UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended: December 31, 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 Blvd., Suite 400 | ||
Greensboro, North Carolina | 27410 | |
| (Address of principal executive offices) | (Zip Code) |
(336) 369-0900
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:
| Title of each class | Name of each exchange on which registered | |
| Class A Common Stock, no par value per share | Nasdaq Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yeso Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yeso Nox
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. Yesx Noo
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). Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K.o
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 filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
The aggregate market value of the Registrant’s voting and nonvoting common equity held by non-affiliates of the Registrant, based on the average bid and asked price of such common equity on the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $165.3 million. As of March 11, 2014 (the most recent practicable date), the Registrant had 25,303,820 shares of Class A Common Stock outstanding and 3,186,748 shares of Class B Common Stock outstanding.
Documents incorporated by reference – Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders of NewBridge Bancorp (the “Proxy Statement”) are incorporated by reference into Part III hereof.
The Exhibit Index begins on page 116.
NewBridge Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 2013
Table of Contents
Index | Page | ||
| PART I | |||
| Item 1. | Business | 4 | |
| Item 1A. | Risk Factors | 14 | |
| Item 1B. | unresolved staff comments | 24 | |
| Item 2. | Properties | 25 | |
| Item 3. | Legal Proceedings | 26 | |
| PART II | |||
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 27 | |
| Item 6. | Selected Financial Data | 30 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 57 | |
| Item 8. | Financial Statements and Supplementary Data | 61 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 112 | |
| Item 9A. | Controls and Procedures | 112 | |
| Item 9B. | Other Information | 113 | |
| PART III | |||
| Item 10. | Directors, Executive Officers And Corporate Governance | 114 | |
| Item 11. | Executive Compensation | 114 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 114 | |
| Item 13. | Certain Relationships and Related Transactions, and director independence | 114 | |
| Item 14. | Principal Accounting Fees and Services | 114 | |
| PART IV | |||
| Item 15. | Exhibits and Financial Statement Schedules | 115 | |
| Signatures | 120 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of NewBridge Bancorp (hereinafter referred to as “Bancorp” or the “Company”) including but not limited to Bancorp’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects,” “anticipates,” “should,” “estimates,” “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this Annual Report on Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation:
| • | Revenues are lower than expected; |
| • | Credit quality deterioration, which could cause an increase in the provision for credit losses; |
| • | Competitive pressure among depository institutions increases significantly; |
| • | Changes in consumer spending, borrowings and savings habits; |
| • | Technological changes and security and operations risks associated with the use of technology; |
| • | The cost of additional capital is more than expected; |
| • | The interest rate environment could reduce interest margins; |
| • | Asset/liability repricing risks, ineffective hedging and liquidity risks; |
| • | Counterparty risk; |
| • | General economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business, are less favorable than expected; |
| • | The effects of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments; |
| • | The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System; |
| • | Volatility in the credit or equity markets and its effect on the general economy; |
| • | Demand for the products or services of the Company, as well as its ability to attract and retain qualified people; |
| • | The costs and effects of legal, accounting and regulatory developments and compliance; |
| • | Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule; |
| • | The effects of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and the enactment of further regulations related to this Act; |
| • | More stringent capital requirements effective January 1, 2015; |
| • | Risks associated with the Company’s growth strategy, including acquisitions; and |
| • | The effects of any intangible or deferred tax asset impairments that may be required in the future. |
Bancorp cautions that the foregoing list of important factors is not exhaustive. See also “Risk Factors” which begins on page 14. Bancorp undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time, by or on behalf of Bancorp.
| 3 | ||
PART I
| Item 1. | Business |
General
The Company is a bank holding company incorporated under the laws of the State of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company’s principal asset is stock of its banking subsidiary, NewBridge Bank (the “Bank”). Accordingly, throughout this Annual Report on Form 10-K, there are frequent references to the Bank. The principal executive offices of the Company and the Bank are located at 1501 Highwoods Boulevard, Suite 400, Greensboro, NC 27410. The telephone number is (336) 369-0900 and its website iswww.newbridgebank.com. The Bank maintains operations facilities in Lexington and Reidsville, NC.
Business of Bank and Other Subsidiaries
Through its branch network, the Bank, a NC chartered non-member bank, provides a wide range of banking products to small to medium-sized businesses and retail clients in its market areas, including interest-bearing and noninterest-bearing demand deposit accounts, certificates of deposits, individual retirement accounts, overdraft protection, personal and corporate trust services, safe deposit boxes, online banking, corporate cash management, brokerage, financial planning and asset management, and secured and unsecured loans.
As of December 31, 2013, the Bank operated two active non-bank subsidiaries: LSB Properties, Inc. (“LSB Properties”) and Henry Properties, LLC (“Henry Properties”), which together own the real estate acquired in settlement of loans of the Bank.
The Company has one non-bank subsidiary, FNB Financial Services Capital Trust I (“FNB Trust”), a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. FNB Trust is not consolidated in the Company’s financial statements.
As part of its operations, the Company regularly holds discussions and evaluates the potential acquisition of, or merger with, various financial institutions and other businesses. The Company also regularly considers the potential disposition of certain assets, branches, subsidiaries, or lines of business. As a general rule, the Company only publicly announces any material acquisitions or dispositions once a definitive agreement has been reached.
The Company operates one reportable segment, the Bank. Reference is made to Item 8 – “Financial Statements and Supplementary Data.” Management believes that the Company is not dependent upon any single client, or a few clients, the loss of any one or more of which would have a material adverse effect on the Company’s operations.
Market Areas
The Bank’s primary market area is the Piedmont Triad Region of NC. The Bank’s secondary market area is the Cape Fear Region of NC, which is comprised of the state’s four most southeastern counties. The Bank also operates in North Carolina’s two strongest growth market areas, Charlotte and Raleigh, NC. On December 31, 2013, the Bank operated 36 branch offices in its four markets, which are also four of the largest markets in NC. The Bank also had loan production offices in Asheboro, Greensboro, Morganton, Raleigh, Southport and Winston-Salem, NC. The following table lists the Bank’s branch offices, categorized by region and city.
| 4 | ||
| Charlotte: | Piedmont Triad Region |
| Charlotte (SouthPark) | Lexington (five offices) |
| Greensboro (four offices) | |
| Raleigh: | Winston-Salem (four offices) |
| Raleigh (Downtown) | Reidsville (two offices) |
| Clemmons | |
| Cape Fear Region: | Danbury |
| Wilmington (two offices) | Eden |
| Boiling Spring Lakes | High Point |
| Burgaw | Jamestown |
| Calabash | Kernersville |
| Oak Island | King |
| Shallotte | Madison |
| Southport | Thomasville |
| Sunset Beach | Walkertown |
In November 2013, the Bank announced that it had entered into an agreement to merge with CapStone Bank, a commercial bank headquartered in Raleigh, NC with four branches in Raleigh and nearby markets. It is anticipated that the merger will be completed in the second quarter of 2014, subject to receipt of regulatory and shareholder approval.
As of December 31, 2013, the Bank operated 25 branches and three loan production offices in the Piedmont Triad Region of North Carolina. The Piedmont Triad Region is a 12 county area, located in the interstate corridor between the Charlotte and Research Triangle metro areas, and has a combined population of approximately 1.6 million people. The Piedmont Triad Region includes the cities of Greensboro, Winston-Salem and High Point, respectively the third, fourth and ninth largest cities in NC.
The Piedmont Triad Region’s economy was built on the textile, furniture and tobacco industries. As these industries have contracted, the Piedmont Triad Region has transitioned to a more service-oriented economy by successfully diversifying into areas related to transportation, logistics, health care, education and technology. The Piedmont Triad International Airport (“PTI”) is home to Honda Aircraft Company’s world headquarters and a national FedEx hub.
In addition to its strategic proximity to key markets, the Piedmont Triad Region has a well-defined transportation infrastructure, providing access to both global and national markets. Interstates 40, 85 and 77 provide both North-South and East-West routes. In addition, local manufacturers and distribution hubs will have direct access to both Midwest markets and additional Southeast ports when Interstates 73 and 74, which will bisect the Piedmont Triad Region, are completed. Moreover, extensive rail services are offered by Norfolk Southern, CSX and Amtrak, as well as a number of short-line railroads.
The Piedmont Triad Region is home to numerous institutions of higher education, including Wake Forest University, Wake Forest University Baptist Medical Center, North Carolina School of the Arts, Salem College and Winston-Salem State University (Winston-Salem); High Point University (High Point); the University of North Carolina at Greensboro, North Carolina A&T University, Elon University School of Law and the Joint School of Nanoscience and Nanoengineering (Greensboro); and a number of well-respected private colleges, as well as many community colleges and technical schools. All are recognized for academic excellence and enhance the Piedmont Triad Region’s business development efforts, particularly in the field of biotechnology.
As of December 31, 2013, the Bank operated nine branches and one loan production office in the Cape Fear Region. The Cape Fear Region is centered around Wilmington, the eighth largest city in NC. A historic seaport and a popular tourist destination, Wilmington has a diversified economy and is a major resort area, a light manufacturing center, a chemical manufacturing center and the distribution hub of southeastern NC. The city also serves as the retail and medical center for the region.
| 5 | ||
In addition to economic diversification, Wilmington has experienced extensive industrial development and growth in the service and trade sectors over the last 20 years. Companies in the Wilmington area produce fiber optic cables for the communications industry, aircraft engine parts, pharmaceuticals, nuclear fuel components and various textile products. The motion picture and television industries also have a significant presence in the area.
The total population of the Cape Fear Region is approximately 420,000. The area is served by Interstate 40 and U.S. Highways 17 and 74, major rail connections and national and regional airlines through facilities at Wilmington International Airport. Wilmington is also home to the Port of Wilmington, one of two deep-water ports in NC, and the University of North Carolina at Wilmington.
As of December 31, 2013, the Bank operated one branch in Charlotte. The office is located in Charlotte’s SouthPark neighborhood featuring one of the largest business districts in the State, as well as upscale shopping and residential areas.
Charlotte is the largest city in North Carolina and is within one of the fastest growing metropolitan statistical areas (“MSAs”) in the Southeast. The city is also considered one of the major banking centers in the country. The Charlotte-Gastonia-Rock Hill MSA is the 34th largest MSA in the nation and the fourth fastest growing MSA over the past decade. Mecklenburg County alone, where Charlotte is located, has grown more than 35 percent since 2000, with a population of more than 900,000.
As of December 31, 2013, the Bank operated one branch and one loan production office in Raleigh, the capital of North Carolina. The branch office is located in the middle of downtown just one block from the State Capitol.
Raleigh is the second largest city in North Carolina. The Raleigh-Cary MSA is the 47th largest MSA in the country and is one of the fastest growing MSAs. Raleigh is also one of the three cities that make up the area known as the Triangle (Raleigh, Durham and Chapel Hill). The Triangle is best known for Research Triangle Park and the three universities which anchor each of its cities: Duke University in Durham, The University of North Carolina in Chapel Hill, and North Carolina State University in Raleigh.
Management believes that unemployment data is the most significant indicator of the economic health of its market areas and monitors this data on a regular basis. As reflected in the table below, the unemployment rate in each of the Bank’s market areas has been elevated since the end of 2008 but showed significant improvement in 2013. The table also shows the Bank’s nonperforming loans as a percentage of its total loans in each market as of December 31, 2013.
| Unemployment Rate | As of December 31, 2013 | ||||||||||||||||||||||||||
| December 31 | Nonperforming Loans | Total Loans(1) | % of Total Loans | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | (in thousands) | |||||||||||||||||||||
| Piedmont Triad: | |||||||||||||||||||||||||||
| Guilford County | 8.3 | % | 11.2 | % | 10.1 | % | 9.9 | % | 9.5 | % | 6.9 | % | $ | 1,139 | $ | 260,719 | 0.44 | % | |||||||||
| Davidson County | 9.7 | 13.4 | 11.1 | 10.5 | 10.1 | 6.9 | 2,054 | 198,591 | 1.03 | ||||||||||||||||||
| Rockingham County | 10.1 | 12.6 | 12.1 | 11.4 | 10.6 | 7.5 | 372 | 68,065 | 0.55 | ||||||||||||||||||
| Forsyth/Stokes Counties | 7.4 | 9.9 | 9.1 | 9.5 | 8.8 | 6.1 | 272 | 161,783 | 0.17 | ||||||||||||||||||
| Wake County | 5.9 | 8.5 | 8.0 | 7.7 | 7.3 | 5.0 | - | 49,938 | - | ||||||||||||||||||
| Mecklenberg County | 7.7 | 11.2 | 10.5 | 9.5 | 9.2 | 6.7 | - | 94,916 | - | ||||||||||||||||||
| Cape Fear | 7.5 | 9.7 | 8.9 | 9.7 | 9.5 | 7.5 | 1,979 | 288,477 | 0.69 | ||||||||||||||||||
| Loan Production Offices | N/A | N/A | N/A | N/A | N/A | N/A | - | 26,152 | - | ||||||||||||||||||
| Corporate Centers: | |||||||||||||||||||||||||||
| Mortgage Center | N/A | N/A | N/A | N/A | N/A | N/A | 3,249 | 230,346 | 1.41 | ||||||||||||||||||
| Virginia Loans | N/A | N/A | N/A | N/A | N/A | N/A | 333 | 6,141 | 5.42 | ||||||||||||||||||
| Credit Cards | N/A | N/A | N/A | N/A | N/A | N/A | - | 7,955 | - | ||||||||||||||||||
| Other | N/A | N/A | N/A | N/A | N/A | N/A | - | 23,620 | - | ||||||||||||||||||
| 6 | ||
The following table reflects the Bank’s loans, deposits and branch locations by region at December 31, 2013, and the Bank’s rank by deposit market share as of June 30, 2013 (dollars in thousands):
| Market | Loans(1)(2) | Deposits(2) | Number of Branches | Deposit Market Share Rank(3)(4) | |||||||
| Piedmont Triad | $ | 689,158 | $ | 1,019,637 | 25 | 2 | |||||
| Raleigh | 49,938 | 16,421 | 1 | 14 | |||||||
| Charlotte | 94,916 | 18,105 | 1 | 15 | |||||||
| Cape Fear | 288,477 | 259,260 | 9 | 2 | |||||||
| (1) | Excludes loans held for sale. |
| (2) | Excludes loans and deposits held in corporate centers and loan production offices. |
| (3) | As of June 30, 2013, rank for community banks; excludes banks greater than $10 billion in assets. |
| (4) | Includes Security Savings Bank, SSB, which was acquired on October 1, 2013. |
Deposits
The Bank offers a variety of deposit products to small to medium-sized businesses and retail clients at interest rates generally competitive with those of other financial institutions. The table below sets forth the mix of depository accounts at the Bank as a percentage of total deposits of the Bank at the dates indicated.
| As of December 31 | |||||||||
| 2013 | 2012 | 2011 | |||||||
| Noninterest-bearing demand | 15.5 | % | 15.4 | % | 12.2 | % | |||
| Savings, NOW, MMI | 55.4 | 59.5 | 60.1 | ||||||
| Certificates of deposit | 29.1 | 25.1 | 27.7 | ||||||
| 100.0 | % | 100.0 | % | 100.0 | % | ||||
The Bank accepts deposits at its banking offices, most of which have automated teller machines (“ATMs”). Its memberships in multiple ATM networks allow clients access to their depository accounts from ATM facilities throughout the United States. Competitive fees are charged for the use of its ATM facilities by clients not having an account with the Bank. Deposit flows are controlled primarily through the pricing of deposits.
At December 31, 2013, the Bank had $273.5 million in certificates of deposit of $100,000 or more, including $193.8 million in certificates of deposit of $250,000 or more. It also utilizes brokered deposits and deposits obtained through the Certificate of Deposit Account Registry Service (“CDARS”), a service of Promontory InterFinancial Network, LLC, to supplement in-market deposits. The accompanying table presents the scheduled maturities of time deposits of $100,000 or more and $250,000 or more at December 31, 2013.
| Scheduled maturity of time deposits | $100,000 or more | $250,000 or more | |||||
| (In thousands) | |||||||
| Less than three months | $ | 127,428 | $ | 104,639 | |||
| Three through six months | 77,196 | 61,220 | |||||
| Seven through twelve months | 38,636 | 17,585 | |||||
| More than twelve months | 30,284 | 10,396 | |||||
| Total | $ | 273,544 | $ | 193,840 | |||
See also Note 7 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Marketing
The Bank focuses its marketing efforts on small to medium-sized businesses, professionals and retail clients, and on achieving certain strategic objectives, including increasing noninterest income and growing core deposits and loans. The Bank promotes its brand through its association with the Greensboro minor league baseball team and ballpark (NewBridge Bank Park), traditional advertising and promotions, sponsorship of local events and other community-focused campaigns. The Bank also invests in bank-hosted events and client hospitality opportunities that foster relationship building and business development.
| 7 | ||
Competition
Commercial banking in North Carolina is extremely competitive. Many of the Bank’s competitors are significantly larger and have greater resources. The Bank encounters significant competition from a number of sources, including commercial banks, thrift institutions, credit unions and other financial institutions and financial intermediaries. The Bank 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. Many of its competitors have substantially higher lending limits due to their greater total capitalization, and some perform functions for their clients that the Bank generally does not offer. The Bank primarily relies on providing quality products and services at a competitive price within its market areas. As a result of interstate banking legislation, the Bank’s market is open to future penetration by out-of-state banks thereby further increasing future competition.
As of June 30, 2013, the Bank competed with 34 commercial banks and savings institutions in the Piedmont Triad Region; 20 in the Cape Fear Region; 26 in Raleigh; and 24 in Charlotte. There are also a large number of competing credit unions in each market.
Employees
At December 31, 2013, the Company had a total of 449 employees, including 434 full time employees, all of whom were compensated by the Bank. None of the Company’s employees are represented by a collective bargaining unit, and the Company has not recently experienced any type of strike or labor dispute. The Company considers its relationship with its employees to be good.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect Bancorp, the Bank and the Bank’s subsidiaries. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of Bancorp and the Bank. Supervision, regulation and examination of Bancorp and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of Bancorp. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. Bancorp cannot predict whether, or in what form, any proposed statute or regulation will be adopted or the extent to which the business of Bancorp and the Bank may be affected by such statute or regulation.
General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC insurance fund in the event the depository institution becomes in danger of default or in default. For example, to mitigate the risk of failure, holding companies are required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with such capital restoration plan. Bancorp, as a registered bank holding company, is subject to the regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve”). Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the holding company.
| 8 | ||
As a result of Bancorp’s ownership of the Bank, Bancorp is also registered under the bank holding company laws of North Carolina. Accordingly, Bancorp is also subject to supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”).
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, will continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance, permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The legislation also, among other things, requires originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory rate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. The Dodd-Frank Act increased the ability of shareholders to influence boards of directors by requiring companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the implementing regulations and, therefore, their impact on our operations cannot be fully determined at this time. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Bank and Bancorp.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve System and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve’s capital adequacy guidelines are required to comply with the Federal Reserve’s risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be “Tier I capital,” principally consisting of common stockholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock less certain goodwill items. The remainder (“Tier II capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum. Bancorp exceeded all applicable minimum capital adequacy guidelines as of December 31, 2013.
In July 2013, the Federal Reserve and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
| 9 | ||
Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Under the regulations, an institution is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) “significantly undercapitalized” if the institution has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C) “critically undercapitalized” if the institution has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2013, the Bank was deemed to be “well capitalized.”
In July 2013, the Federal Reserve approved a new rule that implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. See “Capital Requirements for the Bank” below.
Capital Requirements for the Bank. As a FDIC insured commercial bank that is not a member of the Federal Reserve, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC’s regulations, state non-member banks that (i) receive the highest rating during the examination process and (ii) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable minimum capital requirements as of December 31, 2013.
The rules include new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to Bancorp and the Bank will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.
Dividend and Repurchase Limitations. Federal regulations provide that Bancorp must obtain Federal Reserve approval prior to repurchasing common stock for consideration in excess of 10% of its net worth during any 12 month period unless Bancorp (i) both before and after the redemption satisfies capital requirements for a “well capitalized” bank holding company; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues.
The ability of Bancorp to pay dividends or repurchase shares is dependent upon Bancorp’s receipt of dividends from the Bank. NC commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Also, an insured depository institution, such as the Bank, is prohibited from making distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).
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During 2008, the Company first reduced its quarterly cash dividend, and later suspended the payment of cash dividends.
Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Deposit Insurance Fund, such as the Bank, is specified in a schedule issued by the FDIC. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. In 2010, FDIC assessments for deposit insurance ranged from 12 to 50 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. On February 7, 2011, the FDIC adopted a new assessment formula, effective with the second quarter of 2011, which reduced the Bank’s assessments. In the third quarter of 2011, and then, again in the fourth quarter of 2013, the Bank received a new rating, each of which further reduced the Bank’s assessments.
Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.12% of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta. At December 31, 2013, the Bank was in compliance with these requirements.
Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination, which was completed during September 2011.
Changes in Control. The BHCA prohibits Bancorp from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank or financial holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-objection) must be obtained prior to any person acquiring control of Bancorp. Control is deemed to exist if, among other things, a person acquires 25% or more of any class of voting stock of Bancorp or controls in any manner the election of a majority of the directors of Bancorp. Control is presumed to exist if a person acquires 10% or more of any class of voting stock, the stock is registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), and the acquiror will be the largest shareholder after the acquisition. Bancorp has only one class of voting stock (Class A Common Stock).
Federal Securities Law. Bancorp has registered a class of its common stock (Class A Common Stock) with the Securities and Exchange Commission (“SEC”) pursuant to Section 12(g) of the Exchange Act. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to Bancorp.
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Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution, and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans to one borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.
Loans to One Borrower. The Bank is subject to the loans to one borrower limits imposed by NC law, which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any single borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the Bank’s capital, as used in the calculation of its risk-based capital ratios, plus those portions of the Bank’s allowance for credit losses, deferred tax assets, and intangible assets that are excluded from the Bank’s capital. At December 31, 2013, this limit was $31.8 million. This limit is increased by an additional 10% of the Bank’s capital, or $21.2 million as of December 31, 2013, for loans and extensions of credit that are fully secured by readily marketable collateral.
Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”), dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. In doing so, it increased competition in the financial services industry, presenting greater opportunities for our larger competitors, which were more able to expand their service and products than smaller, community-oriented financial institutions, such as the Bank.
USA Patriot Act of 2001. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act was intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The impact of the Act on financial institutions of all kinds has been significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (“SOX”) was signed into law in 2002 and addresses accounting, corporate governance and disclosure issues. The impact of SOX is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.
In general, SOX established new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
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The economic and operational effects of SOX on public companies, including the Company, have been and will continue to be significant in terms of the time, resources and costs associated with compliance with its requirements.
Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution’s normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction; “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates); and “undercapitalized” depository institutions may not accept, renew, or roll-over such deposits. Definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by the FDIC to implement the prompt corrective action provisions discussed above.
Taxation. Federal Income Taxation. Financial institutions such as the Company are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), in the same general manner as other corporations. The Bank computes its bad debt deduction under the specific chargeoff method.
State Taxation. Under NC law, the Company and its subsidiaries are each subject to corporate income taxes at a 6.90% rate and an annual franchise tax at a rate of 0.15% of equity. 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.
Other. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.
The Bank is subject to examination by the FDIC and the Commissioner. In addition, it is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit, equal credit and fair credit reporting laws and laws relating to branch banking. The Bank, as an insured NC commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance Fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.
As an FHA-approved Title II supervised lender, the Bank is required to report to the Department of Housing and Urban Development (“HUD”) its annual, audited financial and non-financial information necessary for HUD to evaluate compliance with FHA recertification requirements.
Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions, are introduced regularly. Neither the Company nor the Bank can predict whether or what form any proposed statute or regulation will be adopted or the extent to which the business of the Company or the Bank may be affected by such statute or regulation.
Available Information
The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on its internet websitewww.newbridgebank.com as soon as reasonably practicable after the reports are electronically filed with the SEC. The Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are also available on its internet website in interactive data format using the eXtensible Business Reporting Language (XBRL), which allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. Any materials that the Company files with the SEC may be read and/or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SEC’s website atwww.sec.gov.
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Additionally, the Company’s corporate governance policies, including the charters of the Audit and Risk Management, Compensation, and Corporate Governance and Nominating Committees, the Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Code of Business Conduct and Ethics for CEO and Senior Financial Officers may also be found under the“Investor Relations” section of the Company’s website. A written copy of the foregoing corporate governance policies is available upon written request to the Company.
Item 1A. Risk Factors
An investment in Bancorp’s common stock is subject to risks inherent in Bancorp’s business. The material risks and uncertainties that management believes affect Bancorp are described below. Before making an investment decision, you should carefully consider these risks and uncertainties, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. These risks and uncertainties are not the only ones facing Bancorp. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also impair Bancorp’s business operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, Bancorp’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of Bancorp’s common stock could decline significantly, and you could lose all or part of your investment.
Risks Associated with Our Business
Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.While showing signs of improvement, the global, U.S. and North Carolina economies are continuing to experience reduced business activity and consumer spending as a result of the lingering effects of the most recent recession. Continued weakness or further weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:
| • | A decrease in the demand for loans or other products and services offered by us; |
| • | A decrease in the value of our loans or other assets secured by consumer or commercial real estate; |
| • | A decrease in deposit balances due to overall reductions in the accounts of clients; |
| • | An impairment of certain intangible assets or investment securities; |
| • | A decreased ability to raise additional capital on terms acceptable to us or at all; or |
| • | An increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net chargeoffs and provision for credit losses, which would reduce our earnings. |
Financial reform legislation enacted by Congress and resulting regulations have increased, and are expected to continue to increase our costs of operations. Congress enacted the Dodd-Frank Act in 2010. This law has significantly changed the structure of the bank regulatory system and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations. Although some of these regulations have been promulgated, many additional regulations are expected to be issued in 2014 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
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Certain provisions of the Dodd-Frank Act are having an effect on us. For example, a provision repeals restrictions on the payment of interest on commercial demand deposits, thus allowing businesses to have interest-bearing checking accounts. Although not currently quantifiable, this significant change to existing law could have an adverse effect on our interest expense.
The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act created the Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. It also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
It is difficult to quantify what specific impact the Dodd-Frank Act and related regulations have had on the Company to date and what impact yet to be written regulations will have on us in the future. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
Increases in FDIC insurance premiums may adversely affect Bancorp’s net income and profitability.Bancorp is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are bank or financial institution failures that exceed the FDIC’s expectations, the Bank may be required to pay higher FDIC premiums than those currently in force. Any future increases or required prepayments of FDIC insurance premiums may adversely impact Bancorp’s earnings and financial condition.
We are subject to extensive regulation and oversight,and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action.We are subject to extensive regulation and supervision, including examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on us if they determine, upon conclusion of their examination or otherwise, violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, consent orders, civil money penalties and termination of deposit insurance and bank closure. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective actions. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions, paying dividends or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. The imposition of regulatory sanctions, including monetary penalties, may have a material impact on our financial condition and results of operations and/or damage our reputation. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities and limit our ability to raise capital.
We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.In July 2013, the Federal Reserve and the FDIC approved new rules that will substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
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The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for the Bank and Bancorp on January 1, 2015, and revises the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital requirements will be: (i) a new common equity tier 1 capital ratio of 4.5%; (ii) a tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a tier 1 leverage ratio of 4%. These rules also establish a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity tier 1 capital ratio of 7.0%, (ii) a tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for the Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
If the Bank loses key employees with significant business contacts in its market areas, its business may suffer. The Bank’s success is largely dependent on the personal contacts of our officers and employees in its market areas. If the Bank loses key employees temporarily or permanently, this could have a material adverse effect on the business. The Bank could be particularly affected if its key employees go to work for competitors. The Bank’s future success depends on the continued contributions of its existing senior management personnel, many of whom have significant local experience and contacts in its market areas. The Bank has employment agreements or non-competition agreements with several of its senior and executive officers in an attempt to partially mitigate this risk.
Bancorp may not be able to implement aspects of its growth strategy.Bancorp’s growth strategy contemplates the future expansion of its business and operations both organically and by selective acquisitions such as through the acquisition of banks and the establishment of banking offices in its market areas and other markets in the Carolinas and Virginia. Implementing these aspects of Bancorp’s growth strategy depends, in part, on its ability to successfully identify acquisition opportunities and strategic partners that will complement its operating philosophy and to successfully integrate their operations with those of Bancorp, as well as generate loans and deposits of acceptable risk and expense. To successfully acquire or establish banks or banking offices, Bancorp must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships and high caliber banking personnel to make these new banking offices profitable. In addition, Bancorp may not be able to identify suitable opportunities for further growth and expansion or, if it does, Bancorp may not be able to successfully integrate these new operations into its business.
As consolidation of the financial services industry continues, the competition for suitable acquisition candidates may increase. Bancorp will compete with other financial services companies for acquisition opportunities, and many of these competitors have greater financial resources than Bancorp does and may be able to pay more for an acquisition than Bancorp is able or willing to pay.
Bancorp can offer no assurance that it will have opportunities to acquire other financial institutions or acquire or establish any new branches or loan production offices, or that it will be able to negotiate, finance and complete any opportunities available to it.
If Bancorp is unable to effectively implement its growth strategies, its business, results of operations and stock price may be materially and adversely affected.
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Future expansion involves risks.The acquisition by Bancorp of other financial institutions or parts of those institutions, or the establishment of de novo branch offices and loan production offices, involves a number of risks, including the risk that:
| · | Bancorp may incur substantial costs in identifying and evaluating potential acquisitions and merger partners, or in evaluating new markets, hiring experienced local managers, and opening new offices; |
| · | Bancorp’s estimates and judgments used to evaluate credit, operations, management and market risks relating to target institutions may not be accurate; |
| · | The institutions Bancorp acquires may have distressed assets and there can be no assurance that Bancorp will be able to realize the value it predicts from those assets or that it will make sufficient provisions or have sufficient capital for future losses; |
| · | Bancorp may be required to take write-downs or write-offs, restructuring and impairment, or other charges related to the institutions it acquires that could have a significant negative effect on Bancorp’s financial condition and results of operations; |
| · | There may be substantial lag-time between completing an acquisition or opening a new office and generating sufficient assets and deposits to support costs of the expansion; |
| · | Bancorp may not be able to finance an acquisition, or the financing it obtains may have an adverse effect on its results of operations or result in dilution to its existing shareholders; |
| · | Bancorp’s management’s attention in negotiating a transaction and integrating the operations and personnel of the combining businesses may be diverted from its existing business and Bancorp may not be able to successfully integrate such operations and personnel; |
| · | If Bancorp experiences problems with system conversions, financial losses could be sustained from transactions processed incorrectly or not at all; |
| · | Bancorp may not be able to obtain regulatory approval for an acquisition; |
| · | Bancorp may enter new markets where it lacks local experience or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations; |
| · | Bancorp may introduce new products and services it is not equipped to manage or that introduce new risks to its operations, or that otherwise result in adverse effects on its results of operations; |
| · | Bancorp may incur intangible assets in connection with an acquisition, or the intangible assets it incurs may become impaired, which results in adverse short-term effects on Bancorp’s results of operations; |
| · | Bancorp may assume liabilities in connection with an acquisition, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on Bancorp’s results of operations, financial condition and stock price; or |
| · | Bancorp may lose key employees and customers. |
Bancorp cannot assure you that it will be able to successfully integrate any banking offices that Bancorp acquires into its operations or retain the customers of those offices. If any of these risks occur in connection with Bancorp’s expansion efforts, it may have a material and adverse effect on Bancorp’s results of operations and financial condition.
New bank office facilities and other facilities may not be profitable. Bancorp may not be able to organically expand into new markets that are profitable for its franchise. The costs to start up bank branches and loan production offices in new markets, other than through acquisitions, and the additional costs to operate these facilities would increase Bancorp’s noninterest expense and may decrease its earnings. It may be difficult to adequately and profitably manage Bancorp’s growth through the establishment of bank branches or loan production offices in new markets. In addition, Bancorp can provide no assurance that its expansion into any such new markets will successfully attract enough new business to offset the expenses of their operation. If Bancorp is not able to do so, its earnings and stock price may be negatively impacted.
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Acquisition of assets and assumption of liabilities may expose Bancorp to intangible asset risk, which could impact its results of operations and financial condition. In connection with any acquisitions, as required by accounting principles generally accepted in the United States (“GAAP”), Bancorp will record assets acquired and liabilities assumed at their fair value, and, as such, acquisitions may result in Bancorp recording intangible assets, including deposit intangibles and goodwill. Bancorp will perform a goodwill valuation at least annually to test for goodwill impairment. Impairment testing is a two-step process that first compares the fair value of goodwill with its carrying amount, and second measures impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Adverse conditions in its business climate, including a significant decline in future operating cash flows, a significant change in Bancorp’s stock price or market capitalization, or a deviation from Bancorp’s expected growth rate and performance may significantly affect the fair value of any goodwill and may trigger impairment losses, which could be materially adverse to Bancorp’s results of operations, financial condition and stock price.
The success of Bancorp’s growth strategy depends on Bancorp’s ability to identify and retain individuals with experience and relationships in the markets in which it intends to expand. Bancorp’s growth strategy contemplates that it may expand its business and operations to other markets in the Carolinas and Virginia through organic growth and selective acquisitions. Bancorp intends to primarily target market areas that it believes possess attractive demographic, economic or competitive characteristics. To expand into new markets successfully, Bancorp must identify and retain experienced key management members with local expertise and relationships in these markets. Competition for qualified personnel in the markets in which Bancorp may expand may be intense, and there may be a limited number of qualified persons with knowledge of and experience in the commercial banking industry in these markets. Even if Bancorp identifies individuals that it believes could assist it in establishing a presence in a new market, Bancorp may be unable to recruit these individuals away from other banks or be unable to do so at a reasonable cost. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out Bancorp’s strategy is often lengthy. Bancorp’s inability to identify, recruit and retain talented personnel to manage new offices effectively would limit its growth and could materially adversely affect its business, financial condition, results of operations and stock price.
We rely on dividends and management and service fees from the Bank.Bancorp is a separate and distinct legal entity from the Bank. Dividends and management and service fees received from the Bank are the principal source of funds to pay dividends on Bancorp’s common and preferred stock, and interest and principal on its outstanding debt securities. Management and service fees are limited generally to reimbursement of certain operating expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to Bancorp. The Bank was restricted from paying dividends to Bancorp in 2012 unless it received advance approval from the FDIC and the Commissioner. This restriction was removed in February of 2013. In the event the Bank were unable to pay dividends to Bancorp, Bancorp might not be able to service debt, pay obligations, or pay dividends on Bancorp’s common stock. Such an inability to receive dividends from the Bank could have a material adverse effect on Bancorp’s business, financial condition and results of operations. See Item 1 “Business – Supervision and Regulation” and Note 18 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Our allowance for credit losses may be insufficient.All borrowers carry the potential to default, and our remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.) may not fully satisfy money previously lent. We maintain an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated credit losses and risks inherent in the loan portfolio. The level of the allowance for credit losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. In addition, bank regulatory agencies periodically review our allowance for credit losses and may require an increase in the provision for credit losses or the recognition of additional loan chargeoffs, based on judgments different than those of management. An increase in the allowance for credit losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.
| 18 | ||
If the value of real estate in the markets we serve were to decline, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us. At December 31, 2013, our loans secured by real estate totaled $1.27 billion, or 89.5% of total loans (excluding loans held for sale). A decline in local economic conditions in our markets could adversely affect the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. See Allocation of Allowance for Credit Losses in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to the Bank’s process for determining the appropriate level of the allowance for possible credit losses. Additionally, a decrease in asset quality could require additions to our allowance for credit losses through increased provisions for credit losses, which would negatively impact our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies, and natural disasters.
Our commercial real estate lending may expose us to risk of loss and hurt our earnings and profitability. We regularly make loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one to four family residential mortgage loans. Further, loans secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk than one to four family residential mortgage loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. Because of the recent general economic slowdown, these loans represent higher risk, could result in an increase in our total net chargeoffs and could require us to increase our allowance for credit losses, which could have a material adverse effect on our financial condition or results of operations. At December 31, 2013, our loans secured by commercial real estate totaled $542.0 million, which represented 38.3% of total loans (excluding loans held for sale). Of those loans, loans secured by owner-occupied commercial real estate totaled $303.0 million. While we seek to minimize risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
Our land acquisition, development and construction loans involve a higher degree of risk than other segments of our loan portfolio.A portion of our loan portfolio is comprised of land acquisition, development and construction loans. Construction financing typically involves a higher degree of credit risk than commercial real estate lending. Repayment of land acquisition, development and construction loans are dependent on the successful completion of the projects they finance. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations. At December 31, 2013, we had loans of $115.4 million, or 8.1% of total loans outstanding (excluding loans held for sale), to finance land acquisition, development and construction, including $25.7 million of speculative residential construction and residential acquisition and development. At December 31, 2013, the Bank’s concentration levels of land acquisition, development and construction (the “AD&C portfolio”) loans and total commercial real estate loans were 56.64% and 217.92%, respectively, of total regulatory capital. The interagency regulatory guidance maximum concentrations are 100% and 300%, respectively.
| 19 | ||
The Bank is subject to interest rate risk.The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of the Bank’s financial assets and liabilities, and (iii) the average duration of certain of the Bank’s interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Bank’s net interest income and therefore earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, there are costs associated with the Bank’s risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of the Bank’s ability to continue to maintain a consistent, positive spread between the interest earned on the Bank’s earning assets and the interest paid on the Bank’s interest-bearing liabilities. See Item 7A Quantitative and Qualitative Disclosures about Market Risk for further discussion related to Bancorp’s management of interest rate risk.
We may face increasing loan and investment yield pressures, which may among other things reduce our profitability.The interest rate environment has been at a historically low level for an extended period of time. This has had a negative effect on our interest income and net interest margin as new loans and investments are made, or existing loans renewed and maturing investments replaced, at lower rates than those of the portfolios as a whole. If interest rates continue at these low levels, there likely will be further negative effect on interest income and the net interest margin.
We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability.Checking and savings account balances and other forms of deposits can decrease when our deposit clients perceive alternative investments, such as the stock market or other non-depository investments, as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank clients to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank clients move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs.
Bancorp’s operating results and financial condition would likely suffer if there is a deterioration in the general economic condition of the areas in which the Bank does business. Unlike larger national or other regional banks that are more geographically diversified, the Bank primarily provides services to clients located in four principal market areas in NC. Because the Bank’s lending and deposit-gathering activities are concentrated in these markets, particularly the Piedmont Triad Region, the Bank will be affected by the business activity, population, income levels, deposits and real estate activity in these markets. Adverse developments in local industries have had and could continue to have a negative effect on the Bank’s financial condition and results of operations. Even though the Bank’s clients’ business and financial interest may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce the Bank’s growth rate, affect the ability of the Bank’s clients to repay their loans and generally affect Bancorp’s financial condition and results of operations. A decline in general economic conditions in the Bank’s market areas, caused by inflation, recession, higher unemployment or other factors which are beyond the Bank’s control would also impact these local economic conditions and could have an adverse effect on Bancorp’s financial condition and results of operations.
The Bank competes with much larger companies for some of the same business.The banking and financial services business in our market areas continues to be a competitive field and it is becoming more competitive as a result of changes in regulations, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers.
| 20 | ||
We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and clients with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services.
Negative publicity could damage our reputation.Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract clients and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, disclosure, sharing or inadequate protection of client information, criminal security breaches and from actions taken by government regulators and community organizations in response to that conduct.
The Bank is subject to environmental liability risk associated with lending activities. A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Bancorp’s financial condition and results of operations.
Financial services companies depend on the accuracy and completeness of information about clients and counterparties.In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those clients, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows.Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances, securities sold under agreements to repurchase and other wholesale funding sources to obtain the funds necessary to manage our balance sheet.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material adverse effect on our financial condition, results of operations and cash flows.
| 21 | ||
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.
From time to time the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
The FASB is moving forward with its proposal to change the manner in which the allowance for credit losses is established and evaluated from the concept of incurred losses to that of expected losses. The effect of this change in accounting standard on Bancorp’s financial position and results of operations has not been quantified; however, if it results in a material increase in our allowance and future provisions for credit losses, this could have a material adverse effect on our financial condition and results of operations.
Impairment of investment securities, goodwill, certain other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.In assessing the impairment of investment securities, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability of Bancorp to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Under current accounting standards, certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. Assessment of certain other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified. In assessing the realizability of our deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the corporate income tax rate during the periods in which those temporary differences become deductible. The value of our deferred tax assets reflects the current federal and state corporate income tax rates of approximately 35 percent and six percent, respectively. Failure to generate future taxable income in line with our current projections and/or a reduction in the corporate income tax rate could cause us to further impair our deferred tax assets, which impairment would be reflected as a charge to earnings in the period during which such impairment is identified. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.
Technological advances impact the Bank’s business.The banking industry continues to undergo technological changes with frequent introductions of new technology-driven products and services. In addition to improving client services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Bancorp’s future success will depend, in part, on our ability to address the needs of the Bank’s clients by using technology to provide products and services that will satisfy client demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. The Bank may not be able to effectively implement new technology-driven products and services or successfully market such products and services to its clients.
We rely on other companies to provide key components of our business infrastructure.Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our clients and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.
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Our information systems may experience an interruption or breach in security.We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our client relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot make assurances that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation; result in a loss of client business; result in expense to investigate, respond to, mitigate, and recover from the event; subject us to additional regulatory scrutiny; or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
Unpredictable catastrophic events could have a material adverse effect on Bancorp.The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms and blizzards), fires and other catastrophes could adversely affect Bancorp’s consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on the Bank in that such events could materially disrupt its operations or the ability or willingness of its clients to access the financial services offered by the Bank. The incidence and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce Bancorp’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on Bancorp’s financial condition and/or results of operations.
Risks Related to our Common Stock
Our stock price can be volatile.Stock price volatility may make it more difficult for you to sell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
| • | Actual or anticipated variations in quarterly results of operations; |
| • | Recommendations by securities analysts; |
| • | Operating results and stock price performance of other companies that investors deem comparable to us; |
| • | News reports relating to trends, concerns, and other issues in the financial services industry; |
| • | Perceptions in the marketplace regarding us and/or our competitors; |
| • | New technology used or services offered by competitors; |
| • | Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and |
| • | Changes in government regulations. |
General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of operating results.
Bancorp’s trading volume is low compared with larger national and regional banks.A class of Bancorp’s common stock (Class A Common Stock) is traded on the NASDAQ Global Select Market. However, the trading volume of Bancorp’s Class A Common Stock is relatively low when compared with larger companies listed on the NASDAQ, the NYSE or other consolidated reporting systems or stock exchanges. Thus, the market in Bancorp’s Class A Common Stock may be limited in scope relative to larger companies. In addition, Bancorp cannot say with any certainty that a more active and liquid trading market for its Class A Common Stock will develop.
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Bancorp has issued preferred stock and subordinated debentures, all of which rank senior to our common stock.Bancorp has issued and outstanding 15,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”). The Series A Preferred Stock ranks senior to shares of our common stock. As a result, Bancorp must make dividend payments on the Series A Preferred Stock before any dividends can be paid on the common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the Series A Preferred Stock must be satisfied before any distributions can be made on the common stock. If Bancorp does not remain current in the payment of dividends on the Series A Preferred Stock, no dividends may be paid on the common stock. In addition, Bancorp has issued $25.8 million in subordinated debentures in connection with its issuance of trust preferred securities. These debentures also rank senior to the common stock.
Our preferred stock reduces net income available to holders of our common stock and earnings per common share.The dividends payable on our preferred stock will reduce any net income available to holders of common stock and our earnings per common share. The preferred stock will also receive preferential treatment in the event of sale, merger, liquidation, dissolution or winding up of our company.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.We may issue additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Our common stock is not FDIC insured. Bancorp’s common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.
| Item 1B. | Unresolved Staff Comments |
None
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| Item 2. | Properties |
The Company and the Bank’s executive offices are located at 1501 Highwoods Boulevard in Greensboro, NC. The Bank’s principal support and operational functions are located at 38 West First Avenue, Lexington, NC and 202 South Main Street in Reidsville, NC. On December 31, 2013, the Bank operated 36 branch offices in its four markets—Charlotte, Raleigh, the Cape Fear Region and the Piedmont Triad Region—and six loan production offices. The locations of the Bank’s executive and banking offices, their form of occupancy, deposits as of December 31, 2013, and year opened, are provided in the accompanying table (dollars in thousands):
| Location | Owned or Lease | Deposits | Year | |||||
1501 Highwoods Boulevard, Greensboro, NC(1) | Leased | $ | - | 2004 | ||||
38 West First Avenue, Lexington, NC(2) | Owned | 189,465 | 1949 | |||||
202 South Main Street, Reidsville, NC(2) | Owned | 61,359 | 1910 | |||||
3020 George II Highway, Boiling Spring Lakes, NC(3) | Owned | 12,130 | 2007 | |||||
| 301 East Fremont Street, Burgaw, NC | Leased | 26,286 | 1999 | |||||
10231 Beach Drive Southwest, Calabash, NC(3) | Owned | 38,307 | 1983 | |||||
| 5925 Carnegie Boulevard, Charlotte, NC | Leased | 18,105 | 2013 | |||||
| 2386 Lewisville-Clemmons Road, Clemmons, NC | Owned | 20,298 | 2001 | |||||
| 1101 North Main Street, Danbury, NC | Owned | 24,894 | 1997 | |||||
| 801 South Van Buren Road, Eden, NC | Owned | 42,806 | 1996 | |||||
| 4638 Hicone Road, Greensboro, NC | Owned | 30,240 | 2000 | |||||
| 2132 New Garden Road, Greensboro, NC | Owned | 78,222 | 1997 | |||||
| 201 North Elm Street, Greensboro, NC | Leased | 15,897 | 2009 | |||||
| 3202 Randleman Road, Greensboro, NC | Owned | 31,418 | 2000 | |||||
| 200 Westchester Drive, High Point, NC | Owned | 41,353 | 2001 | |||||
| 120 East Main Street, Jamestown, NC | Owned | 18,776 | 2004 | |||||
| 230 East Mountain Street, Kernersville, NC | Leased | 16,752 | 1997 | |||||
| 647 South Main Street, King, NC | Owned | 41,916 | 1997 | |||||
| 4481 Highway 150 South, Lexington, NC | Owned | 28,826 | 2002 | |||||
| 298 Lowes Boulevard, Lexington, NC | Owned | 42,672 | 2011 | |||||
| 6123 Old U.S. Highway 52, Lexington, NC | Owned | 44,946 | 1958 | |||||
500 South Main Street, Lexington, NC(4) | Leased | - | 2004 | |||||
| 605 North Highway Street, Madison, NC | Owned | 23,136 | 1997 | |||||
4815 East Oak Island Drive, Oak Island, NC(3) | Owned | 12,660 | 1986 | |||||
| 133 Fayetteville Street, Raleigh, NC | Leased | 16,421 | 2013 | |||||
| 1646 Freeway Drive, Reidsville, NC | Owned | 39,111 | 1972 | |||||
5074 Main Street, Shallotte, NC(3) | Owned | 44,661 | 1999 | |||||
101 North Howe Street, Southport, NC(3) | Owned | 32,521 | 1981 | |||||
840 Sunset Boulevard North, Sunset Beach, NC(3) | Owned | 14,000 | 2001 | |||||
| 919 Randolph Street, Thomasville, NC | Owned | 45,218 | 1987 | |||||
| 3000 Old Hollow Road, Walkertown, NC | Owned | 25,143 | 1997 | |||||
| 10335 North NC Highway 109, Winston-Salem, NC | Owned | 27,644 | 1992 | |||||
| 3500 Old Salisbury Road, Winston-Salem, NC | Owned | 39,508 | 1978 | |||||
| 11492 Old U.S. Highway 52, Winston-Salem, NC | Owned | 31,933 | 1973 | |||||
| 161 South Stratford Road, Winston-Salem, NC | Leased | 58,103 | 1997 | |||||
| 1001 Military Cutoff Road, Wilmington, NC | Leased | 40,262 | 2006 | |||||
| 704 South College Road, Wilmington, NC | Leased | 38,433 | 1997 | |||||
| (1) | Executive offices of the Company and the Bank. |
| (2) | Serves as a full service branch as well as an operations center for the Bank. |
| (3) | Branches acquired in Security Savings Bank, SSB acquisition on October 1, 2013. |
| (4) | This location is an express drive through facility that only processes transactions and does not open client accounts. |
| 25 | ||
The Bank operates loan production offices in leased premises in Winston-Salem, Asheboro, Morganton and Raleigh and in a premises in Southport, NC, which it owns.
In addition, as of December 31, 2013, the Bank also operated 10 offsite ATM machines in various locations throughout its markets.
| Item 3. | Legal Proceedings |
In the ordinary course of operations, the Company and its subsidiaries are at times involved in legal proceedings. In the opinion of management, neither the Company nor its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the fourth quarter of the Company’s fiscal year ended December 31, 2013.
| 26 | ||
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Prices and Dividend Policies
A class of Bancorp’s common stock (Class A Common Stock) is traded on the Global Select Market of the NASDAQ Stock Market (“NASDAQ GSM”) under the symbol “NBBC.” The following table shows the high, low and closing sales prices of Bancorp’s common stock on the NASDAQ GSM, based on published financial sources, for each quarter within the last two fiscal years.
| Quarter ended | High | Low | Close | |||||||
| December 31, 2013 | $ | 7.92 | $ | 6.40 | $ | 7.43 | ||||
| September 30, 2013 | 9.17 | 5.96 | 7.29 | |||||||
| June 30, 2013 | 6.41 | 5.55 | 5.99 | |||||||
| March 31, 2013 | 6.48 | 4.50 | 5.89 | |||||||
| December 31, 2012 | $ | 4.95 | $ | 3.92 | $ | 4.63 | ||||
| September 30, 2012 | 5.00 | 3.74 | 4.84 | |||||||
| June 30, 2012 | 4.94 | 3.88 | 4.38 | |||||||
| March 31, 2012 | 4.91 | 3.71 | 4.79 | |||||||
As of January 31, 2014, there were approximately 5,934 beneficial owners, including 2,778 holders of record, of Bancorp’s Class A Common Stock, and approximately seven holders of record of Bancorp’s Class B Common Stock.
Holders of Bancorp’s common stock (Class A and Class B) are entitled to receive ratably such dividends as may be declared by Bancorp’s Board of Directors out of legally available funds. No cash dividends have been declared for Bancorp’s common stock since 2008. The ability of Bancorp’s Board of Directors to declare and pay dividends on its capital stock is subject to the terms of applicable North Carolina law and banking regulations. Bancorp must make dividend payments on its Series A Preferred Stock before any dividends can be paid on its common stock. Also, Bancorp may not pay dividends on its capital stock if it is in default or has elected to defer payments of interest under its junior subordinated debentures. The declaration and payment of future dividends to holders of Bancorp’s common stock will also depend upon Bancorp’s earnings and financial condition, the capital requirements of Bancorp’s subsidiaries, regulatory conditions and other factors as Bancorp’s Board of Directors may deem relevant. For a further discussion as to restrictions on Bancorp and the Bank’s ability to pay dividends, please refer to “Item 1 – Supervision and Regulation”.
The following table sets forth certain information regarding shares issuable upon exercise of outstanding options, warrants and rights under equity compensation plans, and shares remaining available for future issuance under equity compensation plans, in each case as of December 31, 2013. Individual equity compensation arrangements are aggregated and included within this table.
| 27 | ||
| Number of Shares | ||||||||
| Remaining Available | ||||||||
| for Future Issuance | ||||||||
| under Equity | ||||||||
| Number of Shares to be | Weighted-Average | Compensation Plans | ||||||
| Issued Upon Exercise of | Exercise Price of | (excluding shares | ||||||
| Outstanding Options, | Outstanding Options, | reflected in | ||||||
| Warrants and Rights | Warrants and Rights | column (a)) | ||||||
| Plan Category | (a) | (b) | (c) | |||||
| Equity Compensation Plans | ||||||||
| Approved by Shareholders | ||||||||
| Stock Options | 377,629 | $ | 15.64 | 861,573 | ||||
| Restricted Stock Units | 302,389 | - | ||||||
| Equity Compensation Plans Not | ||||||||
| Approved by Shareholders | - | - | - | |||||
| Total | 680,018 | $ | 8.69 | 861,573 | ||||
| 28 | ||
FIVE-YEAR STOCK PERFORMANCE TABLE
The following graph compares the cumulative total shareholder return on Bancorp’s common stock with the S&P 500 Index (U.S.) and the SNL Southeast Bank Index. The graph assumes that $100 was originally invested on December 31, 2008, and that all subsequent dividends were reinvested in additional shares.
NEWBRIDGE BANCORP
Comparison of Cumulative Total Shareholder Return
Years Ended December 31
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||
| NewBridge Bancorp | 100 | 93 | 197 | 163 | 195 | 312 | |||||||
SNL Southeast Bank Index(1) | 100 | 100 | 97 | 57 | 95 | 128 | |||||||
| S&P 500 Index | 100 | 126 | 146 | 149 | 172 | 228 |
| (1) | The SNL Southeast Bank Index is comprised of a peer group of 85 bank holding companies headquartered in Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia, whose common stock is traded on the NYSE, NYSE Amex or NASDAQ stock exchanges. The total five year return was calculated for each of the bank holding companies in the peer group taking into consideration changes in stock price, cash dividends, stock dividends and stock splits since December 31, 2008. The individual results were then weighted by the market capitalization of each company relative to the entire peer group. The total return approach and the weighting based upon market capitalization are consistent with the preparation of the S&P 500 total return index. |
| 29 | ||
| Item 6. | Selected Financial Data |
The following table should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and “Item 8 - Financial Statements and Supplementary Data,” which begin on page 31 and page 61 below, respectively.
| (In thousands, except per share data and performance measures) | Years Ended December 31 | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| SUMMARY OF OPERATIONS | ||||||||||||||||||||
| Interest income | $ | 68,819 | $ | 71,080 | $ | 79,445 | $ | 89,913 | $ | 98,500 | ||||||||||
| Interest expense | 5,643 | 7,514 | 12,319 | 20,454 | 39,156 | |||||||||||||||
| Net interest income | 63,176 | 63,566 | 67,126 | 69,459 | 59,344 | |||||||||||||||
| Provision for credit losses | 2,691 | 35,893 | 16,785 | 21,252 | 35,749 | |||||||||||||||
| Net interest income after provision for credit losses | 60,485 | 27,673 | 50,341 | 48,207 | 23,595 | |||||||||||||||
| Noninterest income | 17,454 | 16,888 | 18,393 | 21,323 | 19,768 | |||||||||||||||
| Noninterest expense | 60,384 | 72,413 | 62,607 | 66,397 | 70,137 | |||||||||||||||
| Income (loss) before income taxes | 17,555 | (27,852) | 6,127 | 3,133 | (26,774) | |||||||||||||||
| Income taxes | (3,216) | (2,598) | 1,449 | (247) | (11,641) | |||||||||||||||
| Net income (loss) | 20,771 | (25,254) | 4,678 | 3,380 | (15,133) | |||||||||||||||
| Dividends and accretion on preferred stock | (1,854) | (2,918) | (2,917) | (2,919) | (2,917) | |||||||||||||||
| Net income (loss) available to common shareholders | $ | 18,917 | $ | (28,172) | $ | 1,761 | $ | 461 | $ | (18,050) | ||||||||||
| Cash dividends declared on common stock | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| SELECTED YEAR END ASSETS AND LIABILITIES | ||||||||||||||||||||
| Investment securities | $ | 368,866 | $ | 393,815 | $ | 337,811 | $ | 325,129 | $ | 325,339 | ||||||||||
| Loans held for investment, net of unearned income | 1,416,703 | 1,155,421 | 1,200,070 | 1,260,585 | 1,456,526 | |||||||||||||||
| Assets | 1,965,232 | 1,708,707 | 1,734,564 | 1,809,891 | 1,949,256 | |||||||||||||||
| Deposits | 1,553,996 | 1,332,493 | 1,418,676 | 1,452,995 | 1,499,310 | |||||||||||||||
| Shareholders’ equity | 166,792 | 196,014 | 163,387 | 165,918 | 167,334 | |||||||||||||||
| PERFORMANCE MEASURES | ||||||||||||||||||||
| Net income (loss) to average total assets | 1.17 | % | (1.46) | % | 0.27 | % | 0.18 | % | (0.74) | % | ||||||||||
| Net income (loss) to average shareholders’ equity | 11.75 | (15.18) | 2.81 | 2.00 | (8.73) | |||||||||||||||
| Dividend payout | - | - | - | - | - | |||||||||||||||
| Average shareholders’ equity to average total assets | 9.94 | 9.65 | 9.51 | 8.81 | 8.42 | |||||||||||||||
| Average tangible shareholders’ equity to average tangible total assets | 9.73 | 9.47 | 9.29 | 8.58 | 8.17 | |||||||||||||||
| PER SHARE DATA | ||||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||
| Basic | $ | 0.71 | $ | (1.80) | $ | 0.11 | $ | 0.03 | $ | (1.15) | ||||||||||
| Diluted | 0.65 | (1.80) | 0.11 | 0.03 | (1.15) | |||||||||||||||
| Cash dividends declared | - | - | - | - | - | |||||||||||||||
| Book value at end of year | 5.33 | 5.58 | 7.09 | 7.25 | 7.34 | |||||||||||||||
| Tangible book value at end of year | 5.05 | 5.38 | 6.85 | 6.96 | 7.02 | |||||||||||||||
| 30 | ||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following presents management’s discussion and analysis of the Company’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.
Executive Overview
The Company achieved record earnings in 2013 through the successful implementation of its operating plan. Earnings to common shareholders totaled $18.9 million in 2013, an 11.8% return on common equity. As a consequence of the recession that began in 2008, the Company’s earnings suffered from elevated levels of problem assets and high credit related costs. In 2012, the Company addressed the lingering effects of the recession. It raised $56.3 million in additional capital and implemented a plan to reduce problem assets and normalize future credit related costs. While the plan resulted in extraordinary high credit costs in 2012, it was very successful. The Company eliminated $106 million of substandard classified assets in 2012. With improved asset quality, credit costs fell sharply in 2013. Provision for credit losses declined 93%, or $33.2 million, to $2.7 million in 2013. Losses on real estate acquired in settlement of loans declined as well, resulting in a $49 million improvement in total credit costs.
The Company has built upon the actions it took in 2012 to move forward with implementing its growth strategies. During 2013, the Company solidified its capital position in preparation for growth. It converted recently issued shares of preferred stock to common stock as intended under the prior year’s capital raise. It redeemed $37.4 million of preferred shares, and the dilutive 2.6 million share warrant, previously issued to the U.S. Department of the Treasury (the "U.S. Treasury”) under its Capital Purchase Program (the “CPP”). In addition, the Company experienced strong loan and deposit growth. Vitally important organic loan growth totaled 12% for the year and was supplemented by the acquisition of Security Savings Bank, SSB, an expansion of the Company’s Cape Fear Region market share. In total, loan balances outstanding increased 22% for the year. In November, the Company announced plans for a second acquisition with CapStone Bank, which is expected to close early in the second quarter of 2014.
The positive results from 2013 evidence our commitment to drive value through our strategic and operating plans. The Company is focused on maintaining asset quality, on building efficient and profitable operations and on growth of the balance sheet and other revenues. These three tenets of the Company’s operating plan, Quality, Profitability and Growth, are the focus of the Company’s efforts to increase earnings and our shareholders’ long term value.
Quality
| · | Nonperforming loans declined 56% to $9.4 million; |
| · | As a percentage of assets, nonperforming loans declined to 0.48% from 1.25%; |
| · | Allowance for credit losses to nonperforming loans improved to 261% from 125%; and |
| · | Total nonperforming assets to total assets declined to 0.89% from 1.56% |
Profitability
| · | Earnings to common shareholders totaled $18.9 million; |
| · | Provision for credit costs declined $33.2 million to $2.7 million; |
| · | Loss on real estate acquired in settlement of loans improved $15.9 million to a gain of $126,000; |
| · | Return on common equity improved to 11.8%; |
| · | Average earning assets increased $58.6 million offsetting a decline in the net interest margin; |
| · | Cost on core deposits of $1.1 billion declined to 0.12% at year end; and |
| · | Core deposits represented 71% of total deposits at year end |
| 31 | ||
Growth
| · | Loan balances increased 22.6%; |
| · | Organic loan growth totaled 12%; |
| · | Core deposits, excluding time deposits, expanded 10%; |
| · | Charlotte and Raleigh loan production offices became full service commercial banking centers; |
| · | Security Savings Bank, SSB merger completed; and |
| · | CapStone Bank merger announced |
Quality. In 2013, nonperforming assets fell below 1% of total assets. As part of our robust credit culture, our internal and external loan review functions are independent of loan production teams. Our appraisal and specialized lines of business functions are dedicated to competence and independence. In addition, we employ prudent lending exposure limits and concentration limits.
Under our 2012 asset disposition plan, we projected that the Company would dispose of $71 million in classified assets. The plan targeted both nonperforming and potential problem assets. By year end, the Company had reduced total classified assets by $96 million. Total classified assets were $53 million at December 31, 2012, one-third the level of the 2011 year-end balance of $159 million.
Asset quality trends continued to improve in 2013. Nonperforming loans declined 56% during the year to $9.4 million from $21.3 million at December 31, 2012. As a percentage of total assets, nonperforming loans represented 0.48% at December 31, 2013 compared to 1.25% the prior year.
Profitability. The Company’s ability to achieve sustained profitability depends not only on the maintenance of a high level of asset quality but on careful management of interest income, interest expense and other expense. Management has implemented a number of steps to increase net interest and fee income, preserve an acceptable net interest margin and control our controllable expenses. During 2013:
| · | Our pre-tax net income improved $46 million; |
| · | We experienced a $49 million improvement in total credit costs; |
| · | We reorganized our lending teams into specialty groups, expanding staff and expertise in commercial real estate, commercial and industrial, and construction development loans in each of the four major North Carolina metropolitan markets we serve; |
| · | We expanded our presence into key North Carolina markets and redeployed resources previously dedicated to less vibrant areas. The Company converted two successful loan production offices in Charlotte and Raleigh, NC into full service commercial centers. These markets are the two largest and fastest growth markets in North Carolina; |
| · | We continued our annual franchise validation plan so that the Company’s resources are appropriately allocated to align with short- and long-term strategic goals. Over the past several years, this planning has resulted in the opening of the commercial banking centers in Charlotte and Raleigh, the sale of the Harrisonburg, Virginia operations and the closure of 11 branches that were not meeting the Company’s profitability requirements; |
| · | We reduced the Company’s dependence on high cost time deposits in favor of lower cost core accounts. Our average cost of deposits totaled 0.26%; |
| · | We took further steps to better evaluate risk-based and relationship pricing to include deposit and other relationships. Management has also focused on maintaining consistency on loan pricing relative to credit characteristics of loans; |
| · | We continued to grow our trust and wealth management services. Revenue increased 9.4% to $2.6 million; and |
| · | We remained focused on a disciplined and accountable budget process that includes monitoring loan, investment and deposit yields; carefully reviewing variances every month; and reviewing controllable expenses every month. |
| 32 | ||
Expense management is critical to the achievement of our profitability goals. Management has implemented a disciplined cost management culture where “that which is within our control is controlled.” A key element of this culture is our line item accountable budget process based upon our “CAST” philosophy:
| · | Conservative in forecasts and expectations |
| · | Accountable on an account by account basis |
| · | Specific to each individual in the organization so goals and budgets are understood |
| · | Timely so that continued monitoring and adjustments can be made |
Growth. NewBridge is a regional community bank providing banking services in the major North Carolina metropolitan markets of the Piedmont Triad Region, Charlotte, Raleigh, and Cape Fear Region, as well as smaller markets. Our conservative management philosophy focuses on increasing shareholder value through specialized lines of business that promote core organic growth primarily throughout these major markets. This focus is supplemented by a disciplined acquisition strategy targeted at expanding the Company’s presence in select metropolitan markets in North and South Carolina and Virginia. We are focused on a balanced approach to promoting growth in valuable core transaction deposits, commercial and private bank lending and expansion of fee income services. Our goal is to provide excellence in value to our customers and shareholders as we grow.
The Company experienced significant organic and inorganic growth in 2013. Loan balances increased 22.6%, or $261 million. Vitally important organic loan growth increased 12%, or $140 million, for the year. Expansion efforts were strengthened as loan production offices in Charlotte and Raleigh became full-service bank locations.
As previously noted, we also witnessed meaningful growth through the acquisition of Security Savings Bank, SSB. With the closing of the transaction, NewBridge Bank became a $2.0 billion institution with 36 branches and a number of loan production offices throughout North Carolina. The acquisition also established the Company as an active acquirer in the industry and solidified the Bank as one of the largest community banks in Greater Wilmington, the hub of the State’s Cape Fear Region.
Financial Condition at December 31, 2013 and 2012
The Company’s consolidated assets of $1.97 billion at year end 2013 reflect an increase of 15.0% from year end 2012. The increase was partially a result of the acquisition of Securities Savings Bank, SSB on October 1, 2013. Total average assets increased 3.1% from $1.72 billion in 2012, to $1.78 billion in 2013, while average earning assets increased 3.7%, from $1.58 billion in 2012, to $1.63 billion in 2013. The increases in total average assets and average earning assets were primarily the result of an increase in loans outstanding.
Loans (excluding loans held for sale) increased $261.3 million during 2013, or 22.6%, compared to a decrease of 3.7% in 2012, primarily due to organic loan growth ($140 million) but also due to the acquisition of Security Savings Bank, SSB (which accounted for $121 million of loans outstanding at December 31, 2013). Loans secured by real estate totaled $1.27 billion at year end 2013 and represented 89.5% of total loans (excluding loans held for sale), compared with 87.5% at year end 2012. Within this category, residential real estate loans increased 21.7% to $610.2 million, and land acquisition, development and construction loans increased 52.5% to $115.4 million. Commercial loans totaled $656.4 million at year end 2013, an increase of 20.4% from the end of 2012. Consumer loans decreased 1.7% during 2013, ending the year at $26.4 million.
Investment securities available for sale (at amortized cost) totaled $297.5 million at year end 2013, a 21.5% decrease from $379.1 million at year end 2012. U.S. government agency securities totaled $49.1 million, or 16.5% of the available for sale portfolio, at year end 2013, compared to $67.1 million, or 17.7% of the portfolio one year earlier. Mortgage backed securities totaled $52.6 million, or 17.7% of the available for sale portfolio, at December 31, 2013, compared to $64.7 million, or 17.1% of the portfolio, at the previous year end. Available for sale state and municipal obligations totaled $15.8 million at year end 2013, and comprised 5.3% of the available for sale portfolio, compared to $18.0 million, or 4.7% of the portfolio, a year earlier. Corporate bonds totaled $155.7 million, or 52.4% of the available for sale portfolio at December 31, 2013, of which $49.9 million were covered bonds, compared to corporate bonds of $195.5 million, or 51.6% of the portfolio at December 31, 2012, of which $44.9 million were covered bonds. Collateralized mortgage obligations (“CMOs”) totaled $6.6 million, or 2.2% of the available for sale portfolio at year end 2013, compared to $10.4 million, or 2.7% of the portfolio, at the end of the previous year.
| 33 | ||
As a result of a continuing low interest rate environment and the potential for interest rate risk, the Company classified a number of its investment security purchases as held to maturity status during 2013. The weighted average life of investment securities classified as held to maturity does not exceed seven years. The Company believes it has the capacity to hold these investments to maturity. Investment securities held to maturity (at amortized cost) totaled $67.3 million at year end 2013. U.S. government agency securities totaled $28.7 million, or 42.7% of the held to maturity portfolio, at year end 2013. Mortgage backed securities totaled $32.4 million, or 48.2% of the held to maturity portfolio, at December 31, 2013. Held to maturity state and municipal obligations amounted to $1.1 million at year end 2013, and comprised 1.7% of the held to maturity portfolio. Corporate bonds totaled $5.0 million, or 7.4% of the held to maturity portfolio at December 31, 2013. The Company had no investment securities held to maturity at December 31, 2012.
The Company’s investment strategy is to achieve acceptable total returns through investments in securities with varying maturity dates, cash flows and yield characteristics. U.S. government agency securities are generally purchased for liquidity and collateral purposes, mortgage backed securities are purchased for yield and cash flow purposes, corporate bonds are purchased for yield, and longer maturity municipal bonds are purchased for yield and income tax advantage. The table, “Investment Securities,” on page 52, presents the composition of the securities portfolio for the last three years, as well as information about cost and fair value, and the table“Investment Securities Portfolio Maturity Schedule” presents the maturities, fair values and weighted average yields.
Total deposits increased $221.5 million to $1.55 billion at December 31, 2013, a 16.6% increase from a total of $1.33 billion one year earlier. The increase in deposits was due partially to the acquisition of Security Savings Bank, SSB, which accounted for $154 million of deposits at December 31, 2013. Retail time deposits increased $20.6 million for the year. Noninterest-bearing deposits increased $35.0 million for the year to $241.0 million.
To supplement core deposit growth, the Bank uses several different sources such as brokered certificates of deposit secured through broker/dealer arrangements and deposits obtained through the Certificate of Deposit Account Registry Service (“CDARS”), a service of Promontory InterFinancial Network, LLC. CDARS increased $100.9 million, from $42.4 million at year end 2012 to $143.3 million at year end 2013, while brokered deposits decreased $4.3 million, from $17.7 million at year end 2012 to $13.4 million at year end 2013.
The Bank also has a credit facility available with the FHLB of Atlanta. The credit line at December 31, 2013 was $360.2, compared to $342.5 million at December 31, 2012. FHLB borrowings totaled $170.0 million at year end 2013, and based on collateral pledged, an additional $91.3 million was available. At December 31, 2012, FHLB borrowings totaled $113.0 million with an additional $95.3 million available. In addition to the credit line at the FHLB of Atlanta, at December 31, 2013 the Bank had borrowing capacity at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”) totaling $3.9 million, and had federal funds lines of $30.0 million of which $13.0 million was outstanding. At December 31, 2012, the Bank had borrowing capacity at the Federal Reserve Bank totaling $7.7 million, and had federal funds lines of $25.0 million, of which there were no borrowings outstanding. Management believes these credit lines are a cost effective and prudent alternative to deposit balances, since particular amounts, terms and structures may be selected to meet changing needs.
Financial Condition at December 31, 2012 and 2011
The Company’s consolidated assets of $1.71 billion at year end 2012 reflect a decrease of 1.5% from year end 2011. The decrease was primarily a result of a decline in the Company’s loan portfolio. Total average assets decreased 1.4% from $1.75 billion in 2011, to $1.72 billion in 2012, while average earning assets decreased 1.6%, from $1.60 billion in 2011, to $1.58 billion in 2012. The decreases in total average assets and average earning assets were also primarily the result of a decrease in loans outstanding.
| 34 | ||
Loans (excluding loans held for sale) decreased $44.6 million during 2012, or 3.7%, compared to a decrease of 4.8% in 2011. The decline in loans was due primarily to our asset disposition plan. In our Quarterly Report on Form 10-Q for the second quarter of 2012, we disclosed that a plan was being developed to accelerate the workout and disposition of a substantial portion of remaining problem assets. During the third quarter, management initiated the asset disposition plan.
Using March 31, 2012 problem asset levels, management established the following goals:
| · | Nonperforming Loans – Reduce by $20.0 million to $23.7 million |
| · | Performing Classified Loans – Reduce by $26.0 million to $49.3 million |
| · | Real Estate Acquired in Settlement of Loans – Reduce by $25.0 million to $5.0 million |
| · | Total Classified Assets – Reduce by $71.0 million to $78.0 million |
| · | Classified Assets – Reduce to 45.00% of Tier 1 capital plus allowance for credit losses |
| · | Nonperforming Assets – Reduce to 2.00% or less of total assets |
By December 31, 2012, the asset disposition plan was completed. As of that date, total problem assets were reduced by approximately $95.8 million from the March 31, 2012 levels as follows:
| · | Nonperforming Loans – Reduced by $22.4 million to $21.3 million |
· Performing Classified Loans – Reduced by $48.8 million to $26.5 million
| · | Real Estate Acquired in Settlement of Loans – Reduced by $24.7 million to $5.4 million |
| · | Total Classified Assets – Reduced by $95.8 million to $53.2 million |
| · | Classified Assets – Reduced to 30.53% of Tier 1 capital plus allowance for credit losses |
| · | Nonperforming Assets – Reduced to 1.56% of total assets |
The results achieved through the asset disposition plan are reflected in the amounts reported for December 31, 2012 and for the periods then ended and are the principal reasons for changes from prior period amounts.
Loans secured by real estate totaled $1.27 billion at year end 2012 and represented 89.5% of total loans (excluding loans held for sale), compared with 86.4% at year end 2011. Within this category, residential real estate loans decreased 4.1% to $501.4 million, and land acquisition, development and construction loans decreased 15.4% to $75.7 million. Commercial loans totaled $545.3 million at year end 2012, a decrease of 0.4% from the end of 2011. Consumer loans decreased 22.6% during 2012, ending the year at $26.9 million.
Investment securities (at amortized cost) totaled $379.1 million at year end 2012, a 12.5% increase from $337.0 million at year end 2011. U.S. government agency securities totaled $67.1 million, or 17.7% of the portfolio, at year end 2012, compared to $39.0 million, or 11.6% of the portfolio one year earlier. Mortgage backed securities totaled $64.7 million, or 17.1% of the portfolio, at December 31, 2012, compared to $62.1 million, or 18.4% of the portfolio, at the previous year end. State and municipal obligations amounted to $18.0 million at year end 2012, and comprised 4.7% of the portfolio, compared to $19.4 million, or 5.7% of the portfolio, a year earlier. Corporate bonds totaled $195.5 million, or 51.6% of the portfolio at December 31, 2012, of which $44.9 million were covered bonds, compared to total corporate bonds of $180.0 million, or 53.4% of the portfolio at December 31, 2011, of which $61.4 million were covered bonds. CMOs totaled $10.4 million, or 2.7% of the portfolio at year end 2012, compared to $23.6 million, or 7.0% of the portfolio, at the end of the previous year. The table, “Investment Securities,” on page 52, presents the composition of the securities portfolio for the last three years, as well as information about cost and fair value, and the table“Investment Securities Portfolio Maturity Schedule” presents the maturities, fair values and weighted average yields.
Total deposits decreased $86.2 million to $1.33 billion at December 31, 2012, a 6.1% decrease from a total of $1.42 billion one year earlier. The decline in deposits was due primarily to lower time deposit balances, which fell $59.4 million for the year. Retail time deposits declined $75.9 million for the year as the Company chose not to compete for high priced time deposits. Noninterest-bearing deposits increased $33.7 million for the year to $206.0 million due in part to changes in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012.
| 35 | ||
Net Interest Income
Like most financial institutions, the primary component of the Company’s revenue is net interest income. Net interest income is the difference between interest income, principally from loans and investments, and interest expense on client deposits and borrowings. Changes in net interest income result from changes in volume and mix of the various interest-earning asset and interest-bearing liability components and changes in interest rates earned and paid. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Spread and margin are influenced by the levels and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities.
Average Balances and Net Interest Income Analysis.The accompanying table sets forth, for the years 2011 through 2013, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or rates, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Average loans include nonaccruing loans, the effect of which is to lower the average yield.
| 36 | ||
Average Balances and Net Interest Income Analysis
Fully taxable-equivalent basis(1) (dollars in thousands)
| 2013 | 2012 | 2011 | |||||||||||||||||||||||||
| Interest | Interest | Interest | |||||||||||||||||||||||||
| Average | Income/ | Average | Average | Income/ | Average | Average | Income/ | Average | |||||||||||||||||||
| Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | Balance | Expense | Yield/Rate | |||||||||||||||||||
| Earning assets: | |||||||||||||||||||||||||||
Loans receivable(1) | $ | 1,247,095 | $ | 56,617 | 4.54 | % | $ | 1,175,938 | $ | 57,676 | 4.90 | % | $ | 1,271,790 | $ | 65,871 | 5.18 | % | |||||||||
Taxable securities(2) | 355,864 | 11,239 | 3.16 | 357,463 | 12,492 | 3.49 | 279,417 | 12,672 | 4.54 | ||||||||||||||||||
| Tax-exempt securities | 15,519 | 1,115 | 7.18 | 17,502 | 1,119 | 6.39 | 16,494 | 1,132 | 6.86 | ||||||||||||||||||
| FHLB stock | 7,631 | 195 | 2.56 | 7,323 | 122 | 1.67 | 9,150 | 78 | 0.85 | ||||||||||||||||||
| Interest-bearing bank balances | 7,656 | 23 | 0.30 | 16,923 | 40 | 0.24 | 24,270 | 60 | 0.25 | ||||||||||||||||||
| Total earning assets | 1,633,765 | 69,189 | 4.24 | 1,575,149 | 71,449 | 4.54 | 1,601,121 | 79,813 | 4.99 | ||||||||||||||||||
| Non-earning assets: | |||||||||||||||||||||||||||
| Cash and due from banks | 25,020 | 25,681 | 28,684 | ||||||||||||||||||||||||
| Premises and equipment | 37,327 | 36,284 | 37,248 | ||||||||||||||||||||||||
| Other assets | 108,266 | 117,213 | 111,986 | ||||||||||||||||||||||||
| Allowance for credit losses | (26,309) | (29,872) | (29,230) | ||||||||||||||||||||||||
| Total assets | $ | 1,778,069 | $ | 1,724,455 | $ | 1,749,809 | |||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||
| Savings deposits | $ | 51,197 | $ | 26 | 0.05 | % | $ | 44,144 | $ | 26 | 0.06 | % | $ | 40,766 | $ | 41 | 0.10 | % | |||||||||
| NOW deposits | 425,435 | 709 | 0.17 | 428,299 | 1,242 | 0.29 | 430,695 | 2,504 | 0.58 | ||||||||||||||||||
| Money market deposits | 339,664 | 602 | 0.18 | 365,718 | 1,204 | 0.33 | 353,567 | 2,447 | 0.69 | ||||||||||||||||||
| Time deposits | 368,189 | 1,779 | 0.48 | 377,289 | 2,663 | 0.71 | 433,523 | 4,501 | 1.04 | ||||||||||||||||||
| Other borrowings | 48,773 | 1,332 | 2.73 | 46,957 | 1,367 | 2.91 | 54,215 | 1,648 | 3.04 | ||||||||||||||||||
| Borrowings from Federal | |||||||||||||||||||||||||||
| Home Loan Bank | 120,136 | 1,195 | 0.99 | 79,941 | 1,012 | 1.27 | 87,720 | 1,178 | 1.34 | ||||||||||||||||||
| Total interest-bearing liabilities | 1,353,394 | 5,643 | 0.42 | 1,342,348 | 7,514 | 0.56 | 1,400,486 | 12,319 | 0.88 | ||||||||||||||||||
| Other liabilities and shareholders’ equity: | |||||||||||||||||||||||||||
| Demand deposits | 228,635 | 196,365 | 166,077 | ||||||||||||||||||||||||
| Other liabilities | 19,302 | 19,362 | 16,909 | ||||||||||||||||||||||||
| Shareholders’ equity | 176,738 | 166,380 | 166,337 | ||||||||||||||||||||||||
| Total liabilities and | |||||||||||||||||||||||||||
| shareholders’ equity | $ | 1,778,069 | $ | 1,724,455 | $ | 1,749,809 | |||||||||||||||||||||
| Net interest income and net | |||||||||||||||||||||||||||
interest margin(3) | $ | 63,546 | 3.89 | % | $ | 63,935 | 4.06 | % | $ | 67,494 | 4.22 | % | |||||||||||||||
Interest rate spread(4) | 3.82 | % | 3.98 | % | 4.11 | % | |||||||||||||||||||||
| (1) | Average loans receivable include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $136, $600 and $741, for 2013, 2012 and 2011, respectively, are included in interest income. |
| (2) | 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 $370 for 2013, $369 for 2012 and $358 for 2011. |
| (3) | Net interest margin is computed by dividing taxable-equivalent net interest income by average earning assets. |
| (4) | Interest rate spread is computed by subtracting interest-bearing liability rate from earning asset yield. |
| 37 | ||
Volume and Rate Variance Analysis
The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table identifies (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) have been allocated, based on the absolute value, between changes attributable to volume and changes attributable to rate.
Volume and Rate Variance Analysis
Fully taxable-equivalent basis(1) (dollars in thousands)
| 2013 | 2012 | ||||||||||||||||||
| Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||
Variance(2) | Variance(2) | Variance | Variance(2) | Variance(2) | Variance | ||||||||||||||
| Interest income: | |||||||||||||||||||
| Loans receivable | $ | 3,346 | $ | (4,405) | $ | (1,059) | $ | (4,772) | $ | (3,423) | $ | (8,195) | |||||||
| Taxable investment securities | (57) | (1,196) | (1,253) | 3,111 | (3,291) | (180) | |||||||||||||
Tax-exempt investment securities(1) | (134) | 130 | (4) | 67 | (80) | (13) | |||||||||||||
| FHLB stock | 5 | 68 | 73 | (18) | 62 | 44 | |||||||||||||
| Interest-bearing bank balances | (26) | 9 | (17) | (18) | (2) | (20) | |||||||||||||
| Total interest income | 3,134 | (5,394) | (2,260) | (1,630) | (6,734) | (8,364) | |||||||||||||
| Interest expense: | |||||||||||||||||||
| Savings deposits | 4 | (4) | 0 | 3 | (18) | (15) | |||||||||||||
| NOW deposits | (8) | (525) | (533) | (14) | (1,248) | (1,262) | |||||||||||||
| Money market deposits | (82) | (520) | (602) | 80 | (1,323) | (1,243) | |||||||||||||
| Time deposits | (61) | (823) | (884) | (533) | (1,305) | (1,838) | |||||||||||||
| Other borrowings | 52 | (87) | (35) | (213) | (68) | (281) | |||||||||||||
| Borrowings from FHLB | 438 | (255) | 183 | (104) | (62) | (166) | |||||||||||||
| Total interest expense | 343 | (2,214) | (1,871) | (781) | (4,024) | (4,805) | |||||||||||||
| Increase (decrease) in net interest income | $ | 2,791 | $ | (3,180) | $ | (389) | $ | (849) | $ | (2,710) | $ | (3,559) | |||||||
| (1) | Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35% and is then reduced by the non-deductible portion of interest expense. |
| (2) | The volume/rate variance for each category has been allocated on a consistent basis between rate and volume variances, based on the percentage of rate, or volume, variance to the sum of the two absolute variances. |
Results of Operations – Years Ended December 31, 2013 and 2012
Net Income (Loss).Net income available to common shareholders for 2013 was $18.9 million, representing a net income per diluted share of $0.65, compared to net loss available to common shareholders of $28.2 million, or $1.80 per diluted share, the prior year. In 2013, the Company had a tax benefit of $3.2 million resulting from a deferred tax asset valuation reversal of $10.0 million, $740,000 due to a North Carolina corporate tax rate change, and a calculated tax provision of $6.1 million.In the fourth quarter of 2013, the Bank acquired Security Savings Bank, SSB, and earlier in the yearloan production offices in Charlotte and Raleigh became full service branches.The results for 2012 were largely impacted by the Company’s previously discussed plan to accelerate the disposition of problem assets. Provision for credit losses was $2.7 million in 2013 compared to $35.9 million in 2012. Results for 2013 include $2.2 million in merger-related expense and a loan recourse obligation expense of $356,000, while results for 2012 included $1.8 million of one-time items to write down facilities and other assets, as well as a $10.0 million valuation allowance against the Company’s deferred tax asset.Net interest income for 2013 after provision for credit losses increased by $32.8 million, or 118.6%, as compared to 2012. The taxable-equivalent net interest margin decreased 17 basis points for 2013 to 3.89%, from 4.06% for 2012. Noninterest income increased $566,000, or 3.4%, in 2013, while noninterest expense for 2013 decreased $12.0 million, or 16.6%. Lower mortgage banking revenue, which declined $1.0 million from 2012, was partially offset by gains on sales of investment securities of $736,000. The decrease in noninterest expense is due to a net gain for real estate acquired in settlement of loans expense of $126,000 in 2013 compared to a net loss of $15.7 million in 2012. Return on average assets for 2013 was 1.17% compared to (1.46)% for 2012. Return on average shareholders' equity for 2013 was 11.75% compared to (15.18)% in 2012.
| 38 | ||
Net Interest Income. Net interest income for 2013, on a taxable-equivalent basis, decreased $389,000, or 0.6%, compared to 2012. Average earning assets increased $58.6 million, or 3.7%, to $1.63 billion from $1.58 billion for the prior year. Average interest-bearing liabilities for 2013 increased $11.0 million, or 0.8%, to $1.35 billion, compared to $1.34 billion for 2012.
The net interest margin for the year ended December 31, 2013 was 3.89%, down from 4.06% for the prior year. The decline innet interest margin was partially as a result of the disposition of high risk loans with high yields as a part of our asset disposition plan in late 2012.In 2013, the average yield on earning assets decreased by 30 basis points while the average rate on interest-bearing liabilities decreased by 14 basis points, which resulted in a decrease in the interest rate spread in 2013 of 16 basis points compared to the prior year.
The table,“Average Balances and Net Interest Income Analysis,” above summarizes net interest income and average yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate Variance Analysis” above presents the changes in interest income and interest expense attributable to volume and rate changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses.The Company recorded a $2.7 million provision for credit losses during the year ended December 31, 2013, compared to a $35.9 million provision during the previous year. The Company’s allowance for credit losses was $24.6 million at December 31, 2013. The allowance for credit losses expressed as a percentage of total loans (excluding loans held for sale) decreased to 1.73% at December 31, 2013 from 2.30% at December 31, 2012.
Noninterest Income. In 2013,noninterest income increased $566,000 to $17.5 million, or 3.4%, compared to 2012. Pre-tax gains on sale of investment securities totaled $736,000 in 2013, compared to $3,000 in 2012. Retail banking revenue increased $489,000 to $10.2 million, or 5.0%, for the year, due primarily tochanges in the rate and fee structures the Company applied to certain product offerings in the fourth quarter of 2012.Wealth management revenue increased 9.4% to $2.6 million for the year from $2.3 million last year as the division continued to increase assets under management to $222.5 million at December 31, 2013 from $189.9 million at December 31, 2012. Mortgage banking revenue decreased $1.0 million, or 37.6%, for the yeardue to a lower level of mortgage loan production resulting from increases in interest rates.
Noninterest Expense. In 2013, noninterest expense decreased $12.0 million, or 16.6%, compared to 2012. The Company has continued to focus on improving efficiencies and controlling costs. Real estate acquired in settlement of loans expense was a net gain of $126,000 in 2013 compared to a net loss of $15.7 million in 2012.Personnel expense in 2013 was up $2.8 million, or 9.4%, compared to 2012. The increase in personnel expense was due primarily to the hiring of commercial lenders in the Raleigh and Charlotte markets and the addition of key lending personnel in the Piedmont Triad market as well as the fourth quarter additions resulting from the acquisition of Security Savings Bank, SSB.The decrease in occupancy and other expenses was due primarily to one-time charges of $1.8 million taken in the third quarter of 2012for impairments on facilities related to branch offices closed or scheduled to be closed and for adjustments for various nonrecurring accruals. In 2013,the Company recorded $2.2 million of merger-related costs, which included $2.0 million related to the acquisition of Security Savings Bank, SSB and $260,000 related to the anticipated acquisition of CapStone Bank. In addition, in 2013, the Company recorded a recourse obligation expense of $356,000 to cover estimated losses on nonperforming loans sold prior to September 2008. NewBridge Bank did not sell a significant number of mortgage loans prior to the recession of 2008 and does not anticipate any additional significant losses related to mortgage recourse obligations. Finally, operating costs were elevated due to the acquisition of Security Savings Bank, SSB. For the detailed change in other operating expense please see the table “Other Operating Expenses” in Note 13 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Provision for Income Taxes. The Company recorded an income tax benefit of $3.2 million in 2013, compared to an income tax benefit of $2.6 million in 2012. The Company’s effective tax rate was (18.3)% in 2013 and (9.3)% in 2012. In 2013, the difference between the effective tax rate and the statutory rate was primarily a result of a decrease of $10.0 million in the valuation allowance against deferred tax assets, while in 2012, the difference between the effective tax rate and the statutory rate was primarily a result of an increase of $10.0 million in the valuation allowance against deferred tax assets.
| 39 | ||
Results of Operations – Years Ended December 31, 2012 and 2011
Net Income (Loss).Net loss available to common shareholders for 2012 was $28.2 million, representing a net loss per diluted share of $1.80, compared to net income available to common shareholders of $1.8 million, or $0.11 per diluted share, the prior year. The results for 2012 were largely impacted by the Company’s previously discussed accelerated disposition of problem assets. Provision for credit losses was $35.9 million in 2012 compared to $16.8 million in 2011, and real estate acquired in settlement of loans expense was $15.7 million in 2012 million compared to $7.1 million in 2011. In the fourth quarter 2012, the Company initiated the closure of two bank branch offices. Results for the year include $1.8 million of one-time items to write down facilities and other assets, as well as a $10.0 million valuation allowance against the Company’s deferred tax asset.Net interest income for 2012 after provision for credit losses decreased by $22.7 million, or 45.0%, as compared to 2011. The taxable-equivalent net interest margin decreased 16 basis points for 2012 to 4.06%, from 4.22% for 2011. Noninterest income decreased $1.5 million, or 8.2%, in 2012, while noninterest expense for 2012 increased $9.8 million, or 15.7%. The increase in noninterest expense is due primarily to $15.7 million in real estate acquired in settlement of loans expense. The provision for credit losses in 2012 was $35.9 million, up $19.1 million, or 113.8% from $16.8 million in 2011. Return on average assets for 2012 was (1.46)% compared to 0.27% for 2011. Return on average shareholders' equity for 2012 was (15.18)% compared to 2.81% in 2011.
Net Interest Income. Net interest income for 2012, on a taxable-equivalent basis, decreased $3.6 million, or 5.3%, compared to 2011. This was primarily due to a decrease in average earning assets, which declined $26.0 million, or 1.6%, to $1.58 billion from $1.60 billion for the prior year. Average interest-bearing liabilities for 2012 decreased $58.1 million, or 4.2%, to $1.34 billion, compared to $1.40 billion for 2011.
The net interest margin for the year ended December 31, 2012 was 4.06%, down from 4.22% for the prior year. In 2012, the average yield on earning assets decreased by 45 basis points while the average rate on interest-bearing liabilities decreased by 32 basis points, which resulted in a decrease in the interest rate spread in 2012 of 13 basis points compared to the prior year.
The table,“Average Balances and Net Interest Income Analysis,” above summarizes net interest income and average yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate Variance Analysis” above presents the changes in interest income and interest expense attributable to volume and rate changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses.The Company recorded a $35.9 million provision for credit losses during the year ended December 31, 2012, compared to a $16.8 million provision during the previous year. The Company’s allowance for credit losses was $26.6 million at December 31, 2012. The allowance for credit losses expressed as a percentage of total loans (excluding loans held for sale) decreased to 2.30% at December 31, 2012 from 2.40% at December 31, 2011. Since the current adverse credit cycle began in 2007, the Company has charged off $194.4 million of loans and real estate acquired in settlement of loans, or 12.0% of peak loan balances of $1.63 billion at September 30, 2008.
Noninterest Income. In 2012,noninterest income decreased $1.5 million to $16.9 million, compared to $18.4 million in 2011. Pre-tax gains on sale of investment securities totaled $3,000 in 2012 compared to $2.0 million in 2011. Retail banking revenue declined $0.2 million to $9.7 million, or 1.9%, for the year, due primarily to ongoing regulatory changes in the industry and changes in consumer behavior. Wealth management fees declined $0.2 million for the year. Mortgage banking revenue increased $0.9 million, or 52.5%, for the year due to a higher volume of production. Income on bank-owned life insurance rose $0.1 million, or 7.9%.
| 40 | ||
Noninterest Expense. In 2012, noninterest expense increased $9.8 million, or 15.7%, compared to 2011. The increase is due primarily to $15.7 million in real estate acquired in settlement of loans expense. The Company has continued to focus on improving efficiencies and controlling costs. Furniture and equipment, FDIC insurance and real estate acquired in settlement of loans expense fell an aggregate of $1.6 million from the prior year, while all other expense categories rose an aggregate of $2.1 million. The rise in occupancy and other expenses was due primarily to one-time charges of $1.8 million taken in the third quarterfor impairments on facilities related to branch offices closed or to be closed and for adjustments for various nonrecurring accruals. For the detailed change in other operating expense please see the table “Other Operating Expenses” in Note 13 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Provision for Income Taxes. The Company recorded an income tax benefit of $2.6 million in 2012, compared to an income tax expense of $1.4 million in 2011. The Company’s effective tax rate was (9.3)% in 2012 and 23.6% in 2011. In 2012, the difference between the effective tax rate and the statutory rate was primarily a result of an increase of $10.0 million in the valuation allowance against deferred tax assets, while in 2011, the difference between the effective tax rate and the statutory rate was primarily due to tax-exempt items such as income on bank-owned life insurance and municipal securities.
Liquidity and Cash Flow
Liquidity management refers to the policies and practices that ensure the Bank has the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of the Bank’s clients. Management measures our liquidity position by giving consideration to both on- and off-balance sheet sources of, and demands for, funds on a daily and other periodic bases. Deposit withdrawals, loan funding and general corporate activity create the primary needs for liquidity for the Bank. Sources of liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, investments available for sale, loan repayments, loan sales, increases in deposits, and increases in borrowings from the FHLB of Atlanta secured with pledged loans and securities, and from correspondent banks under overnight federal funds credit lines and securities sold under repurchase agreements.
Bancorp had sufficient cash and cash equivalents on hand at December 31, 2013 to provide for Bancorp’s anticipated obligations and service its debt for approximately two years.
The investment portfolio at December 31, 2013 included securities with a par value of approximately $118.9 million with call features, whereby the issuers of such securities have the option to repay the securities before the contractual maturity dates.
The Bank has the ability to manage, within competitive and cost of funds constraints, increases in deposits within its market areas. The Bank utilizes CDARS and brokered deposits to supplement in-market deposit growth.
The Bank has established wholesale repurchase agreements with regional brokerage firms. The Bank can access this additional source of liquidity by pledging investment securities with the brokerage firms.
Liquidity is further enhanced by a line of credit with the FHLB of Atlanta, amounting to approximately $360.2 million, collateralized byFHLB stock, investment securities, qualifying residential one to four family first mortgage loans, qualifying multi-family first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. Based upon collateral pledged, as of December 31, 2013, the borrowing capacity under this line was $311.3 million, with $91.3 million available to be borrowed. The Bank provides various reports to the FHLB of Atlanta on a regular basis to maintain the availability of the credit line. Each borrowing request to the FHLB of Atlanta is initiated through an advance application that is subject to approval by the FHLB of Atlanta before funds are advanced under the line of credit. In addition to the credit line at the FHLB of Atlanta, the Bank has borrowing capacity at the Federal Reserve Bank totaling $3.9 million, and has federal funds lines of $30.0 million of which $13.0 million was outstanding at December 31, 2013.
| 41 | ||
As presented in the Consolidated Statement of Cash Flows, the Company generated $22.5 million in operating cash flow during 2013, compared to $22.9 million in 2012 and $27.2 million in 2011. The significant difference in 2012 and 2011 between net income and operating cash flow is the result of provision for credit losses and writedowns on real estate acquired in settlement of loans.
Cash used in investing activities in 2013 was $60.7 million, compared to cash used in investing activities of $26.9 million in 2012 and cash provided by investing activities of $75.7 million in 2011. Cash outflows for 2013 included $141.2 million related to an increase in the loan portfolio, compared to $56.3 million in 2012. Cash outflows for 2013 also included $146.8 million in purchases of securities, compared to $264.8 million in 2012 and $165.3 million in 2011. Cash inflows for 2013 included $165.0 million in proceeds from sales, maturities, prepayments and calls of investment securities, compared to $222.7 million in 2012 and $148.8 million in 2011. Cash inflows for 2012 included $54.4 million in proceeds from sales of loans. Cash inflows for 2011 included $20.7 million related to a decrease in the loan portfolio and $73.0 million in proceeds from loans sold in connection with sale of the Bank’s Virginia operations. The Company also invested $12.0 million in bank-owned life insurance during 2011.
Cash provided by financing activities was $32.0 million in 2013, compared to cash used in financing activities of $10.2 million in 2012 and $77.9 million in 2011. Cash inflows for 2013 included an increase of $53.3 million in deposits, compared to a net decrease in deposits of $86.2 million in 2012 and $34.3 million in 2011. During 2013, the Company had cash inflows of $25.7 million related to increased borrowing, compared to $26.3 million in 2012. Cash outflows in 2011 included $41.0 million used to reduce outstanding borrowings. In 2013, the Company had cash outflows of $37.5 million (including related expense of $100,000) for redemption of its Series A Preferred Stock and $7.8 million for the repurchase of a stock warrant. During 2012, the Company had a cash inflow of $52.3 million from the issuance of preferred stock, which was subsequently converted to common stock.
Contractual Obligations and Commitments
In the normal course of business there are various outstanding contractual obligations of the Company that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, which may or may not require future cash outflows. Payments for borrowings do not include interest. Payments related to leases and service contracts are based on actual payments specified in the underlying contracts. The following table reflects the material contractual obligations of the Company outstanding as of December 31, 2013.
Contractual Obligations
(dollars in thousands)
| Payments Due by Period | ||||||||||||||||
| Within One Year | One Year to Three Years | Three Years to Five Years | After Five Years | Total | ||||||||||||
| Federal funds purchased | $ | 13,000 | $ | - | $ | - | $ | - | $ | 13,000 | ||||||
| Junior subordinated notes and wholesale repurchase agreements | - | 21,000 | - | 25,774 | 46,774 | |||||||||||
| Federal Home Loan Bank borrowings | 170,000 | - | - | - | 170,000 | |||||||||||
| Operating lease obligations | 1,747 | 2,235 | 796 | - | 4,778 | |||||||||||
| Service contracts and purchase obligations | 6,450 | 7,832 | 886 | 580 | 15,748 | |||||||||||
| Other long-term liabilities | 1,374 | 669 | 525 | 1,247 | 3,815 | |||||||||||
| Total contractual cash obligations excluding deposits | 192,571 | 31,736 | 2,207 | 27,601 | 254,115 | |||||||||||
| Deposits | 1,491,908 | 52,748 | 9,329 | 11 | 1,553,996 | |||||||||||
| Total contractual cash obligations | $ | 1,684,479 | $ | 84,484 | $ | 11,536 | $ | 27,612 | $ | 1,808,111 | ||||||
| 42 | ||
Capital Resources
Banks, bank holding companies, and financial holding companies, as regulated institutions, must meet required levels of capital. The Federal Reserve and the FDIC have minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are required to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. On August 26, 2005, the Company issued $25.8 million of junior subordinated debentures with the simultaneous private placement of trust preferred securities in the amount of $25.0 million. See Note 8 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for a discussion of the issuance of the trust preferred securities. On December 12, 2008, the Company sold Series A Preferred Stock and a warrant (the “Warrant”) to the U.S Treasury for $52.4 million as part of the CPP. On November 30, 2012, the Company completed a private placement of Series B Preferred Stock and Series C Preferred Stock for an aggregate of $56.3 million.
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.
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. 34,438 shares of Class A 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 the Warrant to purchase 2,567,255 shares of the Company’s common stock 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.
As shown in Note 18 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K, the Company and the Bank both maintained capital levels exceeding the minimum levels required to be categorized as “well capitalized” for each of the three years presented.
Lending Activities
General. The Bank offers a broad array of lending services, including construction, real estate, commercial and consumer loans, to individuals and small to medium-sized businesses and retail clients that are located in or conduct a substantial portion of their business in the Bank’s market areas. The Bank’s total loans (excluding loans held for sale) at December 31, 2013 were $1.42 billion, or 72.1% of total assets. At December 31, 2013, the Bank had no large loan concentrations (exceeding 10% of its portfolio) in any particular industry, other than real estate. The Bank’s legal lending limit at December 31, 2013 was $31.8 million (absent fully marketable collateral), and the largest credit relationship was approximately $19.0 million.
| 43 | ||
Loan Composition. The following table summarizes, at the dates indicated, the composition of the Bank’s loan portfolio and the related percentage composition (excluding loans held for sale).
Summary of Loan Portfolio
(dollars in thousands; excluding loans held for sale)
| December 31 | ||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||
| % Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 302,976 | $ | 247,628 | $ | 269,972 | $ | 222,889 | $ | 232,769 | ||||||||||||||||
| Secured by other nonfarm nonresidential properties | 239,062 | 186,864 | 157,594 | 159,086 | 202,030 | |||||||||||||||||||||
| Other commercial and industrial | 114,402 | 110,850 | 119,877 | 134,011 | 158,624 | |||||||||||||||||||||
| Total Commercial | 656,440 | 46.3 | % | 545,342 | 47.2 | % | 547,443 | 45.6 | % | 515,986 | 40.9 | % | 593,423 | 40.7 | % | |||||||||||
| Construction loans – 1 to 4 family residential | 20,582 | 13,206 | 7,781 | 16,736 | 28,929 | |||||||||||||||||||||
| Other construction and land development | 94,814 | 62,460 | 81,630 | 122,382 | 148,356 | |||||||||||||||||||||
| Total Real estate – construction | 115,396 | 8.1 | 75,666 | 6.6 | 89,411 | 7.4 | 139,118 | 11.0 | 177,285 | 12.2 | ||||||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 358,332 | 277,820 | 287,268 | 304,640 | 339,485 | |||||||||||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 213,112 | 200,465 | 209,634 | 219,557 | 234,674 | |||||||||||||||||||||
| Loans secured by 5 or more family residential properties | 38,735 | 23,116 | 25,883 | 20,207 | 24,333 | |||||||||||||||||||||
| Total Real estate – mortgage | 610,179 | 43.1 | 501,401 | 43.4 | 522,785 | 43.6 | 544,404 | 43.2 | 598,492 | 41.1 | ||||||||||||||||
| Credit cards | 7,659 | 7,610 | 7,649 | 7,749 | 7,416 | |||||||||||||||||||||
| Other revolving credit plans | 8,529 | 9,018 | 9,444 | 9,042 | 10,974 | |||||||||||||||||||||
| Other consumer loans | 10,249 | 10,263 | 17,648 | 36,224 | 57,079 | |||||||||||||||||||||
| Total Consumer | 26,437 | 1.9 | 26,891 | 2.3 | 34,741 | 2.9 | 53,015 | 4.2 | 75,469 | 5.2 | ||||||||||||||||
| Loans to other depository institutions | - | - | - | 3,800 | 10,000 | |||||||||||||||||||||
| All other loans | 8,251 | 6,121 | 5,690 | 4,262 | 1,857 | |||||||||||||||||||||
| Total Other | 8,251 | 0.6 | 6,121 | 0.5 | 5,690 | 0.5 | 8,062 | 0.7 | 11,857 | 0.8 | ||||||||||||||||
| Total | $ | 1,416,703 | 100.0 | % | $ | 1,155,421 | 100.0 | % | $ | 1,200,070 | 100.0 | % | $ | 1,260,585 | 100.0 | % | $ | 1,456,526 | 100.0 | % | ||||||
The Company has no foreign loan activity.
Real Estate Loans. Loans secured by real estate totaled $1.27 billion, or 89.5% of total loans (excluding loans held for sale), at December 31, 2013. At year end 2013, the Bank had real estate loan relationships of various sizes ranging up to $14.0 million and commitments up to $19.0 million, secured by office buildings, retail establishments, residential development and construction, warehouses, motels, restaurants and other types of property. Loan terms are typically limited to five years, with payments through the date of maturity generally based on a 15-20 year (15-30 year for owner-occupied single and multi-family properties) amortization schedule. Interest rates may be fixed or adjustable, based on market conditions, and the Bank generally charges an origination fee. Management has attempted to reduce credit risk in the real estate portfolio by emphasizing loans on properties where the loan to value ratio, established by independent appraisals, does not exceed 70% to 80%, and net projected cash flow available for debt service amounts to at least 120% to 135% of the debt service requirement. The Bank also generally requires personal guarantees and personal financial statements from the principal owners in such cases.
Real Estate – Mortgage. The Bank originates fixed and adjustable rate mortgages as well as FHA, VA and USDA government supported loans for resale into the secondary market. The Bank provides bank-held mortgage products to accommodate qualified borrowers who may not meet all the standards for a conventional secondary market mortgage. The Bank has little or no exposure to subprime lending. During 2013, the Bank originated $160.6 million of loans in these various categories. Also included in real estate mortgage loans are home equity revolving lines of credit, with $213.1 million outstanding as of December 31, 2013. The Bank recorded net chargeoffs from mortgage loans of $2.0 million during 2013, compared to $12.6 million in 2012 and $6.4 million in 2011.
| 44 | ||
Real Estate – Construction Loans. The Bank’s current lending strategy is to moderately increase exposure in this portfolio segment. The Bank expects that the majority of its new construction and development loans on commercial and residential projects will be in the range of $1.0 million to $5.0 million. At December 31, 2013 and 2012, the Bank held $115.4 million and $75.7 million, respectively, of such loans. To reduce credit risk associated with such loans, the Bank emphasizes anchored and neighborhood centers that are substantially pre-leased, or residential projects that are substantially pre-sold and built in strong, proven markets. The leases on commercial projects must generally result in a loan to appraised value of 75% to 80% or less and a net cash flow to debt service of no less than 120% to 135%. The Bank typically requires a personal guarantee from the developer or builder. Loan terms are generally 12-18 months, although the Bank will make a “mini-permanent” loan for purposes of construction and development of up to a five year term. Rates can be either fixed or variable, and the Bank usually charges an origination fee. The Bank experienced net chargeoffs from real estate – construction loans of $0.8 million in 2013, $8.4 million in 2012 and $3.5 million in 2011.
Commercial Loans. The Bank makes loans for commercial purposes to various types of businesses. At December 31, 2013, the Bank held $656.4 million of commercial loans, or 46.3% of its total loan portfolio. Equipment loans are typically made on terms up to five years at fixed or variable rates, with the financed equipment pledged as collateral to the Bank. The Bank attempts to reduce its credit risk on these loans by limiting the loan to value percentage to 80%. Working capital loans are made on terms typically not exceeding one year. These loans may be secured or unsecured, but the Bank attempts to limit its credit risk by requiring the borrower to demonstrate its capacity to produce net cash flow available for debt service equal to 120% to 150% of its debt service requirements. The Bank experienced net chargeoffs from commercial loans of $1.0 million in 2013, $16.4 million in 2012, and $4.6 million in 2011.
Consumer Loans. Using a centralized underwriting process, the Bank makes a variety of loans to individuals for personal and household purposes, including (i) secured and unsecured installment and term loans originated directly by the Bank; (ii) unsecured revolving lines of credit, and (iii) amortizing secured lot loans. Certain of the direct loans are secured by the borrowers’ residences. At December 31, 2013, the Bank held $26.4 million of consumer loans. During 2013, 2012, and 2011, the Bank experienced net consumer loan chargeoffs of $0.7 million, $0.9 million, and $1.0 million, respectively.
Loan Approval and Review. When the aggregate outstanding loans to a single borrower or related entities exceed an individual officer’s lending authority, or the individual officer’s lending authority is not applicable to the contemplated transaction, the loan request must be considered and approved by an officer with a higher lending limit. All consumer purpose loan decisions are initiated through a centralized underwriting process. Commercial banking managers (“CBM”) can generally approve commercial relationships up to $750,000 on a secured basis. If the lending request exceeds the CBM’s lending limit, the loan must be submitted to and approved by a senior credit officer. Generally, a senior credit officer has authority to approve commercial relationships up to $3.0 million on a secured basis. All loan relationships between $3.0 million and $5.0 million must be approved by the Chief Commercial Credit Officer (“CCCO”). All loans between $5.0 million and $10.0 million must be approved by the Chief Credit Officer (“CCO”). Loan relationships exceeding $10.0 million must be unanimously approved by a committee of the CCCO, the CCO, and the Bank’s CEO.
The Bank’s Loan Review Program is headed by the Loan Review Manager, who reports directly to the Credit Management Committee of the Bank’s Board of Directors. The Program includes the Annual Loan Review Coverage Plan which is approved by the Credit Management Committee and which stipulates a certain number of loan reviews to be completed by the Loan Review Manager and employees under his or her guidance. The Bank’s credit review system supplements its loan rating system, pursuant to which the Bank may place a loan on its criticized asset list or may classify a loan in one of various other classification categories. In addition, all loan officers are charged with the responsibility of reviewing their portfolios and making adjustments to the risk ratings as needed. The “Watch List Committee,” which includes the CCO, the Special Assets Manager and the Special Assets Officers, reviews all commercial loans graded special mention, substandard, doubtful and loss on a monthly basis, and provides a summary to the Credit Management Committee, also on a monthly basis.
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The Bank’s loan portfolio is analyzed on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. Past due loans are reviewed with varying frequency and at multiple levels. Its allowance for credit losses is also analyzed monthly by management. This analysis includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. A specified minimum percentage of loans in each adverse asset classification category, based on the probability of default and on the historical loss experience of the Bank in each such category, as well as other environmental factors such as the unemployment level or other economic conditions affecting that type of loan, are used to determine the adequacy of the Bank’s allowance for credit losses monthly. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. The provisions of Accounting Standards Codification (“ASC”) 310-10-35, “Loans that Are Identified for Evaluation or that Are Individually Considered Impaired” are applied to individually significant loans. See Note 5 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Loan Portfolio – Maturities and Interest Rate Sensitivities
(dollars in thousands, excluding loans held for sale)
| Maturity | Maturity Greater Than One Year | ||||||||||||||||||
| Over One | Over | Fixed | Floating or | ||||||||||||||||
| One Year | Years to | Five | Interest | Adjustable | |||||||||||||||
| or Less | Five Years | Years | Total | Rate | Rate | ||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 30,260 | $ | 173,863 | $ | 98,853 | $ | 302,976 | $ | 260,377 | $ | 12,339 | |||||||
| Secured by other nonfarm nonresidential properties | 25,952 | 146,197 | 66,913 | 239,062 | 158,351 | 54,759 | |||||||||||||
| Other commercial and industrial | 30,068 | 60,685 | 23,649 | 114,402 | 66,677 | 17,657 | |||||||||||||
| Total Commercial | 86,280 | 380,745 | 189,415 | 656,440 | 485,405 | 84,755 | |||||||||||||
| Construction loans – 1 to 4 family residential | 19,873 | 626 | 83 | 20,582 | 651 | 58 | |||||||||||||
| Other construction and land development | 19,087 | 62,843 | 12,884 | 94,814 | 52,048 | 23,679 | |||||||||||||
| Total Real estate – construction | 38,960 | 63,469 | 12,967 | 115,396 | 52,699 | 23,737 | |||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 27,058 | 51,569 | 279,705 | 358,332 | 173,687 | 157,587 | |||||||||||||
| Lines of credit secured by 1 to 4 family residential properties | 2,644 | 20,503 | 189,965 | 213,112 | 57 | 210,411 | |||||||||||||
| Loans secured by 5 or more family residential properties | 1,500 | 34,814 | 2,421 | 38,735 | 14,273 | 22,962 | |||||||||||||
| Total Real estate – mortgage | 31,202 | 106,886 | 472,091 | 610,179 | 188,017 | 390,960 | |||||||||||||
| Credit cards | 7,659 | - | - | 7,659 | - | - | |||||||||||||
| Other revolving credit plans | 2,570 | 644 | 5,315 | 8,529 | 2,777 | 3,182 | |||||||||||||
| Other consumer loans | 2,021 | 6,699 | 1,529 | 10,249 | 7,566 | 662 | |||||||||||||
| Total Consumer | 12,250 | 7,343 | 6,844 | 26,437 | 10,343 | 3,844 | |||||||||||||
| All other loans | 953 | 1,954 | 5,344 | 8,251 | 7,296 | 2 | |||||||||||||
| Total Other | 953 | 1,954 | 5,344 | 8,251 | 7,296 | 2 | |||||||||||||
| Total | $ | 169,645 | $ | 560,397 | $ | 686,661 | $ | 1,416,703 | $ | 743,760 | $ | 503,298 | |||||||
Asset Quality
The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to its lending policy as approved by its Board of Directors. See “Lending Activities – Loan Approval and Review.” It is the responsibility of each commercial lending officer to assign an appropriate risk grade to every loan they originate. Credit Administration, through the loan review process, validates the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, it is the lending officer’s responsibility to recommend appropriate changes in the borrower’s risk grade.
The following table summarizes, by internally assigned risk grade, the risk grade for loans for which the bank has assigned a risk grade. The remainder of the loan portfolio consists of non risk graded homogeneous types of loans. The following table reflects $33.1 million of purchased credit-impaired (“PCI”) loans at December 31, 2013, resulting from the acquisition of Security Savings Bank, SSB on October 1, 2013. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Loans – excluding PCI at December 31, 2013, includes $12.0 million of risk graded loans from the acquisition that are not credit impaired.
| 46 | ||
Risk Profile by Internally Assigned Risk Grade
(dollars in thousands)
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | ||||||||||||||||||||||||||||
| Loans – excluding PCI | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 592,221 | $ | 30,962 | $ | 15,044 | $ | 302 | $ | 638,529 | $ | 506,849 | $ | 27,600 | $ | 30,160 | $ | 98 | $ | 564,707 | |||||||||||
| Real estate – construction | 82,483 | 8,628 | 2,288 | - | 93,399 | 48,029 | 9,744 | 5,422 | 182 | 63,377 | |||||||||||||||||||||
| Real estate – mortgage | 84,999 | 4,243 | 5,168 | - | 94,410 | 54,459 | 6,530 | 6,740 | 32 | 67,761 | |||||||||||||||||||||
| Consumer | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Other | 7,373 | - | - | - | 7,373 | 4,918 | - | 619 | - | 5,537 | |||||||||||||||||||||
| Total | $ | 767,076 | $ | 43,833 | $ | 22,500 | $ | 302 | $ | 833,711 | $ | 614,255 | $ | 43,874 | $ | 42,941 | $ | 312 | $ | 701,382 | |||||||||||
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | ||||||||||||||||||||||||||||
| PCI loans | Pass(1) | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 5,451 | $ | 4,831 | $ | 7,031 | $ | 135 | $ | 17,448 | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Real estate – construction | 1,568 | 1,743 | 731 | 198 | 4,240 | - | - | - | - | - | |||||||||||||||||||||
| Real estate – mortgage | 2,811 | 2,361 | 5,739 | 499 | 11,410 | - | - | - | - | - | |||||||||||||||||||||
| Consumer | 2 | 1 | - | - | 3 | - | - | - | - | - | |||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Total | $ | 9,832 | $ | 8,936 | $ | 13,501 | $ | 832 | $ | 33,101 | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | ||||||||||||||||||||||||||||
| Total loans | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 597,672 | $ | 35,793 | $ | 22,075 | $ | 437 | $ | 655,977 | $ | 506,849 | $ | 27,600 | $ | 30,160 | $ | 98 | $ | 564,707 | |||||||||||
| Real estate – construction | 84,051 | 10,371 | 3,019 | 198 | 97,639 | 48,029 | 9,744 | 5,422 | 182 | 63,377 | |||||||||||||||||||||
| Real estate – mortgage | 87,810 | 6,604 | 10,907 | 499 | 105,820 | 54,459 | 6,530 | 6,740 | 32 | 67,761 | |||||||||||||||||||||
| Consumer | 2 | 1 | - | - | 3 | - | - | - | - | - | |||||||||||||||||||||
| Other | 7,373 | - | - | - | 7,373 | 4,918 | - | 619 | - | 5,537 | |||||||||||||||||||||
| Total | $ | 776,908 | $ | 52,769 | $ | 36,001 | $ | 1, 134 | $ | 866,812 | $ | 614,255 | $ | 43,874 | $ | 42,941 | $ | 312 | $ | 701,382 | |||||||||||
(1) PCI loans in the Pass category are in the pre-watch risk grade, which is the lowest risk grade in the Pass category.
Allocation of Allowance for Credit Losses(1)
(dollars in thousands)
| December 31 | ||||||||||||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||||||||||
| % Of | % Of | % Of | % Of | % Of | ||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||
| Commercial | $ | 9,752 | 46.3 | % | $ | 11,348 | 47.2 | % | $ | 8,526 | 45.6 | % | $ | 9,952 | 40.9 | % | $ | 10,648 | 40.7 | % | ||||||||||||
| Real estate – construction | 5,037 | 8.1 | 5,753 | 6.6 | 6,467 | 7.4 | 6,865 | 11.0 | 11,662 | 12.2 | ||||||||||||||||||||||
| Real estate – mortgage | 8,438 | 43.1 | 8,746 | 43.4 | 11,953 | 43.6 | 9,056 | 43.2 | 9,615 | 41.1 | ||||||||||||||||||||||
| Consumer | 1,153 | 1.9 | 781 | 2.3 | 1,866 | 2.9 | 2,827 | 4.2 | 3,858 | 5.2 | ||||||||||||||||||||||
| Other | 170 | 0.6 | 2 | 0.5 | 32 | 0.5 | 52 | 0.7 | 60 | 0.8 | ||||||||||||||||||||||
| Total | $ | 24,550 | 100.0 | % | $ | 26,630 | 100.0 | % | $ | 28,844 | 100.0 | % | $ | 28,752 | 100.0 | % | $ | 35,843 | 100.0 | % | ||||||||||||
| (1) | The allowance for credit losses has been allocated on an approximate basis. The allocation is not necessarily indicative of future losses. |
The Bank’s loan review program is designed to evaluate the credit risk in its loan portfolio. Through this loan review process, the Bank maintains an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. In establishing the appropriate classification for specific loans, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as special mention, substandard, doubtful or loss as described below, and reserves are allocated based on management’s judgment and historical experience.
| 47 | ||
Special Mention – These loans have potential weaknesses, which may, if not corrected or reversed, weaken the bank's credit position at some future date. The loans may not currently show problems due to the borrower(s)’ apparent ability to service the debt, but special circumstances surround the loans of which the bank and management should be aware. This category may also include loans where repayment has not been satisfactory, where constant attention is required to maintain a set repayment schedule, or where terms of a loan agreement have been violated but the borrower still appears to have sufficient financial strength to avoid a lower rating. It also includes new loans that significantly depart from established loan policy and loans to weak borrowers with a strong guarantor.
Substandard – These are loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management, such as unprofitable and/or undercapitalized businesses, inability to generate sufficient cash flow for debt reduction, deterioration of collateral and special problems arising from the particular condition of an industry. It also includes workout loans on a liquidation basis when a loss is not expected. Some of these loans are considered impaired.
Doubtful – These loans have all the weakness inherent in loans graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable. In some instances, the extent of the potential loss is not currently determinable. Most of these loans are considered impaired.
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. The allowance for credit losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for credit losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment 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. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance.
In the fourth quarter 2013, the Company implemented enhancements to the methodology for estimating the allowance for credit losses. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed. In addition, commercial risk graded loans are now segregated between those that are real estate secured and those that are not. A more robust identification of qualitative factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The revisions did not have a material impact on the allowance recorded at December 31, 2013.
Management believes the allowance for credit losses of $24.6 million at December 31, 2013 is adequate to cover inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.
| 48 | ||
The following table presents an analysis of the changes in the allowance for credit losses.
Analysis of Allowance for Credit Losses
(dollars in thousands)
| Beginning | Charge | Ending | ||||||||||||||
| Balance | Offs | Recoveries | Provision | Balance | ||||||||||||
| December 31, 2013 | ||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||
| Commercial | $ | 11,348 | $ | 2,212 | $ | 1,260 | $ | (644) | $ | 9,752 | ||||||
| Real estate – construction | 5,753 | 1,308 | 496 | 96 | 5,037 | |||||||||||
| Real estate – mortgage | 8,746 | 3,552 | 1,544 | 1,700 | 8,438 | |||||||||||
| Consumer | 781 | 1,116 | 389 | 1,099 | 1,153 | |||||||||||
| Other | 2 | 338 | 66 | 440 | 170 | |||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||
| PCI loans | ||||||||||||||||
| Commercial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Real estate – construction | - | - | - | - | - | |||||||||||
| Real estate – mortgage | - | - | - | - | - | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Other | - | - | - | - | - | |||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Total loans | ||||||||||||||||
| Commercial | $ | 11,348 | $ | 2,212 | $ | 1,260 | $ | (644) | $ | 9,752 | ||||||
| Real estate – construction | 5,753 | 1,308 | 496 | 96 | 5,037 | |||||||||||
| Real estate – mortgage | 8,746 | 3,552 | 1,544 | 1,700 | 8,438 | |||||||||||
| Consumer | 781 | 1,116 | 389 | 1,099 | 1,153 | |||||||||||
| Other | 2 | 338 | 66 | 440 | 170 | |||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||
| December 31, 2012 | ||||||||||||||||
| Commercial | $ | 8,526 | $ | 17,306 | $ | 879 | $ | 19,249 | $ | 11,348 | ||||||
| Real estate – construction | 6,467 | 8,774 | 423 | 7,637 | 5,753 | |||||||||||
| Real estate – mortgage | 11,953 | 13,337 | 766 | 9,364 | 8,746 | |||||||||||
| Consumer | 1,866 | 1,191 | 314 | (208) | 781 | |||||||||||
| Other | 32 | 3 | 122 | (149) | 2 | |||||||||||
| Total | $ | 28,844 | $ | 40,611 | $ | 2,504 | $ | 35,893 | $ | 26,630 | ||||||
| December 31, 2011 | ||||||||||||||||
| Commercial | $ | 9,952 | $ | 5,045 | $ | 495 | $ | 3,124 | $ | 8,526 | ||||||
| Real estate – construction | 6,865 | 3,985 | 534 | 3,053 | 6,467 | |||||||||||
| Real estate – mortgage | 9,056 | 6,822 | 443 | 9,276 | 11,953 | |||||||||||
| Consumer | 2,827 | 1,358 | 362 | 35 | 1,866 | |||||||||||
| Other | 52 | 1,387 | 70 | 1,297 | 32 | |||||||||||
| Total | $ | 28,752 | $ | 18,597 | $ | 1,904 | $ | 16,785 | $ | 28,844 | ||||||
| December 31, 2010 | ||||||||||||||||
| Commercial | $ | 11,014 | $ | 9,052 | $ | 1,370 | $ | 6,620 | $ | 9,952 | ||||||
| Real estate – construction | 11,989 | 5,379 | 80 | 175 | 6,865 | |||||||||||
| Real estate – mortgage | 9,914 | 7,260 | 270 | 6,132 | 9,056 | |||||||||||
| Consumer | 2,868 | 2,829 | 647 | 2,141 | 2,827 | |||||||||||
| Other | 58 | 6,200 | 10 | 6,184 | 52 | |||||||||||
| Total | $ | 35,843 | $ | 30,720 | $ | 2,377 | $ | 21,252 | $ | 28,752 | ||||||
| December 31, 2009 | ||||||||||||||||
| Commercial | $ | 8,018 | $ | 11,232 | $ | 605 | $ | 13,623 | $ | 11,014 | ||||||
| Real estate – construction | 11,662 | 12,227 | 588 | 11,966 | 11,989 | |||||||||||
| Real estate – mortgage | 7,964 | 10,110 | 514 | 11,546 | 9,914 | |||||||||||
| Consumer | 8,058 | 4,925 | 1,076 | (1,341) | 2,868 | |||||||||||
| Other | 103 | - | - | (45) | 58 | |||||||||||
| Total | $ | 35,805 | $ | 38,494 | $ | 2,783 | $ | 35,749 | $ | 35,843 | ||||||
| 49 | ||
| As of or for the Years Ended | ||||||||||||||||||||
| December 31 | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Average loans held for investment | $ | 1,243,269 | $ | 1,168,840 | $ | 1,267,601 | $ | 1,398,474 | $ | 1,534,478 | ||||||||||
| Loans held for investment at December 31 | 1,416,703 | 1,155,421 | 1,200,070 | 1,332,928 | 1,460,766 | |||||||||||||||
| Net chargeoffs of loans to average | ||||||||||||||||||||
| loans held for investment | 0.38 | % | 3.26 | % | 1.32 | % | 2.03 | % | 2.33 | % | ||||||||||
| Allowance to loans held for investment | 1.73 | % | 2.30 | % | 2.40 | % | 2.16 | % | 2.45 | % | ||||||||||
| Allowance to nonperforming loans | 261.23 | % | 124.93 | % | 71.18 | % | 56.87 | % | 65.43 | % | ||||||||||
Over the past five years, credit quality has trended upward, with the most significant improvement following the completion of the asset disposition plan in late 2012 and a reduction in unemployment levels in 2013.
Commercial loans. All commercial loans within the portfolio are risk graded among nine risk grades based on management’s evaluation of the overall credit quality of the loan, including the payment history, the financial position of the borrower, the underlying collateral value, an internal credit risk assessment and examination results. As a result, the allowance is adjusted upon any migration of a loan to a higher or lower risk grade within the commercial loan portfolio. The reserve percentages utilized have been determined by management to be appropriate based on probability of default, historical loan loss levels and the risk for each corresponding risk grade.
Mortgage, home equity, and credit lines. Reserves are calculated on mortgage, home equity, and credit lines based on historical loss experience. The average rolling 20 quarter net loss percentage is calculated for each of these loan categories, and is multiplied by the dollar balance of loans in each of these categories to determine the required reserve.
Consumer loans. The consumer loans are pooled together to determine the reserve requirement. The average rolling 20 quarter net loss percentage is calculated for this loan category, and is multiplied by the dollar balance of retail loans to determine a required reserve.
Specific impairment. Management evaluates significant loans that are on nonaccrual or otherwise deemed impaired on an individual basis for impairment. The specific allowance is calculated based upon a review of these loans and the estimated losses at the balance sheet date. At December 31, 2013 and 2012, the recorded investment in loans specifically identified and evaluated for impairment was approximately $5.9 million and $16.4 million, respectively and the specific allowance for credit losses associated with those loans was approximately $772,000 and $1.6 million, respectively. The decrease in the amount of specifically impaired loans held by the Bank and the associated allowance for credit losses resulted primarily from the Bank’s decision to take appropriate aggressive action with our problem credits through chargeoffs and foreclosure.
Provision for credit losses. The 2013 provision for credit losses totaled $2.7 million, compared to $35.9 million in 2012. As of December 31, 2013, nonperforming assets totaled $17.4 million, comprised of $9.4 million in nonperforming loans and $8.0 million in real estate acquired in settlement of loans. Those figures compare to $21.3 million in nonperforming loans and $5.4 million in real estate acquired in settlement of loans at the end of 2012, totaling $26.7 million in nonperforming assets. Net chargeoffs decreased in 2013 to $4.8 million, or 0.38% of average loans held for investment, compared with $38.1 million, or 3.26% of average loans held for investment, in the prior year. During the fourth quarter of 2010, the Company charged off $6.2 million of a $10.0 million loan composed of subordinated debt to a financial institution. In the first quarter of 2011, an additional writedown of $1.3 million was recorded on this loan. The Bank forgave $5.0 million of the loan and all unpaid interest and the remaining $5.0 million was exchanged for preferred stock with a liquidation preference value of $5.0 million in the institution. The Bank’s recorded investment of $2.5 million is carried in other assets on the Company’s balance sheet as of December 31, 2013. Periodic impairment evaluations are performed and management believes this asset is currently not impaired. The Company does not have any other loans to financial institutions. AtDecember 31, 2013 and 2012 the allowance for credit losses as a percentage of year end loans (excluding loans held for sale) was 1.73% and 2.30%, respectively. The 2013 and 2012 results were impacted by the continued weakness in the regional and national economies as well as the 2012 problem asset disposition plan.
| 50 | ||
Nonperforming Assets
(dollars in thousands)
| At December 31 | ||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Commercial nonaccrual loans, not restructured | $ | 2,542 | $ | 11,119 | $ | 15,773 | $ | 23,453 | $ | 46,788 | ||||||||||
| Commercial nonaccrual loans, restructured | 294 | 1,788 | 7,489 | 11,190 | 1,777 | |||||||||||||||
| Non-commercial nonaccrual loans | 4,071 | 4,605 | 9,852 | 8,537 | 4,772 | |||||||||||||||
| Total nonaccrual loans | 6,907 | 17,512 | 33,114 | 43,180 | 53,337 | |||||||||||||||
| Troubled debt restructurings, accruing | 2,491 | 3,804 | 7,406 | 7,378 | 1,442 | |||||||||||||||
| Total nonperforming loans | 9,398 | 21,316 | 40,520 | 50,558 | 54,779 | |||||||||||||||
| Real estate acquired in settlement of loans | 8,025 | 5,355 | 30,587 | 26,718 | 27,337 | |||||||||||||||
| Total nonperforming assets | $ | 17,423 | $ | 26,671 | $ | 71,107 | $ | 77,276 | $ | 82,116 | ||||||||||
Restructured loans, performing(1) | $ | 2,166 | $ | 1,220 | $ | 4,888 | $ | - | $ | - | ||||||||||
| Nonperforming loans to loans | ||||||||||||||||||||
| held for investment at end of year | 0.66 | % | 1.84 | % | 3.38 | % | 4.01 | % | 4.00 | % | ||||||||||
| Nonperforming assets to | ||||||||||||||||||||
| total assets at end of year | 0.89 | % | 1.56 | % | 4.10 | % | 4.27 | % | 4.39 | % | ||||||||||
(1) Loans restructured in a previous year without an interest rate concession or forgiveness of debt that are performing in accordance with their modified terms.
Nonperforming assets include nonaccrual loans, 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.
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 troubled debt restructured (“TDR”) loans to be impaired. All TDR loans are evaluated on an individual basis for level of impairment. Loans specifically identified and evaluated for impairment totaled $5.9 million and $16.4 million at December 31, 2013 and December 31, 2012, respectively, as summarized in the following tables (in thousands):
| Impaired Loans | ||||||||||||||||
| Unpaid | Average | YTD Interest | ||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||
| At December 31, 2013 | ||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||
| Commercial | $ | 1,210 | $ | 1,246 | $ | - | $ | 1,261 | $ | 30 | ||||||
| Real estate – construction | 480 | 480 | - | 514 | 34 | |||||||||||
| Real estate – mortgage | 338 | 369 | - | 358 | 7 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 2,028 | 2,095 | - | 2,133 | 71 | |||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||
| Commercial | 738 | 846 | 68 | 747 | 42 | |||||||||||
| Real estate – construction | 152 | 152 | 8 | 189 | 12 | |||||||||||
| Real estate – mortgage | 2,961 | 2,961 | 696 | 3,025 | 107 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 3,851 | 3,959 | 772 | 3,961 | 161 | |||||||||||
| Total impaired loans | ||||||||||||||||
| Commercial | 1,948 | 2,092 | 68 | 2,008 | 72 | |||||||||||
| Real estate – construction | 632 | 632 | 8 | 703 | 46 | |||||||||||
| Real estate – mortgage | 3,299 | 3,330 | 696 | 3,383 | 114 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | $ | 5,879 | $ | 6,054 | $ | 772 | $ | 6,094 | $ | 232 | ||||||
| 51 | ||
| Impaired Loans | ||||||||||||||||
| Unpaid | Average | YTD Interest | ||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||
| At December 31, 2012 | ||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||
| Commercial | $ | 4,013 | $ | 5,779 | $ | - | $ | 4,190 | $ | 211 | ||||||
| Real estate – construction | 1,940 | 2,681 | - | 2,856 | 15 | |||||||||||
| Real estate – mortgage | 5,066 | 5,746 | - | 5,415 | 252 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 11,019 | 14,206 | - | 12,461 | 478 | |||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||
| Commercial | 2,618 | 2,762 | 564 | 3,432 | 123 | |||||||||||
| Real estate – construction | 64 | 64 | 36 | 65 | 4 | |||||||||||
| Real estate – mortgage | 2,681 | 2,765 | 941 | 2,848 | 85 | |||||||||||
| Consumer | 18 | 18 | 18 | 13 | 1 | |||||||||||
| Total | 5,381 | 5,609 | 1,559 | 6,358 | 213 | |||||||||||
| Total impaired loans | ||||||||||||||||
| Commercial | 6,631 | 8,541 | 564 | 7,622 | 334 | |||||||||||
| Real estate – construction | 2,004 | 2,745 | 36 | 2,921 | 19 | |||||||||||
| Real estate – mortgage | 7,747 | 8,511 | 941 | 8,263 | 337 | |||||||||||
| Consumer | 18 | 18 | 18 | 13 | 1 | |||||||||||
| Total | $ | 16,400 | $ | 19,815 | $ | 1,559 | $ | 18,819 | $ | 691 | ||||||
Investment Activities
Our investment portfolio plays a primary role in the management of liquidity and interest rate sensitivity and, therefore, is managed in the context of the overall balance sheet. In 2013, the securities portfolio generated approximately 17.7% of our interest income and served as a necessary source of liquidity.
Management attempts to deploy investable funds into instruments that are expected to increase the overall return of the portfolio given the current assessment of economic and financial conditions, while maintaining acceptable levels of credit, interest rate and liquidity risk, as well as capital usage and risk.
The following tables present the carrying values, fair values, unrealized gains and losses, and weighted average yields and durations of our investment portfolio at December 31, 2013, 2012 and 2011, as well as the interval of maturities or repricings at December 31, 2013.
Investment Securities
(dollars in thousands)
�� | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||||||||||
| Amortized | Market | Amortized | Market | Amortized | Market | ||||||||||||||
| Cost | Value | Cost | Value | Cost | Value | ||||||||||||||
| U.S. Treasury securities | $ | - | $ | - | $ | 10,000 | $ | 10,000 | $ | - | $ | - | |||||||
| U.S. government agency securities | 77,823 | 71,341 | 67,090 | 67,037 | 39,000 | 39,147 | |||||||||||||
| Agency mortgage backed securities | 46,656 | 48,054 | 21,607 | 23,760 | 31,917 | 34,843 | |||||||||||||
| Collateralized mortgage obligations | 6,611 | 6,774 | 10,417 | 10,668 | 23,599 | 23,435 | |||||||||||||
| Commercial mortgage backed securities | 38,367 | 39,388 | 43,046 | 45,282 | 30,169 | 30,289 | |||||||||||||
| Corporate bonds | 110,772 | 114,266 | 150,589 | 155,487 | 118,573 | 114,676 | |||||||||||||
| Covered bonds | 49,937 | 52,628 | 44,924 | 48,618 | 61,414 | 62,526 | |||||||||||||
| State and municipal obligations | 16,985 | 16,750 | 17,978 | 18,712 | 19,371 | 19,508 | |||||||||||||
| Total debt securities | 347,151 | 349,201 | 365,651 | 379,564 | 324,043 | 324,424 | |||||||||||||
| Other equity | 17,660 | 17,787 | 13,460 | 14,251 | 12,960 | 13,387 | |||||||||||||
| Total securities | $ | 364,811 | $ | 366,988 | $ | 379,111 | $ | 393,815 | $ | 337,003 | $ | 337,811 | |||||||
| 52 | ||
Investment securities at December 31 consist of the following (dollars in thousands):
Securities Available for Sale
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Average Yield | Average Duration(1) | ||||||||||||
| 2013: | |||||||||||||||||
| U.S. government agency securities | $ | 49,094 | $ | - | $ | (4,562) | $ | 44,532 | 2.07 | % | 7.67 | ||||||
| Agency mortgage backed securities | 14,217 | 1,261 | - | 15,478 | 5.09 | 2.83 | |||||||||||
| Collateralized mortgage obligations | 6,611 | 163 | - | 6,774 | 5.63 | 2.60 | |||||||||||
| Commercial mortgage backed securities | 38,367 | 1,123 | (102) | 39,388 | 3.32 | 3.36 | |||||||||||
| Corporate bonds | 105,772 | 4,066 | (572) | 109,266 | �� | 3.83 | 4.13 | ||||||||||
| Covered bonds | 49,937 | 2,924 | (233) | 52,628 | 3.49 | 2.90 | |||||||||||
| State and municipal obligations | 15,836 | 161 | (301) | 15,696 | 6.46(2) | 7.94 | |||||||||||
| Total debt securities | 279,834 | 9,698 | (5,770) | 283,762 | 3.65(2) | 4.55 | |||||||||||
| Federal Home Loan Bank stock | 9,988 | - | - | 9,988 | |||||||||||||
| Other equity securities | 7,672 | 596 | (469) | 7,799 | |||||||||||||
| Total | $ | 297,494 | $ | 10,294 | $ | (6,239) | $ | 301,549 | |||||||||
| 2012: | |||||||||||||||||
| 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 | 4.19 | 10.58 | |||||||||||
| 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 | 3.41(2) | 4.47 | |||||||||||
| 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 | |||||||||
Securities Held to Maturity
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Average Yield | Average Duration(1) | ||||||||||||
| 2013: | |||||||||||||||||
| U.S. government agency securities | $ | 28,729 | $ | - | $ | (1,920) | $ | 26,809 | 2.13 | % | 6.73 | ||||||
| Agency mortgage backed securities | 32,439 | 171 | (34) | 32,576 | 2.64 | 5.90 | |||||||||||
| Corporate bonds | 5,000 | - | - | 5,000 | 7.63 | 9.61 | |||||||||||
| State and municipal obligations | 1,149 | - | (95) | 1,054 | 4.25(2) | 13.58 | |||||||||||
| Total | $ | 67,317 | $ | 171 | $ | (2,049) | $ | 65,439 | 2.81(2) | 6.66 | |||||||
(1) Average remaining duration to maturity, in years.
(2) Fully taxable-equivalent basis.
| 53 | ||
Investment Securities Portfolio Maturity Schedule
(dollars in thousands)
| At December 31, 2013 | ||||||
| Weighted | ||||||
| Market | Average | |||||
| Value | Yield(1) | |||||
| U. S. government agencies and mortgage backed obligations: | ||||||
| Within one year | $ | - | - | % | ||
| One to five years | 798 | 4.81 | ||||
| Five to ten years | 75,647 | 2.24 | ||||
| After ten years | 89,112 | 3.44 | ||||
| Total | 165,557 | 2.86 | ||||
| State and municipal obligations: | ||||||
| Within one year | - | - | ||||
| One to five years | 1,280 | 6.32 | ||||
| Five to ten years | 191 | 3.13 | ||||
| After ten years | 15,279 | 6.44 | ||||
| Total | 16,750 | 6.39 | ||||
| Corporate bonds and covered bonds: | ||||||
| Within one year | - | - | ||||
| One to five years | 103,994 | 3.81 | ||||
| Five to ten years | 62,900 | 3.90 | ||||
| After ten years | - | - | ||||
| Total | 166,894 | 3.84 | ||||
| Total debt securities | $ | 349,201 | 3.49 | % | ||
| (1) | The yield related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%. |
See also Note 4 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Information about the Company’s off-balance sheet risk exposure is presented in Note 11 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair values of financial instruments or other assets caused by changes in interest rates, currency exchange rates, or equity prices. Interest rate risk is the Company’s primary market risk and results from timing differences in the repricing of assets and liabilities, changes in relationships between rate indices, and the potential exercise of explicit or embedded options.
For a complete discussion on market risk and how the Company addresses this risk, see Item 7A of this Annual Report on Form 10-K.
Effects of Inflation
As discussed in Item 7A of this Annual Report on Form 10-K, the effect of interest rate movements in response to changes in the actual and perceived rates of inflation can materially impact the Bank operations, which rely on net interest margins as a major source of earnings. Noninterest expense, such as salaries and wages, occupancy and equipment are also negatively affected by inflation.
| 54 | ||
Application of Critical Accounting Policies
The Company's accounting policies are in accordance with accounting principles generally accepted in the United States and with general practice within the banking industry, and are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company's significant accounting policies are discussed in detail in Note 1 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
The preparation of the financial information contained in this Annual Report on Form 10-K 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 “Lending Activities” as well as in Note 5 of the Notes to Consolidated Financial Statements. Income taxes and the valuation allowance against deferred tax assets are discussed in Note 10 of the Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Significant accounting policies are described in Note 1 to the audited consolidated financial statements. These policies may involve significant judgments and estimates that have a material impact on the carrying value of certain assets and liabilities. Different assumptions made in the application of these policies could result in material changes in our financial position and results of operations.
Business combinations and method of accounting for loans acquired
We account for acquisitions under FASB ASC Topic 805,Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, and liabilities assumed, are recorded at fair value. No allowance for credit losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.
The acquired loans were segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings. Acquired credit-impaired loans (PCI loans) are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30,Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP) 03-3,Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the lives of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as acquired performing loans and lines of credit (consumer and commercial) are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated lives of the loans.
For further discussion of the Company's loan accounting and acquisitions, see Note 1—Summary of Significant Accounting Policies, Note 2— Business Combinations and Acquisitions and Note 5—Loans of the Notes to Consolidated Financial Statements.
| 55 | ||
Allowance for credit losses
The allowance for credit losses reflects the estimated losses that will result from the inability of the Bank's borrowers to make required loan payments. The allowance for credit losses is established for estimated credit losses through a provision for credit losses charged to earnings. Credit losses are charged against the allowance when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina.
In the fourth quarter 2013, the Company implemented enhancements to the methodology for estimating the allowance for credit losses. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed. In addition, commercial risk graded loans are now segregated between those that are real estate secured and those that are not. A more robust identification of qualitative factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The revisions did not have a material impact on the allowance recorded at December 31, 2013.
Allowance for credit losses for acquired loans
Subsequent to the acquisition date, decreases in cash flows expected to be received on FASB ASC Topic 310-30 acquired loans from the Company's initial estimates are recognized as impairment through the provision for credit losses. Probable and significant increases in cash flows (in a loan pool where an allowance for acquired credit losses was previously recorded) reduces the remaining allowance for acquired credit losses before recalculating the amount of accretable yield percentage for the loan pool in accordance with ASC 310-30.
Acquired loans that are not subject to FASB ASC Topic 310-30 are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on contractual cash flows over the estimated life of the loan. The allowance for these loans will be determined in a similar manner to the non-acquired credit losses.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors, including length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for credit losses. Subsequent declines in the fair value of real estate acquired in settlement of loans below the new cost basis are recorded through valuation adjustments. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate. Management reviews the value of real estate acquired in settlement of loans periodically and adjusts the values as appropriate.
| 56 | ||
Income taxes and deferred tax assets
Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available for sale securities, allowance for credit losses, write downs of real estate acquired in settlement of loans, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded in situations where it is "more likely than not" that a deferred tax asset is not realizable. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for our subsidiary bank. In addition, we evaluate the need for income tax reserves related to uncertain income tax positions but had no such reserves at December 31, 2013 or 2012.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk is considered to be the Bank’s interest rate risk which could potentially have the greatest impact on operating earnings. The Bank is not subject to other types of market risk, such as foreign currency exchange rate risk, commodity or equity price risk. Interest rate risk on our balance sheet arises from the maturity mismatch of interest-earning assets versus interest-bearing liabilities, as well as the potential for maturities to shorten or lengthen our interest-earning assets and interest-bearing liabilities. In addition, market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets, over interest expense on interest-bearing liabilities.
Interest rate risk management is a part of the Bank’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 CEO, Chief Financial Officer (“CFO”) and other senior executives. The Committee meets approximately monthly 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 Committees of the Company’s and the Bank’s Board of Directors.
The Bank uses several interest rate risk measurement tools provided by a national asset liability management consultant to help manage this risk. The Bank’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. Following is a summary of two different tools management uses on a quarterly basis to monitor and manage interest rate risk.
Earnings Simulation Modeling. Net income is affected by changes in the level of interest rates, the shape of the yield curve and the general market pressures affecting current market interest rates at the time of simulation. Many interest rate indices do not move uniformly, creating certain disunities between them. For example, the spread between a 30 day prime-based asset and a 30 day FHLB advance may not be uniform over time. The earnings simulation model projects changes in net interest income caused by the effect of changes in interest rates on interest-earning assets and interest-bearing liabilities. Simulation results are measured as a percentage change in net interest income compared to the static-rate or “base case” scenario. The model uses the Bank’s current balance sheet, but considers decreases in asset and liability volumes based on prepayment assumptions as well as rate changes. Rate changes are modeled gradually over a 12 month period, referred to as a “rate ramp.” The model projects only changes in interest income and expense and does not project changes in noninterest income, noninterest expense, provision for credit losses or the impact of changing tax rates. At December 31, 2013, net interest income simulation showed a positive 1.26% change from the base case in a 200 basis point ramped rising rate environment and a negative 0.32% change from the base case in a 100 basis point ramped declining rate environment. The projected changes in net interest income are within the Board of Directors’ guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate environment. However, management continually monitors signs of elevated risks and takes certain actions to limit these risks.
| 57 | ||
The following table summarizes the results of the Bank’s income simulation model as of December 31, 2013.
| Change in Net Interest Income | |||||
| Year 1 | Year 2 | ||||
| Change in Market Interest Rates: | |||||
| 200 basis point ramped increase | 1.26 | % | 3.29 | % | |
| Base case – no change | - | (1.35) | % | ||
| 100 basis point ramped decrease | (0.32) | % | (6.05) | % | |
Net Portfolio Value Analysis. Net portfolio value (“NPV”) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates with no effect given to any actions management might take to counter the effect of that interest rate movement. The following is a summary of the results of the report compiled by the Bank’s outside consultant using data and assumptions management provided as of December 31, 2013.
| Estimated Change in Net Portfolio Value | ||||||
| Amount in 000s | Percent | |||||
| Change in Market Interest Rates: | ||||||
| 200 basis point increase | $ | (7,997) | (3.61) | % | ||
| Base case – no change | - | - | ||||
| 100 basis point decrease | $ | (12,023) | (5.42) | % | ||
The preceding table indicates that, at December 31, 2013, in the event of a 200 basis point increase in prevailing market interest rates, NPV would be expected to decrease by $8.0 million, or 3.61% of the base case scenario value of $221.6 million. In the event of a decrease in prevailing market rates of 100 basis points, NPV would be expected to decline by $12.0 million, or 5.42% of the base case scenario value. The projected changes in NPV are within the Board of Directors’ guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate environment. However, management continually monitors signs of elevated risks and takes certain actions to limit these risks.
A primary objective of interest rate sensitivity management is to ensure the stability and quality of the Bank’s primary earnings component, net interest income. This process involves monitoring the Bank’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.
| 58 | ||
Interest Sensitivity Analysis
At December 31, 2013
(dollars in thousands, except ratios)
| Total | Total | |||||||||||||||
| 1 – 90 | 91 – 365 | Sensitive | Sensitive | |||||||||||||
| Day | Day | Within | Over | |||||||||||||
| Sensitive | Sensitive | One Year | One Year | Total | ||||||||||||
| Interest earning assets: | ||||||||||||||||
| Loans (excluding held for sale), net of unearned income | $ | 379,526 | $ | 158,169 | $ | 537,695 | $ | 879,008 | $ | 1,416,703 | ||||||
U. S. government agencies and mortgage backed obligations(1) | - | - | - | 169,457 | 169,457 | |||||||||||
State and municipal obligations(1) | 1,255 | - | 1,255 | 15,730 | 16,985 | |||||||||||
Corporate and covered bonds(1) | 20,970 | - | 20,970 | 139,739 | 160,709 | |||||||||||
Other investment securities(1) | 17,660 | - | 17,660 | - | 17,660 | |||||||||||
| Overnight funds | 3,915 | - | 3,915 | - | 3,915 | |||||||||||
| Total interest earning assets | 423,326 | 158,169 | 581,495 | 1,203,934 | 1,785,429 | |||||||||||
| Interest bearing liabilities: | ||||||||||||||||
| NOW | 439,624 | - | 439,624 | - | 439,624 | |||||||||||
| MMI | 359,174 | - | 359,174 | - | 359,174 | |||||||||||
| Savings | 62,353 | - | 62,353 | - | 62,353 | |||||||||||
| Time deposits | 187,961 | 202,967 | 390,928 | 60,938 | 451,866 | |||||||||||
| Federal funds purchased | 13,000 | 13,000 | 13,000 | |||||||||||||
| Junior subordinated notes | 25,774 | - | 25,774 | - | 25,774 | |||||||||||
| FHLB borrowings | 140,000 | 30,000 | 170,000 | - | 170,000 | |||||||||||
| Wholesale repurchase agreements | - | - | - | 21,000 | 21,000 | |||||||||||
| Total interest bearing liabilities | 1,227,886 | 232,967 | 1,460,853 | 81,938 | 1,542,791 | |||||||||||
| Interest sensitivity gap | $ | (804,560) | $ | (74,798) | $ | (879,358) | $ | 1,121,996 | $ | 242,638 | ||||||
| Ratio of interest sensitive assets to liabilities | 0.34 | 0.68 | 0.40 | 14.69 | 1.16 | |||||||||||
(1) At amortized cost.
The measurement of the Bank’s interest rate sensitivity, or “gap,” is a technique traditionally used in asset/liability management. The interest sensitivity gap is the difference between repricing assets and repricing liabilities for a particular time period. The table, “Interest Sensitivity Analysis,” indicates a ratio of rate sensitive assets to rate sensitive liabilities within one year at December 31, 2013, to be 0.40. This ratio indicates that a larger balance of liabilities, compared to assets, could potentially reprice during the upcoming 12 month period. Included in rate sensitive liabilities are certain deposit accounts (Negotiable Order of Withdrawal (“NOW”), Money Market Investment (“MMI”), and savings) that are subject to immediate withdrawal and repricing. These balances are presented in the category that management believes best identifies their actual repricing patterns. The overall risk to net interest income is also influenced by the Bank’s level of variable rate loans. These are loans with a contractual interest rate tied to an interest rate index, such as the prime rate. A portion of these loans may reprice on multiple occasions during a one-year period due to changes in the underlying interest rate index. Approximately 41.4% of the total loan portfolio at December 31, 2013 had a variable interest rate and reprices in accordance with the underlying rate index subject to terms of individual note agreements.
The table, “Market Sensitive Financial Instruments Maturities,” presents the Bank’s financial instruments that are considered to be sensitive to changes in interest rates, categorized by contractual maturities, average interest rates and estimated fair values as of December 31, 2013.
| 59 | ||
Market Sensitive Financial Instruments Maturities
(dollars in thousands)
| Contractual Maturities as of December 31, 2013 | ||||||||||||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | After Five Years | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||||
| Debt securities at amortized cost | $ | - | $ | 20,401 | $ | 39,946 | $ | 36,076 | $ | 4,025 | $ | 246,703 | $ | 347,151 | ||||||||
| Loans: | ||||||||||||||||||||||
| Fixed rate | 86,405 | 69,979 | 76,978 | 119,030 | 165,445 | 312,329 | 830,166 | |||||||||||||||
| Variable rate | 83,240 | 22,918 | 36,812 | 22,645 | 46,590 | 374,332 | 586,537 | |||||||||||||||
| Total | $ | 169,645 | $ | 113,298 | $ | 153,736 | $ | 177,751 | $ | 216,060 | $ | 933,364 | $ | 1,763,854 | ||||||||
| Financial liabilities: | ||||||||||||||||||||||
| NOW | $ | 439,624 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 439,624 | ||||||||
| MMI | 359,174 | - | - | - | - | - | 359,174 | |||||||||||||||
| Savings | 62,353 | - | - | - | - | - | 62,353 | |||||||||||||||
| Time deposits | 389,200 | 38,810 | 14,250 | 5,164 | 4,431 | 11 | 451,866 | |||||||||||||||
| Federal funds purchased | 13,000 | - | - | - | - | - | 13,000 | |||||||||||||||
| Wholesale repurchase agreements | - | - | 21,000 | - | - | - | 21,000 | |||||||||||||||
| FHLB borrowing | 170,000 | - | - | - | - | - | 170,000 | |||||||||||||||
| Junior subordinated notes | - | - | - | - | - | 25,774 | 25,774 | |||||||||||||||
| Total | $ | 1,433,351 | $ | 38,810 | $ | 35,250 | $ | 5,164 | $ | 4,431 | $ | 25,785 | $ | 1,542,791 | ||||||||
Market Sensitive Financial Instruments Maturities (continued)
(dollars in thousands)
| Average Interest Rate | Estimated Fair Value | |||||
| Financial assets: | ||||||
| Debt and equity securities | 3.54 | % | $ | 366,988 | ||
| Loans: | ||||||
| Fixed rate | 4.75 | 828,344 | ||||
| Variable rate | 3.84 | 585,765 | ||||
| Total loans | 1,414,109 | |||||
| Total | $ | 1,781,097 | ||||
| Financial liabilities: | ||||||
| NOW | 0.15 | $ | 439,624 | |||
| MMI | 0.18 | 359,174 | ||||
| Savings | 0.05 | 62,353 | ||||
| Time deposits | 0.48 | 453,091 | ||||
| Total interest-bearing deposits | 1,314,242 | |||||
| Wholesale repurchase agreements | 4.03 | 22,915 | ||||
| Federal funds purchased | 0.83 | 13,000 | ||||
| FHLB borrowing | 0.58 | 170,153 | ||||
| Junior subordinated notes | 1.71 | 11,279 | ||||
| Total | $ | 1,531,589 | ||||
| 60 | ||
Item 8. | Financial Statements and Supplementary Data |
QUARTERLY FINANCIAL INFORMATION– UNAUDITED
The following table sets forth, for the periods indicated, certain of the Company’s consolidated quarterly financial information. This information is derived from the Company’s unaudited financial statements, which include all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with the Company’s consolidated financial statements included elsewhere in this report. The results for any quarter are not necessarily indicative of results for any future period.
Quarterly Financial Data
(dollars in thousands, except per share data)
| 2013 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | |||||||||
| Interest income | $ | 18,547 | $ | 17,142 | $ | 16,706 | $ | 16,424 | |||||
| Interest expense | 1,634 | 1,346 | 1,296 | 1,367 | |||||||||
| Net interest income | 16,913 | 15,796 | 15,410 | 15,057 | |||||||||
| Provision for credit losses | 642 | 33 | 1,037 | 979 | |||||||||
| Net interest income after provision for credit losses | 16,271 | 15,763 | 14,373 | 14,078 | |||||||||
| Noninterest income | 4,069 | 4,497 | 4,215 | 4,673 | |||||||||
| Noninterest expense | 18,390 | 14,411 | 13,563 | 14,020 | |||||||||
| Income (loss) before income taxes | 1,950 | 5,849 | 5,025 | 4,731 | |||||||||
| Income tax expense (benefit) | 524 | 2,861 | (6,601) | - | |||||||||
| Net income (loss) | 1,426 | 2,988 | 11,626 | 4,731 | |||||||||
| Dividends and accretion on preferred stock | (237) | (208) | (679) | (730) | |||||||||
| Net income (loss) available to common shareholders | $ | 1,189 | $ | 2,780 | $ | 10,947 | $ | 4,001 | |||||
| Income (loss) per common share: | |||||||||||||
| Basic | $ | 0.04 | $ | 0.10 | $ | 0.38 | $ | 0.19 | |||||
| Diluted | $ | 0.04 | $ | 0.10 | $ | 0.38 | $ | 0.13 | |||||
| 2012 | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | |||||||||
| Interest income | $ | 16,898 | $ | 17,341 | $ | 18,319 | $ | 18,522 | |||||
| Interest expense | 1,505 | 1,663 | 1,996 | 2,350 | |||||||||
| Net interest income | 15,393 | 15,678 | 16,323 | 16,172 | |||||||||
| Provision for credit losses | 1,209 | 28,881 | 2,360 | 3,443 | |||||||||
| Net interest income after provision for credit losses | 14,184 | (13,203) | 13,963 | 12,729 | |||||||||
| Noninterest income | 4,710 | 4,185 | 3,985 | 4,008 | |||||||||
| Noninterest expense | 13,957 | 27,132 | 16,715 | 14,609 | |||||||||
| Income (loss) before income taxes | 4,937 | (36,150) | 1,233 | 2,128 | |||||||||
| Income tax expense (benefit) | 173 | (3,700) | 312 | 617 | |||||||||
| Net income (loss) | 4,764 | (32,450) | 921 | 1,511 | |||||||||
| Dividends and accretion on preferred stock | (730) | (729) | (729) | (730) | |||||||||
| Net income (loss) available to common shareholders | $ | 4,034 | $ | (33,179) | $ | 192 | $ | 781 | |||||
| Income (loss) per common share: | |||||||||||||
| Basic | $ | 0.26 | $ | (2.12) | $ | 0.01 | $ | 0.05 | |||||
| Diluted | $ | 0.19 | $ | (2.12) | $ | 0.01 | $ | 0.05 | |||||
| 61 | ||
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
NewBridge Bancorp
We have audited the accompanying consolidated balance sheets of NewBridge Bancorp and Subsidiary (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NewBridge Bancorp and Subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NewBridge Bancorp and Subsidiary’s internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)and our report dated March 12, 2014, expressed an unqualified opinion thereon.
/s/ DIXON HUGHES GOODMAN LLP
Raleigh, North Carolina
March 12, 2014
| 62 | ||
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
NewBridge Bancorp
We have audited NewBridge Bancorp and Subsidiary’s (the “Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Annual Report on Internal Control Over Financial Reporting, the Company acquired Security Savings Bank, SSB (SSB) on October 1, 2013, and management excluded from its assessment of internal control over financial reporting as of December 31, 2013 SSB’s internal control over financial reporting associated with total net assets of approximately $144.1 million and total interest income and noninterest income of approximately $1.5 million as of and for the year ended December 31, 2013. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of SSB.
In our opinion, NewBridge Bancorp and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control—Integrated Framework (1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of NewBridge Bancorp and Subsidiary as of December 31, 2013 and 2012, and for each of the years in the three-year period ended December 31, 2013, and our report dated March 12, 2014, expressed an unqualified opinion thereon.
/s/ DIXON HUGHES GOODMAN LLP
Raleigh, North Carolina
March 12, 2014
| 63 | ||
NewBridge Bancorp and Subsidiary
Consolidated Balance Sheets
December 31, 2013 and 2012
(dollars in thousands, except per share data)
| 2013 | 2012 | ||||||
| Assets | |||||||
| Cash and due from banks | $ | 29,598 | $ | 30,785 | |||
| Interest-bearing bank balances | 3,915 | 9,006 | |||||
| Loans held for sale | 3,530 | 9,464 | |||||
| Available for sale investment securities | 301,549 | 393,815 | |||||
| Held to maturity investment securities (market value $65,439 at December 31, 2013) | 67,317 | - | |||||
| Loans | 1,416,703 | 1,155,421 | |||||
| Less allowance for credit losses | (24,550) | (26,630) | |||||
| Net loans | 1,392,153 | 1,128,791 | |||||
| Premises and equipment | 44,249 | 35,570 | |||||
| Goodwill and other intangible assets | 7,843 | 3,074 | |||||
| Real estate acquired in settlement of loans | 8,025 | 5,355 | |||||
| Bank-owned life insurance | 48,161 | 45,262 | |||||
| Deferred tax assets | 36,779 | 29,538 | |||||
| Other assets | 22,113 | 18,047 | |||||
| Total assets | $ | 1,965,232 | $ | 1,708,707 | |||
| Liabilities | |||||||
| Noninterest-bearing deposits | $ | 240,979 | $ | 206,023 | |||
| NOW deposits | 439,624 | 424,720 | |||||
| Savings and money market deposits | 421,527 | 367,776 | |||||
| Time deposits | 451,866 | 333,974 | |||||
| Total deposits | 1,553,996 | 1,332,493 | |||||
| Federal Home Loan Bank borrowings | 170,000 | 113,000 | |||||
| Other borrowings | 59,774 | 46,774 | |||||
| Accrued expenses and other liabilities | 14,670 | 20,426 | |||||
| Total liabilities | 1,798,440 | 1,512,693 | |||||
| Shareholders’ Equity | |||||||
| Preferred stock – Authorized 30,000,000 shares no par value at 12/31/2013 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 12/31/2013 and 52,372 at 12/31/2012 | 15,000 | 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 | 210,297 | 78,279 | |||||
| Class A, no par value – Authorized 90,000,000 shares; issued and outstanding – 25,291,568 at 12/31/2013 | |||||||
| Class B, no par value – Authorized 10,000,000 shares; issued and outstanding – 3,186,748 at 12/31/2013 | |||||||
| Paid-in capital | - | 83,259 | |||||
| Directors’ deferred compensation plan | (468) | (468) | |||||
| Accumulated deficit | (56,880) | (75,697) | |||||
| Accumulated other comprehensive income (loss) | (1,157) | 2,284 | |||||
| Total shareholders’ equity | 166,792 | 196,014 | |||||
| Total liabilities and shareholders’ equity | $ | 1,965,232 | $ | 1,708,707 | |||
See notes to consolidated financial statements
| 64 | ||
NewBridge Bancorp and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2013, 2012 and 2011
(dollars in thousands, except per share data)
| 2013 | 2012 | 2011 | ||||||||
| Interest Income | ||||||||||
| Interest and fees on loans | $ | 56,617 | $ | 57,676 | $ | 65,871 | ||||
| Interest on taxable investment securities | 11,434 | 12,614 | 12,750 | |||||||
| Interest on tax-exempt investment securities | 745 | 750 | 764 | |||||||
| Interest-bearing bank balances and federal funds sold | 23 | 40 | 60 | |||||||
| Total Interest Income | 68,819 | 71,080 | 79,445 | |||||||
| Interest Expense | ||||||||||
| Deposits | 3,116 | 5,135 | 9,493 | |||||||
| Federal Home Loan Bank borrowings | 1,195 | 1,012 | 1,178 | |||||||
| Other borrowings | 1,332 | 1,367 | 1,648 | |||||||
| Total Interest Expense | 5,643 | 7,514 | 12,319 | |||||||
| Net Interest Income | 63,176 | 63,566 | 67,126 | |||||||
| Provision for credit losses | 2,691 | 35,893 | 16,785 | |||||||
| Net interest income after provision for credit losses | 60,485 | 27,673 | 50,341 | |||||||
| Noninterest Income | ||||||||||
| Retail banking | 10,228 | 9,739 | 9,925 | |||||||
| Wealth management services | 2,570 | 2,349 | 2,499 | |||||||
| Mortgage banking services | 1,644 | 2,636 | 1,728 | |||||||
| Gain on sales of investment securities | 736 | 3 | 2,026 | |||||||
| Bank-owned life insurance | 1,429 | 1,494 | 1,385 | |||||||
| Other | 847 | 667 | 830 | |||||||
| Total Noninterest Income | 17,454 | 16,888 | 18,393 | |||||||
| Noninterest Expense | ||||||||||
| Personnel | 32,104 | 29,354 | 28,806 | |||||||
| Occupancy | 4,208 | 5,171 | 3,987 | |||||||
| Furniture and equipment | 3,501 | 3,335 | 3,644 | |||||||
| Technology and data processing | 4,192 | 4,063 | 3,942 | |||||||
| Legal and professional | 2,683 | 3,029 | 2,892 | |||||||
| FDIC insurance | 1,565 | 1,770 | 2,399 | |||||||
| Real estate acquired in settlement of loans | (126) | 15,726 | 7,068 | |||||||
| Merger-related | 2,232 | - | - | |||||||
| Other operating | 10,025 | 9,965 | 9,869 | |||||||
| Total Noninterest Expense | 60,384 | 72,413 | 62,607 | |||||||
| Income (Loss) Before Income Taxes | 17,555 | (27,852) | 6,127 | |||||||
| Income Tax Expense (Benefit) | (3,216) | (2,598) | 1,449 | |||||||
| Net Income (Loss) | 20,771 | (25,254) | 4,678 | |||||||
| Dividends and accretion on preferred stock | (1,854) | (2,918) | (2,917) | |||||||
| Net Income (Loss) available to common shareholders | $ | 18,917 | $ | (28,172) | $ | 1,761 | ||||
| Income (Loss) Per Share – Basic | $ | 0.71 | $ | (1.80) | $ | 0.11 | ||||
| Income (Loss) Per Share – Diluted | $ | 0.65 | $ | (1.80) | $ | 0.11 | ||||
| Weighted Average Shares Outstanding | ||||||||||
| Basic | 26,643,820 | 15,655,868 | 15,655,868 | |||||||
| Diluted | 29,070,127 | 15,655,868 | 16,573,064 | |||||||
See notes to consolidated financial statements
| 65 | ||
NewBridge Bancorp and Subsidiary
Consolidated Statements of Comprehensive Income
Years ended December 31, 2013, 2012 and 2011
(dollars in thousands, except per share data)
| 2013 | 2012 | 2011 | ||||||||
| Net Income (Loss) | $ | 20,771 | $ | (25,254) | $ | 4,678 | ||||
| Other Comprehensive Income (Loss), Net of Tax: | ||||||||||
| Unrealized gains on securities: | ||||||||||
| Unrealized holding gains (losses) arising during period, net of tax of $(3,937), $5,488 and $(389), respectively | (5,975) | 8,411 | (595) | |||||||
| Reclassification adjustment for (gains) losses included in net income, net of tax of $291, $1 and $800, respectively | (445) | (2) | (1,226) | |||||||
| Defined benefit pension plans: | ||||||||||
| Pension obligation, net of tax of $1,905, $(231) and $(1,928), respectively | 3,114 | (354) | (2,955) | |||||||
| Adjustment to deferred tax asset resulting from North Carolina State income tax rate reduction | (135) | - | - | |||||||
| Total other comprehensive income (loss) | (3,441) | 8,055 | (4,776) | |||||||
| Comprehensive Income (Loss) | $ | 17,330 | $ | (17,199) | $ | (98) | ||||
See notes to consolidated financial statements
| 66 | ||
NewBridge Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2013, 2012 and 2011
(dollars in thousands, except share data)
| 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, 2010 | $ | 51,490 | $ | - | $ | - | 15,655,868 | - | $ | 78,279 | $ | 87,048 | $ | (618) | $ | (49,286) | $ | (995) | $ | 165,918 | ||||||||||||
| Net Income | 4,678 | 4,678 | ||||||||||||||||||||||||||||||
| Change in accumulated other | ||||||||||||||||||||||||||||||||
| comprehensive income (loss) net | ||||||||||||||||||||||||||||||||
| of deferred income taxes | (4,776) | (4,776) | ||||||||||||||||||||||||||||||
| Dividends and accretion on | ||||||||||||||||||||||||||||||||
| preferred stock | 299 | (2,917) | (2,618) | |||||||||||||||||||||||||||||
| Stock-based compensation | 142 | 142 | ||||||||||||||||||||||||||||||
| Distributions | 43 | 43 | ||||||||||||||||||||||||||||||
| Balances at December 31, 2011 | $ | 51,789 | $ | - | $ | - | 15,655,868 | - | $ | 78,279 | $ | 87,190 | $ | (575) | $ | (47,525) | $ | (5,771) | $ | 163,387 | ||||||||||||
| Net Loss | (25,254) | (25,254) | ||||||||||||||||||||||||||||||
| Change in accumulated other | ||||||||||||||||||||||||||||||||
| comprehensive income (loss) net | ||||||||||||||||||||||||||||||||
| of deferred income taxes | 8,055 | 8,055 | ||||||||||||||||||||||||||||||
| Preferred stock issued, net | 42,246 | 14,022 | (4,090) | 52,178 | ||||||||||||||||||||||||||||
| Dividends and accretion on | ||||||||||||||||||||||||||||||||
| preferred stock | 300 | (2,918) | (2,618) | |||||||||||||||||||||||||||||
| Stock-based compensation | 159 | 159 | ||||||||||||||||||||||||||||||
| Distributions | 107 | 107 | ||||||||||||||||||||||||||||||
| 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 | 20,771 | 20,771 | ||||||||||||||||||||||||||||||
| Change in accumulated other | ||||||||||||||||||||||||||||||||
| comprehensive income (loss) net | ||||||||||||||||||||||||||||||||
| of deferred income taxes | (3,441) | (3,441) | ||||||||||||||||||||||||||||||
| 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 | 283 | (1,854) | (1,571) | |||||||||||||||||||||||||||||
| Repurchase of stock warrant | (7,779) | (7,779) | ||||||||||||||||||||||||||||||
| Stock issuance pursuant to Restricted stock units | 34,438 | (52) | (52) | |||||||||||||||||||||||||||||
| Stock-based compensation | 439 | 439 | ||||||||||||||||||||||||||||||
| Balances at December 31, 2013 | $ | 15,000 | $ | - | $ | - | 25,291,568 | 3,186,748 | $ | 210,297 | $ | - | $ | (468) | $ | (56,880) | $ | (1,157) | $ | 166,792 | ||||||||||||
See notes to consolidated financial statements
| 67 | ||
NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2013, 2012 and 2011
(dollars in thousands)
| 2013 | 2012 | 2011 | ||||||||||
| Cash Flow from operating activities | ||||||||||||
| Net Income (Loss) | $ | 20,771 | $ | (25,254) | $ | 4,678 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 4,169 | 3,406 | 3,769 | |||||||||
| Securities premium amortization and discount accretion, net | 387 | 444 | (334) | |||||||||
| (Gain) loss on sale of securities | (736) | (3) | (2,026) | |||||||||
| Earnings on bank-owned life insurance | (1,456) | (1,535) | (1,385) | |||||||||
| Mortgage banking services | (1,644) | (2,636) | (1,728) | |||||||||
| Originations of loans held for sale | (98,322) | (156,880) | (119,914) | |||||||||
| Proceeds from sales of loans held for sale | 105,900 | 157,973 | 117,965 | |||||||||
| Accretion on acquired loans | (783) | - | - | |||||||||
| Deferred income tax expense (benefit) | (3,292) | (2,532) | 1,446 | |||||||||
| Writedowns and losses (gains) on sales of real estate acquired in settlement of loans, net | (779) | 14,520 | 5,238 | |||||||||
| Provision for credit losses | 2,691 | 35,893 | 16,785 | |||||||||
| Stock-based compensation | 439 | 159 | 142 | |||||||||
| (Increase) decrease in income taxes receivable | (102) | (218) | 1,160 | |||||||||
| (Increase) decrease in interest earned but not received | (206) | 624 | 605 | |||||||||
| Increase (decrease) in interest accrued but not paid | (244) | (212) | (328) | |||||||||
| Net (increase) decrease in other assets | (2,184) | (1,941) | (1,765) | |||||||||
| Net increase (decrease) in other liabilities | (2,111) | 1,065 | 2,895 | |||||||||
| Net cash provided by (used in) operating activities | 22,498 | 22,873 | 27,203 | |||||||||
| Cash Flow from investing activities | ||||||||||||
| Purchases of securities available for sale | (80,442) | (264,779) | (165,309) | |||||||||
| Purchases of securities held to maturity | (66,318) | - | - | |||||||||
| Proceeds from sales of securities available for sale | 65,711 | 6,724 | 41,235 | |||||||||
| Proceeds from maturities, prepayments and calls of securities | 99,240 | 216,007 | 107,528 | |||||||||
| Net (increase) decrease in loans | (141,306) | (56,346) | 20,737 | |||||||||
| Proceeds from sales of loans | - | 54,440 | 72,750 | |||||||||
| Cash received from acquisition | 55,205 | - | - | |||||||||
| Purchase of bank-owned life insurance | - | - | (12,000) | |||||||||
| Purchases of premises and equipment | (2,685) | (3,342) | (2,246) | |||||||||
| Proceeds from sales of premises and equipment | 702 | 1,181 | 1,408 | |||||||||
| Proceeds from sales of real estate acquired in settlement of loans | 9,163 | 19,205 | 11,549 | |||||||||
| Net cash provided by (used in) investing activities | (60,730) | (26,910) | 75,652 | |||||||||
| Cash Flow from financing activities | ||||||||||||
| Net increase (decrease) in demand deposits and NOW accounts | 9,865 | 17,100 | 11,719 | |||||||||
| Net increase (decrease) in savings and money market accounts | 11,122 | (43,873) | 56,143 | |||||||||
| Net increase (decrease) in time deposits | 32,283 | (59,410) | (102,182) | |||||||||
| Net increase (decrease) in borrowings from FHLB | 12,675 | 26,300 | (26,000) | |||||||||
| Net increase (decrease) in other borrowings | 13,000 | - | (15,000) | |||||||||
| Proceeds from issuance of preferred stock, net of expense | - | 52,337 | - | |||||||||
| Dividends paid | (1,571) | (2,618) | (2,618) | |||||||||
| 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 | - | - | |||||||||
| Expense of stock issuance | (117) | - | - | |||||||||
| Net cash provided by (used in) financing activities | 31,954 | (10,164) | (77,938) | |||||||||
| Increase (decrease) in cash and cash equivalents | (6,278) | (14,201) | 24,917 | |||||||||
| Cash and cash equivalents at the beginning of the years | 39,791 | 53,992 | 29,075 | |||||||||
| Cash and cash equivalents at the end of the years | $ | 33,513 | $ | 39,791 | $ | 53,992 | ||||||
See notes to consolidated financial statements
| 68 | ||
NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2013, 2012 and 2011
(dollars in thousands)
| 2013 | 2012 | 2011 | ||||||||
| Supplemental disclosures of cash flow information | ||||||||||
| Cash paid during the years for: | ||||||||||
| Interest | $ | 5,659 | $ | 7,726 | $ | 12,647 | ||||
| Income taxes | - | 250 | - | |||||||
| Supplemental disclosures of noncash transactions | ||||||||||
| Transfer of loans to real estate acquired in settlement of loans | $ | 6,968 | $ | 8,492 | $ | 20,656 | ||||
| Unrealized gains/(losses) on securities available for sale: | ||||||||||
| Change in securities available for sale | (10,648) | 13,896 | (3,010) | |||||||
| Change in deferred income taxes | 4,228 | (5,487) | 1,189 | |||||||
| Change in shareholders’ equity | 6,420 | (8,409) | 1,821 | |||||||
| Conversion of preferred stock | 56,268 | - | - | |||||||
See notes to consolidated financial statements
| 69 | ||
NewBridge Bancorp and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Note 1 – Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of NewBridge Bancorp (“Bancorp” or the “Company”) and its wholly owned subsidiary NewBridge Bank (the “Bank”).The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States (“GAAP”) and conform to practices within the financial services industry.All significant intercompany balances and transactions have been eliminated in consolidation.
Nature of operations
The Bank provides a variety of financial services to individual and corporate clients in North Carolina (“NC”).On October 1, 2013, theBank successfully completed the acquisition of Security Savings Bank, SSB of Southport, NC, a mutual savings bank with six branches serving Brunswick County. See Note 2 of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. As of December 31, 2013, the Bank operated 36 branches in Charlotte, Raleigh, the Cape Fear Region and the Piedmont Triad Region of NC. The majority of the Bank’s clients are located in Brunswick, Davidson, Forsyth, Guilford, Mecklenburg, New Hanover, Pender, Rockingham, Stokes and Wake Counties. The Bank’s primary deposit products are noninterest-bearing checking accounts, interest-bearing checking accounts, money market accounts, certificates of deposit and individual retirement accounts. Its primary lending products are commercial, real estate and consumer loans.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses, fair value of financial instruments, fair values of assets and liabilities acquired in business combinations, real estate acquired in settlement of loans, evaluating other than temporary impairment of investment securities, valuation of deferred tax assets, and pension plan assumptions.
In connection with the determination of the allowance for credit losses, the majority of the Bank’s loan portfolio consists of loans in the geographic areas cited above. The local economies of these areas depend heavily on the industrial, agricultural and service sectors. Accordingly, the ultimate collectability of a large portion of the Bank’s loan portfolio would be affected by changes in local economic conditions.
Business combinations
Business combinations are accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations.”Under the acquisition method, the acquiring entity in a business combination recognizes all of the acquired assets and assumed liabilities at their estimated fair values as of the date of acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including identified intangible assets, exceeds the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from contingencies must also be recognized at fair value if the fair value can be determined during the measurement period. Results of operations of an acquired business are included in the statement of earnings from the date of acquisition. Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
| 70 | ||
The acquired assets and assumed liabilities are recorded at estimated fair values. Management makes significant estimates and exercises significant judgment in accounting for business combinations. Management judgmentally assigns risk ratings to loans based on credit quality, appraisals and estimated collateral values, and estimated expected cash flows to measure fair values for loans. Real estate acquired in settlement of loans is valued based upon pending sales contracts and appraised values, adjusted for current market conditions. Core deposit intangibles are valued based on a weighted combination of the income and market approach where the income approach converts anticipated economic benefits to a present value and the market approach evaluates the market in which the asset is traded to find an indication of prices from actual transactions. Management uses quoted or current market prices to determine the fair value of investment securities. Fair values of deposits and borrowings are based on current market interest rates and are inclusive of any applicable prepayment penalties.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks and interest-bearing bank deposits. Cash and cash equivalents are defined as cash and short-term investments with maturities of three months or less at the time of acquisition.
Investment securities
Investment securities may be classified as held to maturity, available for sale or trading. The appropriate classification is initially decided at the time of purchase. Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or general economic conditions. These securities are carried at amortized cost. The sale of a security within three months of its maturity date or after the majority of the principal outstanding has been collected is considered a maturity for purposes of classification and disclosure.
Securities classified as available for sale or trading are reported as an asset on the consolidated balance sheets at their estimated fair value. As the fair value of available for sale securities changes, the changes are reported net of income tax as an element of other comprehensive income (“OCI”), except for impaired securities. When available for sale securities are sold, the unrealized gain or loss is reclassified from OCI to noninterest income. The changes in the fair values of trading securities are reported in noninterest income. Securities classified as available for sale are both equity and debt securities the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, decline in credit quality, and regulatory capital considerations.
Interest income is recognized based on the coupon rates and increased by accretion of discounts earned or decreased by the amortization of premiums paid over the contractual lives of the securities using methods that approximate the level yield method. For mortgage backed securities, estimates of prepayments are considered in the constant yield calculations.
The Company’s policy regarding other than temporary impairment of investment securities requires continuous monitoring. Individual investment securities with a fair market value that is materially less than its original cost over a continuous period of two quarters are evaluated for impairment during the subsequent quarter. The evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value.In evaluating whether there are any other than temporary impairment losses, management considers (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near term prospects of the issuer, (iii) the impact of changes in market interest rates, and (iv) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value and it is not more likely than not the Company would be required to sell the security.
Declines in the fair value of individual debt securities available for sale that are deemed to be other than temporary are reflected in earnings when identified. The fair value of the debt security then becomes the new cost basis. For individual debt securities where the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the other than temporary decline in fair value of the debt security related to (i) credit loss is recognized in earnings, and (ii) market or other factors is recognized in other comprehensive income or loss. Credit loss is recorded if the present value of cash flows is less than amortized cost.
| 71 | ||
For individual debt securities where the Company intends to sell the security or more likely than not will not recover all of its amortized cost, the other than temporary impairment is recognized in earnings equal to the entire difference between the security’s cost basis and its fair value at the balance sheet date. For individual debt securities for which a credit loss has been recognized in earnings, interest accruals and amortization and accretion of premiums and discounts are suspended when the credit loss is recognized. Interest received after accruals have been suspended is recognized on a cash basis.
The Bank is required to maintain certain levels of Federal Home Loan Bank (“FHLB”) of Atlanta stock based on various criteria established by the issuer.
Loans
Interest income on loans is accrued daily using methods that approximate the effective interest method and recognized over the terms of the loans. 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.
The acquired loans are segregated between those considered to be performing (“acquired performing”) and those with evidence of credit deterioration based on such factors as past due status, nonaccrual status and credit risk ratings.
In determining the acquisition date fair value of purchased credit-impaired (“PCI”) loans, and in subsequent accounting, the Company generally aggregates purchased loans into pools of loans with common risk characteristics within the following loan categories – one to four family residential loans other than junior liens, one to four family residential junior liens, construction and land development, farm land, commercial real estate (nonowner-occupied), commercial real estate (owner-occupied), commercial and industrial, and all other loan categories. Expected cash flows at the acquisition date in excess of the fair value of loans are referred to as the “accretable yield” and recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, significant increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
The difference between the fair value of an acquired performing loan pool and the contractual amounts due at the acquisition date (the “fair value discount”) is accreted into income over the estimated life of the pool. The Company’s policy for determining when to discontinue accruing interest on acquired performing loans and the subsequent accounting for such loans is essentially the same as the policy for originated loans described earlier.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Loan fees collected for the origination of loans less direct loan origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If the loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the interest method over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight-line basis over the contractual life of the loan commitment. Commitment fees based on a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period.
| 72 | ||
Troubled debt restructured loans
A troubled debt restructured (“TDR”) loan is a loan on which the Bank, for reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Bank would not otherwise consider. The loan terms that have been modified or restructured due to a borrower’s financial situation include, but are not limited to, the stated interest rate; extension of the maturity or renewal of the loan at an interest rate below current market; reduction in the face amount of the debt; and reduction in the accrued interest or other amounts due from the borrower. A TDR loan is also considered impaired. Generally, a loan that is modified at an effective market rate of interest may no longer be disclosed as a TDR loan in years subsequent to the restructuring if it is not impaired based on the terms specified by the restructuring agreement.
Allowance for credit losses
Credit risk is inherent in the business of extending loans and leases to borrowers. Like other financial institutions, the Company must maintain an adequate allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when Management believes that the contractual principal or interest will not be collected. Subsequent recoveries, if any, are credited to the allowance. The allowance is an amount believed adequate to absorb probable losses on existing loans that may become uncollectable, based on evaluation of the collectability of loans and prior credit loss experience together with other factors. The Company formally re-evaluates and establishes the appropriate level of the allowance for credit losses on a quarterly basis.
The Company’s allowance for credit loss methodology incorporates several quantitative and qualitative risk factors used to establish the appropriate allowance for credit losses at each reporting date. Quantitative factors include our historical loss experience, delinquency and chargeoff trends, collateral values, changes in the level of nonperforming loans and other factors. Qualitative factors include the economic condition of our operating markets, composition of the loan portfolio and the state of certain industries. Specific changes in the risk factors are based on actual loss experience, as well as perceived risk of similar groups of loans classified by collateral type, purpose and term. An internal one-year and five-year loss history are also incorporated into the allowance calculation model. Due to the credit concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina.
In the fourth quarter 2013, the Company implemented enhancements to the methodology for estimating the allowance for credit losses. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed. In addition, commercial risk graded loans are now segregated between those that are real estate secured and those that are not. A more robust identification of qualitative factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The revisions did not have a material impact on the allowance recorded at December 31, 2013.
While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the FDIC and state bank regulatory agencies, as an integral part of their examination processes, periodically review our subsidiary bank’s allowance for credit losses, and may require us to make additions to our allowance based on their judgment about information available to them at the time of their examinations. Management regularly reviews the assumptions and formulae used in determining the allowance and makes adjustments if required to reflect the current risk profile of the portfolio. The allowance consists of specific and general components. The specific allowance relates to impaired loans. In general, impaired loans include those where interest recognition has been suspended, loans that are more than 90 days delinquent but because of adequate collateral coverage, income continues to be recognized, and other loans not paying substantially according to the original contract terms. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan are lower than the carrying value of that loan, pursuant to FASB ASC 310,“Receivables.” Loans not collateral dependent are evaluated based on the expected future cash flows discounted at the original contractual interest rate. The amount to which the present value falls short of the current loan obligation is established as a reserve for that account or charged off.
| 73 | ||
Decreases in expected cash flows of PCI loans after the acquisition date are recognized by recording an allowance for credit loss. In pools where impairment has already been recognized, an increase in cash flows will result in a reversal of prior impairment. Management analyzes these acquired loan pools using various assessments of risk to determine and calculate an expected loss. The expected loss is derived using an estimate of a loss given default based upon the collateral type and/or specific review by loan officers. Trends are reviewed in terms of traditional credit metrics such as accrual status, past due status, and weighted average risk grade of the loans within each of the accounting pools. In addition, the relationship between the change in the unpaid principal balance and change in the fair value mark is assessed to correlate the directional consistency of the expected loss for each pool.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, through partial or total satisfaction of loans, is initially recorded at fair market value, less estimated costs to sell, which becomes the property’s new basis. At the date of acquisition, losses are charged to the allowance for credit losses. Expenses to maintain the property, subsequent writedowns, and gains or losses on sales of foreclosed properties are recorded as noninterest expense in the period they are incurred.
Premises and equipment
Premises and equipment are stated at cost (or at fair value for premises and equipment acquired in business combinations) less accumulated depreciation and amortization. The provision for depreciation and amortization is computed principally by the straight-line method over the estimated useful lives of the assets. Useful lives are estimated at 20 to40 years for buildings and three toten years for equipment. Leasehold improvements are amortized over the expected terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Expenditures for maintenance and repairs are charged to operations, and expenditures for major replacements and betterments are added to the premises and equipment accounts. The cost and accumulated depreciation of premises and equipment retired or sold are eliminated from the appropriate asset accounts at the time of retirement or sale, and the resulting gain or loss is reflected in current operations.
Goodwill and other intangible assets
Intangible assets consist of goodwill and core deposit intangibles that result from the acquisition of other banks or branches from other financial institutions. Core deposit intangibles represent the value of long-term deposit relationships acquired in these transactions. Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill assigned to that reporting unit is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment of goodwill assigned to that reporting unit.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has one reporting unit.
| 74 | ||
The Company will evaluate the carrying value of goodwill in the fourth quarter, with its first annual test date in the fourth quarter of 2014. Additionally, should the Company's future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required.
Core deposit intangibles, included in goodwill and other intangibles, are amortized over the estimated useful lives of the deposit accounts acquired (generally5 to10 years) on either (i) the straight-line method or (ii) an accelerated basis method which reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
Bank-owned life insurance
Bank owned life insurance is stated at its cash surrender value with changes recorded in other noninterest income. The face amount of the underlying policies’ death benefits was $102.7 million and $99.8 million as of December 31, 2013 and 2012, respectively, net of split dollar arrangements with the insured individuals. There are no loans outstanding against cash surrender values, and there are no restrictions as to the use of death proceeds.
Employee benefit plans
The Company's defined benefit pension and other post retirement plans are accounted for in accordance with FASB ASC 715, “Compensation — Retirement Benefits,” which requires the Company to recognize the funded status in its statement of financial position. The calculation of the obligations and related expenses under the plans require the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. See Note 17 for information regarding the defined benefit pension plan for information regarding the Company’s post retirement benefits plan. The expected costs of the plans are being expensed over the period that employees provide service.
Stock-based compensation
Stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related stock options or restricted stock units. This expense had no impact on the Company’s reported cash flows. The stock-based compensation expense is reported under personnel expense in the consolidated statements of income. To determine the amounts recorded in the financial statements, the fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model. For restricted stock units, the fair value is considered to be the market price on the date the restricted stock unit is granted.
Income taxes
Provisions for income taxes are based on taxes payable or refundable, for the current year (after exclusion of non-taxable income such as interest on state and municipal securities and bank-owned life insurance and non-deductible expenses) and deferred taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance is established against deferred tax assets when it is more likely than not that the assets will not be realized.
Per share data
Basic net income per share of common stock is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during each year. Diluted net income per share of common stock is computed by dividing net income available to common shareholders plus any adjustments to net income related to the issuance of dilutive potential common shares, comprised of convertible preferred stock, outstanding options and warrants to purchase shares of common stock and restricted stock units, by the weighted average number of shares of common stock outstanding during each year plus the number of dilutive potential common shares.
| 75 | ||
Sales of loans
Gains and losses on the sales of loans are accounted for as the difference between the proceeds received and the carrying value of the loans. Such gains or losses are recognized in the financial statements at the time of the sale. Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.
Off-balance sheet arrangements
In the ordinary course of business, the Bank enters into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Segment information
Operating segments are components of an enterprise with separate financial information available for use by the chief operating decision maker to allocate resources and to assess performance. The Company has determined that it has one significant operating segment, providing financial services through the Bank, including banking, mortgage, and investment services, to clients located principally in Brunswick, Davidson, Forsyth, Guilford, Mecklenburg, New Hanover, Pender, Rockingham, Stokes and Wake Counties in NC, and in the surrounding communities. The various products are those generally offered by community banks, and the allocation of resources is based on the overall performance of the Bank, rather than the individual branches or products.
There are no differences between the measurements used in reporting segment information and those used in the Company’s general-purpose financial statements.
Subsequent events
The Company has evaluated subsequent events for accounting and disclosure purposes through the date the financial statements are issued.
Recent accounting pronouncements
In January 2013, the FASB issued guidance within Accounting Standards Update (“ASU”) 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in ASU 2013-01 to Topic 210, “Balance Sheet,”clarify that the scope of ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities,” would apply to derivatives including bifurcated embedded derivatives, repurchase agreements and reverse agreements, and securities borrowing and securities lending transactions that are either offset or subject to a master netting arrangement. The amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance did not have a material impact on the Company’s consolidated statement of income, its consolidated balance sheet, or its consolidated cash flows.
In February 2013, the FASB issued ASU 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, 2013.
Reclassification
Certain items for 2012 and 2011 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.
| 76 | ||
Note2 –Business Combinations and Acquisitions
OnJune 13, 2013, the Companyentered into a definitive agreement to acquireSecurity Savings Bank, SSB, a mutual savings bank, headquartered in Southport, NC.The acquisition was completed on October 1, 2013. When Security Savings Bank, SSB merged with and into the Bank, this acquisition expanded the Bank’s coastal North Carolina presence with the addition of six branches and one loan production office in Brunswick County. No shares were issued or cash exchanged in the transaction.The following unaudited combined condensed consolidated pro forma financial information is based on the historical financial statements of the Company and its subsidiary and the historical financial statements of Security Savings Bank, SSB and has been prepared to illustrate the effects of the merger of the Bank and Security Savings Bank, SSB. The unaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2013 and the year ended December 31, 2012 give effect to the merger, accounted for under the acquisition method. Under the acquisition method, the assets and liabilities of Security Savings Bank, SSB, as of the effective date of the acquisition, are recorded at their respective fair values. For the acquisition of Security Savings Bank, SSB, estimated fair values of assets acquired and liabilities assumed are based on the information that is available, and the Company believes this information provides a reasonable basis for determining fair values. Management is currently evaluating these fair values, which are subject to revision as more detailed analyses are completed and additional information becomes available. Any changes resulting from the evaluation of these or other estimates as of the acquisition date may change the amount of the preliminary fair values recorded.
Theunaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2013 has been derived from the audited financial statements of the Company and the unaudited interim financial statements of Security Savings Bank, SSB. The unaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2012 has been derived from the audited financial statements of the Company and Security Savings Bank, SSB. The unaudited pro forma combined condensed consolidated statements of income give effect to the transaction as if it had been consummated on January 1, 2012. Certain reclassifications have been made to the historical financial statements of Security Savings Bank, SSB to conform to the presentation in the Company’s consolidated financial statements.
The unaudited pro forma combined condensed consolidated financial statements should be considered together with the historical statements of the Company and Security Savings Bank, SSB, including the respective notes to those statements. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the acquisition been consummated on January 1, 2012.
| 77 | ||
The following table presents the estimated fair value of the assets acquired and the liabilities assumed as of the acquisition date (in thousands):
| October 1, | ||||
| 2013 | ||||
| Fair value of assets acquired: | ||||
| Cash and cash equivalents | $ | 55,205 | ||
| Investment securities | 3,541 | |||
| Loans held for investment | 131,361 | |||
| Premises and equipment | 9,727 | |||
| Real estate acquired in settlement of loans | 4,086 | |||
| Net deferred tax asset | 1,945 | |||
| Goodwill | 4,117 | |||
| Core deposit intangible | 1,460 | |||
| Other assets | 1,790 | |||
| Total assets acquired | 213,232 | |||
| Fair value of liabilities assumed: | ||||
| Deposits | 167,939 | |||
| Federal Home Loan Bank borrowings | 44,324 | |||
| Other liabilities | 969 | |||
| Total liabilities assumed | 213,232 | |||
| Net assets acquired | $ | - | ||
PCI loans acquired totaled $60.0 million at estimated fair value, and acquired performing loans totaling $71.4 million at estimated fair value were not credit impaired.The gross contractual amount receivable for PCI loans and acquired performing loans was $88.3 million and $104.0 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected is $1.1 million.Goodwill recorded for Security Savings Bank, SSB represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. The acquisition was a taxable transaction. No cash was paid or stock issued in the acquisition.
| 78 | ||
NewBridge Bancorp (“Bancorp”) Combined with Security Savings Bank, SSB (“SSB”)
Unaudited Pro Forma Combined Condensed Consolidated Statement of Income
For the Twelve Months Ended December 31, 20131
(Dollars in thousands, except per share data)
| Bancorp | SSB | Reclassification | Pro Forma | Pro Forma | ||||||||||||||
| Historical | Historical | Adjustments | Adjustments | Combined | ||||||||||||||
| Interest Income | ||||||||||||||||||
| Loans, including fees | $ | 56,617 | $ | 6,028 | $ | - | $ | (473) | 4 | $ | 62,172 | |||||||
| Investment securities | 12,179 | 84 | - | - | 12,263 | |||||||||||||
| Interest-bearing bank balances | 23 | 67 | - | - | 90 | |||||||||||||
| Total Interest Income | 68,819 | 6,179 | - | (473) | 74,525 | |||||||||||||
| Interest Expense | ||||||||||||||||||
| Deposits | 3,116 | 829 | - | (114) | 5 | 3,831 | ||||||||||||
| Federal Home Loan Bank borrowings | 1,195 | 1,338 | - | (891) | 6 | 1,642 | ||||||||||||
| Other borrowings | 1,332 | - | - | - | 1,332 | |||||||||||||
| Total Interest Expense | 5,643 | 2,167 | - | (1,005) | 6,805 | |||||||||||||
| Net Interest Income | 63,176 | 4,012 | - | 532 | 67,720 | |||||||||||||
| Provision for Credit Losses | 2,691 | - | - | - | 2,691 | |||||||||||||
| Net Interest Income After Provision | 60,485 | 4,012 | 532 | 65,029 | ||||||||||||||
| Noninterest Income | ||||||||||||||||||
| Retail banking | 10,228 | 340 | - | - | 10,568 | |||||||||||||
| Mortgage banking services | 1,644 | 11 | - | - | 1,655 | |||||||||||||
| Wealth management services | 2,570 | - | - | - | 2,570 | |||||||||||||
| Gains on sales of investment securities | 736 | - | - | - | 736 | |||||||||||||
| Bank-owned life insurance | 1,429 | 45 | - | - | 1,474 | |||||||||||||
| Other | 847 | 152 | - | - | 999 | |||||||||||||
| Total Noninterest Income | 17,454 | 548 | - | 18,002 | ||||||||||||||
| Noninterest Expense | ||||||||||||||||||
| Personnel | 32,104 | 2,470 | - | 34,574 | ||||||||||||||
| Occupancy | 4,208 | 788 | (326) | 2 | - | 4,670 | ||||||||||||
| Furniture and equipment | 3,501 | - | 326 | 2 | - | 3,827 | ||||||||||||
| Technology and data processing | 4,192 | 700 | (219) | 3 | - | 4,673 | ||||||||||||
| Legal and professional | 2,683 | - | 219 | 3 | - | 2,902 | ||||||||||||
| FDIC insurance | 1,565 | 567 | - | - | 2,132 | |||||||||||||
| Real estate acquired in settlement of loans | (126) | 1,297 | - | - | 1,171 | |||||||||||||
| Amortization of core deposit intangibles | 809 | - | - | 261 | 7 | 1,070 | ||||||||||||
| Merger-related expense | 2,232 | - | - | (302) | 8 | 1,930 | ||||||||||||
| Other | 9,216 | 629 | - | - | 9,845 | |||||||||||||
| Total Noninterest Expense | 60,384 | 6,451 | - | (41) | 66,794 | |||||||||||||
| Net income (loss) before income taxes | 17,555 | (1,891) | - | 573 | 16,237 | |||||||||||||
| Income tax expense (benefit) | (3,216) | - | - | 199 | 9 | (3,017) | ||||||||||||
| Net Income (Loss) | 20,771 | (1,891) | - | 374 | 19,254 | |||||||||||||
| Dividends and accretion on preferred stock | (1,854) | - | - | - | (1,854) | |||||||||||||
| Net Income (Loss) available to common shareholders | $ | 18,917 | $ | (1,891) | $ | - | $ | 374 | $ | 17,400 | ||||||||
| 79 | ||
| Bancorp | Pro Forma | ||||||
| Historical | Combined | ||||||
| Earnings per share | |||||||
| Basic | $ | 0.71 | $ | 0.65 | |||
| Diluted | $ | 0.65 | $ | 0.60 | |||
| Weighted average shares outstanding | |||||||
| Basic | 26,643,820 | 26,643,820 | |||||
| Diluted | 29,070,127 | 29,070,127 | |||||
1 | Bancorp completed its acquisition of SSB on October 1, 2013. The pro forma combined condensed consolidated statement of income for the twelve months ended December 31, 2013 assumes the acquisition took place as of January 1, 2012. |
2 | Reclassifies furniture and equipment expense out of occupancy expense. |
3 | Reclassifies legal and professional fees out of technology and data processing. |
4 | Reflects accretion and amortization of loan purchase accounting adjustments. |
5 | Reflects amortization of deposit premium on acquired interest-bearing deposits. |
6 | Reflects amortization of Federal Home Loan Bank borrowings purchase accounting adjustment. |
7 | Reflects amortization of core deposit intangible on the acquired core deposit accounts. |
8 | Reflects elimination of direct, incremental costs. |
9 | Reflects income tax on adjustments at the effective rate of 34.65%. |
| 80 | ||
NewBridge Bancorp (“Bancorp”) Combined with Security Savings Bank, SSB (“SSB”)
Unaudited Pro Forma Combined Condensed Consolidated Statement of Income
For the Twelve Months Ended December 31, 20121
(Dollars in thousands, except per share data)
| Bancorp | SSB | Reclassification | Pro Forma | Pro Forma | ||||||||||||||
| Historical | Historical | Adjustments | Adjustments | Combined | ||||||||||||||
| Interest Income | ||||||||||||||||||
| Loans, including fees | $ | 57,676 | $ | 10,101 | $ | - | $ | (710) | 4 | $ | 67,067 | |||||||
| Investment securities | 13,364 | 271 | - | - | 13,635 | |||||||||||||
| Interest-bearing bank balances | 40 | 133 | - | - | 173 | |||||||||||||
| Total Interest Income | 71,080 | 10,505 | - | (710) | 80,875 | |||||||||||||
| Interest Expense | ||||||||||||||||||
| Deposits | 5,135 | 1,813 | - | (152) | 5 | 6,796 | ||||||||||||
| Federal Home Loan Bank borrowings | 1,012 | 1,944 | - | (1,360) | 6 | 1,596 | ||||||||||||
| Other borrowings | 1,367 | - | - | - | 1,367 | |||||||||||||
| Total Interest Expense | 7,514 | 3,757 | - | (1,512) | 9,759 | |||||||||||||
| Net Interest Income | 63,566 | 6,748 | - | 802 | 71,116 | |||||||||||||
| Provision for Credit Losses | 35,893 | 1,113 | - | - | 37,006 | |||||||||||||
| Net Interest Income After Provision | 27,673 | 5,635 | 802 | 34,110 | ||||||||||||||
| Noninterest Income | ||||||||||||||||||
| Retail banking | 9,739 | 602 | - | - | 10,341 | |||||||||||||
| Mortgage banking services | 2,636 | 37 | - | - | 2,673 | |||||||||||||
| Wealth management services | 2,349 | - | - | - | 2,349 | |||||||||||||
| Gains on sales of investment securities | 3 | - | - | - | 3 | |||||||||||||
| Bank-owned life insurance | 1,494 | 56 | - | - | 1,550 | |||||||||||||
| Other | 667 | 30 | - | - | 697 | |||||||||||||
| Total Noninterest Income | 16,888 | 725 | - | 17,613 | ||||||||||||||
| Noninterest Expense | ||||||||||||||||||
| Personnel | 29,354 | 4,092 | - | 33,446 | ||||||||||||||
| Occupancy | 5,171 | 1,351 | (589) | 2 | - | 5,933 | ||||||||||||
| Furniture and equipment | 3,335 | - | 589 | 2 | - | 3,924 | ||||||||||||
| Technology and data processing | 4,063 | 1,063 | (414) | 3 | - | 4,712 | ||||||||||||
| Legal and professional | 3,029 | - | 414 | 3 | - | 3,443 | ||||||||||||
| FDIC insurance | 1,770 | 888 | - | - | 2,658 | |||||||||||||
| Real estate acquired in settlement of loans | 15,726 | 5,444 | - | - | 21,170 | |||||||||||||
| Amortization of core deposit intangibles | 726 | - | - | 417 | 7 | 1,143 | ||||||||||||
| Other | 9,239 | 973 | - | - | 10,212 | |||||||||||||
| Total Noninterest Expense | 72,413 | 13,811 | - | 417 | 86,641 | |||||||||||||
| Net income (loss) before income taxes | (27,852) | (7,451) | - | 385 | (34,918) | |||||||||||||
| Income tax expense (benefit) | (2,598) | (4) | - | 173 | 8 | (2,429) | ||||||||||||
| Net Income (Loss) | (25,254) | (7,447) | - | 212 | (32,489) | |||||||||||||
| Dividends and accretion on preferred stock | (2,918) | - | - | - | (2,918) | |||||||||||||
| Net Income (Loss) available to common shareholders | $ | (28,172) | $ | (7,447) | $ | - | $ | 212 | $ | (35,407) | ||||||||
| 81 | ||
| Bancorp | Pro Forma | ||||||
| Historical | Combined | ||||||
| Earnings per share | |||||||
| Basic | $ | (1.80) | $ | (2.26) | |||
| Diluted | $ | (1.80) | $ | (2.26) | |||
| Weighted average shares outstanding | |||||||
| Basic | 15,655,868 | 15,655,868 | |||||
| Diluted | 15,655,868 | 15,655,868 |
1 | Bancorp completed its acquisition of SSB on October 1, 2013. The pro forma combined condensed consolidated statement of income for the twelve months ended December 31, 2012 assumes the acquisition took place as of January 1, 2012. |
2 | Reclassifies furniture and equipment expense out of occupancy expense. |
3 | Reclassifies legal and professional fees out of technology and data processing. |
4 | Reflects accretion and amortization of loan purchase accounting adjustments. |
5 | Reflects amortization of deposit premium on acquired interest-bearing deposits. |
6 | Reflects amortization of Federal Home Loan Bank borrowings purchase accounting adjustment. |
7 | Reflects amortization of core deposit intangible on the acquired core deposit accounts. |
8 | Reflects income tax on adjustments at the effective rate of 45.00%. |
| 82 | ||
OnNovember 1, 2013, the Company entered into a definitive agreement to acquire CapStone Bank(“CapStone”), a commercial bank headquartered in Raleigh, NC, with four branches and $382 million in assets as of December 31, 2013. The Company anticipates that the acquisition will be effected in the second quarter of 2014, subject to regulatory and shareholder approval. Under the terms of theAgreement and Plan of Combination,CapStone’s shareholders will receive 2.25 shares of the Company’s common stock for each share of CapStone common stock, or approximately8.1 million shares of its common stock for an aggregate purchase price of $59.9 million, based on the recent trading rangeof the Company’s common stock.
Merger-related expense in 2013 totaled $2.2 million. These costs are recorded as noninterest expense as incurred. There were no merger-related expenses in 2012 or 2011. The components of merger-related expense for 2013 are as follows (dollars in thousands):
| Personnel | $ | 337 | ||
| Furniture and equipment | 22 | |||
| Technology and data processing | 1,115 | |||
| Legal and professional | 456 | |||
| Marketing | 11 | |||
| Stationery, printing and supplies | 148 | |||
| Travel, dues and subscriptions | 71 | |||
| Other | 72 | |||
| Total merger-related expense | $ | 2,232 |
Note 3 – Restriction on cash and due from banks
The Bank’s gross reserve requirement with the Federal Reserve Bank of Richmond was $1.8 million and $7.3 million at December 31, 2013 and December 31, 2012, respectively. Due to vault cash that exceeded the gross reserve requirement, the balance to be maintained with the Federal Reserve Bank of Richmond was zero at both year ends.
| 83 | ||
Note 4 – Investment securities
Investment securities at December 31 consist of the following (in thousands):
| December 31, 2013 – Securities Available for Sale | |||||||||||||
| Gross | Gross | Estimated | |||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| Cost | Gains | Losses | Value | ||||||||||
| U.S. government agency securities | $ | 49,094 | $ | - | $ | (4,562) | $ | 44,532 | |||||
| Agency mortgage backed securities | 14,217 | 1,261 | - | 15,478 | |||||||||
| Collateralized mortgage obligations | 6,611 | 163 | - | 6,774 | |||||||||
| Commercial mortgage backed securities | 38,367 | 1,123 | (102) | 39,388 | |||||||||
| Corporate bonds | 105,772 | 4,066 | (572) | 109,266 | |||||||||
| Covered bonds | 49,937 | 2,924 | (233) | 52,628 | |||||||||
| State and municipal obligations | 15,836 | 161 | (301) | 15,696 | |||||||||
| Total debt securities | 279,834 | 9,698 | (5,770) | 283,762 | |||||||||
| Federal Home Loan Bank stock | 9,988 | - | - | 9,988 | |||||||||
| Other equity securities | 7,672 | 596 | (469) | 7,799 | |||||||||
| Total | $ | 297,494 | $ | 10,294 | $ | (6,239) | $ | 301,549 | |||||
| December 31, 2012 – Securities Available for Sale | |||||||||||||
| Gross | Gross | Estimated | |||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| Cost | Gains | Losses | Value | ||||||||||
| U.S. Treasury securities | $ | 10,000 | $ | - | $ | - | $ | 10,000 | |||||
| U.S. government agency securities | 67,090 | 72 | (125) | 67,037 | |||||||||
| Agency mortgage backed securities | 21,607 | 2,153 | - | 23,760 | |||||||||
| Collateralized mortgage obligations | 10,417 | 254 | (3) | 10,668 | |||||||||
| Commercial mortgage backed Securities | 43,046 | 2,318 | (82) | 45,282 | |||||||||
| Corporate bonds | 150,589 | 5,742 | (844) | 155,487 | |||||||||
| Covered bonds | 44,924 | 3,694 | - | 48,618 | |||||||||
| State and municipal obligations | 17,978 | 734 | - | 18,712 | |||||||||
| Total debt securities | 365,651 | 14,967 | (1,054) | 379,564 | |||||||||
| 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 | |||||
| December 31, 2013 – Securities Held to Maturity | |||||||||||||
| Gross | Gross | Estimated | |||||||||||
| Amortized | Unrealized | Unrealized | Fair | ||||||||||
| Cost | Gains | Losses | Value | ||||||||||
| U.S. government agency securities | $ | 28,729 | $ | - | $ | (1,920) | $ | 26,809 | |||||
| Agency mortgage backed securities | 32,439 | 171 | (34) | 32,576 | |||||||||
| Corporate bonds | 5,000 | - | - | 5,000 | |||||||||
| State and municipal obligations | 1,149 | - | (95) | 1,054 | |||||||||
| Total | $ | 67,317 | $ | 171 | $ | (2,049) | $ | 65,439 | |||||
The aggregate cost of the Company’s investment in FHLB stock totaled $9,988,000 at December 31, 2013. Because of the redemption provisions of this stock, the Company estimates that the fair value equals the cost of this investment and that it is not impaired.
The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2013 and 2012. There were45 securities in an unrealized loss position at December 31, 2013, compared to16 securities in an unrealized loss position at December 31, 2012. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are not likely to reverse unless and until market interest rates decline to the levels that existed when the securities were purchased. As of December 31, 2013, management of the Company does not have the intent to sell any of the securities classified as available for sale in an unrealized loss position and believes that it is more likely than not that it will not be necessary to sell any such securities before a recovery of cost; therefore, since none of the unrealized losses are material relative to the specific securities and do not relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.
| 84 | ||
| 2013 | Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||
| (In thousands) | |||||||||||||||||||
| Investment securities: | |||||||||||||||||||
| U.S. government agency securities | $ | 37,203 | $ | (2,544) | $ | 34,138 | $ | (3,938) | $ | 71,341 | $ | (6,482) | |||||||
| Agency mortgage backed securities | 5,439 | (34) | - | - | 5,439 | (34) | |||||||||||||
| Commercial mortgage backed securities | 3,134 | (84) | 1,875 | (18) | 5,009 | (102) | |||||||||||||
| Corporate bonds | 19,794 | (312) | 8,240 | (260) | 28,034 | (572) | |||||||||||||
| Covered bonds | 4,745 | (233) | - | - | 4,745 | (233) | |||||||||||||
| State and municipal obligations | 7,859 | (396) | - | - | 7,859 | (396) | |||||||||||||
| Equity securities | 1,428 | (469) | - | - | 1,428 | (469) | |||||||||||||
| Total temporarily impaired securities | $ | 79,602 | $ | (4,072) | $ | 44,253 | $ | (4,216) | $ | 123,855 | $ | (8,288) | |||||||
| 2012 | Less than 12 months | 12 months or more | Total | ||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||
| (In thousands) | |||||||||||||||||||
| Investment securities: | |||||||||||||||||||
| U.S. government agency securities | $ | 33,763 | $ | (125) | $ | - | $ | - | $ | 33,763 | $ | (125) | |||||||
| Collateralized mortgage obligations | - | - | 1,260 | (3) | 1,260 | (3) | |||||||||||||
| Commercial mortgage backed securities | 3,613 | (82) | - | - | 3,613 | (82) | |||||||||||||
| Corporate bonds | 2,481 | (19) | 19,161 | (825) | 21,642 | (844) | |||||||||||||
| Total temporarily impaired securities | $ | 39,857 | $ | (226) | $ | 20,421 | $ | (828) | $ | 60,278 | $ | (1,054) | |||||||
| 85 | ||
The amortized cost and estimated market value of debt securities at December 31, 2013, by contractual maturities, are shown in the accompanying schedule (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage backed securities have been included in maturity groupings based on the contractual maturity.
| Amortized | Estimated | ||||||
| Cost | Fair Value | ||||||
| Due in one year or less | $ | - | $ | - | |||
| Due after one through five years | 100,449 | 106,072 | |||||
| Due after five through ten years | 144,386 | 138,738 | |||||
| Due after ten years | 102,316 | 104,391 | |||||
| Total debt securities | $ | 347,151 | $ | 349,201 | |||
There were no maturities of held to maturity securities in 2013, 2012 or 2011. A recap of the maturities and sales of available for sale securities follows (in thousands):
| Years Ended December 31 | ||||||||||
| 2013 | 2012 | 2011 | ||||||||
| Proceeds from maturities | $ | 55,465 | $ | 131,400 | $ | - | ||||
| Proceeds from sales | 65,711 | 6,724 | 41,235 | |||||||
| Gross realized gains | 791 | 3 | 2,026 | |||||||
| Gross realized losses | (55) | - | - | |||||||
During 2013, the Company sold $64,976,000 of investments for a net gain of $736,000. During 2012, the Company sold $6,721,000 of investments for a gain of $3,000. Investment securities of $39,209,000 were sold during 2011, for a gain of $2,026,000.
Investment securities with amortized costs of approximately $106,163,000 and $94,612,000 and market values of approximately $101,091,000 and $97,419,000 as of December 31, 2013 and 2012, respectively, were pledged to secure public deposits and for other purposes. The Bank has obtained $50,000,000 in letters of credit, which are used in lieu of securities to pledge against public deposits.
| 86 | ||
Note 5 – Loans
Loans are summarized as follows (in thousands):
| December 31, 2013 | December 31, 2012 | ||||||||||||
| Loans – | |||||||||||||
| Excluding | PCI | Total | Total | ||||||||||
| PCI | Loans | Loans | Loans | ||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 290,953 | $ | 12,023 | $ | 302,976 | $ | 247,628 | |||||
| Secured by other nonfarm nonresidential properties | 234,355 | 4,707 | 239,062 | 186,864 | |||||||||
| Other commercial and industrial | 113,620 | 782 | 114,402 | 110,850 | |||||||||
| Total Commercial | 638,928 | 17,512 | 656,440 | 545,342 | |||||||||
| Construction loans – 1 to 4 family residential | 20,582 | - | 20,582 | 13,206 | |||||||||
| Other construction and land development | 90,575 | 4,239 | 94,814 | 62,460 | |||||||||
| Total Real estate – construction | 111,157 | 4,239 | 115,396 | 75,666 | |||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 334,127 | 24,205 | 358,332 | 277,820 | |||||||||
| Lines of credit secured by 1 to 4 family residential Properties | 205,524 | 7,588 | 213,112 | 200,465 | |||||||||
| Loans secured by 5 or more family residential properties | 38,735 | - | 38,735 | 23,116 | |||||||||
| Total Real estate – mortgage | 578,386 | 31,793 | 610,179 | 501,401 | |||||||||
| Credit cards | 7,659 | - | 7,659 | 7,610 | |||||||||
| Other revolving credit plans | 8,520 | 9 | 8,529 | 9,018 | |||||||||
| Other consumer loans | 7,787 | 2,462 | 10,249 | 10,263 | |||||||||
| Total Consumer | 23,966 | 2,471 | 26,437 | 26,891 | |||||||||
| All other loans | 8,251 | - | 8,251 | 6,121 | |||||||||
| Total Other | 8,251 | - | 8,251 | 6,121 | |||||||||
| Total loans | $ | 1,360,688 | $ | 56,015 | $ | 1,416,703 | $ | 1,155,421 | |||||
As of December 31, 2013 and December 31, 2012, loans totaling approximately $517,108,000 and $478,002,000, respectively, were pledged to secure the lines of credit with the FHLB and the Federal Reserve Bank of Richmond.
Nonperforming assets include nonaccrual loans, restructured loans, and real estate acquired in settlement of loans. Nonperforming assets are summarized as follows (in thousands):
| December 31 | |||||||
| 2013 | 2012 | ||||||
| Commercial nonaccrual loans, not restructured | $ | 2,542 | $ | 11,119 | |||
| Commercial nonaccrual loans, restructured | 294 | 1,788 | |||||
| Non-commercial nonaccrual loans, not restructured | 3,680 | 4,263 | |||||
| Non-commercial nonaccrual loans, restructured | 391 | 342 | |||||
| Total nonaccrual loans | 6,907 | 17,512 | |||||
| Troubled debt restructured, accruing | 2,491 | 3,804 | |||||
| Total nonperforming loans | 9,398 | 21,316 | |||||
| Real estate acquired in settlement of loans | 8,025 | 5,355 | |||||
| Total nonperforming assets | $ | 17,423 | $ | 26,671 | |||
Restructured loans, performing(1) | $ | 2,166 | $ | 1,220 | |||
Loans past due 90 days or more and still accruing(2) | $ | 2,887 | $ | 44 | |||
(1) Loans restructured in a previous year without an interest rate concession or forgiveness of debt that are performing in accordance with their modified terms.
(2)Loans past due 90 days or more and still accruing includes $2,834 and $0 of PCI loans as of December 31, 2013 and 2012, respectively.
Commitments to lend additional funds to borrowers whose loans have been restructured are not material at December 31, 2013 or 2012.
| 87 | ||
The aging of loans is summarized in the following table (in thousands):
| Loans – Excluding PCI | |||||||||||||||||||
| December 31, 2013 | 30-89 days | 90+ days | Nonaccrual | Total past due | Total loans | ||||||||||||||
| past due | past due | Loans | + nonaccrual | Current | Receivable | ||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,170 | $ | - | $ | 1,948 | $ | 3,118 | $ | 287,835 | $ | 290,953 | |||||||
| Secured by other nonfarm nonresidential properties | 256 | - | 745 | 1,001 | 233,354 | 234,355 | |||||||||||||
| Other commercial and industrial | 22 | - | 143 | 165 | 113,455 | 113,620 | |||||||||||||
| Total Commercial | 1,448 | - | 2,836 | 4,284 | 634,644 | 638,928 | |||||||||||||
| Construction loans – 1 to 4 family residential | 231 | - | - | 231 | 20,351 | 20,582 | |||||||||||||
| Other construction and land development | 368 | - | 719 | 1,087 | 89,488 | 90,575 | |||||||||||||
| Total Real estate – construction | 599 | - | 719 | 1,318 | 109,839 | 111,157 | |||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 4,691 | 41 | 2,326 | 7,058 | 327,069 | 334,127 | |||||||||||||
| Lines of credit secured by 1 to 4 family residential Properties | 1,825 | - | 899 | 2,724 | 202,800 | 205,524 | |||||||||||||
| Loans secured by 5 or more family residential properties | 951 | - | - | 951 | 37,784 | 38,735 | |||||||||||||
| Total Real estate – mortgage | 7,467 | 41 | 3,225 | 10,733 | 567,653 | 578,386 | |||||||||||||
| Credit cards | 92 | 12 | - | 104 | 7,555 | 7,659 | |||||||||||||
| Other revolving credit plans | 37 | - | 102 | 139 | 8,381 | 8,520 | |||||||||||||
| Other consumer loans | 229 | - | 25 | 254 | 7,533 | 7,787 | |||||||||||||
| Total Consumer | 358 | 12 | 127 | 497 | 23,469 | 23,966 | |||||||||||||
| All other loans | - | - | - | - | 8,251 | 8,251 | |||||||||||||
| Total Other | - | - | - | - | 8,251 | 8,251 | |||||||||||||
| Total loans | $ | 9,872 | $ | 53 | $ | 6,907 | $ | 16,832 | $ | 1,343,856 | $ | 1,360,688 | |||||||
| PCI Loans | |||||||||||||||||||
| December 31, 2013 | 30-89 days | 90+ days | Nonaccrual | Total past due | Total loans | ||||||||||||||
| past due | past due | Loans | + nonaccrual | Current | Receivable | ||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 95 | $ | - | $ | - | $ | 95 | $ | 11,928 | $ | 12,023 | |||||||
| Secured by other nonfarm nonresidential properties | - | 222 | - | 222 | 4,485 | 4,707 | |||||||||||||
| Other commercial and industrial | 15 | 13 | - | 28 | 754 | 782 | |||||||||||||
| Total Commercial | 110 | 235 | - | 345 | 17,167 | 17,512 | |||||||||||||
| Construction loans – 1 to 4 family residential | - | - | - | - | - | - | |||||||||||||
| Other construction and land development | 181 | 79 | - | 260 | 3,979 | 4,239 | |||||||||||||
| Total Real estate – construction | 181 | 79 | - | 260 | 3,979 | 4,239 | |||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 2,484 | 1,634 | - | 4,118 | 20,087 | 24,205 | |||||||||||||
| Lines of credit secured by 1 to 4 family residential Properties | 132 | 795 | - | 927 | 6,661 | 7,588 | |||||||||||||
| Loans secured by 5 or more family residential properties | - | - | - | - | - | - | |||||||||||||
| Total Real estate – mortgage | 2,616 | 2,429 | - | 5,045 | 26,748 | 31,793 | |||||||||||||
| Credit cards | - | - | - | - | - | - | |||||||||||||
| Other revolving credit plans | - | 1 | - | 1 | 8 | 9 | |||||||||||||
| Other consumer loans | 95 | 90 | - | 185 | 2,277 | 2,462 | |||||||||||||
| Total Consumer | 95 | 91 | - | 186 | 2,285 | 2,471 | |||||||||||||
| All other loans | - | - | - | - | - | - | |||||||||||||
| Total Other | - | - | - | - | - | - | |||||||||||||
| Total loans | $ | 3,002 | $ | 2,834 | $ | - | $ | 5,836 | $ | 50,179 | $ | 56,015 | |||||||
| 88 | ||
| Total Loans | |||||||||||||||||||
| December 31, 2013 | 30-89 days | 90+ days | Nonaccrual | Total past due | Total loans | ||||||||||||||
| past due | past due | Loans | + nonaccrual | Current | receivable | ||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,265 | $ | - | $ | 1,948 | $ | 3,213 | $ | 299,763 | $ | 302,976 | |||||||
| Secured by other nonfarm nonresidential properties | 256 | 222 | 745 | 1,223 | 237,839 | 239,062 | |||||||||||||
| Other commercial and industrial | 37 | 13 | 143 | 193 | 114,209 | 114,402 | |||||||||||||
| Total Commercial | 1,558 | 235 | 2,836 | 4,629 | 651,811 | 656,440 | |||||||||||||
| Construction loans – 1 to 4 family residential | 231 | - | - | 231 | 20,351 | 20,582 | |||||||||||||
| Other construction and land development | 549 | 79 | 719 | 1,347 | 93,467 | 94,814 | |||||||||||||
| Total Real estate – construction | 780 | 79 | 719 | 1,578 | 113,818 | 115,396 | |||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 7,175 | 1,675 | 2,326 | 11,176 | 347,156 | 358,332 | |||||||||||||
| Lines of credit secured by 1 to 4 family residential Properties | 1,957 | 795 | 899 | 3,651 | 209,461 | 213,112 | |||||||||||||
| Loans secured by 5 or more family residential properties | 951 | - | - | 951 | 37,784 | 38,735 | |||||||||||||
| Total Real estate – mortgage | 10,083 | 2,470 | 3,225 | 15,778 | 594,401 | 610,179 | |||||||||||||
| Credit cards | 92 | 12 | - | 104 | 7,555 | 7,659 | |||||||||||||
| Other revolving credit plans | 37 | 1 | 102 | 140 | 8,389 | 8,529 | |||||||||||||
| Other consumer loans | 324 | 90 | 25 | 439 | 9,810 | 10,249 | |||||||||||||
| Total Consumer | 453 | 103 | 127 | 683 | 25,754 | 26,437 | |||||||||||||
| All other loans | - | - | - | - | 8,251 | 8,251 | |||||||||||||
| Total Other | - | - | - | - | 8,251 | 8,251 | |||||||||||||
| Total loans | $ | 12,874 | $ | 2,887 | $ | 6,907 | $ | 22,668 | $ | 1,394,035 | $ | 1,416,703 | |||||||
| Loans | |||||||||||||||||||
| December 31, 2012 | 30-89 days | 90+ days | Nonaccrual | Total past due | Total loans | ||||||||||||||
| past due | past due | Loans | + nonaccrual | Current | receivable | ||||||||||||||
| Secured by owner-occupied nonfarm nonresidential properties | $ | 1,985 | $ | - | $ | 4,544 | $ | 6,529 | $ | 241,099 | $ | 247,628 | |||||||
| Secured by other nonfarm nonresidential properties | 1,034 | - | 1,560 | 2,594 | 184,270 | 186,864 | |||||||||||||
| Other commercial and industrial | 711 | - | 94 | 805 | 110,045 | 110,850 | |||||||||||||
| Total Commercial | 3,730 | - | 6,198 | 9,928 | 535,414 | 545,342 | |||||||||||||
| Construction loans – 1 to 4 family residential | - | - | 270 | 270 | 12,936 | 13,206 | |||||||||||||
| Other construction and land development | 525 | - | 2,259 | 2,784 | 59,676 | 62,460 | |||||||||||||
| Total Real estate – construction | 525 | - | 2,529 | 3,054 | 72,612 | 75,666 | |||||||||||||
| Closed-end loans secured by 1 to 4 family residential properties | 4,436 | - | 5,243 | 9,679 | 268,141 | 277,820 | |||||||||||||
| Lines of credit secured by 1 to 4 family residential Properties | 2,666 | - | 1,136 | 3,802 | 196,663 | 200,465 | |||||||||||||
| Loans secured by 5 or more family residential properties | 120 | - | 2,146 | 2,266 | 20,850 | 23,116 | |||||||||||||
| Total Real estate – mortgage | 7,222 | - | 8,525 | 15,747 | 485,654 | 501,401 | |||||||||||||
| Credit cards | 78 | 44 | - | 122 | 7,488 | 7,610 | |||||||||||||
| Other revolving credit plans | 85 | - | 112 | 197 | 8,821 | 9,018 | |||||||||||||
| Other consumer loans | 446 | - | 148 | 594 | 9,669 | 10,263 | |||||||||||||
| Total Consumer | 609 | 44 | 260 | 913 | 25,978 | 26,891 | |||||||||||||
| All other loans | - | - | - | - | 6,121 | 6,121 | |||||||||||||
| Total Other | - | - | - | - | 6,121 | 6,121 | |||||||||||||
| Total loans | $ | 12,086 | $ | 44 | $ | 17,512 | $ | 29,642 | $ | 1,125,779 | $ | 1,155,421 | |||||||
Loans specifically identified and individually evaluated for impairment totaled $5.9 million and $16.4 million at December 31, 2013 and December 31, 2012, respectively. Included in these balances were $5.3 million and $7.2 million, respectively, of loans classified as TDR loans. A modification of a loan’s terms constitutes a TDR if the Company grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as TDR loans, the Company further evaluates the loans as performing or nonperforming. Nonperforming TDR loans 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.
| 89 | ||
Modifications of terms for loans and their inclusion as TDR loans are based on individual facts and circumstances. Loan modifications that are included as TDR loans may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal payments, regardless of the period of the modification. The loans included in all loan classes as TDR loans at December 31, 2013 had either an interest rate modification or a deferral of one or more principal payments, which the Company considers are concessions. All loans designated as TDR loans were modified due to financial difficulties experienced by the borrower. At December 31, 2013, the Company had $2,166,000 of TDR loans which were restructured in a previous year without an interest rate concession or forgiveness of debt and are performing in accordance with their modified terms and are therefore excluded from nonperforming status.
The Company monitors the performance of modified loans on an ongoing basis. Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A modified loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. A loan on nonaccrual may be reclassified to accrual status following an evaluation and having experienced at least six consecutive months of payment performance in accordance with the restructured terms. All TDR loans are considered impaired.
The total number of loans that are TDR loans and the total outstanding recorded investment in TDR loans as of December 31 for the three years 2013, 2012, and 2011 are reflected in the table below (dollars in thousands):
| 2013 | 2012 | 2011 | ||||||||||||
| Number | Outstanding | Number | Outstanding | Number | Outstanding | |||||||||
| of | Recorded | of | Recorded | of | Recorded | |||||||||
| Loans | Investment | Loans | Investment | Loans | Investment | |||||||||
| 29 | $ | 5,342 | 36 | $ | 7,154 | 59 | $ | 20,021 | ||||||
The following tables provide information about TDR loans identified during the current and prior year (in thousands, except number of contracts):
| Modifications for the year ended | Modifications for the year ended | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||||||
| Post- | Post- | ||||||||||||||||
| Pre-Modification | Modification | Pre-Modification | Modification | ||||||||||||||
| Number | Outstanding | Outstanding | Number | Outstanding | Outstanding | ||||||||||||
| of | Recorded | Recorded | of | Recorded | Recorded | ||||||||||||
| Contracts | Investment | Investment | Contracts | Investment | Investment | ||||||||||||
| Troubled Debt Restructurings: | |||||||||||||||||
| Commercial | 2 | $ | 874 | $ | 407 | 10 | $ | 8,063 | $ | 6,378 | |||||||
| Real estate – construction | 1 | 460 | 460 | 3 | 321 | 309 | |||||||||||
| Real estate – mortgage | 3 | 323 | 323 | 5 | 747 | 763 | |||||||||||
| Total | 6 | $ | 1,657 | $ | 1,190 | 18 | $ | 9,131 | $ | 7,450 | |||||||
Six loans were modified and classified as TDR loans during 2013. One of the commercial loan modifications involved an interest rate concession, and two of the real estate - mortgage loan modifications involved deferrals of principal payments. The remaining modificationseach involved an extension of the term of the loan. A TDR loan 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 TDR loans restructured in the previous 12 months that subsequently defaulted during the current and prior year (in thousands, except number of contracts):
| 90 | ||
| Defaults during the year ended | Defaults during the year ended | ||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||
| Number | Number | ||||||||||
| of | Recorded | of | Recorded | ||||||||
| Contracts | Investment | Contracts | Investment | ||||||||
| TDR Defaults: | |||||||||||
| Commercial | - | $ | - | 3 | $ | 914 | |||||
| Real estate – mortgage | - | - | 1 | 117 | |||||||
| Total | - | $ | - | 4 | $ | 1,031 | |||||
Interest is not typically accrued on impaired loans, as they are normally in nonaccrual status. However, interest is accrued on performing TDR loans, and interest may be accrued in certain circumstances on nonperforming TDR loans, such as those that have an interest rate concession but are otherwise performing. Interest income on performing or nonperforming accruing TDR loans is recognized consistent with any other accruing loan. When a loan goes into nonaccrual status, any accrued interest is reversed out of interest income. If a nonaccrual loan is later returned to accruing status, future interest income is recognized on a method that approximates the effective yield to maturity based on the recorded amount of the loan. There are $2.5 million in nonperforming TDR loans at December 31, 2013,compared to $3.8 million at December 31, 2012, that are considered impaired and are accruing. The following table shows interest income recognized and received on these nonperforming TDR loans for the years ended December 31, 2013 and 2012 (in thousands):
| Year Ended | Year Ended | ||||||||||||
| December 31, 2013 | December 31, 2012 | ||||||||||||
| Recognized | Received | Recognized | Received | ||||||||||
| Interest Income: | |||||||||||||
| Commercial | $ | 28 | $ | 29 | $ | 108 | $ | 85 | |||||
| Real estate – construction | 3 | 3 | 16 | 12 | |||||||||
| Real estate – mortgage | 85 | 77 | 113 | 107 | |||||||||
| Consumer | - | - | 2 | 2 | |||||||||
| Total | $ | 116 | $ | 109 | $ | 239 | $ | 206 | |||||
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, other than TDR loans which are all evaluated individually, 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 TDR loans to be impaired.
Loans specifically identified and evaluated for level of impairment totaled $5.9 million and $16.4 million at December 31, 2013 and December 31, 2012, respectively, as displayed in the following tables (in thousands).
| Impaired Loans | ||||||||||||||||
| Unpaid | Average | YTD Interest | ||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||
| At December 31, 2013 | ||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||
| Commercial | $ | 1,210 | $ | 1,246 | $ | - | $ | 1,261 | $ | 30 | ||||||
| Real estate – construction | 480 | 480 | - | 514 | 34 | |||||||||||
| Real estate – mortgage | 338 | 369 | - | 358 | 7 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 2,028 | 2,095 | - | 2,133 | 71 | |||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||
| Commercial | 738 | 846 | 68 | 747 | 42 | |||||||||||
| Real estate – construction | 152 | 152 | 8 | 189 | 12 | |||||||||||
| Real estate – mortgage | 2,961 | 2,961 | 696 | 3,025 | 107 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 3,851 | 3,959 | 772 | 3,961 | 161 | |||||||||||
| Total impaired loans | ||||||||||||||||
| Commercial | 1,948 | 2,092 | 68 | 2,008 | 72 | |||||||||||
| Real estate – construction | 632 | 632 | 8 | 703 | 46 | |||||||||||
| Real estate – mortgage | 3,299 | 3,330 | 696 | 3,383 | 114 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | $ | 5,879 | $ | 6,054 | $ | 772 | $ | 6,094 | $ | 232 | ||||||
| 91 | ||
| Impaired Loans | ||||||||||||||||
| Unpaid | Average | YTD Interest | ||||||||||||||
| Recorded | Principal | Specific | Recorded | Income | ||||||||||||
| Balance | Balance | Allowance | Investment | Recognized | ||||||||||||
| At December 31, 2012 | ||||||||||||||||
| Loans without a specific valuation allowance | ||||||||||||||||
| Commercial | $ | 4,013 | $ | 5,779 | $ | - | $ | 4,190 | $ | 211 | ||||||
| Real estate – construction | 1,940 | 2,681 | - | 2,856 | 15 | |||||||||||
| Real estate – mortgage | 5,066 | 5,746 | - | 5,415 | 252 | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Total | 11,019 | 14,206 | - | 12,461 | 478 | |||||||||||
| Loans with a specific valuation allowance | ||||||||||||||||
| Commercial | 2,618 | 2,762 | 564 | 3,432 | 123 | |||||||||||
| Real estate – construction | 64 | 64 | 36 | 65 | 4 | |||||||||||
| Real estate – mortgage | 2,681 | 2,765 | 941 | 2,848 | 85 | |||||||||||
| Consumer | 18 | 18 | 18 | 13 | 1 | |||||||||||
| Total | 5,381 | 5,609 | 1,559 | 6,358 | 213 | |||||||||||
| Total impaired loans | ||||||||||||||||
| Commercial | 6,631 | 8,541 | 564 | 7,622 | 334 | |||||||||||
| Real estate – construction | 2,004 | 2,745 | 36 | 2,921 | 19 | |||||||||||
| Real estate – mortgage | 7,747 | 8,511 | 941 | 8,263 | 337 | |||||||||||
| Consumer | 18 | 18 | 18 | 13 | 1 | |||||||||||
| Total | $ | 16,400 | $ | 19,815 | $ | 1,559 | $ | 18,819 | $ | 691 | ||||||
The balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method for the years ended December 31, 2013 and 2012 were as follows:
| Real Estate - | Real Estate - | Total | |||||||||||||||||
| Allowance for credit losses: | Commercial | Construction | Mortgage | Consumer | Other | Allowance | |||||||||||||
| December 31, 2013 | |||||||||||||||||||
| Individually evaluated for impairment | $ | 68 | $ | 8 | $ | 696 | $ | - | $ | - | $ | 772 | |||||||
| Collectively evaluated for impairment | 9,684 | 5,029 | 7,742 | 1,153 | 170 | 23,778 | |||||||||||||
| Purchased credit-impaired | - | - | - | - | - | - | |||||||||||||
| Total ending allowance | $ | 9,752 | $ | 5,037 | $ | 8,438 | $ | 1,153 | $ | 170 | $ | 24,550 | |||||||
| 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 | |||||||
| 92 | ||
| Real Estate - | Real Estate - | Total | |||||||||||||||||
| Recorded investment in loans: | Commercial | Construction | Mortgage | Consumer | Other | Loans | |||||||||||||
| December 31, 2013 | |||||||||||||||||||
| Individually evaluated for impairment | $ | 1,948 | $ | 632 | $ | 3,299 | $ | - | $ | - | $ | 5,879 | |||||||
| Collectively evaluated for impairment | 636,980 | 110,525 | 575,087 | 23,966 | 8,251 | 1,354,809 | |||||||||||||
| Purchased credit-impaired | 17,512 | 4,239 | 31,793 | 2,471 | - | 56,015 | |||||||||||||
| Total recorded investment in loans | $ | 656,440 | $ | 115,396 | $ | 610,179 | $ | 26,437 | $ | 8,251 | $ | 1,416,703 | |||||||
| 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 | |||||||
The Bank’s policy for calculating and assigning specific reserves is applicable to all loans except for groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans in which impairment is collectively evaluated. The Bank generally considers loans 90 days or more past due and all nonaccrual loans to be impaired.
Management follows a loan review program designed to evaluate the credit risk in its loan portfolio. Sample selection is a combination of random selection and targeted selection based on total credit exposure and identified risk factors. The Internal Loan Review Department consists of qualified personnel knowledgeable in lending practices, bank policies and procedures and relevant laws and regulations. Internal Loan Review along with lending personnel utilize a system of nine risk grades in assessing and identifying the risk in the loan portfolio. The nine risk grades are minimal risk, low risk, low to moderate risk, moderate risk, pre-watch, special mention, substandard, doubtful, and loss. Through this loan review process, the Bank maintains an internally classified watch list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as pass, special mention, substandard, or doubtful as described below, and reserves are allocated based on management’s judgment and historical experience. The Management Credit Committee, consisting of the Chief Credit Officer, Chief Commercial Credit Officer, Senior Credit Officers, and the Loan Review Manager perform a monthly high level review of new and renewed production.
Pass – These loans are loans that have been assigned to one of the first five risk grades: minimal risk, low risk, low to moderate risk, moderate risk, or pre-watch.
Special Mention – These loans have potential weaknesses, which may, if not corrected or reversed, weaken the bank's credit position at some future date. The loans may not show problems as yet due to the borrower(s)’ apparent ability to service the debt, but special circumstances surround the loans of which the bank and management should be aware. This category may also include loans where repayment has not been satisfactory, where constant attention is required to maintain a set repayment schedule, or where terms of a loan agreement have been violated but the borrower still appears to have sufficient financial strength to avoid a lower rating. It also includes new loans that significantly depart from established loan policy and loans to weak borrowers with a strong guarantor.
Substandard – These are loans whose full final collectability may not appear to be a matter for serious doubt, but which nevertheless have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and require close supervision by management, such as unprofitable and/or undercapitalized businesses, inability to generate sufficient cash flow for debt reduction, deterioration of collateral and special problems arising from the particular condition of an industry. It also includes workout loans on a liquidation basis when a loss is not expected.
Doubtful – These are loans that have all the weakness inherent in one graded substandard with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and value, highly questionable. In addition, the extent of the potential loss may not be currently determinable. Most of these loans are considered impaired.
| 93 | ||
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). The remainder of the loan portfolio consists of non risk graded homogeneous types of loans. The following table reflects $33.1 million of PCI loans at December 31, 2013, resulting from the acquisition of Security Savings Bank, SSB on October 1, 2013. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit impaired. Loans – Excluding PCI at December 31, 2013, includes $12.0 million of loans from the acquisition that are not credit impaired.
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Loans – | Special | Sub- | Special | Sub- | |||||||||||||||||||||||||||
| excluding PCI | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 592,221 | $ | 30,962 | $ | 15,044 | $ | 302 | $ | 638,529 | $ | 506,849 | $ | 27,600 | $ | 30,160 | $ | 98 | $ | 564,707 | |||||||||||
| Real estate – construction | 82,483 | 8,628 | 2,288 | - | 93,399 | 48,029 | 9,744 | 5,422 | 182 | 63,377 | |||||||||||||||||||||
| Real estate – mortgage | 84,999 | 4,243 | 5,168 | - | 94,410 | 54,459 | 6,530 | 6,740 | 32 | 67,761 | |||||||||||||||||||||
| Consumer | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Other | 7,373 | - | - | - | 7,373 | 4,918 | - | 619 | - | 5,537 | |||||||||||||||||||||
| Total | $ | 767,076 | $ | 43,833 | $ | 22,500 | $ | 302 | $ | 833,711 | $ | 614,255 | $ | 43,874 | $ | 42,941 | $ | 312 | $ | 701,382 | |||||||||||
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | ||||||||||||||||||||||||||||
| PCI loans | Pass(1) | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 5,451 | $ | 4,831 | $ | 7,031 | $ | 135 | $ | 17,448 | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| Real estate – construction | 1,568 | 1,743 | 731 | 198 | 4,240 | - | - | - | - | - | |||||||||||||||||||||
| Real estate – mortgage | 2,811 | 2,361 | 5,739 | 499 | 11,410 | - | - | - | - | - | |||||||||||||||||||||
| Consumer | 2 | 1 | - | - | 3 | - | - | - | - | - | |||||||||||||||||||||
| Other | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||
| Total | $ | 9,832 | $ | 8,936 | $ | 13,501 | $ | 832 | $ | 33,101 | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
| December 31 | |||||||||||||||||||||||||||||||
| 2013 | 2012 | ||||||||||||||||||||||||||||||
| Special | Sub- | Special | Sub- | ||||||||||||||||||||||||||||
| Total loans | Pass | Mention | standard | Doubtful | Total | Pass | Mention | standard | Doubtful | Total | |||||||||||||||||||||
| Commercial | $ | 597,672 | $ | 35,793 | $ | 22,075 | $ | 437 | $ | 655,977 | $ | 506,849 | $ | 27,600 | $ | 30,160 | $ | 98 | $ | 564,707 | |||||||||||
| Real estate – construction | 84,051 | 10,371 | 3,019 | 198 | 97,639 | 48,029 | 9,744 | 5,422 | 182 | 63,377 | |||||||||||||||||||||
| Real estate – mortgage | 87,810 | 6,604 | 10,907 | 499 | 105,820 | 54,459 | 6,530 | 6,740 | 32 | 67,761 | |||||||||||||||||||||
| Consumer | 2 | 1 | - | - | 3 | - | - | - | - | - | |||||||||||||||||||||
| Other | 7,373 | - | - | - | 7,373 | 4,918 | - | 619 | - | 5,537 | |||||||||||||||||||||
| Total | $ | 776,908 | $ | 52,769 | $ | 36,001 | $ | 1,134 | $ | 866,812 | $ | 614,255 | $ | 43,874 | $ | 42,941 | $ | 312 | $ | 701,382 | |||||||||||
(1) PCI loans in the Pass category are in the pre-watch risk grade, which is the lowest risk grade in the Pass category.
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. The Bank’s allowance for credit losses is calculated and determined, at a minimum, each fiscal quarter end. The allowance for credit losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for credit losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment is based on discounted expected cash flows using the loan’s initial effective interest rate or the fair value of the collateral (less selling costs) for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. The Credit Management Committee of the Board of Directors has responsibility for oversight.
| 94 | ||
In the fourth quarter of 2013, the Company implemented enhancements to the methodology for estimating the allowance for credit losses. These enhancements included several refinements to the data accumulation processes for determining the probability of default and loss given default for the various classes of loans that are more statistically sound than those previously employed. In addition, commercial risk graded loans are now segregated between those that are real estate secured and those that are not. A more robust identification of qualitative factors has also been embedded in the estimation process. Management believes these enhancements will improve the precision of the process for estimating the allowance. The revisions did not have a material impact on the allowance recorded at December 31, 2013.
Management believes the allowance for credit losses of $24.5 million at December 31, 2013 is adequate to cover probable inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.
An analysis of the changes in the allowance for credit losses follows (in thousands):
| Beginning | Charge | Ending | ||||||||||||||
| Balance | Offs | Recoveries | Provision | Balance | ||||||||||||
| December 31, 2013 | ||||||||||||||||
| Loans – excluding PCI | ||||||||||||||||
| Commercial | $ | 11,348 | $ | 2,212 | $ | 1,260 | $ | (644) | $ | 9,752 | ||||||
| Real estate – construction | 5,753 | 1,308 | 496 | 96 | 5,037 | |||||||||||
| Real estate – mortgage | 8,746 | 3,552 | 1,544 | 1,700 | 8,438 | |||||||||||
| Consumer | 781 | 1,116 | 389 | 1,099 | 1,153 | |||||||||||
| Other | 2 | 338 | 66 | 440 | 170 | |||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||
| PCI loans | ||||||||||||||||
| Commercial | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Real estate – construction | - | - | - | - | - | |||||||||||
| Real estate – mortgage | - | - | - | - | - | |||||||||||
| Consumer | - | - | - | - | - | |||||||||||
| Other | - | - | - | - | - | |||||||||||
| Total | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||
| Total loans | ||||||||||||||||
| Commercial | $ | 11,348 | $ | 2,212 | $ | 1,260 | $ | (644) | $ | 9,752 | ||||||
| Real estate – construction | 5,753 | 1,308 | 496 | 96 | 5,037 | |||||||||||
| Real estate – mortgage | 8,746 | 3,552 | 1,544 | 1,700 | 8,438 | |||||||||||
| Consumer | 781 | 1,116 | 389 | 1,099 | 1,153 | |||||||||||
| Other | 2 | 338 | 66 | 440 | 170 | |||||||||||
| Total | $ | 26,630 | $ | 8,526 | $ | 3,755 | $ | 2,691 | $ | 24,550 | ||||||
| December 31, 2012 | ||||||||||||||||
| Commercial | $ | 8,526 | $ | 17,306 | $ | 879 | $ | 19,249 | $ | 11,348 | ||||||
| Real estate – construction | 6,467 | 8,774 | 423 | 7,637 | 5,753 | |||||||||||
| Real estate – mortgage | 11,953 | 13,337 | 766 | 9,364 | 8,746 | |||||||||||
| Consumer | 1,866 | 1,191 | 314 | (208) | 781 | |||||||||||
| Other | 32 | 3 | 122 | (149) | 2 | |||||||||||
| Total | $ | 28,844 | $ | 40,611 | $ | 2,504 | $ | 35,893 | $ | 26,630 | ||||||
| December 31, 2011 | ||||||||||||||||
| Commercial | $ | 9,952 | $ | 5,045 | $ | 495 | $ | 3,124 | $ | 8,526 | ||||||
| Real estate – construction | 6,865 | 3,985 | 534 | 3,053 | 6,467 | |||||||||||
| Real estate – mortgage | 9,056 | 6,822 | 443 | 9,276 | 11,953 | |||||||||||
| Consumer | 2,827 | 1,358 | 362 | 35 | 1,866 | |||||||||||
| Other | 52 | 1,387 | 70 | 1,297 | 32 | |||||||||||
| Total | $ | 28,752 | $ | 18,597 | $ | 1,904 | $ | 16,785 | $ | 28,844 | ||||||
| 95 | ||
Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired company.
In conjunction with the acquisition of Security Savings Bank, SSB on October 1, 2013, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):
| October 1, 2013 | ||||
| Contractual principal and interest at acquisition | $ | 88,335 | ||
| Nonaccretable difference | (13,552) | |||
| Expected cash flows at acquisition | 74,783 | |||
| Accretable yield | (15,147) | |||
| Basis in PCI loans at acquisition – estimated fair value | $ | 59,636 | ||
A summary of changes in the accretable yield for PCI loans for the twelve months ended December 31, 2013 follows (in thousands):
| Twelve Months Ended December 31, 2013 | ||||
| Accretable yield, beginning of period | $ | - | ||
| Additions | 15,147 | |||
| Accretion | (685) | |||
| Reclassification of nonaccretable difference due to improvement in expected cash flows | - | |||
| Other changes, net | - | |||
| Accretable yield, end of period | $ | 14,462 | ||
Note 6 – Premises and equipment
The following is a summary of premises and equipment (in thousands):
| December 31 | |||||||
| 2013 | 2012 | ||||||
| Land | $ | 17,617 | $ | 13,404 | |||
| Buildings | 25,370 | 21,047 | |||||
| Equipment | 27,887 | 27,481 | |||||
| Leasehold improvements | 2,469 | 1,902 | |||||
| Premises and equipment, total cost | 73,343 | 63,834 | |||||
| Less, accumulated depreciation | 29,094 | 28,264 | |||||
| Premises and equipment, net | $ | 44,249 | $ | 35,570 | |||
Depreciation and amortization expense amounting to $2,999,000, $2,796,000 and $3,044,000, for the years ended December 31, 2013, 2012, and 2011, respectively, is included in occupancy expense and furniture and equipment expense in the consolidated statements of income.
Note 7 – Deposits
The aggregate amount of certificates of deposit of $100,000 or more was approximately $273,544,000 and $172,675,000 at December 31, 2013 and 2012, respectively. The accompanying table presents the scheduled maturities of total time deposits at December 31, 2013 (in thousands).
| Years ending December 31, | ||||
| 2014 | $ | 389,200 | ||
| 2015 | 38,810 | |||
| 2016 | 14,250 | |||
| 2017 | 5,164 | |||
| 2018 | 4,431 | |||
| Thereafter | 11 | |||
| Total time deposits | $ | 451,866 |
| 96 | ||
Note 8 – Short-term borrowings and long-term debt
The following is a schedule of short-term borrowings and long-term debt (in thousands, except percentages):
| Maximum | ||||||||||||||||
| Balance | Interest Rate | Average | Outstanding | |||||||||||||
| as of | as of | Average | Interest | at Any | ||||||||||||
| December 31 | December 31 | Balance | Rate | Month End | ||||||||||||
| 2013 | ||||||||||||||||
| Federal funds purchased and repurchase agreements | $ | 34,000 | 2.81 | % | $ | 22,999 | 3.77 | % | $ | 34,000 | ||||||
| Junior subordinated notes | 25,774 | 1.71 | % | 25,774 | 1.76 | % | 25,774 | |||||||||
| FHLB borrowings | 170,000 | 0.58 | % | 120,136 | 0.99 | % | 170,000 | |||||||||
| Total | $ | 229,774 | $ | 168,909 | $ | 229,474 | ||||||||||
| 2012 | ||||||||||||||||
| Federal funds purchased and repurchase agreements | $ | 21,000 | 4.03 | % | $ | 21,104 | 4.01 | % | $ | 22,000 | ||||||
| Federal Reserve Bank borrowings | - | N/A | 79 | 0.75 | % | - | ||||||||||
| Junior subordinated notes | 25,774 | 1.77 | % | 25,774 | 1.96 | % | 25,774 | |||||||||
| FHLB borrowings | 113,000 | 0.94 | % | 79,941 | 1.27 | % | 125,700 | |||||||||
| Total | $ | 159,774 | $ | 126,898 | $ | 173,474 |
At December 31, 2013, the Bank had a $360,170,000 line of credit with the FHLB of Atlanta under which $220,000,000 was used. The amounts used consist of $170,000,000 in regular FHLB advances and a $50,000,000 letter of credit which the Bank uses as collateral securing deposits from municipalities. This line of credit is secured withFHLB stock, investment securities, qualifying residential one to four family first mortgage loans, qualifying multi-family first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. Based upon collateral pledged, as of December 31, 2013, the borrowing capacity under this line was $311,259,000, with $91,259,000 million available to be borrowed. In addition to the credit line at the FHLB of Atlanta, the Bank has borrowing capacity at the Federal Reserve Bank totaling $3,900,000, and has federal funds lines of $30,000,000 of which $13,000,000 was outstanding at December 31, 2013.
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. Retail repurchase agreements represent short-term borrowings by the Bank, with overnight maturities collateralized by securities issued by the United States Government or its agencies.
The Bank sold securities under an agreement to repurchase (a “wholesale repurchase agreement”) in 2006. This $21,000,000 transaction has a maturity date in 2016, became callable after one year, and has quarterly calls thereafter at a fixed rate of4.03%. The investment securities serving as collateral for this borrowing had a market value of approximately $25,556,000 at December 31, 2013. In 2007, the Bank entered into a $15,000,000 wholesale repurchase agreement, which was repaid in June, 2011.
| 97 | ||
FNB Financial Services Capital Trust I, a Delaware statutory trust (the “Trust,” wholly owned by the Company), issued and sold in a private placement, on August 26, 2005, $25,000,000 of the Trust’s floating rate preferred securities, with a liquidation amount of $1,000 per preferred security, bearing a variable rate of interest per annum, reset quarterly, equal to 3 monthLIBOR plus 1.46% (the “Preferred Securities”) and a maturity date ofSeptember 30, 2035. The Preferred Securities became callable after five years. Interest payment dates are March 30, June 30, September 30 and December 31 of each year. The Preferred Securities are fully and unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment. The entire proceeds from the sale by the Trust to the holders of the Preferred Securities was combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the “Common Securities”), and was used by the Trust to purchase $25,774,000 in principal amount of the Floating Rate Junior Subordinated Notes (the “Junior Subordinated Notes”) of the Company. The Company has not included the Trust in the consolidated financial statements. Currently, regulatory capital rules allow trust preferred securities to be included as a component of regulatory capital for the Company.
The maturities of short-term borrowings and long-term debt at December 31, 2013, are as follows (in thousands):
| Years Ending December 31 | ||||
| 2014 | $ | 183,000 | ||
| 2015 | - | |||
| 2016 | 21,000 | |||
| 2017 | - | |||
| 2018 | - | |||
| Thereafter | 25,774 | |||
| Total maturities of short-term borrowings and long-term debt | $ | 229,774 |
Note 9 – Other assets and other liabilities
The components of other assets and liabilities at December 31 are as follows (in thousands):
| 2013 | 2012 | ||||||
| Other assets: | |||||||
| Accrued interest receivable | $ | 6,392 | $ | 5,906 | |||
| Assets held in trusts for deferred compensation plans | 6,254 | 4,824 | |||||
| Retirement plans | 952 | - | |||||
| Other | 8,515 | 7,317 | |||||
| Total | $ | 22,113 | $ | 18,047 | |||
| Other liabilities: | |||||||
| Accrued interest payable | 355 | 371 | |||||
| Accrued compensation | 1,684 | 878 | |||||
| Dividends payable | 128 | 335 | |||||
| Retirement plans | 3,024 | 10,113 | |||||
| Deferred compensation | 6,737 | 5,216 | |||||
| Other | 2,742 | 3,513 | |||||
| Total | $ | 14,670 | $ | 20,426 |
Note 10 – Income taxes
The components of income tax expense (benefit) for the years ended December 31 are as follows (in thousands):
| 2013 | 2012 | 2011 | ||||||||
| Current tax (benefit) expense | ||||||||||
| Federal | $ | 76 | $ | (81) | $ | 135 | ||||
| State | - | 15 | (132) | |||||||
| Total current | 76 | (66) | 3 | |||||||
| Deferred tax (benefit) expense | ||||||||||
| Federal | (4,771) | (2,408) | 1,168 | |||||||
| State | 1,479 | (124) | 278 | |||||||
| Total deferred | (3,292) | (2,532) | 1,446 | |||||||
| Total income tax (benefit) expense | $ | (3,216) | $ | (2,598) | $ | 1,449 |
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 December 31, 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.
| 98 | ||
During the third quarter of 2013, North Carolina reduced its corporate income tax rate from6.90% to6.00% effective January 1, 2014, and to5.00% effective January 1, 2015. Further reductions to4.00% on January 1, 2016, and3.00% 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 beless than $300,000 each.
The significant components of deferred tax assets at December 31 are as follows (in thousands):
| 2013 | 2012 | ||||||
| Deferred tax assets: | |||||||
| Allowance for credit losses | $ | 9,428 | $ | 10,534 | |||
| Non-qualified deferred compensation plans | 2,293 | 2,297 | |||||
| Accrued compensation | 546 | 406 | |||||
| Writedowns on real estate acquired in settlement of loans | 800 | 2,434 | |||||
| Interest on nonaccrual loans | 227 | 1,135 | |||||
| Net operating losses | 28,201 | 29,006 | |||||
| Pension plans | 2,276 | 4,315 | |||||
| Contribution carryforward | 141 | 789 | |||||
| Other | 2,148 | 1,876 | |||||
| Valuation allowance | (571) | (11,067) | |||||
| Total | 45,489 | 41,725 | |||||
| Deferred tax liabilities: | |||||||
| Depreciable basis of property and equipment | (2,278) | (2,322) | |||||
| Deferred loan fees | (583) | (354) | |||||
| Net unrealized gain on available for sale securities | (1,577) | (5,806) | |||||
| Other | (4,272) | (3,705) | |||||
| Total | (8,710) | (12,187) | |||||
| Net deferred tax assets | $ | 36,779 | $ | 29,538 |
Federal net operating loss carryforwards of $1,503,000, $27,601,000, $13,108,000 and $31,252,000 expire in2028,2029,2030 and2032 respectively. State net economic loss carryforwards of $997,000, $5,825,000, $21,420,000, $7,134,000, $2,628,000, $32,098,000 and $553,000 expire in2022 through 2028, respectively.
The provision for income taxes differs from that computed by applying the federal statutory rate of35% as indicated in the following analysis (in thousands, except percentages):
| 2013 | 2012 | 2011 | ||||||||||
| Tax based on statutory rates | $ | 6,144 | $ | (9,748) | $ | 2,144 | ||||||
| Increase (decrease) resulting from: | ||||||||||||
| Effect of tax-exempt income | (343) | (337) | (306) | |||||||||
| State income taxes, net of federal benefit | 739 | (1,322) | 80 | |||||||||
| State tax rate reduction | 740 | - | - | |||||||||
| Income on bank-owned life insurance | (500) | (523) | (484) | |||||||||
| Change in valuation allowance | (10,496) | 10,030 | 228 | |||||||||
| Other, net | 500 | (698) | (213) | |||||||||
| Total provision (benefit) for income taxes | $ | (3,216) | $ | (2,598) | $ | 1,449 | ||||||
| Effective tax rate | (18.3) | % | 9.3 | % | 23.6 | % |
The Company’s federal and state income tax returns through 2009 have been examined and settled. The Company does not have any material uncertain tax positions.
Note 11 – Commitments and contingent liabilities
The minimum annual lease commitments under noncancelable operating leases in effect at December 31, 2013, are as follows (in thousands):
| Years Ending December 31 | ||||
| 2014 | $ | 1,747 | ||
| 2015 | 1,422 | |||
| 2016 | 813 | |||
| 2017 | 591 | |||
| 2018 | 205 | |||
| Thereafter | - | |||
| Total lease commitments | $ | 4,778 |
| 99 | ||
Payments for all operating leases amounted to approximately $1,859,000, $1,708,000 and $1,676,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
The Company’s consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. A summary of the contractual amounts of the Bank’s exposure to off-balance sheet risk at December 31 is as follows (in thousands):
| Contractual Amount | |||||||
| 2013 | 2012 | ||||||
| Loan commitments | $ | 317,520 | $ | 282,615 | |||
| Credit card lines | 25,569 | 24,584 | |||||
| Standby letters of credit | 2,841 | 3,242 | |||||
| Total commitments and contingent liabilities | $ | 345,930 | $ | 310,441 | |||
The Bank’s exposure to credit loss in the event of nonperformance by the counter party is equal to the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company and its subsidiary are involved at times in certain litigation arising in the normal course of business. In the opinion of management as of December 31, 2013, there is no pending or threatened litigation that will have a material effect on the Company's consolidated financial position or results of operations.
Note 12 – Related party transactions
The Bank had loans outstanding to officers and directors and their affiliated entities during each of the past two years. Such loans were made substantially on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers, and, at the time that they were made, did not involve more than the normal risks of collectability. The following table summarizes the transactions for the past two years (in thousands):
| 2013 | 2012 | ||||||
| Balance, beginning of year | $ | 7,142 | $ | 9,409 | |||
| Amounts removed as a result of director departures | (170) | (805) | |||||
| Advances (repayments), net, during year | 3,268 | (1,462) | |||||
| Balance, end of year | $ | 10,240 | $ | 7,142 |
Note 13– Other operating expenses
The components of other operating expense for the years ended December 31, 2013, 2012 and 2011 are as follows (in thousands):
| Years Ended December 31 | ||||||||||
| 2013 | 2012 | 2011 | ||||||||
| Other operating expenses: | ||||||||||
| Advertising | $ | 1,583 | $ | 1,506 | $ | 1,526 | ||||
| Bankcard expense | 488 | 450 | 621 | |||||||
| Postage | 743 | 746 | 750 | |||||||
| Stationery, printing and supplies | 487 | 420 | 492 | |||||||
| Telephone | 666 | 699 | 669 | |||||||
| Travel, dues and subscriptions | 1,001 | 823 | 725 | |||||||
| Directors’ fees | 601 | 517 | 599 | |||||||
| Franchise and privilege taxes | 403 | 430 | 530 | |||||||
| Deposit premium amortization | 809 | 726 | 726 | |||||||
| Other expense | 3,244 | 3,648 | 3,231 | |||||||
| Total | $ | 10,025 | $ | 9,965 | $ | 9,869 | ||||
| 100 | ||
Note 14 – Stock-based compensation
As of December 31, 2013, the Company’s Compensation Committee administered the Company’s five stock-based compensation plans, each of which was approved by the shareholders.
Three of these plans have expired, and while there are options outstanding that have not yet expired, no new awards may be granted thereunder. One of the active plans, which will expire in 2014, had750,000 shares of common stock authorized for issuance to plan participants in the form of stock options, restricted stock, restricted stock units, performance units and other stock-based awards. The other active plan, which will expire in 2016, had535,000 shares of common stock authorized for issuance to plan participants in the form of stock options, rights to receive restricted shares of common stock and/or performance units. At December 31, 2013, a total of861,573 shares were available for future grants under these two plans.
The Company recorded $439,000 of total stock-based compensation expense during 2013, compared to $159,000 in 2012 and $142,000 in 2011, or less than $0.02 per diluted share in each year.As of December 31, 2013, there was $922,000 of total unrecognized compensation expense related to stock options and restricted stock units. This expense will be fully amortized byDecember 31, 2015.
As of December 31, 2013,302,389 restricted stock units granted to certain senior officers were outstanding. The fair value of each restricted stock unit is the closing price of the Company’scommon stock on the dates they were granted. The number of units, date of grant and the fair value of each restricted stock unit are as follows:
| Grant | Fair Value | |||||
| Units | Date | Per Unit | ||||
| 37,668 | 02/09/11 | $ | 5.15 | |||
| 102,818 | 01/11/12 | 3.89 | ||||
| 9,710 | 07/25/12 | 4.10 | ||||
| 109,581 | 01/16/13 | 5.00 | ||||
| 2,390 | 03/06/13 | 5.91 | ||||
| 1,460 | 04/24/13 | 5.99 | ||||
| 35,359 | 07/24/13 | 8.80 | ||||
| 3,403 | 10/09/13 | 6.61 | ||||
| 302,389 |
The following is a summary of restricted stock unit activity and related information for the years ended December 31:
| 2013 | 2012 | 2011 | ||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||
| Average | Average | Average | ||||||||||||||
| Intrinsic | Intrinsic | Intrinsic | ||||||||||||||
| Units | Value | Units | Value | Units | Value | |||||||||||
| Outstanding - | ||||||||||||||||
| Beginning of year | 229,420 | $ | 4.31 | 98,094 | $ | 4.85 | 10,000 | $ | 2.18 | |||||||
| Granted | 168,754 | 5.85 | 131,326 | 3.91 | 88,094 | 5.15 | ||||||||||
| Vested | 47,660 | 4.53 | - | - | - | - | ||||||||||
| Forfeited | 48,125 | 4.61 | - | - | - | - | ||||||||||
| Outstanding – | ||||||||||||||||
| End of year | 302,389 | $ | 5.09 | 229,420 | $ | 4.31 | 98,094 | $ | 4.85 | |||||||
The following is a summary of stock option activity and related information for the years ended December 31:
| 2013 | 2012 | 2011 | |||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||
| Average | Average | Average | |||||||||||||||||
| Exercise | Exercise | Exercise | |||||||||||||||||
| Options | Price | Options | Price | Options | Price | ||||||||||||||
| Outstanding - | |||||||||||||||||||
| Beginning of year | 529,825 | $ | 14.55 | 658,465 | $ | 14.82 | 821,767 | $ | 14.23 | ||||||||||
| Granted | - | - | - | - | - | - | |||||||||||||
| Exercised | - | - | - | - | - | - | |||||||||||||
| Forfeited | (152,196) | 11.86 | (128,640) | 15.93 | (163,302) | 12.14 | |||||||||||||
| Outstanding – | |||||||||||||||||||
| End of year | 377,629 | $ | 15.64 | 529,825 | $ | 14.55 | 658,465 | $ | 14.82 | ||||||||||
| Exercisable – | |||||||||||||||||||
| End of year | 377,629 | $ | 15.64 | 529,825 | $ | 14.55 | 654,465 | $ | 14.86 | ||||||||||
All options were granted at fair value on date of grant, which is equal to the exercise price.
The following is a summary of information on outstanding and exercisable stock options at December 31, 2013:
| Options Outstanding | Options Exercisable | ||||||||||||
| Weighted Average | Weighted | Weighted | |||||||||||
| Range of | Remaining Contractual | Average Exercise | Average | ||||||||||
| Exercise Prices | Number | Life (Years) | Price | Number | Exercise Price | ||||||||
| $ 5.81 – 10.05 | 16,000 | 4.17 | $ | 9.07 | 16,000 | $ | 9.07 | ||||||
| $11.06 – 14.93 | 87,602 | 0.29 | 14.81 | 87,602 | 14.81 | ||||||||
| $15.42 – 16.93 | 208,777 | 1.49 | 15.98 | 208,777 | 15.98 | ||||||||
| $17.10 – 18.00 | 65,250 | 1.64 | 17.25 | 65,250 | 17.25 | ||||||||
| 377,629 | 1.35 | $ | 15.64 | 377,629 | $ | 15.64 | |||||||
| 101 | ||
Note 15 – Net income (loss) per share
The following is a reconciliation of the numerator and denominator of basic and diluted net income (loss) per share of common stock (in thousands, except share data):
| For the years ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Basic: | |||||||||||
| Net income (loss) available to common shareholders | $ | 18,917 | $ | (28,172) | $ | 1,761 | |||||
| Weighted average shares outstanding | 26,643,820 | 15,655,868 | 15,655,868 | ||||||||
| Net income (loss) per share, basic | $ | 0.71 | $ | (1.80) | $ | 0.11 | |||||
| Diluted: | |||||||||||
| Net income (loss) available to common shareholders | $ | 18,917 | $ | (28,172) | $ | 1,761 | |||||
| Weighted average shares outstanding | 26,643,820 | 15,655,868 | 15,655,868 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options | 357 | - | - | ||||||||
| Restricted stock units | 98,843 | - | 98,094 | ||||||||
| Warrant | 505,254 | - | 819,102 | ||||||||
| Convertible preferred stock | 1,821,853 | - | - | ||||||||
| Weighted average shares outstanding and dilutive potential shares outstanding | 29,070,127 | 15,655,868 | 16,573,064 | ||||||||
| Net income (loss) per share, diluted | $ | 0.65 | $ | (1.80) | $ | 0.11 | |||||
On December 31, 2013, there were374,629 options that were antidilutive since the exercise price exceeded the average market price for the year, and there were dilutive stock options of357, restricted stock units of98,843, warrant of505,254, and mandatorily convertible preferred stock of1,821,853. For the year ended December 31, 2012, there were529,825 options that were antidilutive since the exercise price exceeded the average market price for the year. The calculation of diluted net income (loss) per share for 2012 excludes the effect of normally dilutive restricted stock units of41,116, warrant of759,749, and mandatorily convertible preferred stock of1,101,191 as these were antidilutive as a result of the Company’s net loss for 2012. For the year ended December 31, 2011, there were658,465 options that were antidilutive since the exercise price exceeded the average market price for the year, and there were dilutive restricted stock units of98,094 and warrant of819,102.
See Note 21 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a description of the warrant.
| 102 | ||
Note16 – Parent company only
The Company’s principal asset is its investment in its subsidiary, the Bank. The Company’s principal source of income is dividends and management fees received from the Bank. The following presents condensed financial information of the Company:
| 2013 | 2012 | ||||||
| Condensed balance sheets (in thousands) | |||||||
| Assets | |||||||
| Cash and due from banks | $ | 5,936 | $ | 53,882 | |||
| Investment in wholly owned subsidiary | 186,712 | 168,363 | |||||
| Other assets | 787 | 644 | |||||
| Total assets | $ | 193,435 | $ | 222,889 | |||
| Liabilities | |||||||
| Junior subordinated notes | $ | 25,774 | $ | 25,774 | |||
| Other liabilities | 869 | 1,101 | |||||
| Shareholders’ equity | 166,792 | 196,014 | |||||
| Total liabilities and shareholders’ equity | $ | 193,435 | $ | 222,889 | |||
| 2013 | 2012 | 2011 | ||||||||
| Condensed statements of income | ||||||||||
| Management and service fees from subsidiary | $ | 619 | $ | 523 | $ | 1,762 | ||||
| Other operating expense | 1,199 | 972 | 1,110 | |||||||
| Income (loss) before equity in undistributed net income (loss) of subsidiary | (580) | (449) | 652 | |||||||
| Equity in undistributed net income (loss) of subsidiary | 21,351 | (24,805) | 4,026 | |||||||
| Net income (loss) | $ | 20,771 | $ | (25,254) | $ | 4,678 | ||||
| 2013 | 2012 | 2011 | ||||||||
| Condensed statements of cash flows | ||||||||||
| Cash flows from operating activities | ||||||||||
| Net income( loss) | $ | 20,771 | $ | (25,254) | $ | 4,678 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||
| Other changes, net | (375) | (425) | 721 | |||||||
| Change in investment in wholly owned subsidiary | (21,351) | 24,805 | (4,026) | |||||||
| Net cash (used in) provided by operating activities | (955) | (874) | 1,373 | |||||||
| Cash flows from investing activities | ||||||||||
| Investments in wholly owned subsidiary | - | - | - | |||||||
| Net cash provided by (used in) investing activities | - | - | - | |||||||
| Cash flows from financing activities | ||||||||||
| Payment to repurchase warrant | (7,857) | - | - | |||||||
| Proceeds from issuance of preferred stock | (38) | 52,337 | - | |||||||
| Payment to repurchase preferred stock | (37,472) | - | - | |||||||
| Other changes, net | (53) | - | - | |||||||
| Dividends paid | (1,571) | (2,618) | (2,618) | |||||||
| Net cash provided by (used in) financing activities | (46,991) | 49,719 | (2,618) | |||||||
| Increase (decrease) in cash | (47,946) | 48,845 | (1,245) | |||||||
| Cash at beginning of year | 53,882 | 5,037 | 6,282 | |||||||
| Cash at end of year | $ | 5,936 | $ | 53,882 | $ | 5,037 | ||||
Income derived from management and service fees from subsidiary reported in 2011 includes $1,154,000 for prior years.
| 103 | ||
Note17 – Employee benefit plans
The Company has three curtailed defined benefit retirement plans:
| ⋅ | A pension plan; | |
| ⋅ | A supplemental executive retirement plan (“SERP”) covering certain executive and former executive officers; and | |
| ⋅ | A retiree health benefit plan, which provides partial health insurance benefits for certain early retired employees. |
The disclosures presented represent combined information for all of the employee benefit plans. The retiree health benefit plan is not a material part of the aggregate information.
The pension plan and the SERP provide for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and a percentage of qualifying compensation during the employee’s final years of employment. Contributions to the pension plan are based upon the projected unit credited actuarial funding method and comply with the funding requirements of the Employee Retirement Income Security Act. Contributions prior to the curtailments were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets consist primarily of cash and cash equivalents, U.S. government securities, and other securities. The following tables outline the changes in these pension obligations, assets and funded status for the years ended December 31, 2013 and 2012, and the assumptions and components of net periodic pension cost for the two and three years in the period ended December 31, 2013 (dollars in thousands):
| 2013 | 2012 | ||||||
| Change in benefit obligation | |||||||
| Projected benefit obligation at beginning of year | $ | 31,652 | $ | 29,857 | |||
| Service cost | 20 | 26 | |||||
| Interest cost | 1,398 | 1,433 | |||||
| Actuarial (gain) loss | (3,342) | 1,624 | |||||
| Benefits paid | (1,559) | (1,288) | |||||
| Projected benefit obligation at end of year | 28,169 | 31,652 | |||||
| Change in plan assets | |||||||
| Fair value of plan assets at beginning of year | 21,538 | 19,725 | |||||
| Actual return on plan assets | 2,824 | 2,014 | |||||
| Employer contributions | 3,295 | 1,087 | |||||
| Benefits paid | (1,559) | (1,288) | |||||
| Fair value of plan assets at end of year | 26,098 | 21,538 | |||||
| Funded status at end of year | |||||||
| Plan assets less projected benefit obligation – pension liability | $ | (2,071) | $ | (10,114) | |||
| 2013 | 2012 | ||||||
| Amounts recognized in the consolidated balance sheets consist of: | |||||||
| Pension asset (liability) | $ | 952 | $ | (6,715) | |||
| SERP liability | (3,023) | (3,399) | |||||
| Deferred tax asset | 805 | 3,944 | |||||
| Accumulated comprehensive income, net | 3,597 | 6,614 | |||||
| Net amount recognized | $ | 2,331 | $ | 444 |
| 104 | ||
| 2013 | 2012 | 2011 | ||||||||||
| Components of net periodic pension cost | ||||||||||||
| Service | $ | 20 | $ | 26 | $ | 35 | ||||||
| Interest | 1,398 | 1,433 | 1,495 | |||||||||
| Expected return on plan assets | (1,826) | (1,605) | (1,662) | |||||||||
| Amortization of prior service cost | 1 | 1 | 1 | |||||||||
| Amortization of net (gain) loss | 641 | 564 | 135 | |||||||||
| Net periodic pension cost | $ | 234 | $ | 419 | $ | 4 | ||||||
| Weighted-average assumptions | ||||||||||||
| Discount rate | 5.50 | % | 4.50 | % | 4.90 | % | ||||||
| Expected return on plan assets | 8.00 | % | 8.25 | % | 8.25 | % | ||||||
| Rate of compensation increases | 4.00 | % | 4.00 | % | 4.00 | % | ||||||
Target asset allocations are established based on periodic evaluations of risk/reward under various economic scenarios and with varying asset class allocations. The near-term and long-term impact on obligations and asset values are projected and evaluated for funding and financial accounting implications. Actual allocation and investment performance is reviewed quarterly. The current target allocation ranges, along with the actual allocation as of December 31, 2013, are included in the accompanying table.
| Plan Assets | Market Value as of December 31, 2013 (in thousands) | Actual Allocation as of December 31, 2013 | Long-Term Allocation Target | ||||||
| Equity securities | $ | 15,923 | 61.0 | % | 40% - 75 | % | |||
| Debt securities | 10,175 | 39.0 | % | 25% - 60 | % | ||||
| Total | $ | 26,098 | 100 | % | 100 | % | |||
The fair value of the Company’s pension plan assets at December 31, 2013 and 2012 by asset category are reflected in the following table. The fair value hierarchy descriptions used to measure these plan assets are identified in Note19 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||
| Plan Assets at December 31, 2013 | |||||||||||||
| US equity securities | $ | 5,237 | $ | - | $ | - | $ | 5,237 | |||||
| Equity mutual funds | 10,574 | - | - | 10,574 | |||||||||
| Foreign equity securities | 112 | - | - | 112 | |||||||||
| Fixed income securities | - | 1,933 | - | 1,933 | |||||||||
| Fixed income mutual funds | - | 7,879 | - | 7,879 | |||||||||
| Cash and money market funds | 363 | - | - | 363 | |||||||||
| Total plan assets | $ | 16,286 | $ | 9,812 | $ | - | $ | 26,098 | |||||
| Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | Total | ||||||||||
| Plan Assets at December 31, 2012 | |||||||||||||
| US equity securities | $ | 5,222 | $ | - | $ | - | $ | 5,222 | |||||
| Equity mutual funds | 8,033 | - | - | 8,033 | |||||||||
| Fixed income securities | - | 2,588 | - | 2,588 | |||||||||
| Fixed income mutual funds | - | 4,687 | - | 4,687 | |||||||||
| Cash and money market funds | 1,008 | - | - | 1,008 | |||||||||
| Total plan assets | $ | 14,263 | $ | 7,275 | $ | - | $ | 21,538 | |||||
| 105 | ||
The Company’s policy is to amortize actuarial gains and losses over the average remaining service periods for active participants when the accumulated net gain or loss exceeds 10% of the projected benefit obligation or market value of plan assets, whichever is greater. The assumed expected return on assets considers the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in the portfolio and the expectation for future returns of each asset class. The expected return of each asset class is weighted based on the target allocation to develop the expected long-term rate of return on assets. This resulted in the selection of the8.25% rate used in 2011 and 2012 and the8.00% rate used in 2013 and to be used for 2014. The contributions for 2013 were approximately $3,295,000, and the required contributions for 2014 are expected to be approximately $306,000. The expected benefit payments for the next ten years are as follows: (i) 2014– $1,616,000, (ii) 2015– $1,626,000, (iii) 2016– $1,686,000, (iv) 2017– $1,843,000, (v) 2018– $1,857,000, and (vi) 2019 through 2023– $9,742,000.
The Company also has a separate contributory 401(k) savings plan covering substantially all employees. The 401(k) savings plan allows eligible employees to contribute up to a fixed percentage of their compensation, with the Bank matching a portion of each employee’s contribution. The Bank’s contributions were $832,000 for 2013, $751,000 for 2012 and $756,000 for 2011. The 401(k) savings plan contribution expense is reported under personnel expense in the consolidated statements of income.
A deferred compensation plan allows the directors of the Company to defer compensation. Each plan participant makes an annual election to either receive that year’s compensation or to defer receipt until his or her death, disability or retirement. The deferred compensation balances of this plan are maintained in a rabbi trust. The balances in the trust at December 31, 2013 and 2012 were $6,184,000 and $4,748,000, respectively. In addition, the Company has an inactive Director Deferred Compensation Plan that acquired shares of the Company’s Class A Common Stock in the open market. These shares are held in a trust at cost, as a component of shareholders’ equity, until distributed.
Note18 – Regulatory matters
The primary source of funds for dividends that may be paid by the Company to its shareholders is dividends received from the Bank plus cash on hand of $5.9 million as of December 31, 2013. Dividends paid by the Company and the Bank may be limited by minimum capital requirements imposed by banking regulators. At December 31, 2012, the Bank was restricted from paying dividends to the Company unless it received advance approval from the FDIC and the North Carolina Commissioner of Banks (the “Commissioner”). This restriction was removed in February of 2013.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that as of December 31, 2013, both the Company and the Bank met all capital adequacy requirements to which they are subject.
| 106 | ||
The most recent notification from the FDIC categorized the Bank as “well capitalized” under the Regulatory Framework for Prompt Corrective Action. There are no conditions or events since that notification that management believes have changed the Bank’s category. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the accompanying table (dollars in thousands).
| Actual | For Capital Adequacy Purposes | To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||
| Amount | Percentages | Amount | Percentages | Amount | Percentages | ||||||||||||||||
| December 31, 2013 | |||||||||||||||||||||
| Total Capital (To Risk-Weighted Assets) | |||||||||||||||||||||
| Consolidated | $ | 177,774 | 11.70 | % | $ | 121,540 | ≥8.0 | % | N/A | ||||||||||||
| Bank | 171,974 | 11.33 | 121,481 | ≥8.0 | $ | 151,779 | ≥10.0 | % | |||||||||||||
| Tier 1 Capital (To Risk-Weighted Assets) | |||||||||||||||||||||
| Consolidated | 158,658 | 10.44 | 60,770 | ≥4.0 | N/A | ||||||||||||||||
| Bank | 152,867 | 10.07 | 60,741 | ≥4.0 | 91,067 | ≥6.0 | % | ||||||||||||||
| Tier 1 Capital (To Average Assets) | |||||||||||||||||||||
| Consolidated | 158,658 | 8.33 | 76,218 | ≥4.0 | N/A | ||||||||||||||||
| Bank | 152,867 | 8.03 | 76,173 | ≥4.0 | 95,216 | ≥5.0 | % | ||||||||||||||
| December 31, 2012 | |||||||||||||||||||||
| Total Capital (To Risk-Weighted Assets) | |||||||||||||||||||||
| Consolidated | $ | 219,803 | 16.48 | % | $ | 106,719 | ≥8.0 | % | N/A | ||||||||||||
| Bank | 164,817 | 12.38 | 106,543 | ≥8.0 | $ | 133,178 | ≥10.0 | % | |||||||||||||
| Tier 1 Capital (To Risk-Weighted Assets) | |||||||||||||||||||||
| Consolidated | 167,203 | 12.53 | 53,360 | ≥4.0 | N/A | ||||||||||||||||
| Bank | 147,690 | 11.09 | 53,271 | ≥4.0 | 79,907 | ≥6.0 | % | ||||||||||||||
| Tier 1 Capital (To Average Assets) | |||||||||||||||||||||
| Consolidated | 167,203 | 10.00 | 66,904 | ≥4.0 | N/A | ||||||||||||||||
| Bank | 147,690 | 8.84 | 66,823 | ≥4.0 | 83,529 | ≥5.0 | % | ||||||||||||||
Banking regulations restrict the amount of deferred income tax assets that may be recognized for purposes of calculating regulatory capital ratios. At December 31, 2013, $26.4 million of the Company’s deferred income tax assets were deducted from regulatory capital. This amount, which is principally comprised of the future tax benefit associated with net operating loss carry-forwards, when fully utilized would add1.53% to the total risk-based capital ratio.
Note19– Fair value of financial instruments
FASB ASC 825, “Financial Instruments” requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2013 or December 31, 2012. The estimated fair value amounts for December 31, 2013 and December 31, 2012 have been measured as of period-end, and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at the period end.
The estimated fair value amounts should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimate, comparisons between the Company’s disclosures and those of other companies or banks may not be meaningful.
| 107 | ||
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities. FASB ASC 820,“Fair Value Measurements and Disclosures” establishes a framework for measuring fair value, establishes a three level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The Company uses various valuation approaches, including market, income and/or cost approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would consider in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs, as follows:
· Level 1 — Observable quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
· Level 2 — Observable quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, matrix pricing or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly in the market.
· Level 3 — Model-based techniques where all significant assumptions are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of discounted cash flow models and similar techniques.
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.
Rabbi trust investments. Rabbi trust investments consist primarily of cash and cash equivalents, equity securities, and mutual fund investments, and are recorded at fair value and included in other assets. The purpose of these rabbi trust investments is to fund certain executive non-qualified retirement benefits and deferred compensation. For cash and cash equivalents, which have maturities of 90 days or less, their carrying amounts reported in the consolidated balance sheets approximate fair value and are categorized as Level 1. The fair value of other equity securities and mutual funds are valued based on quoted prices from the market and are categorized as Level 1.
Deposits. The fair value of noninterest-bearing demand deposits andNegotiable Order of Withdrawal (“NOW”), savings, and money market deposits are the amounts payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal funds purchased and retail repurchase agreements. The carrying value of federal funds purchased and retail repurchase agreements are considered to be a reasonable estimate of fair value.
Wholesale repurchase agreements, junior subordinated notes and FHLB borrowings. The fair values of these liabilities are estimated using the discounted values of the contractual cash flows. The discount rate is estimated using the rates currently in effect for similar borrowings.
| 108 | ||
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 estimated fair values of financial instruments for the years ending December 31 (in thousands):
| Estimated Fair Value | ||||||||||||||||
| December 31, 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 short-term investments | $ | 33,513 | $ | 33,513 | $ | - | $ | - | $ | 33,513 | ||||||
| Investment securities | 368,866 | 2,845 | 349,155 | 14,988 | 366,988 | |||||||||||
| Loans | 1,392,153 | - | - | 1,414,109 | 1,414,109 | |||||||||||
| Loans held for sale | 3,530 | - | 3,530 | - | 3,530 | |||||||||||
| Rabbi trust | 6,184 | 6,184 | - | - | 6,184 | |||||||||||
| Financial liabilities: | ||||||||||||||||
| Deposits | 1,553,996 | - | 1,555,221 | - | 1,555,221 | |||||||||||
| Federal funds purchased | 13,000 | 13,000 | - | - | 13,000 | |||||||||||
| Wholesale repurchase agreements | 21,000 | - | 22,915 | - | 22,915 | |||||||||||
| Junior subordinated notes | 25,774 | - | - | 11,279 | 11,279 | |||||||||||
| FHLB borrowings | 170,000 | - | 170,253 | - | 170,153 | |||||||||||
| 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 short-term investments | $ | 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 | |||||||||||
| Rabbi trust | 4,748 | 4,748 | - | - | 4,748 | |||||||||||
| 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 other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset (in thousands):
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| 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 December 31, 2013 | $ | 2,845 | $ | 288,716 | $ | 9,988 | ||||
| Available for sale securities at December 31, 2012 | 1,307 | 384,823 | 7,685 | |||||||
| Rabbi trust at December 31, 2013 | 6,184 | - | - | |||||||
| Rabbi trust at December 31, 2012 | 4,748 | - | - | |||||||
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) during 2013 and 2012 (in thousands):
| Twelve Months | Twelve Months | ||||||
| Ended | Ended | ||||||
| December 31 | December 31 | ||||||
| 2013 | 2012 | ||||||
| Available for sale securities | |||||||
| Beginning balance | $ | 7,685 | $ | 7,185 | |||
| Purchases | 17,464 | 6,514 | |||||
| Acquisitions | 2,090 | - | |||||
| Redemptions | (17,251) | (6,014) | |||||
| Ending balance | $ | 9,988 | $ | 7,685 | |||
The table below presents the assets measured at fair value on a nonrecurring 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 December 31, 2013 | $ | - | $ | 3,530 | $ | - | ||||
| Loans held for sale at December 31, 2012 | - | 9,464 | - | |||||||
| Real estate acquired in settlement of loans at December 31, 2013 | - | - | 8,025 | |||||||
| Real estate acquired in settlement of loans at December 31, 2012 | - | - | 5,355 | |||||||
| Impaired loans, net of allowance at December 31, 2013 | - | - | 5,107 | |||||||
| Impaired loans, net of allowance at December 31, 2012 | - | - | 14,841 | |||||||
The fair value of collateral dependent loans is determined by appraisals or by alternative evaluations, such as tax evaluations. The fair value of loans may also be determined by sales contracts in hand or settlement agreements.
Note20—Accumulated Other Comprehensive Income (Loss)
The balance of accumulated other comprehensive income, net of tax, at December 31, 2013 is comprised of $2,478,000 of unrealized gains on securities available for sale and $(3,635,000) for the 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 the funded status of pension plans.
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Reclassifications from accumulated other comprehensive income (loss) for the years ended December 31, 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 | |||||
| Year ended December 31, 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 | $ | 63 | Personnel expense | ||||
| (25) | Income tax expense (benefit) | ||||||
| $ | 38 | Net of tax | |||||
| Total reclassifications for the period | $ | 483 | |||||
| Year ended December 31, 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 | $ | 63 | Personnel expense | ||||
| (25) | Income tax expense (benefit) | ||||||
| $ | 38 | Net of tax | |||||
| Total reclassifications for the period | $ | 40 | |||||
Note21 –Capital Transactions
At the Special Meeting of Shareholders on February 20, 2013, shareholders approved the conversion of up to422,456 shares of Series B preferred stock and up to140,217 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 into9,601,262 shares of voting Class A Common Stock, and the Series C preferred stock was converted into3,186,748 shares of nonvoting Class B Common Stock.
Pursuant to the Capital Purchase Program (the “CPP”), on December 12, 2008, the Company issued and sold to the U.S. Department of the Treasury (the “U.S. Treasury”) (i)52,372 shares of Series A Preferred Stock and (ii) a warrant (the “Warrant”) to purchase2,567,255 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 wasestimated 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 redeemed37,372 of the Company’s52,372 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.
Note22 –Sale of Virginia operations
On May 20, 2011, the Bank sold its Harrisonburg, Virginia operations, which includeddeposits of approximately $48.8 million and loans of approximately $73.0 million at book value. The Bank also sold its branch in Harrisonburg, as well as a parcel of land located in Waynesboro, Virginia. An impairment charge of $339,000 was recorded during the fourth quarter of 2010 for the expected loss on the sale of the real property. A gain of $90,000 was recorded on the sale of the real property when the sale closed in the second quarter of 2011.
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The 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 Exchange Act) as of December 31, 2013. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of December 31, 2013, the end of the period covered by this Annual Report on Form 10-K, the Company maintained effective disclosure controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As permitted by guidance provided by the Staff of the U.S. Securities and Exchange Commission, the scope of management’s assessment of internal control over financial reporting as of December 31, 2013 has excluded Security Savings Bank, SSB, which was acquired on October 1, 2013. Security Savings Bank, SSB constituted 1.8% of consolidated revenue (total interest income and total noninterest income) for the year ended December 31, 2013 and 7.3% of consolidated total assets as of December 31, 2013. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s CEO, CFO and CAO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Management has made a comprehensive review, evaluation and assessment of the Company’s internal control over financial reporting as of December 31, 2013. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control – Integrated Framework (1992). Based on this assessment, management has determined that, as of December 31, 2013, the Company’s internal control over financial reporting is effective. In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, management makes the following assertions:
| • | Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting. |
| • | Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
| 112 | ||
The Company’s independent registered public accounting firm, Dixon Hughes Goodman LLP, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. This Report of Independent Registered Public Accounting Firm is included in Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s CEO, CFO, and CAO, changes in the Company’s internal control over financial reporting during the fourth quarter of 2013. During the fourth quarter of 2013, the Company implemented new internal controls related to the acquisition method of accounting. In connection with such evaluation, the Company has determined that there have been no other changes in internal control over financial reporting during the fourth quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. | Other Information |
None.
| 113 | ||
PART III
| Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
(a) Directors and Executive Officers – The information required by this Item regarding directors, nominees and executive officers of the Company is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors” and “Executive Officers of the Company,” which sections are incorporated herein by reference.
(b) Section 16(a) Compliance – The information required by this Item regarding compliance with Section 16(a) of the Exchange Act is set forth in the Proxy Statement under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance,” which section is incorporated herein by reference.
(c) Audit Committee – The information required by this Item regarding the Company’s Audit Committee, including the Audit Committee Financial Expert, is set forth in the Company’s Proxy Statement under the sections captioned “Board Committees – Audit and Risk Management Committee” and “Board Committees – Audit Committee Report,” which sections are incorporated herein by reference.
(d) Code of Ethics – The information required by this Item regarding the Company’s code of ethics is set forth in the Proxy Statement under the section captioned “Code of Business Conduct and Ethics,” which section is incorporated herein by reference.
| Item 11. | EXECUTIVE COMPENSATION |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “ Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director Compensation,” “Directors’ Fees and Practices,” “Board Committees – Compensation Committee Interlocks and Insider Participation” and “Board Committees – Compensation Committee Report,” which sections are incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Security Ownership of Certain Beneficial Owners” and “How Much Common Stock do our Directors and Executive Officers Own?” and in Item 5 of this Annual Report on Form 10-K, which sections and Item are incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item is set forth in the Proxy Statement under the sections captioned “Proposal 1 – Election of Directors,” “Certain Relationships and Related Transactions,” “Board Committees,” “Board Committees – Compensation Committee Interlocks and Insider Participation,” and “Related Party Matters,” which sections are incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is set forth in the Proxy Statement under the section captioned “Audit Fees Paid to Independent Auditor,” which section is incorporated herein by reference.
| 114 | ||
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.
| Financial Statements | Page | |
| Quarterly Financial Information | 61 | |
| Reports of Independent Registered Public Accounting Firm | 62 | |
| Consolidated Balance Sheets as of December 31, 2013 and 2012 | 64 | |
| Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011 | 65 | |
Consolidated Statements of Comprehensive Income for the years endedDecember 31, 2013, 2012 and 2011 | 66 | |
| Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011 | 67 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 | 68 | |
| Notes to Consolidated Financial Statements | 70 |
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X have been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below.
(b) The exhibits to the Form 10-K begin on page 116 of this Report.
(c) See 15(a)(2) above.
| 115 | ||
Exhibit Index
| Exhibit No. | Description | |
| 2.1 | Agreement and Plan of Combination and Reorganization dated as of November 1, 2013, by and among CapStone Bank, NewBridge Bancorp and NewBridge Bank, incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on November 1, 2013 (SEC File No. 000-11448). | |
| 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. | |
| 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).* |
| 116 | ||
| 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).* | |
| 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).* |
| 117 | ||
| 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 (SEC File No. 000-11448).* | |
| 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 (SEC File No. 000-11448).* | |
| 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 (SEC File No. 000-11448).* | |
| 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 (SEC File No. 000-11448).* | |
| 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 (SEC File No. 000-11448).* |
| 118 | ||
| 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 (SEC File No. 000-11448).* | |
| 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.* | |
| 21.1 | Schedule of Subsidiaries. | |
| 23.1 | Consent of Dixon Hughes Goodman LLP. | |
| 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. | |
| 99.1 | Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. | |
| 99.2 | Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. | |
| 101.1 | Financial Statements filed in XBRL format. |
* Management contract and compensatory arrangements.
| 119 | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NEWBRIDGE BANCORP | ||
Date: March 12, 2014 | By: | /s/Pressley A. Ridgill |
| Pressley A. Ridgill, | ||
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Capacity | Date | ||
/s/pressley a. ridgill | President, Chief Executive Officer, Director | March 12, 2014 | ||
| Pressley A. Ridgill | (Principal Executive Officer) | |||
| Senior Executive Vice President, Chief | ||||
/s/ramsey k. hamadi | Financial Officer | March 12, 2014 | ||
| Ramsey K. Hamadi | (Principal Financial Officer) | |||
| Senior Vice President, Chief Accounting | ||||
/s/richard m. cobb | Officer, Controller | March 12, 2014 | ||
| Richard M. Cobb | (Principal Accounting Officer) | |||
/s/michael s. albert | Chairman of the Board | March 12, 2014 | ||
| Michael S. Albert | ||||
/s/Barry Z. Dodson | Vice Chairman of the Board | March 12, 2014 | ||
| Barry Z. Dodson | ||||
/s/j. david branch | Director | March 12, 2014 | ||
| J. David Branch | ||||
/s/ c. arnold britt | Director | March 12, 2014 | ||
| C. Arnold Britt | ||||
/s/ robert c. clark | Director | March 12, 2014 | ||
| Robert C. Clark | ||||
/s/Alex A. Diffey, jr. | Director | March 12, 2014 | ||
| Alex A. Diffey, Jr. | ||||
/s/Donald P. Johnson | Director | March 12, 2014 | ||
| Donald P. Johnson | ||||
/s/Joseph H. Kinnarney | Director | March 12, 2014 | ||
| Joseph H. Kinnarney |
| 120 | ||
| Signature | Capacity | Date | ||
/s/mary e. rittling | Director | March 12, 2014 | ||
| Mary E. Rittling | ||||
/s/E. Reid Teague | Director | March 12, 2014 | ||
| E. Reid Teague | ||||
/s/g. alfred webster | Director | March 12, 2014 | ||
| G. Alfred Webster | ||||
/s/Kenan C. Wright | Director | March 12, 2014 | ||
| Kenan C. Wright | ||||
/s/julius s. young, jr. | Director | March 12, 2014 | ||
| Julius S. Young, Jr. |
| 121 | ||
EXHIBIT INDEX
Exhibit | Description | |
| 4.6 | Specimen certificate of Class A Common Stock, no par value. | |
| 10.35 | Third Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 23, 2013. | |
| 21.1 | Schedule of Subsidiaries. | |
| 23.1 | Consent of Dixon Hughes Goodman LLP. | |
| 31.1 | Certification of Pressley A. Ridgill. | |
| 31.2 | Certification of Ramsey K. Hamadi. | |
| 32.1 | Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 | |
| 99.1 | Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. | |
| 99.2 | Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009. | |
| 101.1 | Financial Statements submitted in XBRL format. |
| 122 | ||