UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended:

September 30, 2013

Commission File Number: 000-11448

NewBridge Bancorp

(Exact name of Registrant as specified in its Charter)

North Carolina	56-1348147
(State of Incorporation)	(I.R.S. Employer Identification No.)

1501 Highwoods Boulevard, Suite 400
Greensboro, North Carolina	27410
(Address of principal executive offices)	(Zip Code)

(336) 369-0900

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

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

At November 7, 2013, the registrant had 25,291,568 shares of Class A Common Stock outstanding and 3,186,748 shares of Class B Common Stock outstanding.

NEWBRIDGE BANCORP

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I
	Financial Information

Item 1	Financial Statements	3
	Consolidated Balance Sheets September 30, 2013 and December 31, 2012	3
	Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2013 and 2012	5
	Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2013 and 2012	6
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2013 and 2012	7
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	Controls and Procedures	43

	PART II
	Other Information

Item 6	Exhibits	44

	2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

NewBridge Bancorp and Subsidiary

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	September 30		December 31
	2013		2012
Assets
Cash and due from banks	$	32,313	$	30,785
Interest-bearing bank balances		24,583		9,006
Loans held for sale		3,744		9,464
Available for sale investment securities		304,311		393,815
Held to maturity investment securities (market value $52,401 at September 30, 2013)		53,226		-
Loans		1,266,361		1,155,421
Less allowance for credit losses		(25,385)		(26,630)
Net loans		1,240,976		1,128,791
Premises and equipment		34,399		35,570
Real estate acquired in settlement of loans		2,695		5,355
Bank-owned life insurance		46,411		45,262
Deferred tax assets		36,908		29,538
Other assets		22,776		21,121
Total assets	$	1,802,342	$	1,708,707

Liabilities
Noninterest-bearing deposits	$	241,246	$	206,023
NOW deposits		413,268		424,720
Savings and money market deposits		382,885		367,776
Time deposits		374,611		333,974
Total deposits		1,412,010		1,332,493
Borrowings from the Federal Home Loan Bank		162,700		113,000
Other borrowings		46,774		46,774
Accrued expenses and other liabilities		18,012		20,426
Total liabilities		1,639,496		1,512,693

Shareholders’ Equity
Preferred stock – Authorized 30,000,000 shares no par value at 9/30/2013 and 10,000,000 shares $.01 par value per share at 12/31/2012
Series A preferred stock
Reserved – 52,372 shares liquidation preference $1,000 per share; issued and outstanding – 15,000 at 9/30/2013 and 52,372 at 12/31/2012		14,981		52,089
Series B mandatorily convertible preferred stock
Reserved – 1,000,000 shares liquidation preference $100 per share; issued and outstanding – 422,456 at 12/31/2012		-		42,246
Series C mandatorily convertible preferred stock
Reserved – 500,000 shares liquidation preference $100 per share; issued and outstanding – 140,217 at 12/31/2012		-		14,022
Common stock, $5.00 par value per share at 12/31/2012 – Authorized 50,000,000 shares; issued and outstanding – 15,655,868 at 12/31/2012		210,153		78,279
Class A, no par value – Authorized 90,000,000 shares; issued and outstanding – 25,291,568 at 9/30/2013
Class B, no par value – Authorized 10,000,000 shares; issued and outstanding – 3,186,748 at 9/30/2013
Paid-in capital		-		83,259
Directors’ deferred compensation plan		(468)		(468)
Accumulated deficit		(58,068)		(75,697)
Accumulated other comprehensive income (loss)		(3,752)		2,284
Total shareholders’ equity		162,846		196,014
Total liabilities and shareholders’ equity	$	1,802,342	$	1,708,707

See notes to consolidated financial statements

	3

NewBridge Bancorp and Subsidiary

Consolidated Statements of Income

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

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
Interest Income
Interest and fees on loans	$	13,969	$	14,084	$	41,135	$	43,587
Interest on investment securities
Taxable		2,975		3,061		8,546		9,994
Tax exempt		196		186		576		571
Interest bearing bank balances and federal funds sold		2		10		15		30
Total interest income		17,142		17,341		50,272		54,182

Interest Expense
Deposits		737		1,088		2,247		4,217
Borrowings from the Federal Home Loan Bank		271		232		768		760
Other borrowings		338		343		994		1,032
Total interest expense		1,346		1,663		4,009		6,009
Net interest income		15,796		15,678		46,263		48,173
Provision for credit losses		33		28,881		2,049		34,684
Net interest income after provision for credit losses		15,763		(13,203)		44,214		13,489

Noninterest Income
Retail banking		2,614		2,308		7,592		6,888
Mortgage banking services		302		732		1,347		1,848
Wealth management services		682		645		1,932		1,800
Gain on sales of investment securities		458		3		736		3
Bank-owned life insurance		317		326		1,107		1,171
Other		124		171		671		468
Total noninterest income		4,497		4,185		13,385		12,178

Noninterest Expense
Personnel		8,052		7,513		23,387		21,800
Occupancy		1,034		2,155		3,073		4,183
Furniture and equipment		840		832		2,510		2,495
Technology and data processing		1,032		1,039		3,071		3,074
Legal and professional		603		858		2,031		2,219
FDIC insurance		444		444		1,329		1,326
Real estate acquired in settlement of loans		152		11,066		(285)		15,573
Other		2,254		3,225		6,878		7,786
Total noninterest expense		14,411		27,132		41,994		58,456
Income (Loss) before income taxes		5,849		(36,150)		15,605		(32,789)
Income tax expense (benefit)		2,861		(3,700)		(3,740)		(2,771)
Net Income (Loss)		2,988		(32,450)		19,345		(30,018)
Dividends and accretion on preferred stock		(208)		(729)		(1,616)		(2,188)
Net Income (Loss) available to common shareholders	$	2,780	$	(33,179)	$	17,729	$	(32,206)

Earnings per share
Basic	$	0.10	$	(2.12)	$	0.68	$	(2.06)
Diluted	$	0.10	$	(2.12)	$	0.61	$	(2.06)

Weighted average shares outstanding
Basic		28,478,316		15,655,868		26,025,601		15,655,868
Diluted		28,572,565		15,655,868		29,203,192		15,655,868

See notes to consolidated financial statements

	4

NewBridge Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in thousands)

	Three Months Ended				Nine Months Ended
	September 30				September 30
	2013		2012		2013		2012
Net Income (Loss)	$	2,988	$	(32,450)	$	19,345	$	(30,018)
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period, net of tax of $(242), $1,867, $(3,541), and $5,087, respectively		(372)		2,863		(5,428)		7,797
Reclassification adjustment for (gains) losses included in net income, net of tax of $181, $1, $291, and $1, respectively		(277)		(2)		(445)		(2)
Defined benefit pension plans:
Amortization of post retirement benefit, net of tax of $6, $6, $18 and $18, respectively		(9)		(9)		(28)		(29)
Adjustment to deferred tax asset resulting from North Carolina State income tax rate reduction		(135)		-		(135)		-
Total other comprehensive income (loss)		(793)		2,852		(6,036)		7,766
Comprehensive Income (Loss)	$	2,195	$	(29,598)	$	13,309	$	(22,252)

See notes to consolidated financial statements

	5

NewBridge Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2013 and 2012

(Unaudited; dollars in thousands)

															Directors’				Accumulated
	Preferred		Preferred		Preferred		Common Stock								Deferred				Other		Total
	Stock		Stock		Stock		Class A		Class B				Paid-In		Comp		Accumulated		Comprehensive		Shareholders’
	Series A		Series B		Series C		Shares		Shares		Amount		Capital		Plan		Deficit		Income (Loss)		Equity
Balances at December 31, 2011	$	51,789	$	-	$	-		15,655,868		-	$	78,279	$	87,190	$	(575)	$	(47,525)	$	(5,771)	$	163,387
Net Income (Loss)																		(30,018)				(30,018)
Change in accumulated other
comprehensive income (loss)
net of deferred income taxes																				7,766		7,766
Dividends and accretion on
preferred stock		225																(2,188)				(1,963)
Stock-based compensation														86								86
Distributions																107						107
Balances at September 30, 2012	$	52,014	$	-	$	-		15,655,868		-	$	78,279	$	87,276	$	(468)	$	(79,731)	$	1,995	$	139,365

Balances at December 31, 2012	$	52,089	$	42,246	$	14,022		15,655,868		-	$	78,279	$	83,259	$	(468)	$	(75,697)	$	2,284	$	196,014
Net Income (Loss)																		19,345				19,345
Change in accumulated other
comprehensive income (loss)
net of deferred income taxes																				(6,036)		(6,036)
Conversion of preferred stock				(42,246)		(14,022)		9,601,262		3,186,748		139,410		(83,259)								(117)
Redemption of preferred stock		(37,372)																(100)				(37,472)
Dividends and accretion on
preferred stock		264																(1,616)				(1,352)
Repurchase of stock warrant												(7,779)										(7,779)
Stock issuance pursuant to RSUs								34,438				(52)										(52)
Stock-based compensation												295										295
Balances at September 30, 2013	$	14,981	$	-	$	-		25,291,568		3,186,748	$	210,153	$	-	$	(468)	$	(58,068)	$	(3,752)	$	162,846

See notes to consolidated financial statements

	6

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited; dollars in thousands)

	Nine Months Ended
	September 30
	2013		2012
Cash Flow from operating activities
Net Income (Loss)	$	19,345	$	(30,018)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,746		2,585
Securities premium amortization and discount accretion, net		336		162
(Gain) loss on sales of securities		(736)		(3)
Mortgage banking services		(1,347)		(1,848)
Originations of loans held for sale		(72,975)		(114,385)
Proceeds from sales of loans held for sale		80,042		117,081
Deferred income tax expense (benefit)		(3,740)		(2,789)
Writedowns and (gains) losses on sales of real estate acquired in settlement of loans, net		(742)		14,571
Provision for credit losses		2,049		34,684
Stock-based compensation		295		86
(Increase) decrease in income taxes receivable		-		(153)
(Increase) decrease in interest earned but not received		(39)		190
Increase (decrease) in interest accrued but not paid		(32)		(195)
Net (increase) decrease in other assets		(2,038)		(730)
Net increase (decrease) in other liabilities		(2,428)		2,002
Net cash provided by (used in) operating activities		20,736		21,240

Cash Flow from investing activities
Purchases of securities available for sale		(81,914)		(171,379)
Purchases of securities held to maturity		(53,296)		-
Proceeds from sales of securities available for sale		65,711		6,724
Proceeds from maturities, prepayments and calls of securities available for sale		96,390		127,812
Proceeds from maturities, prepayments and calls of securities held to maturity		82		-
Net (increase) decrease in loans		(117,554)		(4,618)
Net (increase) decrease in bank-owned life insurance		(1,149)		(1,183)
Purchases of premises and equipment		(1,727)		(2,686)
Proceeds from sales of premises and equipment		709		159
Proceeds from sales of real estate acquired in settlement of loans		6,672		12,977
Net cash provided by (used in) investing activities		(86,076)		(32,194)

Cash Flow from financing activities
Net increase (decrease) in demand deposits and NOW accounts		23,771		1,090
Net increase (decrease) in savings and money market accounts		15,109		(16,470)
Net increase (decrease) in time deposits		40,637		(13,561)
Net increase (decrease) in borrowings from FHLB		49,700		30,500
Dividends paid		(1,352)		(1,963)
Redemption of preferred stock and related expense		(37,472)		-
Repurchase of stock warrant		(7,779)		-
Cash paid in lieu of issuing shares pursuant to restricted stock units		(78)		-
Tax windfall on shares issued pursuant to restricted stock units		26		-
Common stock distributed		-		107
Expense of stock issuance		(117)		-
Net cash provided by (used in) financing activities		82,445		(297)
Increase (decrease) in cash and cash equivalents		17,105		(11,251)
Cash and cash equivalents at the beginning of the period		39,791		53,992
Cash and cash equivalents at the end of the period	$	56,896	$	42,741

See notes to consolidated financial statements

	7

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited; dollars in thousands)

	Nine Months Ended
	September 30
	2013		2012
Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest	$	4,041	$	6,204
Income Taxes		-		250

Supplemental disclosures of noncash transactions
Transfer of loans to real estate acquired
in settlement of loans	$	3,270	$	7,426
Unrealized gains (losses) on securities available for sale:
Change in securities available for sale		(9,705)		12,881
Change in deferred income taxes		3,832		(5,086)
Change in shareholders’ equity		5,873		(7,795)

Conversion of preferred stock		56,268		-

See notes to consolidated financial statements

	8

NewBridge Bancorp and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and provisions for credit losses considered necessary for a fair presentation have been included. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. Operating results for the three-month and nine-month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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

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

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2013 (SEC File No. 000-11448) (the “Annual Report”). This Quarterly Report should be read in conjunction with the Annual Report.

Recent accounting pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This Update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and requires the entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. This Update does not change the current requirements for reporting net income or other comprehensive income in the financial statements. For public companies, this Update became effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted the new disclosure requirements in the first quarter.

	9

Reclassification

Certain items for 2012 have been reclassified to conform to the 2013 presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.

Note 2 — Net Income Per Share

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

	For the three months ended September 30				For the nine months ended September 30
	2013		2012		2013		2012
Basic:
Net income available to common shareholders	$	2,780	$	(33,179)	$	17,729	$	(32,206)
Weighted average shares outstanding		28,478,316		15,655,868		26,025,601		15,655,868
Net income per share, basic	$	0.10	$	(2.12)	$	0.68	$	(2.06)

Diluted:
Net income available to common shareholders	$	2,780	$	(33,179)	$	17,729	$	(32,206)
Weighted average shares outstanding		28,478,316		15,655,868		26,025,601		15,655,868
Effect of dilutive securities:
Stock options		687		-		269		-
Restricted stock units		93,562		-		85,524		-
Warrant		-		-		655,987		-
Convertible preferred stock		-		-		2,435,811		-
Weighted average shares outstanding and dilutive potential shares outstanding		28,572,565		15,655,868		29,203,192		15,655,868
Net income per share, diluted	$	0.10	$	(2.12)	$	0.61	$	(2.06)

The calculation of diluted net income (loss) per share for the 2012 periods excludes the effect of 50,472 restricted stock units and a warrant to purchase 791,539 shares for the three months and 33,054 restricted stock units and a warrant to purchase 732,867 shares for the nine months as these are antidilutive due to the net loss reported in these periods. There were no stock options in the 2012 periods that would have normally been dilutive.

	10

Note 3 — Investment Securities

Investment securities consist of the following (dollars in thousands):

	September 30, 2013 – Securities Available for Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. government agency securities	$	49,093	$	-	$	(3,621)	$	45,472	2.07	%	7.86
Agency mortgage backed securities		15,336		1,392		-		16,728	5.27		2.21
Collateralized mortgage obligations		7,248		175		(7)		7,416	5.67		1.62
Commercial mortgage backed securities		38,597		1,256		(49)		39,804	3.32		3.54
Corporate bonds		105,771		3,685		(862)		108,594	3.81		4.36
Covered bonds		49,928		3,101		(210)		52,819	3.49		3.13
State and municipal obligations		16,297		142		(348)		16,091	6.53	⁽²⁾	7.14
Total debt securities		282,270		9,751		(5,097)		286,924	3.67	⁽²⁾	4.62
Federal Home Loan Bank stock		9,370		-		-		9,370
Other equity securities		7,672		759		(414)		8,017
Total	$	299,312	$	10,510	$	(5,511)	$	304,311

	December 31, 2012 – Securities Available for Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. Treasury securities	$	10,000	$	-	$	-	$	10,000	0.01	%	0.05
U.S. government agency securities		67,090		72		(125)		67,037	1.94		5.78
Agency mortgage backed securities		21,607		2,153		-		23,760	5.30		2.30
Collateralized mortgage obligations		10,417		254		(3)		10,668	5.54		2.78
Commercial mortgage backed securities		43,046		2,318		(82)		45,282	3.21		3.52
Corporate bonds		150,589		5,742		(844)		155,487	3.24		3.29
Covered bonds		44,924		3,694		-		48,618	3.68		3.49
State and municipal obligations		17,978		734		-		18,712	6.21	⁽²⁾	4.09
Total debt securities		365,651		14,967		(1,054)		379,564	3.30	⁽²⁾	3.68
Federal Home Loan Bank stock		7,685		-		-		7,685
Other equity securities		5,775		791		-		6,566
Total	$	379,111	$	15,758	$	(1,054)	$	393,815

	September 30, 2013 – Securities Held to Maturity
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. government agency securities	$	27,763	$	25	$	(1,271)	$	26,517	2.11	%	6.97
Agency mortgage backed securities		19,314		503		-		19,817	2.62		6.76
Corporate bonds		5,000		-		-		5,000	7.63		9.86
State and municipal obligations		1,149		-		(82)		1,067	4.24	⁽²⁾	13.78
Total	$	53,226	$	528	$	(1,353)	$	52,401	2.85	⁽²⁾	7.31

(1) Average expected remaining duration to maturity, in years

(2) Fully taxable-equivalent basis

	11

The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, as of September 30, 2013 (in thousands):

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

U.S. government agency securities	$	69,079	$	(4,892)	$	-	$	-	$	69,079	$	(4,892)
Collateralized mortgage obligations		811		(7)		-		-		811		(7)
Commercial mortgage backed securities		3,191		(27)		1,924		(22)		5,115		(49)
Corporate bonds		19,440		(671)		13,296		(191)		32,736		(862)
Covered bonds		4,768		(210)		-		-		4,768		(210)
State and municipal obligations		9,477		(430)		-		-		9,477		(430)
Equity securities		1,483		(414)		-		-		1,483		(414)
Total securities	$	108,249	$	(6,651)	$	15,220	$	(213)	$	123,469	$	(6,864)

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

There were 44 securities in an unrealized loss position at September 30, 2013. Management does not intend to sell any of the securities classified as available for sale which have unrealized losses and believes that it is not likely that we will have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality.

Investment securities with an amortized cost of $108,340,000 and $94,612,000, as of September 30, 2013, and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes. The Bank has $50,000,000 in letters of credit, which are used in lieu of securities to pledge against public deposits.

Investment securities with a book value of $64,975,000 were sold during the nine months ended September 30, 2013. The Company recognized a net gain of $736,000 on the sale of those securities. During the first nine months of 2012, the Company sold $6,721,000 of investment securities for a net gain of $3,000.

	12

Note 4 — Loans and Allowance for Credit Losses

Loans are summarized as follows (in thousands):

	September 30		December 31
	2013		2012
Secured by owner-occupied nonfarm nonresidential properties	$	275,880	$	247,628
Secured by other nonfarm nonresidential properties		231,518		186,864
Other commercial and industrial		113,047		110,850
Total Commercial		620,445		545,342

Construction loans – 1 to 4 family residential		14,175		13,206
Other construction and land development		79,081		62,460
Total Real estate – construction		93,256		75,666

Closed-end loans secured by 1 to 4 family residential properties		293,200		277,820
Lines of credit secured by 1 to 4 family residential properties		194,210		200,465
Loans secured by 5 or more family residential properties		36,848		23,116
Total Real estate – mortgage		524,258		501,401

Credit cards		7,613		7,610
Other revolving credit plans		8,470		9,018
Other consumer loans		5,974		10,263
Total Consumer		22,057		26,891

All other loans		6,345		6,121
Total Other		6,345		6,121

Total loans	$	1,266,361	$	1,155,421

Nonperforming assets are summarized as follows (dollars in thousands):

	September 30			December 31
	2013			2012
Commercial nonaccrual loans, not restructured	$	3,705		$	5,528
Commercial nonaccrual loans, restructured		546			670
Non-commercial nonaccrual loans, not restructured		4,132			9,855
Non-commercial nonaccrual loans, restructured		889			1,459
Total nonaccrual loans		9,272			17,512
Troubled debt restructured, accruing		2,231			3,804
Accruing loans which are contractually
past due 90 days or more		34			44
Total nonperforming loans		11,537			21,360
Real estate acquired in settlement of loans		2,695			5,355
Total nonperforming assets	$	14,232		$	26,715
Restructured loans, performing ⁽¹⁾	$	2,407		$	1,220

Nonperforming loans to loans held for investment		0.91	%		1.85	%
Nonperforming assets to total assets at end of period		0.79	%		1.56	%
Allowance for credit losses to nonperforming loans		220.03	%		124.67	%

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

Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, restructured loans, and real estate acquired in settlement of loans. Loans are placed on nonaccrual status when (i) management has concerns relating to the ability to collect the loan principal and interest, and (ii) generally when such loans are 90 days or more past due. No assurance can be given, however, that economic conditions will not adversely affect borrowers and result in increased credit losses.

Commitments to lend additional funds to borrowers whose loans have been restructured are not material at September 30, 2013.

	13

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

September 30, 2013	Accruing Loans
			30-89 Days		90+ Days		Nonaccrual		Total Loans
	Current		Past Due		Past Due		Loans		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	270,028	$	3,149	$	-	$	2,703	$	275,880
Secured by other nonfarm nonresidential properties		228,948		1,376		-		1,194		231,518
Other commercial and industrial		112,385		308		-		354		113,047
Total Commercial		611,361		4,833		-		4,251		620,445

Construction loans – 1 to 4 family residential		14,175		-		-		-		14,175
Other construction and land development		78,513		71		-		497		79,081
Total Real estate – construction		92,688		71		-		497		93,256

Closed-end loans secured by 1 to 4 family residential properties		288,115		1,950		-		3,135		293,200
Lines of credit secured by 1 to 4 family residential properties		191,182		1,772		-		1,256		194,210
Loans secured by 5 or more family residential properties		36,848		-		-		-		36,848
Total Real estate – mortgage		516,145		3,722		-		4,391		524,258

Credit cards		7,499		80		34		-		7,613
Other revolving credit plans		8,243		114		-		113		8,470
Other consumer loans		5,846		109		-		19		5,974
Total Consumer		21,588		303		34		132		22,057

All other loans		6,344		-		-		1		6,345
Total Other		6,344		-		-		1		6,345

Total loans	$	1,248,126	$	8,929	$	34	$	9,272	$	1,266,361

December 31, 2012	Accruing Loans
			30-89 Days		90+ Days		Nonaccrual		Total Loans
	Current		Past Due		Past Due		Loans		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	241,099	$	1,985	$	-	$	4,544	$	247,628
Secured by other nonfarm nonresidential properties		184,270		1,034		-		1,560		186,864
Other commercial and industrial		110,045		711		-		94		110,850
Total Commercial		535,414		3,730		-		6,198		545,342

Construction loans – 1 to 4 family residential		12,936		-		-		270		13,206
Other construction and land development		59,676		525		-		2,259		62,460
Total Real estate – construction		72,612		525		-		2,529		75,666

Closed-end loans secured by 1 to 4 family residential properties		268,141		4,436		-		5,243		277,820
Lines of credit secured by 1 to 4 family residential properties		196,663		2,666		-		1,136		200,465
Loans secured by 5 or more family residential properties		20,850		120		-		2,146		23,116
Total Real estate – mortgage		485,654		7,222		-		8,525		501,401

Credit cards		7,488		78		44		-		7,610
Other revolving credit plans		8,821		85		-		112		9,018
Other consumer loans		9,669		446		-		148		10,263
Total Consumer		25,978		609		44		260		26,891

All other loans		6,121		-		-		-		6,121
Total Other		6,121		-		-		-		6,121

Total loans	$	1,125,779	$	12,086	$	44	$	17,512	$	1,155,421

	14

At September 30, 2013 and December 31, 2012 there were $6.1 million and $7.2 million, respectively, of loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. The Company monitors the performance of modified loans on an ongoing basis. For loans classified as TDRs, the Company further evaluates the loans as performing or nonperforming. Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A modified loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. Nonperforming TDRs originally classified as nonaccrual are able to be reclassified as accruing if, subsequent to restructure, they experience six consecutive months of payment performance according to the restructured terms. Further, a TDR may be considered performing and subsequently removed from nonperforming status in years subsequent to the restructuring if it meets the following criteria:

	⋅	At the time of restructure, the loan was made at a market rate of interest for comparable risk; and
	⋅	The loan has shown at least six consecutive months of payment performance in accordance with the restructured terms; and
	⋅	The loan has been included in the TDR disclosures for at least one Annual Report on Form 10-K

Modifications of terms for loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal payments, which the Company considers are concessions. All loans designated as TDRs were modified due to financial difficulties experienced by the borrower. The Company has $2,407,000 of performing TDRs at September 30, 2013 which were restructured in a previous year without an interest rate concession and are performing in accordance with their modified terms.

The following tables provide information about TDRs identified during the current and prior year three-month and nine-month periods (in thousands, except number of contracts):

	Modifications for the three months ended September 30, 2013						Modifications for the three months ended September 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		1	$	142	$	142		2	$	1,242	$	651
Real estate - construction		-		-		-		1		135		124
Real estate - mortgage	2			226		226		1		100		117
Total	3		$	368	$	368		4	$	1,477	$	892

	Modifications for the nine months ended September 30, 2013						Modifications for the nine months ended September 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Troubled Debt Restructurings:
Commercial		2	$	874	$	407		9	$	7,851	$	6,204
Real estate - construction		1		460		460		3		321		309
Real estate - mortgage		3		323		323		4		669		685
Total		6	$	1,657	$	1,190		16	$	8,841	$	7,198

	15

Three loans were modified and classified as TDRs during the third quarter of 2013. The commercial loan modification involved an interest rate concession, and the two real estate - mortgage loan modifications involved deferrals of principal payments. The remaining modifications made during the first nine months of 2013 and the modifications made during the first nine months of 2012 each involved an extension of the term of the loan. A TDR is considered to be in default if it is 90 days or more past due at the end of any month during the reporting period.

The following table provides information about TDRs restructured in the previous 12 months that subsequently defaulted during the current and prior year three-month and nine-month periods (in thousands, except number of contracts):

	Defaults during the three months ended September 30, 2013				Defaults during the three months ended September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
TDR Defaults:
Commercial		-	$	-		1	$	425
Total		-	$	-		1	$	425

	Defaults during the nine months ended September 30, 2013				Defaults during the nine months ended September 30, 2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
TDR Defaults:
Commercial		-	$	-		3	$	914
Total		-	$	-		3	$	914

Interest is not typically accrued on nonperforming loans, as they are normally in nonaccrual status. However, interest may be accrued in certain circumstances on nonperforming TDRs, such as those that have an interest rate concession but are otherwise performing. Interest income on performing or nonperforming accruing TDRs is recognized consistent with any other accruing loan. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on a loan is discontinued when, in management’s 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 on the cash basis only to the extent payments are received and only if the loan is well secured. Commercial 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. Residential mortgage and consumer loans are typically returned to accrual status once they are no longer past due. There were $2.2 million in TDRs at September 30, 2013 and $4.8 million in TDRs at September 30, 2012 that were considered nonperforming and were accruing. The following tables show interest income recognized and received on these TDRs for the three months and nine months ended September 30, 2013 and 2012 (in thousands):

	Three Months Ended September 30, 2013				Three Months Ended September 30, 2012
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	3	$	4	$	29	$	24
Real estate – construction		-		-		4		5
Real estate – mortgage		22		19		22		23
Consumer		-		-		-		-
Total	$	25	$	23	$	55	$	52

	16

	Nine Months Ended September 30, 2013				Nine Months Ended September 30, 2012
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	20	$	21	$	90	$	66
Real estate – construction		1		1		13		10
Real estate – mortgage		69		62		90		81
Consumer		-		-		2		2
Total	$	90	$	84	$	195	$	159

The Bank’s policy for impaired loan accounting subjects all loans to impairment recognition; however, loans with total credit exposure of less than $500,000 are not evaluated on an individual basis for level of impairment. The Bank generally considers loans 90 days or more past due, all nonaccrual loans and all TDRs to be impaired. All TDRs are evaluated on an individual basis for level of impairment.

Loans specifically identified and evaluated for level of impairment totaled $9.6 million and $16.4 million at September 30, 2013 and December 31, 2012, respectively, as displayed in the following tables (in thousands).

	Impaired Loans
	Recorded		Unpaid Principal		Specific		Average
	Investment		Balance		Allowance		Recorded Investment
September 30, 2013
Loans without a specific valuation allowance
Commercial	$	2,316	$	3,278	$	-	$	2,367
Real estate – construction		500		500		-		520
Real estate – mortgage		823		972		-		917
Consumer		-		-		-		-
Total		3,639		4,750		-		3,804

Loans with a specific valuation allowance
Commercial		1,920		1,920		25		1,930
Real estate – construction		87		205		10		109
Real estate – mortgage		3,951		3,951		690		4,037
Consumer		10		10		10		10
Total		5,968		6,086		735		6,086

Total impaired loans
Commercial		4,236		5,198		25		4,297
Real estate – construction		587		705		10		629
Real estate – mortgage		4,774		4,923		690		4,954
Consumer		10		10		10		10
Total	$	9,607	$	10,836	$	735	$	9,890

	17

	Impaired Loans
	Recorded		Unpaid Principal		Specific		Average
	Investment		Balance		Allowance		Recorded Investment
December 31, 2012
Loans without a specific valuation allowance
Commercial	$	4,013	$	5,779	$	-	$	4,190
Real estate – construction		1,940		2,681		-		2,856
Real estate – mortgage		5,066		5,746		-		5,415
Consumer		-		-		-		-
Total		11,019		14,206		-		12,461

Loans with a specific valuation allowance
Commercial		2,618		2,762		564		3,432
Real estate – construction		64		64		36		65
Real estate – mortgage		2,681		2,765		941		2,848
Consumer		18		18		18		13
Total		5,381		5,609		1,559		6,358

Total impaired loans
Commercial		6,631		8,541		564		7,622
Real estate – construction		2,004		2,745		36		2,921
Real estate – mortgage		7,747		8,511		941		8,263
Consumer		18		18		18		13
Total	$	16,400	$	19,815	$	1,559	$	18,819

The balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method as of September 30, 2013, December 31, 2012 and September 30, 2012 were as follows:

			Real Estate –		Real Estate –						Total
Allowance for credit losses:	Commercial		Construction		Mortgage		Consumer		Other		Allowance
September 30, 2013
Individually evaluated for impairment	$	25	$	10	$	690	$	10	$	-	$	735
Collectively evaluated for impairment		9,888		5,392		8,104		1,080		186		24,650
Total ending allowance	$	9,913	$	5,402	$	8,794	$	1,090	$	186	$	25,385
December 31, 2012
Individually evaluated for impairment	$	564	$	36	$	941	$	18	$	-	$	1,559
Collectively evaluated for impairment		10,784		5,717		7,805		763		2		25,071
Total ending allowance	$	11,348	$	5,753	$	8,746	$	781	$	2	$	26,630
September 30, 2012
Individually evaluated for impairment	$	876	$	253	$	1,155	$	19	$	-	$	2,303
Collectively evaluated for impairment		12,790		7,941		11,007		972		3		32,713
Total ending allowance	$	13,666	$	8,194	$	12,162	$	991	$	3	$	35,016

			Real Estate –		Real Estate –							Total
Recorded investment in loans:		Commercial	Construction		Mortgage		Consumer		Other			Loans
September 30, 2013
Individually evaluated for impairment	$	4,236	$	587	$	4,774	$	10	$	-	$	9,607
Collectively evaluated for impairment		616,209		92,669		519,484		22,047		6,345		1,256,754
Total recorded investment in loans	$	620,445	$	93,256	$	524,258	$	22,057	$	6,345	$	1,266,361
December 31, 2012
Individually evaluated for impairment	$	6,631	$	2,004	$	7,747	$	18	$	-	$	16,400
Collectively evaluated for impairment		538,711		73,662		493,654		26,873		6,121		1,139,021
Total recorded investment in loans	$	545,342	$	75,666	$	501,401	$	26,891	$	6,121	$	1,155,421
September 30, 2012
Individually evaluated for impairment	$	12,753	$	2,766	$	7,106	$	19	$	-	$	22,644
Collectively evaluated for impairment		539,861		73,360		498,732		27,969		6,181		1,146,103
Total recorded investment in loans	$	552,614	$	76,126	$	505,838	$	27,988	$	6,181	$	1,168,747

	18

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

	September 30										December 31
	2013										2012
			Special		Sub-								Special		Sub-
	Pass		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total__
Commercial	$	506,916	$	34,787	$	19,252	$	501	$	561,456	$	491,780	$	26,649	$	26,733	$	98	$	545,260
Real estate – construction		72,043		7,497		2,352		-		81,892		48,029		9,744		5,422		182		63,377
Real estate – mortgage		70,943		5,287		4,772		8		81,010		73,338		7,480		10,027		32		90,877
Other		5,519		-		-		-		5,519		4,918		-		619		-		5,537
Total	$	655,421	$	47,571	$	26,376	$	509	$	729,877	$	618,065	$	43,873	$	42,801	$	312	$	705,051

Loans with a risk grade of substandard or doubtful are components of classified loans. Additionally, non risk graded residential, home equity, and consumer loans in nonaccrual status of $3,738,000 and $4,605,000 as of September 30, 2013 and December 31, 2012, respectively, are components of classified loans. Classified loans are summarized in the following table (in thousands):

	September 30		December 31
	2013		2012
Impaired loans individually evaluated	$	9,607	$	16,400
Other nonperforming loans		1,930		4,960
Total nonperforming loans		11,537		21,360
Performing classified loans		19,086		26,498
Total classified loans	$	30,623	$	47,858

	19

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

	Three Months Ended September 30 2013		Three Months Ended September 30 2012		Nine Months Ended September 30 2013		Nine Months Ended September 30 2012
Balance, beginning of period	$	26,395	$	25,231	$	26,630	$	28,844
Loans charged off:
Secured by owner-occupied nonfarm nonresidential properties		-		4,609		175		5,755
Secured by other nonfarm nonresidential properties		-		1,491		125		2,101
Other commercial and industrial		324		3,257		559		3,842
Total Commercial		324		9,357		859		11,698

Construction loans – 1 to 4 family residential		-		193		182		403
Other construction and land development		372		4,079		943		6,611
Total Real estate – construction		372		4,272		1,125		7,014

Closed-end loans secured by 1 to 4 family residential properties		674		4,034		1,964		6,560
Lines of credit secured by 1 to 4 family residential properties		462		1,409		813		3,578
Loans secured by 5 or more family residential properties		-		273		-		273
Total Real estate – mortgage		1,136		5,716		2,777		10,411

Credit cards		49		54		162		265
Other consumer loans		127		263		644		583
Total consumer		176		317		806		848

Total other		338		1		338		3

Total chargeoffs		2,346		19,663		5,905		29,974

Recoveries of loans previously charged off:
Total Commercial		796		118		1,020		294
Total Real estate – construction		59		107		392		292
Total Real estate – mortgage		366		176		922		576
Total Consumer		69		157		214		278
Total Other		13		9		63		22
Total Recoveries		1,303		567		2,611		1,462
Net loans charged off		1,043		19,096		3,294		28,512
Provision for credit losses		33		28,881		2,049		34,684

Balance, end of period	$	25,385	$	35,016	$	25,385	$	35,016

Loans totaling $3,744,000 and $9,464,000, as of September 30, 2013 and December 31, 2012, respectively, were held for sale. Loans held for sale are valued at the lower of cost or market value, as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.

Loans totaling $492,200,000 and $502,563,000, as of September 30, 2013 and December 31, 2012, respectively, were pledged to secure lines of credit with the Federal Home Loan Bank and Federal Reserve Bank.

	20

Note 5 — Deferred Tax Assets

ASC Topic 740 requires that the realizability of the deferred tax asset and evaluation of the need for a valuation allowance consider all positive and negative evidence to form a conclusion as to whether the realization of the deferred tax asset is more likely than not. The Company must also assign weight to the various forms of evidence, based upon the ability to verify the evidence. Management evaluates the realizability of the recorded deferred tax assets on a regular basis. This evaluation includes a review of all available evidence, including recent historical financial performance and expected near-term levels of net interest margin, nonperforming assets, operating expenses, earnings and other factors. It further includes the consideration of the items that have given rise to the deferred tax assets, as well as tax planning strategies.

During the third quarter of 2012, the Company recorded material writedowns and losses on the disposition or resolution of problem assets, which resulted in a material pretax net loss for that quarter. As a consequence, the Company was in a cumulative pretax loss position for the three-year period ended September 30, 2012, which constituted significant negative evidence in the context of evaluating deferred tax assets for realizability as prescribed by ASC Topic 740. At that time, the Company believed the three-year cumulative loss position was due to an unusual, self-imposed, acceleration of loss recognition to dispose of problem assets in a liquidation market. However, there was insufficient verifiable evidence to substantiate that belief, and the deferred tax asset was deemed impaired and a valuation allowance of $11.0 million was established by recording a charge to income tax expense at September 30, 2012. In each of the quarters ended December 31, 2012 and March 31, 2013, adjustments were made to the valuation allowance to carry the deferred tax assets at net realizable value. In addition, in the second quarter of 2013, after having completed three consecutive quarters of meaningful profitability, coupled with continuing improvement in asset quality, the Company was able to place a high level of significance to this verifiable positive evidence. As a result, management concluded at that time that only the portion of the deferred tax asset associated with certain state net economic loss and contribution carryforwards should be impaired. Therefore, in the second quarter of 2013, the valuation allowance against the deferred tax asset was further reduced by $8,371,000 to $1,027,000. At September 30, 2013, with an additional quarter of meaningful profitability and further improvement in asset quality, management maintains its conclusion that no additional valuation allowance is necessary. Management has also concluded that the utilization of the remaining deferred tax assets is more likely than not.

During the third quarter of 2013, North Carolina reduced its corporate income tax rate from 6.90% to 6.00% effective January 1, 2014, and to 5.00% effective January 1, 2015. Further reductions to 4.00% on January 1, 2016, and 3.00% on January 1, 2017, are contingent upon the State meeting revenue targets. As a result, the Company’s deferred tax asset was reduced by $875,000 at September 30, 2013, for the estimated effect of these changes by a charge to income tax expense of $740,000 and a charge to accumulated other comprehensive income – pension of $135,000. No provision has been made for the future contingent rate reductions, the effect of which is estimated to be less than $300,000 each.

	21

Income tax expense for each of the quarters and nine-month periods of 2013 and 2012 were determined as follows (in thousands):

	First		Second		Third		Nine Months
	Quarter		Quarter		Quarter		Year to Date
2013
Income tax expense (benefit) calculated	$	1,668	$	1,770	$	2,121	$	5,559
Deferred tax asset valuation adjustment		(1,668)		(8,371)		-		(10,039)
North Carolina corporate income tax rate
reduction adjustment		-		-		740		740
Income tax expense (benefit)	$	-	$	(6,601)	$	2,861	$	(3,740)

2012
Income tax expense (benefit) calculated	$	617	$	312	$	(14,700)	$	(13,771)
Deferred tax asset valuation adjustment		-		-		11,000		11,000
Income tax expense (benefit)	$	617	$	312	$	(3,700)	$	(2,771)

The significant components of deferred tax assets at September 30, 2013 and December 31, 2012 were as follows (in thousands):

	2013		2012
Deferred tax assets:
Allowance for credit losses	$	10,023	$	10,534
Writedowns on real estate acquired in settlement of loans		1,006		2,434
Interest on nonaccrual loans		245		1,135
Net operating losses		26,772		29,006
Other		9,566		9,683
Valuation allowance		(1,027)		(11,067)
Total		46,585		41,725

Deferred tax liabilities:
Net unrealized gain on available for sale securities		1,974		5,806
Other		7,703		6,381
Total		9,677		12,187
Net deferred tax assets	$	36,908	$	29,538

Note 6 — Stock Compensation Plans

The Company recorded $295,000 and $86,000 of total stock-based compensation expense for the nine-month periods ended September 30, 2013 and September 30, 2012, respectively. The prior year period reduced expense is due to a change in expectation related to vesting of outstanding performance based awards. The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related stock options or restricted stock grants and is reported within personnel expense. This expense had no impact on the Company’s reported cash flows. As of September 30, 2013, there was $1,043,000 of total unrecognized stock-based compensation expense. This expense will be fully recognized by December of 2015.

For purposes of determining estimated fair value of stock options and restricted stock grants, the Company has computed the estimated fair values of all stock-based compensation using the Black-Scholes option pricing model and, for stock options and restricted stock grants granted prior to December 31, 2012, has applied the assumptions set forth in the Annual Report. During the first nine months of 2013, no stock options were granted to employees or directors.

	22

On January 16, 2013, the Company’s Board of Directors awarded a total of 126,142 restricted stock units to certain executive officers. The fair value of these restricted stock units is $5.00 per unit, which was the closing price of the Company’s common stock on the grant date. On March 6, 2013, an additional 2,390 restricted stock units were awarded. The fair value of these restricted stock units is $5.91 per unit, the closing price of the common stock on the grant date. Another 1,460 restricted stock units were awarded on April 24, 2013. The fair value of these restricted stock units is $5.99 per unit, the closing price of the common stock on that date. These restricted stock units vest over a period of three years with half subject to meeting certain performance criteria. Additionally, on July 24, 2013, the Board awarded 35,359 restricted stock units with a fair value per unit of $8.80, the closing price of the common stock on the grant date. Half of 18,798 of these restricted stock units vests on January 1, 2015 subject to meeting certain performance criteria, and the remaining half vests on January 1, 2016. The remaining 16,561 restricted stock units vest on January 1, 2016 with half subject to meeting certain performance criteria.

On April 18, 2013, the U.S. Department of the Treasury (the “U.S. Treasury”) held an auction to sell all of its investment in the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), which was previously issued and sold to the U.S. Treasury in 2008 under the Capital Purchase Program (the “CPP”). The preferred shares were sold at a price of $980.50 per share, or 98.05% of the $1,000.00 per share liquidation value. The sale was settled on April, 29, 2013. Under the terms of the CPP, restricted stock units granted by the Company to certain employees may not fully vest until all of the U.S. Treasury’s investment in the Series A Preferred Stock has been repaid. Accordingly, because the U.S. Treasury sold the Series A Preferred Stock at a small discount to the $1,000.00 per share liquidation value, a portion of restricted stock units granted by the Company will never fully vest. As a result, following the sale by the U.S. Treasury, 48,125 restricted stock units were forfeited and canceled, 34,438 shares of common stock were issued pursuant to vested restricted stock units, and $78,000 was paid by the Company in lieu of issuing 13,222 shares to cover personal income tax. The Company recorded an expense reversal of $71,000 for the forfeited and canceled restricted stock units.

Note 7 — Fair Value of Financial Instruments

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

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

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

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. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value.

Loans held for sale. Substantially all residential mortgage loans held for sale are pre-sold, and their carrying value approximates fair value.

	23

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.

Wholesale repurchase agreements, junior subordinated notes and FHLB borrowing. 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.

Impaired loans. The fair value of impaired loans is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral, less selling and other handling costs, for certain collateral dependent loans less specific reserves.

The table below presents the estimated fair values of financial instruments as of September 30, 2013 and December 31, 2012:

			Estimated Fair Value
September 30, 2013	Carrying Value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	56,896	$	56,896	$	-	$	-	$	56,896
Investment securities		357,537		2,989		339,353		14,370		356,712
Loans		1,240,976		-		-		1,259,353		1,259,353
Loans held for sale		3,744		-		3,744		-		3,744
Financial liabilities:
Deposits		1,412,010		-		1,412,739		-		1,412,739
Wholesale repurchase agreements		21,000		-		23,293		-		23,293
Junior subordinated notes		25,774		-		-		11,584		11,584
FHLB borrowings		162,700		-		163,009		-		163,009

			Estimated Fair Value
December 31, 2012	Carrying Value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Financial assets:
Cash and cash equivalents	$	39,791	$	39,791	$	-	$	-	$	39,791
Investment securities		393,815		1,307		384,823		7,685		393,815
Loans		1,128,791		-		-		1,142,346		1,142,346
Loans held for sale		9,464		-		9,464		-		9,464
Financial liabilities:
Deposits		1,332,493		-		1,333,888		-		1,333,888
Wholesale repurchase agreements		21,000		-		23,835		-		23,835
Junior subordinated notes		25,774		-		-		12,006		12,006
FHLB borrowings		113,000		-		113,833		-		113,833

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

	24

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

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available for sale securities at September 30, 2013	$	-	$	294,941	$	9,370
Available for sale securities at December 31, 2012		-		386,130		7,685

The table below presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the nine months ended September 30, 2013 and the year ended December 31, 2012 (in thousands):

	Nine Months		Twelve Months
	Ended		Ended
	September 30		December 31
	2013		2012
Available for sale securities
Beginning balance	$	7,685	$	7,185
Purchases		14,629		6,514
Redemptions		(12,944)		(6,014)
Ending balance	$	9,370	$	7,685

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

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Loans held for sale at September 30, 2013	$	-	$	3,744	$	-
Loans held for sale at December 31, 2012		-		9,464		-
Real estate acquired in settlement of loans at September 30, 2013		-		-		2,695
Real estate acquired in settlement of loans at December 31, 2012		-		-		5,355
Impaired loans, net of allowance at September 30, 2013		-		-		8,872
Impaired loans, net of allowance at December 31, 2012		-		-		14,841

Note 8 — Accumulated Other Comprehensive Income (Loss)

The balance of accumulated other comprehensive income, net of tax, at September 30, 2013 is $3,025,000 of unrealized gains on securities available for sale and $(6,777,000) for funded status of pension plans. At December 31, 2012, the balance of accumulated other comprehensive income, net of tax, was $8,898,000 of unrealized gains on securities available for sale and $(6,614,000) for funded status of pension plans.

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Reclassifications from accumulated other comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2013 and 2012 are as follows (in thousands):

Details about accumulated other	Amount reclassified from accumulated other		Affected line item in the Consolidated
comprehensive income (loss)	comprehensive income (loss)		Statements of Income

Three months ended September 30, 2013
Unrealized gains (losses) on available
for sale securities	$	458	Gain on sales of investment securities
		(181)	Income tax expense (benefit)
	$	277	Net of tax

Amortization of post retirement benefit	$	15	Personnel expense
		(6)	Income tax expense (benefit)
	$	9	Net of tax

Total reclassifications for the period	$	286

Three months ended September 30, 2012
Unrealized gains (losses) on available
for sale securities	$	3	Gain on sales of investment securities
		(1)	Income tax expense (benefit)
	$	2	Net of tax

Amortization of post retirement benefit	$	15	Personnel expense
		(6)	Income tax expense (benefit)
	$	9	Net of tax
Total reclassifications for the period	$	11

Nine months ended September 30, 2013
Unrealized gains (losses) on available
for sale securities	$	736	Gain on sales of investment securities
		(291)	Income tax expense (benefit)
	$	445	Net of tax

Amortization of post retirement benefit	$	46	Personnel expense
		(18)	Income tax expense (benefit)
	$	28	Net of tax
Total reclassifications for the period	$	473

Nine months ended September 30, 2012
Unrealized gains (losses) on available
for sale securities	$	3	Gain on sales of investment securities
		(1)	Income tax expense (benefit)
	$	2	Net of tax

Amortization of post retirement benefit	$	47	Personnel expense
		(18)	Income tax expense (benefit)
	$	29	Net of tax

Total reclassifications for the period	$	31

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Note 9 — Capital Transactions

At the Special Meeting of Shareholders on February 20, 2013, shareholders approved the conversion of up to 422,456 shares of Series B preferred stock and up to 140,217 shares of Series C preferred stock into Class A Common Stock and Class B Common Stock, respectively, at a conversion rate of $4.40 per share. Articles of Amendment filed with the North Carolina Secretary of State on February 21, 2013, created a new class of nonvoting common stock designated “Class B Common Stock,” and redesignated the Company’s existing common stock as “Class A Common Stock.” The Class A Common Stock and the Class B Common Stock each have no par value per share. As a result, on February 22, 2013, the Series B preferred stock was converted into 9,601,262 shares of voting Class A Common Stock, and the Series C preferred stock was converted into 3,186,748 shares of nonvoting Class B Common Stock.

Pursuant to the CPP, on December 12, 2008, the Company issued and sold to the U.S. Treasury (i) 52,372 shares of Series A Preferred Stock and (ii) a warrant (the “Warrant”) to purchase 2,567,255 shares of the Company’s common stock at an exercise price of $3.06 per share, for an aggregate purchase price of $52,372,000 in cash. The fair value of the Warrant of $1,497,000 was estimated on the date of the grant using the Black-Scholes option-pricing model. The Series A Preferred Stock bears cumulative dividends of five percent for the first five years and nine percent thereafter. On April 18, 2013, the U.S. Treasury held an auction to sell all of its investment in the Company’s Series A Preferred Stock. The sale was settled on April, 29, 2013. As a consequence, the Company is no longer subject to many of the rules and regulations that were established in connection with the CPP. On May 15, 2013, the Company completed its repurchase of the Warrant for its fair market value of $7,779,000. Following the Company’s repurchase of the Warrant, the U.S. Treasury has no equity or other ownership interest in the Company. On June 3, 2013, the Company redeemed 37,372 of the Company’s 52,372 outstanding shares of Series A Preferred Stock at the liquidation price of $1,000 per share for a total of $37,372,000 plus $93,430 of accrued and unpaid dividends.

Note 10 — Subsequent Events

Acquisition of Security Savings Bank

On June 13, 2013, the Company signed a definitive agreement to acquire Security Savings Bank, a mutual savings bank, headquartered in Southport, North Carolina. Regulatory approval was received on September 16, 2013, and the acquisition was completed on October 1, 2013. This acquisition has expanded the Bank’s coastal North Carolina presence with six branches and one loan production office in Brunswick County. No shares were issued or cash exchanged in the transaction. Initial accounting for acquisition fair values are in process but incomplete. Pro forma financials will be included in an amended Form 8-K to be filed by December 14, 2013. At September 30, 2013, total assets of Security Savings Bank were $212.5 million. Substantially all of the acquisition-related costs will be incurred in the fourth quarter of 2013.

Pending acquisition of CapStone Bank

On November 1, 2013, the Company announced the signing of a definitive merger agreement with CapStone Bank, a commercial bank headquartered in Raleigh, North Carolina, with four branches and $376 million in assets as of September 30, 2013. The Company anticipates that the acquisition will close in the first quarter of 2014, subject to shareholder and regulatory approval. Under the terms of the agreement, CapStone’s shareholders will receive 2.25 shares of NewBridge Bancorp Class A Common Stock for each share of CapStone common stock; therefore, the Company expects to issue approximately 8.1 million shares of its Class A Common Stock for an aggregate purchase price of $63.6 million, based on recent trading range.

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Item 2.

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

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of the Company including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects,” “anticipates,” “should,” “estimates,” “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation: (1) recently enacted legislation, or legislation enacted in the future, or any proposed federal programs may subject the Company to increased regulation and may adversely affect the Company; (2) the strength of the United States economy generally, and the strength of the local economies in which the Company conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on the Company’s loan portfolio and allowance for credit losses; (3) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); (4) inflation, deflation, interest rate, market and monetary fluctuations; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate and market liquidity conditions) and the impact of such conditions on the Company’s capital markets and capital management activities; (6) the timely development of competitive new products and services by the Company and the acceptance of these products and services by new and existing customers; (7) the willingness of customers to accept third party products marketed by the Company; (8) the willingness of customers to substitute competitors’ products and services for the Company’s products and services and vice versa; (9) the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking and securities); (10) technological changes; (11) changes in consumer spending and saving habits; (12) the effect of corporate restructurings, acquisitions and/or dispositions, and the failure to achieve the expected revenue growth and/or expense savings from such corporate restructurings, acquisitions and/or dispositions; (13) the current stresses in the financial and real estate markets, including possible continued deterioration in property values; (14) unanticipated regulatory or judicial proceedings; (15) the impact of changes in accounting policies by the Securities and Exchange Commission (the “SEC”); (16) adverse changes in financial performance and/or condition of the Company’s borrowers which could impact repayment of such borrowers’ outstanding loans; and (17) the Company’s success at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exhaustive. See also those risk factors identified in the section headed “Risk Factors,” beginning on page 13 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 25, 2013 (the “Annual Report”). The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of the Company.

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Introduction

The Company is a bank holding company incorporated under the laws of North Carolina and registered under the Bank Holding Company Act of 1956, as amended. The Company’s principal asset is the stock of its banking subsidiary, the Bank.

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

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

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

Application of Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiary comply with accounting principles generally accepted in the United States and conform to standards within the banking industry. The preparation of the financial information contained in this Quarterly Report on Form 10-Q requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s management evaluates these estimates on an ongoing basis. A summary of the allowance for credit losses, the most complex and subjective accounting policy of the Company, is discussed under the heading “Asset Quality and Allowance for Credit Losses” as well as in Note 4 of the Notes to Consolidated Financial Statements. Income taxes and the valuation allowance against deferred tax assets are discussed in Note 5 of the Notes to Consolidated Financial Statements.

	29

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Net Interest Income

Net interest income for the third quarter of 2013, on a taxable equivalent basis, was $15.9 million, an increase of $0.1 million, or 0.8%, from $15.8 million for the third quarter of 2012. Average earning assets in the third quarter of 2013 increased $55.5 million, or 3.6%, to $1.62 billion, compared to $1.56 billion in the third quarter of 2012. Average interest-bearing liabilities in the third quarter of 2013 increased $12.6 million, or 0.9%, to $1.35 billion, compared to $1.34 billion in the third quarter of 2012. Taxable-equivalent net interest margin decreased to 3.90% for the third quarter of 2013, compared to 4.02% for the third quarter of 2012, a decrease of 12 basis points. The interest rate spread decreased to 3.83% in the third quarter of 2013, compared to 3.94% in the third quarter of 2012, a decrease of 11 basis points.

	30

(Fully taxable equivalent basis¹, dollars in thousands)

	Three Months Ended							Three Months Ended
	September 30, 2013							September 30, 2012
			Interest		Annualized					Interest		Annualized
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate			Balance		Expense		Yield/Rate
Earning assets:
Loans receivable²	$	1,226,469	$	13,969		4.52	%	$	1,165,080	$	14,084		4.81	%
Taxable securities		365,035		2,935		3.22			361,123		3,033		3.34
Tax exempt securities		14,796		294		7.95			17,464		279		6.36
FHLB stock		8,277		40		1.93			7,163		28		1.56
Interest-bearing bank balances		2,213		2		0.36			10,430		10		0.38

Total earning assets		1,616,790		17,240		4.23			1,561,260		17,434		4.44

Non-earning assets:
Cash and due from banks		23,658							25,439
Premises and equipment		34,671							36,544
Other assets		109,994							120,127
Allowance for credit losses		(26,176)							(28,757)

Total assets	$	1,758,937	$	17,240				$	1,714,613	$	17,434

Interest-bearing liabilities:
Savings deposits	$	48,834	$	6		0.05	%	$	45,298	$	6		0.05	%
NOW deposits		418,106		169		0.16			425,361		259		0.24
Money market deposits		337,777		141		0.17			366,213		224		0.24
Time deposits		355,766		421		0.47			389,638		599		0.61
Other borrowings		49,757		338		2.70			46,926		343		2.91
Borrowings from the Federal
Home Loan Bank		138,080		271		0.78			62,259		232		1.48

Total interest-bearing liabilities		1,348,320		1,346		0.40			1,335,695		1,663		0.50

Other liabilities and
shareholders’ equity:
Demand deposits		229,972							189,979
Other liabilities		19,644							18,442
Shareholders’ equity		161,001							170,497
Total liabilities and
shareholders’ equity	$	1,758,937		1,346				$	1,714,613		1,663

Net interest income and net
interest margin³			$	15,894		3.90	%			$	15,771		4.02	%

Interest rate spread⁴						3.83	%						3.94	%

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 $98 for 2013 and $93 for 2012.

²	The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $7 and $84 for the three months ended September 30, 2013 and 2012, respectively, are included in interest income.

³	Net interest margin is computed by dividing net interest income by average earning assets.

⁴	Earning assets yield minus interest-bearing liability rate.

	31

Noninterest Income and Expense

In the third quarter of 2013, noninterest income increased 7.5% to $4.5 million, from $4.2 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $458,000 during the third quarter of 2013, compared to $3,000 during the third quarter of 2012. Retail banking income increased 13.3% to $2.6 million in the third quarter of 2013 from $2.3 million in the third quarter of 2012 due primarily to changes in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012. Wealth management revenue increased 5.7% to $682,000 in the third quarter of 2013 from $645,000 in the third quarter of 2012 as the division continued to increase assets under management to $215.5 million at September 30, 2013 from $190.4 million at September 30, 2012.

In the third quarter of 2013, noninterest expense decreased 46.9% to $14.4 million, from $27.1 million in the third quarter of 2012. Personnel expense increased 7.2% to $8.1 million, from $7.5 million in the prior year third quarter. The increase is due primarily to the Company’s investments in its Charlotte and Raleigh commercial banking teams and, to a lesser extent, other key banking team additions in the Triad market. Other real estate owned (“OREO”) expense declined 98.6% to $152,000, from $11.1 million in the same period last year during which period the Company made significant progress in the execution of its asset disposition plan. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals.

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

	Three Months Ended
	September 30				Percentage
	2013		2012		Variance

Other noninterest expense:
Advertising	$	324	$	367	(11.7)	%
Bankcard expense		130		117	11.1
Postage		177		186	(4.8)
Telephone		121		182	(33.5)
Amortization of core deposit intangible		176		182	(3.3)
Stationery, printing and supplies		105		97	8.2
Other expense		1,221		2,094	(41.7)
Total other noninterest expense	$	2,254	$	3,225	(30.1)

Income Taxes

The Company recorded income tax expense of $2.9 million for the third quarter of 2013, compared to an income tax benefit of $3.7 million for the third quarter of 2012. For the three-month period ended September 30, 2013, the Company’s effective tax rate was 48.9%. The effective tax rate was 36.3% before recording the estimated effect of a reduction in North Carolina corporate income tax rates. The Company’s effective tax rate was (10.2)% for the three-month period ended September 30, 2012, primarily a result of an increase of $11.0 million in the valuation allowance against deferred tax assets in that quarter. (Refer to Note 5 of the Notes to Consolidated Financial Statements.)

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Net Interest Income

Net interest income for the first nine months of 2013, on a taxable equivalent basis, was $46.6 million, a decrease of $1.9 million, or 3.9%, from $48.5 million for the first nine months of 2012. Average earning assets in the first nine months of 2013 increased $9.5 million, or 0.6%, compared to the first nine months of 2012. Average interest-bearing liabilities in the first nine months of 2013 decreased $51.1 million, or 3.8%, to $1.30 billion, compared to $1.35 billion in the first nine months of 2012. Taxable equivalent net interest margin decreased to 3.93% for the first nine months of 2013, compared to 4.11% for the first nine months of 2012, a decrease of 18 basis points. The interest rate spread decreased to 3.86% in the first nine months of 2013, compared to 4.03% in the first nine months of 2012, a decrease of 17 basis points.

	32

The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on taxable investment securities and a lower yield on the loan portfolio, partially offset by a lower cost of funds rate. The average yield on earning assets during the first nine months of 2013 decreased 35 basis points to 4.27% from 4.62% during the comparable period in 2012, while the average rate on interest-bearing liabilities decreased 18 basis points to 0.41% from 0.59%. For the nine months ended September 30, 2013, the annualized average yield on loans decreased to 4.61% from 4.95% for the nine months ended September 30, 2012. The net interest margin is also impacted by changes in interest income from nonaccrual loans. For the nine months ended September 30, 2013, nonaccrual interest decreased the net interest margin by four basis points compared to nine basis points for the nine months ended September 30, 2012. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the nine months ended September 30, 2013 and 2012.

	33

(Fully taxable equivalent basis¹, dollars in thousands)

	Nine Months Ended							Nine Months Ended
	September 30, 2013							September 30, 2012
			Interest		Annualized					Interest		Annualized
	Average		Income/		Average			Average		Income/		Average
	Balance		Expense		Yield/Rate			Balance		Expense		Yield/Rate
Earning assets:
Loans receivable²	$	1,192,263	$	41,135		4.61	%	$	1,177,334	$	43,587		4.95	%
Taxable securities		362,548		8,423		3.10			357,371		9,915		3.71
Tax exempt securities		15,810		863		7.28			17,692		852		6.43
FHLB stock		7,228		123		2.27			7,302		79		1.45
Interest-bearing bank balances		6,807		15		0.29			15,462		30		0.26

Total earning assets		1,584,656		50,559		4.27			1,575,161		54,463		4.62

Non-earning assets:
Cash and due from banks		24,416							26,132
Premises and equipment		35,036							36,522
Other assets		103,872							122,271
Allowance for credit losses		(26,504)							(28,635)

Total assets	$	1,721,476	$	50,559				$	1,731,451	$	54,463

Interest-bearing liabilities:
Savings deposits	$	47,397	$	18		0.05	%	$	44,155	$	20		0.06	%
NOW deposits		420,434		540		0.17			433,546		1,015		0.31
Money market deposits		332,014		441		0.18			373,158		1,024		0.37
Time deposits		341,301		1,248		0.49			379,106		2,158		0.76
Other borrowings		48,021		994		2.77			47,016		1,032		2.93
Borrowings from the Federal
Home Loan Bank		111,209		768		0.92			74,532		760		1.36

Total interest-bearing liabilities		1,300,376		4,009		0.41			1,351,513		6,009		0.59

Other liabilities and
shareholders’ equity:
Demand deposits		220,654							192,100
Other liabilities		19,420							19,372
Shareholders’ equity		181,026							168,466
Total liabilities and
shareholders’ equity	$	1,721,476		4,009				$	1,731,451		6,009

Net interest income and net
interest margin³			$	46,550		3.93	%			$	48,454		4.11	%

Interest rate spread⁴						3.86	%						4.03	%

¹	Income related to securities exempt from federal income taxes is stated on a fully taxable equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $287 for 2013 and $281 for 2012.

²	The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $119 and $373 for the nine months ended September 30, 2013 and 2012, respectively, are included in interest income.

³	Net interest margin is computed by dividing net interest income by average earning assets.

⁴	Earning assets yield minus interest-bearing liability rate.

	34

Noninterest Income and Expense

In the first nine months of 2013, noninterest income increased to $13.4 million, from $12.2 million during the same period in 2012. The Company recognized gains on the sale of investment securities of $736,000 during the first nine months of 2013, compared to $3,000 during the first nine months of 2012. Retail banking income increased 10.2% to $7.6 million in the first nine months of 2013 from $6.9 million in the first nine months of 2012 due primarily to changes in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012. Wealth management revenue increased 7.3% to $1.9 million in the first nine months of 2013 from $1.8 million in the same period last year as the division continued to increase assets under management to $215.5 million at September 30, 2013 from $190.4 million at September 30, 2012. The Company also had a net gain of $308,000 on other equity investments during the first nine months of 2013, which is reflected within other noninterest income, compared to a net gain of $46,000 in the prior year period.

In the first nine months of 2013, noninterest expense decreased 28.2% to $42.0 million, from $58.5 million in the first nine months of 2012. Personnel expense increased 7.3% to $23.4 million, from $21.8 million in the first nine months of 2012. The increase is due primarily to the Company’s investments in its Charlotte and Raleigh commercial banking teams and, to a lesser extent, other key banking team additions in the Triad market. OREO expense declined to $(285,000), from $15.6 million in the same period last year due to significant progress by the Company in the execution of its asset disposition plan. In the third quarter of 2012, the Company expensed $1.9 million in adjustments for impairments on facilities and for other nonrecurring accruals.

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

	Nine Months Ended
	September 30				Percentage
	2013		2012		Variance

Other noninterest expense:
Advertising	$	1,128	$	1,150	(1.9)	%
Bankcard expense		364		329	10.6
Postage		530		572	(7.3)
Telephone		528		525	0.6
Amortization of core deposit intangible		539		545	(1.1)
Stationery, printing and supplies		347		312	11.2
Other expense		3,442		4,353	(20.9)
Total other noninterest expense	$	6,878	$	7,786	(11.7)

Income Taxes

The effective tax rate for the first nine months of 2013 is (24.0)%, as the Company recorded the reversal of a substantial portion of the valuation allowance against its deferred tax asset in the second quarter (see Note 5 of the Notes to Consolidated Financial Statements) and the estimated effect of a reduction in North Carolina corporate income tax rates during the third quarter. The Company recorded an income tax benefit of $2.8 million for the first nine months of 2012 at an effective tax rate of (8.5)%, primarily as a result of losses during that period offset by an increase of $11.0 million in the valuation allowance against deferred tax assets in 2012.

	35

Asset Quality and Allowance for Credit Losses

The Company’s allowance for credit losses, which is utilized to absorb actual losses in the loan portfolio, is analyzed monthly by management. This analysis includes a methodology that segments the loan portfolio into risk graded loans and homogeneous loan classifications and considers the current status of the portfolio, historical chargeoff experience, current levels of delinquent, impaired and nonperforming loans and their underlying collateral values, as well as economic and other risk factors. It is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology employed and other analytical measures in comparison to a group of peer banks. The Bank, like many financial institutions, has recently faced a challenging credit environment and could continue to face similar challenges in the coming months unless there is a significant improvement in regional and national economic conditions. The majority of the Bank’s loan portfolio is comprised of loans secured by real estate and is therefore subject to risk as a result of the weak real estate market. No assurances can be given that future economic conditions will not adversely affect borrowers and result in increases in credit losses and nonperforming asset levels.

The allowance for credit losses is maintained at a level consistent with management’s best estimate of probable credit losses incurred as of the balance sheet date. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management analyzes loans in the portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. The process of determining the allowance for credit losses is driven by the risk grade system and the loss experience on non risk graded homogeneous types of loans. While management uses the best information available to make evaluations, future adjustments may be needed if economic or other conditions differ substantially from the assumptions used.

At September 30, 2013, the allowance for credit losses was $25.4 million, or 2.00% of loans held for investment, compared to $26.6 million, or 2.30% of loans held for investment, at December 31, 2012, and $35.0 million, or 3.00% of loans held for investment, at September 30, 2012. At September 30, 2013, the allowance for credit losses was 220.03% of nonperforming loans, 124.67% at December 31, 2012 and 126.44% at September 30, 2012. The reduction in the allowance for credit losses and the changes in the composition of loans collectively evaluated for impairment are due to the reduction and changes in composition of classified loans. Based on analysis of the current loan portfolio and levels of problem assets and potential problem loans, management believes the allowance for credit losses is adequate. Additional information regarding the allowance for credit losses is presented in the table headed “Asset Quality Analysis” on page 39.

Nonperforming loans totaled $11.5 million at September 30, 2013, compared to $21.4 million at December 31, 2012 and $27.7 million at September 30, 2012. OREO was $2.7 million at September 30, 2013, $5.4 million at December 31, 2012, and $10.5 million at September 30, 2012. The decreases from the prior year third quarter reflect the successful completion of the Company’s asset disposition plan in 2012, which resulted in a $106 million reduction in adversely classified assets. Approximately $3.4 million was transferred from loans into OREO, and approximately $5.6 million of OREO was disposed of during the first nine months of 2013. The Company recorded $(285,000) of expenses on OREO during the first nine months of 2013, compared to $15.6 million in the first nine months of 2012. Nonperforming assets (comprised of nonaccrual loans, restructured loans and OREO) totaled $14.2 million, or 0.79% of total assets, at September 30, 2013, compared to $26.7 million, or 1.56% of total assets, at December 31, 2012 and $38.2 million, or 2.23% of total assets, a year ago.

	36

Classified assets are summarized in the following table (dollars in thousands):

	September 30			December 31			September 30
	2013			2012			2012
Loans identified as impaired	$	9,607		$	16,400		$	22,644
Other nonperforming loans		1,930			4,960			5,050
Total nonperforming loans		11,537			21,360			27,694
Performing classified loans		19,086			26,498			46,842
Total classified loans		30,623			47,858			74,536
OREO		2,695			5,355			10,465
Total classified assets	$	33,318		$	53,213		$	85,001
Classified percentage⁽¹⁾		18.25	%		30.53	%		48.10	%

(1) Percentage of classified assets to the Bank’s Tier 1 capital and reserves.

The Bank is well within the regulatory commercial real estate high concentration guidelines in land acquisition, development and construction (the “AD&C portfolio”) loans, as well as total commercial real estate loans. At September 30, 2013, the Bank’s concentration levels were 46.74% and 200.37%, respectively, of total regulatory capital, which compares favorably to the interagency regulatory guidance maximum concentrations of 100% and 300%, respectively. The Bank’s AD&C portfolio totaled $81.7 million at September 30, 2013, including $20.8 million of speculative residential construction and residential acquisition and development. This portfolio is largely graded as classified loans.

The provision for credit losses charged to operations for the three months ended September 30, 2013 totaled $33,000, compared to $28.9 million for the three months ended September 30, 2012. Net chargeoffs for the three months ended September 30, 2013 were $1.0 million, or 0.34% of average loans held for investment on an annualized basis, compared to net chargeoffs of $19.1 million, or 6.52% of average loans held for investment on an annualized basis, for the three months ended September 30, 2012.

The provision for credit losses charged to operations for the nine months ended September 30, 2013 totaled $2.0 million, compared to $34.7 million for the nine months ended September 30, 2012. Net chargeoffs for the nine months ended September 30, 2013 were $3.3 million, or 0.37% of average loans held for investment on an annualized basis, compared to net chargeoffs of $28.5 million, or 3.23% of average loans held for investment on an annualized basis, for the nine months ended September 30, 2012.

	37

Asset Quality Analysis

(dollars in thousands)

Allowance for credit losses:	Three Months Ended September 30 2013			Year Ended December 31 2012			Three Months Ended September 30 2012
Balance, beginning of period	$	26,395		$	28,844		$	25,231
Loans charged off:
Secured by owner-occupied nonfarm nonresidential properties		-			9,297			4,609
Secured by other nonfarm nonresidential properties		-			3,634			1,491
Other commercial and industrial		324			4,375			3,257
Total Commercial		324			17,306			9,357

Construction loans – 1 to 4 family residential		-			439			193
Other construction and land development		372			8,335			4,079
Total Real estate – construction		372			8,774			4,272

Closed-end loans secured by 1 to 4 family residential properties		674			8,342			4,034
Lines of credit secured by 1 to 4 family residential properties		462			4,205			1,409
Loans secured by 5 or more family residential properties		-			790			273
Total Real estate – mortgage		1,136			13,337			5,716

Credit cards		49			348			54
Other consumer loans		127			843			263
Total Consumer		176			1,191			317

Total Other		338			3			1

Total chargeoffs		2,346			40,611			19,663

Recoveries of loans previously charged off:
Total Commercial		796			879			118
Total Real estate – construction		59			423			107
Total Real estate – mortgage		366			766			176
Total Consumer		69			314			157
Total Other		13			122			9
Total Recoveries		1,303			2,504			567
Net loans charged off		1,043			38,107			19,096
Provision for credit losses		33			35,893			28,881

Balance, end of period	$	25,385		$	26,630		$	35,016

Nonperforming Assets:
Commercial nonaccrual loans, not restructured	$	3,705		$	5,528		$	12,411
Commercial nonaccrual loans, restructured		546			670			5,092
Non-commercial nonaccrual loans, not restructured		4,132			9,855			4,418
Non-commercial nonaccrual loans, restructured		889			1,459			1,007
Total nonaccrual loans		9,272			17,512			22,928
Troubled debt restructured, accruing		2,231			3,804			4,760
Loans 90 days or more past due and still accruing		34			44			6
Total nonperforming loans		11,537			21,360			27,694
OREO		2,695			5,355			10,465
Total nonperforming assets	$	14,232		$	26,715		$	38,159

Asset Quality Percentages:
Nonperforming loans to loans held for investment at end of period		0.91	%		1.85	%		2.37	%
Nonperforming assets to total assets at end of period		0.79	%		1.56	%		2.23	%
Allowance for credit losses as a percentage of loans held for investment at end of period		2.00	%		2.30	%		3.00	%
Allowance for credit losses to nonperforming loans		220.03	%		124.67	%		126.44	%
Net chargeoffs as a percentage of average loans outstanding during the period (annualized for interim periods)		0.34	%		3.26	%		6.52	%

	38

Allowance for credit losses:	Nine Months Ended September 30 2013			Year Ended December 31 2012			Nine Months Ended September 30 2012
Balance, beginning of period	$	26,630		$	28,844		$	28,844
Loans charged off:
Secured by owner-occupied nonfarm nonresidential properties		175			9,297			5,755
Secured by other nonfarm nonresidential properties		125			3,634			2,101
Other commercial and industrial		559			4,375			3,842
Total Commercial		859			17,306			11,698

Construction loans – 1-4 family residential		182			439			403
Other construction and land development		943			8,335			6,611
Total Real estate – construction		1,125			8,774			7,014

Closed-end loans secured by 1 to 4 family residential properties		1,964			8,342			6,560
Lines of credit secured by 1 to 4 family residential properties		813			4,205			3,578
Loans secured by 5 or more family residential properties		-			790			273
Total Real estate – mortgage		2,777			13,337			10,411

Credit cards		162			348			265
Other consumer loans		644			843			583
Total Consumer		806			1,191			848

Total Other		338			3			3

Total chargeoffs		5,905			40,611			29,974

Recoveries of loans previously charged off:
Total Commercial		1,020			879			294
Total Real estate – construction		392			423			292
Total Real estate – mortgage		922			766			576
Total Consumer		214			314			278
Total Other		63			122			22
Total Recoveries		2,611			2,504			1,462
Net loans charged off		3,294			38,107			28,512
Provision for credit losses		2,049			35,893			34,684

Balance, end of period	$	25,385		$	26,630		$	35,016

Nonperforming Assets:
Commercial nonaccrual loans, not restructured	$	3,705		$	5,528		$	12,411
Commercial nonaccrual loans, restructured		546			670			5,092
Non-commercial nonaccrual loans, not restructured		4,132			9,855			4,418
Non-commercial nonaccrual loans, restructured		889			1,459			1,007
Total nonaccrual loans		9,272			17,512			22,928
Troubled debt restructured, accruing		2,231			3,804			4,760
Loans 90 days or more past due and still accruing		34			44			6
Total nonperforming loans		11,537			21,360			27,694
OREO		2,695			5,355			10,465
Total nonperforming assets	$	14,232		$	26,715		$	38,159

Asset Quality Percentages:
Nonperforming loans to loans held for investment at end of period		0.91	%		1.85	%		2.37	%
Nonperforming assets to total assets at end of period		0.79	%		1.56	%		2.23	%
Allowance for credit losses as a percentage of loans held for investment at end of period		2.00	%		2.30	%		3.00	%
Allowance for credit losses to nonperforming loans		220.03	%		124.67	%		126.44	%
Net chargeoffs as a percentage of average loans outstanding during the period (annualized for interim periods)		0.37	%		3.26	%		3.23	%

	39

Liquidity Management

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

During the first nine months of 2013, the Company had net cash provided by operating activities of $20.7 million, compared to $21.2 million in the first nine months of 2012. Proceeds from sales of loans held for sale in excess of originations of loans held for sale were $7.1 million during the first nine months of 2013, compared to $2.7 million in the first nine months of 2012. Net income increased $49.4 million in the first nine months of 2013 compared to the first nine months of 2012. The provision for credit losses decreased $32.6 million for the first nine months of 2013 compared to the first nine months of 2012. For the first nine months of 2013, there was a net gain of $742,000 related to OREO, compared to a net loss of $14.6 million for the first nine months of 2012. In addition, there was a net gain on sales of investment securities of $736,000 during the first nine months of 2013, compared to a gain of $3,000 for the first nine months of 2012. There was a deferred income tax benefit of $3.7 million for the first nine months of 2013 compared to a deferred income tax benefit of $2.8 million for the first nine months of 2012.

Net cash used in investing activities for the first nine months of 2013 was $86.1 million, compared to net cash used in investing activities for the first nine months of 2012 of $32.2 million. This change is primarily attributable to an increase in loans held for investment of $117.6 million, compared to an increase of $4.6 million during the same period last year, partially offset by proceeds from sales, calls, maturities and prepayments of securities of $162.2 million during the first nine months of 2013, compared to $134.5 million during the same period last year. Purchases of securities used $135.2 million during the first nine months of 2013, compared to $171.4 million used during the first nine months of 2012. During the first nine months of 2013, proceeds from the sale of OREO were $6.7 million, compared to $13.0 million during the same period last year.

During the nine months ended September 30, 2013, net cash provided by financing activities was $82.4 million, compared to net cash used in financing activities of $297,000 during the same period of 2012. The change was primarily the result of an increase in deposits of $79.5 million during the first nine months of 2013, compared to a net decrease of $28.9 million in deposits during the first nine months of 2012. During the first nine months of 2013, borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”) increased $49.7 million, compared to an increase of $30.5 million during the same period last year. During the first nine months of 2013, the Company had cash outflows of $37.5 million (including related expense of $100,000) for redemption of preferred stock and $7.8 million for repurchase of stock warrant, as discussed on page 42 under the heading “Capital Resources and Shareholder’s Equity.”

Cash and cash equivalents totaled $56.9 million at September 30, 2013, compared to $39.8 million at December 31, 2012 and $42.7 million at September 30, 2012.

The Bank has borrowing capacity of approximately $301.6 million with the FHLB, of which approximately $88.9 million was available at September 30, 2013 after deducting $50.0 million in letters of credit and $162.7 million in outstanding borrowings. These borrowings are collateralized by FHLB stock, investment securities, qualifying residential 1 to 4 family first mortgage loans, qualifying multifamily first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. The Bank provides various reports to the FHLB on a regular basis to maintain the availability of the credit line. Each borrowing request to the FHLB is initiated through an advance application that is subject to approval by the FHLB before funds are advanced under the line of credit. The Bank also has $5.0 million of borrowing capacity through the Federal Reserve Bank System, of which none was used as of September 30, 2013. The line with the Federal Reserve Bank of Richmond is collateralized using qualified loans. In addition, the Bank has $25.0 million in unsecured, overnight federal funds lines with correspondent banks.

	40

Interest Rate Risk Management

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

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

The Company uses several interest rate risk measurement tools provided by a national asset/liability management consultant to help manage this risk. The Company’s Asset/Liability policy provides guidance for acceptable levels of interest rate risk and potential remediations. Management provides the consultant with key assumptions, which are used as inputs into the measurement tools. The Company has not experienced any material changes in interest rate risk since the end of the fiscal year ended December 31, 2012.

The following table summarizes the results of the Company’s income simulation model as of June 30, 2013, the most currently available review date.

	Change in Net Interest Income
	Year 1			Year 2
Change in Market Interest Rates:
200 basis point ramped increase		(0.52)	%		(3.46)	%
Base case – no change		-			(2.87)	%
100 basis point ramped decrease		0.00	%		(5.92)	%

Capital Resources and Shareholders’ Equity

At a Special Meeting of Shareholders on February 20, 2013, shareholders approved the conversion of up to 422,456 shares of Series B preferred stock and up to 140,217 shares of Series C preferred stock into Class A Common Stock and Class B Common Stock, respectively, at a conversion rate of $4.40 per share. Articles of Amendment filed with the North Carolina Secretary of State on February 21, 2013, created a new class of nonvoting common stock designated “Class B Common Stock,” and redesignated the Company’s existing common stock as “Class A Common Stock.” The Class A Common Stock and the Class B Common Stock each have no par value per share. As a result, on February 22, 2013, the Series B preferred stock was converted into 9,601,262 shares of voting Class A Common Stock, and the Series C preferred stock was converted into 3,186,748 shares of nonvoting Class B Common Stock.

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On April 18, 2013, the U.S. Department of the Treasury (the “U.S. Treasury”) held an auction to sell all of its investment in the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”). The sale was settled on April 29, 2013. As a consequence, the Company is no longer subject to many of the rules and regulations that were established in connection with the Capital Purchase Program (the “CPP”). Subsequent to the auction, 34,438 shares of common stock were issued pursuant to vested restricted stock units. On May 15, 2013, the Company completed its repurchase from the U.S. Treasury of a warrant (the “Warrant”) to purchase 2,567,255 shares of the Company’s common stock. The Company repurchased the Warrant for its fair market value of $7,779,000. Following the Company’s repurchase of the Warrant, the U.S. Treasury has no equity or other ownership interest in the Company. On June 3, 2013, the Company redeemed 37,372 of the Company’s 52,372 outstanding shares of Series A Preferred Stock at the liquidation price of $1,000 per share for a total of $37,372,000 plus $93,430 of accrued and unpaid dividends. The Company did not repurchase any of its equity securities during 2012.

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

As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies as of September 30, 2013.

	Regulatory Capital
	Well Capitalized		Adequately Capitalized		Company		Bank

Total Capital	10.0	%	8.0	%	13.09	%	12.65	%
Tier 1 Capital	6.0		4.0		11.82		11.38
Leverage Capital	5.0		4.0		9.47		9.11

The Company has decided to eliminate tax planning strategies from the calculation of the disallowed deferred tax asset used in determining the regulatory capital levels of the Company and the Bank. The Company has revised its methodology accordingly. The following table presents the capital levels as of June 30, 2013 of the Company and the Bank, as revised and as originally reported.

	Regulatory Capital
	Company Revised		Company As Reported		Bank Revised		Bank As Reported

Total Capital	12.87	%	13.47	%	12.40	%	12.97	%
Tier 1 Capital	11.59		12.19		11.12		11.69
Leverage Capital	9.51		10.01		9.12		9.60

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Company considers interest rate risk to be its most significant market risk, which is discussed under the heading “Interest Rate Risk Management” on page 42.

	42

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s management, including its CEO, CFO and Chief Accounting Officer (“CAO”) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2013. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of September 30, 2013, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in internal control over financial reporting

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit No.		Description

3.1		Articles of Incorporation, and amendments thereto, incorporated by reference to Exhibit 4.1 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046).

3.2		Articles of Merger of FNB with and into LSB, including amendments to the Articles of Incorporation, as amended, incorporated by reference to Exhibit 3.4 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448).

3.3		Amended and Restated Bylaws adopted by the Board of Directors on August 17, 2004 and amended on July 23, 2008 (with identified Bylaw approved by the shareholders) incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, filed with the SEC on May 8, 2009 (SEC File No. 000-11448).

3.4		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).

3.5		Articles of Amendment to Designate the Terms of the Series B Mandatorily Convertible Adjustable Rate Cumulative Perpetual Preferred Stock and Series C Mandatorily Convertible Adjustable Rate Cumulative Perpetual Preferred Stock, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on November 30, 2012 (SEC File No. 000-11448).

3.6		Articles of Amendment, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on February 21, 2013 (SEC File No. 000-11448).

4.1		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).

4.2		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).

4.3		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).

4.4		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).

4.5		Certificate of Designation for the Class B Common Stock, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on February 21, 2013 (SEC File No. 000-11448).

4.6		Specimen certificate of Class A Common Stock, no par value.

	44

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		1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995, filed with the SEC on March 28, 1996 (SEC File No. 000-11448).*

10.3		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).*

10.4		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).*

10.5		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).*

10.6		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).*

10.7		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).*

10.8		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).*

10.9		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).*

10.10		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).*

10.11		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).*

10.12		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).*

10.13		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).*

	45

10.14		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).*

10.15		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).*

10.16		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, NewBridge Bancorp and NewBridge Bank, which is incorporated by reference to Exhibit 99.8 of the current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448). *

10.17		NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2008 (SEC File No. 000-11448).*

10.18		First Amendment to the NewBridge 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).*

10.19		NewBridge 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).*

10.20		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).*

10.21		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).*

10.22		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and David P. Barksdale, dated January 12, 2012, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on January 30, 2012 (SEC File No. 000-11448).*

10.23		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Ramsey K. Hamadi, dated March 2, 2012, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on March 2, 2012 (SEC File No. 000-11448).*

10.24		Second Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 11, 2012, incorporated herein by reference to Exhibit 10.33 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

10.25		Third Amendment to the Trust Agreement for the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy, effective March 5, 2012, incorporated herein by reference to Exhibit 10.34 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

10.26		Appointment of Successor Trustee under the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management dated March 5, 2012, incorporated herein by reference to Exhibit 10.35 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

	46

10.27		Second 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 10.36 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

10.28		Third 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 10.37 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

10.29		Fourth 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 10.38 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012.*

10.30		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Pressley A. Ridgill, executed September 9, 2009, and effective January 1, 2013, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 5, 2012 (SEC File No. 000-11448).*

10.31		Form of Securities Purchase Agreement, dated November 1, 2012, between NewBridge Bancorp and certain investors, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on November 1, 2012 (SEC File No. 000-11448).

10.32		Form of Registration Rights Agreement, dated November 1, 2012, between NewBridge Bancorp and certain investors, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on November 1, 2012 (SEC File No. 000-11448).

10.33		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and William W. Budd, Jr., executed February 8, 2013, and effective March 5, 2013, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on February 11, 2013 (SEC File No. 000-11448).*

10.34		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Robin S. Hager, executed February 8, 2013, and effective August 1, 2013, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on February 11, 2013 (SEC File No. 000-11448).*

10.35		Third Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 23, 2013, incorporated herein by reference to Exhibit 10.38 of the Annual Report on Form 10-K filed with the SEC on March 25, 2013 (SEC File No. 000-11448).*

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.1		Financial Statements filed in XBRL format.

*Management contract and compensatory arrangements.

	47

SIGNATURES

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

Date: November 8, 2013	NEWBRIDGE BANCORP
	(Registrant)

	By:	/s/ Ramsey K. Hamadi
	Name: Ramsey K. Hamadi
	Title: Senior Executive Vice President and Chief Financial Officer
	(Authorized Officer)

	48

EXHIBIT INDEX

Exhibit No.		Description

31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	49

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Newbridge Bancorp (NBBC) Inactive 10-Q2013 Q3 Quarterly report

Content analysis

Item 1. Financial Statements.

Consolidated Statements of Changes in Shareholders’ Equity

Note 1 – Basis of Presentation

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

PART II. OTHER INFORMATION

SIGNATURES