference to Exhibit 99.6 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.22
|
Directors and Senior Management Deferred Compensation Plan Trust Agreement between FNB Southeast and Morgan Trust Company, incorporated herein by reference to Exhibit 99.7 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.23
|
Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy Trust Agreement among Regions bank d/b/a/Regions Morgan Keegan Trust, Bancorp and the Bank, incorporated herein by reference to Exhibit 99.8 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.24
|
Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.9 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.25
|
First Amendment to the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.10 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448). | |
10.26
|
Bancorp Amended and Restated Long Term Stock Incentive Plan, formerly the FNB Long Term Stock Incentive Plan (the 2006 Omnibus Plan), incorporated herein by reference to Exhibit 10.27 of the Quarterly Report on Form 10-Q filed with the SEC on May 9, 2008 (SEC File No. 000-11448). | |
10.27
|
Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q, filed with the SEC on August 11, 2008 (SEC File No. 000-11448). | |
10.28
|
Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.45 of the Quarterly Report on Form 10-Q, filed with the SEC on August 11, 2008 (SEC File No. 000-11448). | |
10.29
|
Employment and Change of Control Agreement with David P. Barksdale, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on October 17, 2008 (SEC File No. 000-11448). | |
10.30
|
Letter Agreement, dated December 12, 2008, between Bancorp and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). | |
10.31
|
Form of Employment Agreement Amendment, dated December 12, 2008 among Bancorp, the Bank and the senior executive officers of Bancorp, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448). |
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Exhibit | ||
No. | Description | |
10.32
|
Bancorp Management Incentive Plan, dated February 18, 2008, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 6, 2009 (SEC File No. 000-11448). | |
10.33
|
Employment and Change of Control Agreement with Ramsey K. Hamadi, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 30, 2009 (SEC File No. 000-11448). | |
10.34
|
Promissory Note by Ramsey K. Hamadi in favor of the Bank incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on April 21, 2009 (SEC File No. 000-11448). | |
10.35
|
Excessive and Luxury Expenditure Policy of Bancorp and the Bank, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 9, 2009 (SEC File No. 000-11448). | |
10.36
|
Employment and Change of Control Agreement among Bancorp, the Bank and Pressley A. Ridgill, executed September 9, 2009, and effective January 1, 2010, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 11, 2009 (SEC File No. 000-11448). | |
10.37
|
Form of Amendment to Employment and Change of Control Agreement, dated September 16, 2009, among Bancorp, the Bank and the senior executive officers of Bancorp, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 16, 2009 (SEC File No. 000-11448). | |
21.01
|
Schedule of Subsidiaries | |
23.01
|
Consent of Grant Thornton LLP | |
31.01
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.02
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.01
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.01
|
Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. | |
99.02
|
Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NEWBRIDGE BANCORP
Date: March 17, 2010 | By: | /s/ Pressley A. Ridgill | |||
Pressley A. Ridgill, | |||||
President and Chief Executive Officer | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature | Capacity | Date | ||
/s/ pressley a. ridgill
|
President, Chief Executive Officer, Director (Principal Executive Officer) |
March 17, 2010 | ||
/s/ ramsey k. hamadi
|
Executive Vice President, Chief Financial Officer (Principal Financial Officer) |
March 17, 2010 | ||
/s/ richard m. cobb
|
Senior Vice President, Chief Accounting Officer, Controller (Principal Accounting Officer) |
March 17, 2010 | ||
/s/ michael s. albert
|
Chairman of the Board | March 17, 2010 | ||
/s/ Barry Z. Dodson
|
Vice Chairman of the Board | March 17, 2010 | ||
/s/ j. david branch
|
Director | March 17, 2010 | ||
/s/ c. arnold britt
|
Director | March 17, 2010 | ||
/s/ robert c. clark
|
Director | March 17, 2010 | ||
/s/ Alex A. Diffey, jr.
|
Director | March 17, 2010 | ||
/s/ Joseph H. Kinnarney
|
Director | March 17, 2010 | ||
/s/ robert f. lowe
|
Director | March 17, 2010 |
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Table of Contents
Signature | Capacity | Date | ||
/s/ robert v. perkins, ii
|
Director | March 17, 2010 | ||
/s/ mary e. rittling
|
Director | March 17, 2010 | ||
/s/ burr w. sullivan
|
Director | March 17, 2010 | ||
/s/ E. Reid Teague
|
Director | March 17, 2010 | ||
/s/ elizabeth s. ward
|
Director | March 17, 2010 | ||
/s/ john f. watts
|
Director | March 17, 2010 | ||
/s/ g. alfred webster
|
Director | March 17, 2010 | ||
/s/ Kenan C. Wright
|
Director | March 17, 2010 | ||
/s/ julius s. young, jr.
|
Director | March 17, 2010 |
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Table of Contents
EXHIBIT INDEX
Exhibit | Description | |
21.01
|
Schedule of Subsidiaries |
|
23.01
|
Consent of Grant Thornton LLP |
|
31.01
|
Certification of Pressley A. Ridgill |
|
31.02
|
Certification of Ramsey K. Hamadi |
|
32.01
|
Certification of Periodic Financial Report
Pursuant to 18 U.S.C. Section 1350 |
|
99.01
|
Certification Pursuant to the Emergency Economic
Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. |
|
99.02
|
Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by
the American Recovery and Reinvestment Act of 2009. |
94