ANNUAL REPORT 2009
Your Way Forward NewBridge Bancorp
OUR VISION
To be a high-performing community bank by:
• understanding and exceeding client expectations
• supporting our communities
• providing above average shareholder returns
• living our Guiding Principles in all that we do
OUR MISSION
To be the preferred financial partner for small and midsize businesses and retail clients by:
• using a client-centric, consultative approach
• growing in markets providing above average results
• offering credit consistently while balancing risks and returns
• supporting our clients and employees
• employing professionals that live our Guiding Principles and are committed to being the best
OUR GUIDING PRINCIPLES
• Always do your best
• Do what is right
• Treat others as you want to be treated
• Financial success begins with integrity
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements represent expectations and beliefs of the Company, including but not limited to
the Company’s operations, performance, financial condition, growth or strategies. These forward-looking
statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and
variations of these words and other similar statements. For this purpose, any statements contained in this report
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, some of which are described in the sections entitled
“Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors,” beginning on pages 3 and
13 respectively of the attached Annual Report on Form 10-K. The Company undertakes no obligation to update
any forward-looking statement, whether written or oral, that may be made from time to time, by or on behalf of
the Company.
Dear Shareholder:
The NewBridge Bancorp team is diligently working to improve operations and financial
results during this very difficult time for financial institutions. It is our belief that your
Company is successfully navigating through the extraordinarily challenging banking envi-
ronment that has persisted for the past two years. While business conditions are likely
to remain unsettled for the foreseeable future, we are heartened by a number of positive
indicators that provide evidence that the worst may be behind us. Perhaps the most telling
evidence of our progress is the profit reported in the fourth quarter of 2009.
The Overall Economy Appears to be Stabilizing
Last year, I described the dire economic conditions that put our national economy on the
brink of financial ruin. Looking back over the past year, the heavy toll these excesses have
taken is evident. Among them, 140 banks in the U.S. failed in 2009, more than in the previ-
ous 15 years combined. While the toll has been high, and more banks will fail in 2010, it is
encouraging that economic conditions now appear to be improving.
Unemployment, which affects loan demand and also impacts borrowers’ ability to repay,
improved in early 2010. Temporary employment has increased in each of the past five
months, another positive sign. Overall economic activity has improved, as evidenced by
the strong fourth quarter GDP. Further, many economic analysts expect modest growth
in 2010, particularly if the Federal Reserve remains fairly accommodative, which is likely in
order to preserve the still fragile recovery. Just as important, the banking industry (and the
nation as a whole) has learned a valuable lesson from this historic recession — there are
severe consequences to excessive risk taking. While business conditions are still quite dif-
ficult, the momentum in the economy has begun to improve, and the culling out of poorly
managed financial institutions has left the industry stronger, as well as wiser.
Our Key Earnings Drivers are Steadily Improving
Given the economic turmoil, it should come as no surprise that the Company reported a
loss in 2009. Our net loss available to common shareholders was $18.1 million, or $1.15
per diluted share, versus a loss available to common shareholders of $57.1 million, or
$3.64 per common share, for 2008. Included in the 2008 results was a non-cash, after-
tax charge of approximately $50.4 million for the impairment of goodwill. Excluding that
charge, the 2008 net loss available to common shareholders was $6.7 million, or $0.42 per
diluted share.
It is important to note that many of our underlying trends are improving, much like what
has occurred in the economy. For example, the fourth quarter was our first profitable
quarter since mid-2008. These positive earnings were achieved despite a significant
provision for credit losses of $5.6 million. Our operating trends actually became favorable
in mid-2009, with pretax income before nonrecurring items increasing on a linked quarter
basis in both the third and fourth quarters. Much of that operating improvement came
from higher net interest income, which benefitted from a dramatic reduction in our cost
of funds, as well as successful expense containment efforts. The progress in these two
areas – net interest income and noninterest expense – provides a solid underpinning for
improved earnings momentum as we look ahead, especially with the anticipated return of
our provision for credit losses to a more normalized level. A more detailed discussion
of our financial results can be found on pages 29 - 49 of the Company’s Annual Report
on Form 10-K under the section titled Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Defining Our Strategy and Operating Plan
Despite the environmental changes, what constitutes sound banking practices has not
changed. We have therefore honed our operating plan to focus the entire organization on
several key value drivers: 1) improving asset quality; 2) managing our net interest margin;
3) increasing noninterest income; 4) implementing a disciplined cost management culture,
and 5) positioning the Company to fulfill its vision and mission. Meaningful progress is be-
ing made in each of these areas.
Minimizing Future Credit Losses
Improving asset quality and reducing our future credit related costs are among our top
priorities. We have made the early recognition of credit losses and the aggressive manage-
ment of problem credits our rule. Although nonperforming assets did increase at the end
of 2009 to $85.6 million, or 4.40% of assets, from the year-ago level of $48.6 million, or
2.34% of assets, total nonperforming loans were down from their peak in June 2009, and
our 30 to 89 day past due loans declined more than 19% during the last quarter of 2009.
While total nonperforming assets may still increase somewhat, we believe our early recog-
nition of credit losses has led to more conservative valuations and increased the potential
for future recoveries. Moreover, we have maintained our reserve position. At year-end
2009, the allowance for credit losses was $35.8 million, or 2.45% of outstanding loans, as
compared to $35.8 million, or 2.23% of outstanding loans, at the end of 2008.
Increasing Our Net Interest Margin
With the assistance of some of the industry’s leading consultants, our interest rate man-
agement tools have been enhanced. We are focused on actively managing our earning as-
sets and interest bearing liabilities. On the asset side, a more consistent pricing discipline
for loans has been instituted and the relative yields and balances on all earning assets are
monitored closely. From a retail funding standpoint, our focus is on building core deposit
accounts and reducing our dependence on less stable, higher cost CDs. The cumulative
effect of these efforts allowed us to increase our net interest margin throughout 2009 and
better positions us to maintain that margin going forward.
Expanding Other Revenue Sources
Noninterest income for many banks will be under pressure in 2010, in part due to regula-
tory changes regarding fees on certain deposit related services. Our strategies to combat
those effects include building the number of client relationships and considering strategic
acquisitions. In the Piedmont Triad Region of North Carolina, where all but five of the
Bank’s branches are located, the vast majority of deposits are controlled by large national
and regional banks. While we are the largest community bank in this market, our market
share is still relatively small, and an excellent opportunity exists to increase fee income
simply through growing our account base.
Additionally, our asset acquisition of Bradford Mortgage Company, completed at the end
of 2009, will allow for excellent cross selling opportunities, add diversity to our revenue
base and provide a sizable recurring income source.
Containing Costs to Create Positive Operating Leverage
By lowering many “fixed” costs, the Company is better positioned for improved earnings
momentum. Many of these cost containment opportunities relate to our branch network.
For example, in October, we announced our decision to invest $5 million in new, strategi-
cally located, offices in Lexington, Thomasville, Greensboro and Forsyth County, N.C. This
restructuring will allow us to close seven existing offices. However, we believe there are
opportunities for continued cost reduction at virtually every level of the organization. For
that reason, a line item accountable budget process has been implemented that is specific
to each of our employees. Our progress in lowering expenses has been gratifying. Nonin-
terest expense in the fourth quarter of 2009 was the lowest it has been since the merger
of equals was finalized in mid-2007. Noninterest expense for last year, excluding FDIC in-
surance expenses and nonrecurring charges, actually declined $8.9 million relative to 2008.
Positioning the Franchise for Future Success
Our ultimate success as a community bank will hinge on prudently managing our risks
and maintaining a solid capital position. We have tempered our exposure by reducing our
concentration in higher risk assets, such as construction and development loans, boost-
ing investment securities and reducing our borrowings and total liabilities. At the same
time, we have maintained a strong capital position by controlling our balance sheet growth
and returning to profitability. All of our capital ratios comfortably exceed the regulatory
minimums necessary to qualify for the “well capitalized” designation. As of December 31,
2009, the Company’s risk based capital ratio was 12.27% (the regulatory minimum for
“well capitalized” institutions is 10%).
Outlook is Improving
There are many reasons to be encouraged. The banking industry is now operating in a
more rational pricing environment. The excesses that propelled speculation have largely
been wrung out of the system, and the surviving financial institutions, like NewBridge Bank,
are in a unique position to absorb clients and key professionals displaced from failed or
weakened institutions. Our liquidity is strong. Our exposure to risk has been curtailed in
many areas. There are encouraging signs in our loan delinquencies.
The stock market has not been oblivious to our improving fundamentals. In March, our
stock traded at over $4.00 per share, reaching the highest it has been in the past eighteen
months. While we are obviously not making any predictions with respect to the stock
price, it is heartening that the market appears to be slowly recognizing the value of our
franchise and the progress we have made in restoring your Company to profitability.
The recession is not over but we are successfully moving through it. My hope is that next
year we will be simply remembering these difficult conditions, and not still living in them.
Thank you for your loyal support through these challenging times.
Very truly yours,
Pressley A. Ridgill
President and Chief Executive Officer
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, 2009 Commission File Number: 000-11448
NEWBRIDGE BANCORP
(Exact name of Registrant as specified in its Charter)
North Carolina
(State of Incorporation)
56-1348147
(I.R.S. Employer Identification No.)
1501 Highwoods Blvd., Suite 400
Greensboro, North Carolina
(Address of principal executive offices)
27410
(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
Common Stock, par value $5.00 per share
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes (cid:31) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes (cid:31) No ⌧
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No (cid:31)
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. ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer (cid:31)
Accelerated filer (cid:31)
Non-accelerated filer (cid:31) Smaller reporting company ⌧
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:31) No ⌧
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 $31.2 million. As of March 10, 2010 (the most recent practicable date), the
Registrant had 15,655,868 shares of Common Stock outstanding.
Documents incorporated by reference – Portions of the Proxy Statement for the 2010 Annual Meeting of Shareholders of
NewBridge Bancorp (the “Proxy Statement”) are incorporated by reference into Part III hereof.
The Exhibit Index begins on page 88.
NewBridge Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 2009
Table of Contents
Index
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
BUSINESS ……………………………………………………………………
RISK FACTORS……………………………………………………………….
UNRESOLVED STAFF COMMENTS…………………………………………….
PROPERTIES …………………………………………………………………
LEGAL PROCEEDINGS………………………………………………………
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES……………
SELECTED FINANCIAL DATA ……………………………………………..
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ……………
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK …
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ……………………
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ……………………….
CONTROLS AND PROCEDURES ………………………………………………
OTHER INFORMATION………………………………………………………
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE……
EXECUTIVE COMPENSATION ………………………………………………
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS………………….
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE……………………………………………………………
PRINCIPAL ACCOUNTANT FEES AND SERVICES….…………………………
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES……………………….
SIGNATURES …………………………………………………………………
Page
4
13
22
23
24
25
28
29
49
54
85
85
85
86
86
86
86
86
87
92
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;
our ability to successfully integrate acquired entities or to achieve expected synergies
and operating efficiencies within expected time-frames or at all;
technological changes and security and operations risks associated with the use of
technology;
the cost of additional capital is more than expected;
a change in the interest rate environment reduces interest margins;
asset/liability repricing risks, ineffective hedging and liquidity risks;
counterparty risk;
general economic conditions, particularly those affecting real estate values, either
nationally or in the market area in which we do or anticipate doing business, are less
favorable than expected;
the effects of the FDIC deposit insurance premiums and assessments;
the effects of and changes in monetary and fiscal policies and laws, including the
interest rate policies of the Federal Reserve Board;
volatility in the credit or equity markets and its effect on the general economy;
demand for the products or services of the Company and the Bank, as well as their
ability to attract and retain qualified people;
the costs and effects of legal, accounting and regulatory developments and compliance;
and
regulatory approvals for acquisitions cannot be obtained on the terms expected or on the
anticipated schedule.
Bancorp cautions that the foregoing list of important factors is not exhaustive. See also “Risk Factors” which
begins on page 13. Bancorp undertakes no obligation to update any forward-looking statement, whether written
or oral, that may be made from time to time, by or on behalf of Bancorp.
3
Item 1.
BUSINESS
General
PART I
Bancorp is a bank holding company incorporated under the laws of the State of North Carolina (“NC”) and
registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’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 Bancorp and the
Bank are located at 1501 Highwoods Boulevard, Suite 400, Greensboro, NC 27410. The telephone number is
(336) 369-0900 and its website is www.newbridgebank.com. The Bank maintains operations facilities in
Lexington and Reidsville, NC.
Bancorp is the successor entity to LSB Bancshares, Inc., which was incorporated on December 8, 1982 (“LSB”).
On July 31, 2007, FNB Financial Services Corporation (“FNB”), a bank holding company, also incorporated in
NC and registered under the BHCA, merged with and into LSB in a merger of equals (the “Merger”). LSB’s
name was then changed to “NewBridge Bancorp”.
The Bank, a NC chartered non-member bank, is the successor entity to Lexington State Bank (“LSB Bank”),
which was incorporated on July 5, 1949. As a result of the Merger, Bancorp acquired FNB Southeast, a NC
chartered bank, the sole banking subsidiary of FNB. On November 12, 2007, FNB Southeast merged with and
into LSB Bank (the “Bank Merger”) and the surviving bank changed its name to “NewBridge Bank”.
Business of Bank and Other Subsidiaries
Through its branch network, the Bank provides a wide range of banking products to individuals, small to
medium-sized businesses and retail clients in its market areas, including interest bearing and noninterest bearing
demand deposit accounts, certificates of deposits, individual retirement accounts, overdraft protection, personal
and corporate trust services, safe deposit boxes, online banking, corporate cash management, brokerage, financial
planning and asset management, mortgage production and secured and unsecured loans. On December 31, 2009,
the Bank expanded its mortgage production business through its acquisition of the assets of Bradford Mortgage
Company, an established community mortgage company operating principally in the Piedmont Triad Region of
NC.
As of December 31, 2009, the Bank operated four active non-bank subsidiaries: Peoples Finance Company of
Lexington, Inc. (“Peoples Finance”), LSB Properties, Inc. (“LSB Properties”), Henry Properties, LLC (“Henry
Properties”) and Prince George Court Holdings, Inc. (“Prince George”). Peoples Finance, a NC licensed finance
company, with approximately $2.8 million of loans outstanding as of December 31, 2009, is no longer actively
soliciting loans. LSB Properties, Henry Properties and Prince George together own the real estate acquired in
settlement of loans of the Bank.
Bancorp has one non-bank subsidiary, FNB Financial Services Capital Trust I (“FNB Trust”), a Delaware
statutory trust, formed to facilitate the issuance of trust preferred securities. Prior to the Merger, FNB Trust was
a subsidiary of FNB. FNB Trust is not consolidated in Bancorp’s financial statements.
As part of its operations, Bancorp regularly holds discussions and evaluates the potential acquisition of, or
merger with, various financial institutions and other businesses. Bancorp also regularly considers the potential
disposition of certain assets, branches, subsidiaries, or lines of business. As a general rule, Bancorp only publicly
announces any material acquisitions or dispositions once a definitive agreement has been reached.
Bancorp operates one reportable segment, the Bank. Reference is made to Item 8 – “Financial Statements and
Supplementary Data”. Management believes that Bancorp is not dependent upon any single customer, or a few
customers, the loss of any one or more of which would have a material adverse effect on Bancorp’s operations.
4
Market Areas
The Bank’s primary market area is the Piedmont Triad Region of NC. On December 31, 2009, the Bank
operated 38 branch offices and two loan production offices in its three markets: the Piedmont Triad Region and
Coastal Region of NC and the Shenandoah Valley Region of Virginia (“VA”). The following table lists the
Bank’s branch offices, categorized by region and city.
Piedmont Triad Region:
Greensboro (five offices)
Lexington (five offices) (1)
Reidsville (three offices) (1)
Winston-Salem (three offices) (1)
Thomasville (two offices)
Archdale
Clemmons
Danbury
Eden
High Point
Jamestown
Kernersville
King
Piedmont Triad Region (continued):
Madison
Midway
Rural Hall (1)
Tyro
Walkertown
Wallburg
Welcome
Coastal Region:
Wilmington (two offices)
Burgaw
Shenandoah Valley Region:
Harrisonburg (two offices) (2)
(1) During the first quarter of 2010, the Bank closed two branches in Lexington and one branch each in Winston-Salem, Reidsville and
Rural Hall, as part of a plan to restructure operations in the Piedmont Triad Region.
(2) On January 27, 2010, the Bank announced that it will close one of its branches in Harrisonburg, VA during the second quarter of
2010.
As of December 31, 2009, the Bank operated 33 branches and two loan production offices in the Piedmont Triad
region of North Carolina. The Piedmont Triad region is a 12 county area, located in the rapidly growing
interstate corridor between Charlotte, NC and the Research Triangle Park, and has a combined population of
approximately 1.6 million people. The Piedmont Triad Region includes the cities of Greensboro, Winston-Salem
and High Point, respectively the third, fourth and eighth largest cities in NC.
The Piedmont Triad Region economy, traditionally centered on the textile, furniture and tobacco industries, has
transitioned to a more service-oriented economy; successfully diversifying into areas related to transportation,
logistics, health care, education and technology. Benefiting the Piedmont Triad Region’s economy are decisions
by FedEx to locate a national hub at Piedmont Triad International Airport (“PTIA”), and by Honda Aircraft
Company to locate its world headquarters at PTIA.
In addition to its strategic proximity to key markets, the Piedmont Triad Region has a well defined transportation
infrastructure, providing access to both global and national markets. Interstates I-40, I-85 and I-77 provide both
North-South and East-West routes. In addition, local manufacturers and distribution hubs will have direct access
to both Midwest markets and additional Southeast ports when Interstates I-73 and I-74, which will bisect the
Piedmont Triad Region, are completed. Moreover, extensive rail services are offered by major carriers, Norfolk
Southern, CSX and Amtrak as well as a number of short-line railroads.
The Piedmont Triad Region is home to numerous institutions of higher education, including Wake Forest
University, Wake Forest University Medical Center, North Carolina School of the Arts, Salem College and
Winston-Salem State University (Winston-Salem), High Point University (High Point), two members of the
University of North Carolina system located in Greensboro; the University of North Carolina at Greensboro and
North Carolina A&T State University, and Elon University (Elon). The Piedmont Triad Region is also home to
several well respected private institutions, as well as many community colleges and technical schools. All are
recognized for academic excellence and enhance the Piedmont Triad Region’s business development efforts,
particularly in the field of biotechnology.
5
As of June 30, 2009, the Bank was the largest community bank in the Piedmont Triad Region, based on deposit
market share.
As of December 31, 2009, the Bank operated three branches in the Coastal Region, which includes Pender
County and New Hanover County, located on the Southeast coast of NC. Wilmington is the county seat and
industrial center of New Hanover County. A historic seaport and a popular tourism destination, Wilmington has
diversified and developed into a major resort area, a busy sea port (one of NC’s two deep water ports), a light
manufacturing center, a chemical manufacturing center and the distribution hub of southeastern NC. During the
past 20 years, the Wilmington area has experienced extensive industrial development and growth in the service
and trade sectors. Industries in the Wilmington region produce fiber optic cables for the communications
industry; aircraft engine parts; pharmaceuticals; nuclear fuel components; and various textile products. The
motion picture industry has a significant presence in the Wilmington area. Wilmington also serves as a regional
retail center, a regional medical center and the home of the University of North Carolina at Wilmington.
The total population of New Hanover County is approximately 190,000. The County is served by Interstate 40
and U.S. Highways 17 and 74, major rail connections and national and regional airlines through facilities at the
New Hanover International Airport, located near Wilmington.
As of December 31, 2009, the Bank operated two branches and one loan production office in its Shenandoah
Valley Region, serving the counties of Rockingham and Augusta, VA. Harrisonburg is the county seat of
Rockingham County, centrally located in the Shenandoah Valley in west central VA. With a population of
approximately 40,000, Harrisonburg is an important educational, industrial, retail, tourism, commercial,
agricultural and governmental center, and is home to five colleges and universities, including James Madison
University. Interstate 81, several primary U.S. highways, the Shenandoah Valley Regional Airport and a major
rail connection serve the area.
The following table reflects the Bank’s deposits and branch locations by region at December 31, 2009, and the
Bank’s rank, by deposit market share as of June 30, 2009 (deposits in thousands):
Deposit Market Share and Branch Locations
December 31, 2009
Region
Piedmont Triad
Coastal
Shenandoah Valley
Deposits
$ 1,320,357
109,941
69,012
Number of
Branches
33
3
2
Deposit Market
Share Rank (1)
1
3
4
(1) As of June 30, 2009. Rank for community financial institutions; excludes banks greater than $10 billion in assets.
Deposits
The Bank offers a variety of deposit products to small and medium-sized businesses and retail clients at interest
rates generally competitive with local market conditions. The table below sets forth the mix of depository
accounts at the Bank as a percentage of total deposits of the Bank at the dates indicated.
2009
As of December 31,
2008
2007
Noninterest-bearing demand…………...
Savings, NOW, MMI…………………...
Certificates of deposit…………………..
10.4%
44.6
45.0
100.0%
9.0%
36.9
54.1
10.8%
39.2
50.0
100.0%
100.0%
6
The Bank accepts deposits at its banking offices, all of which have automated teller machines (“ATMs”). Its
memberships in multiple ATM networks allow customers access to their depository accounts from ATM
facilities throughout the United States. Competitive fees are charged for the use of its ATM facilities by
customers not having an account with the Bank. Deposit flows are controlled primarily through the pricing of
such deposits.
At December 31, 2009, the Bank had $239.1 million in certificates of deposit of $100,000 or more. The Bank is
a member of an electronic network that allows it to post interest rates and attract certificates of deposit
nationally. It also utilizes brokered deposits and deposits obtained through the Promontory InterFinancial
Network, also known as CDARS, to supplement in-market deposit growth. The accompanying table presents the
scheduled maturities of time deposits of $100,000 or more at December 31, 2009.
Scheduled maturity of time deposits of $100,000 or more
(In thousands)
Less than three months…….……………………………..
Three through six months……………….…………….….
Seven through twelve months.………….……..………….
Over twelve months………………………………………
Total time deposits - $100,000 or more…………
$ 105,231
55,213
56,367
22,246
$ 239,057
See also Note 7 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
Marketing
The Bank focuses its marketing efforts on small- to medium-sized businesses and retail clients, and on achieving
certain strategic objectives, including increasing non-interest income and growing core deposits and loans. The
Bank promotes its brand through its association with the Greensboro minor league baseball team and stadium
(NewBridge Bank Park), traditional advertising and promotions, sponsorship of local events and other
community-focused campaigns.
Competition
Commercial banking in North Carolina and Virginia is extremely competitive, due in large part to intrastate and
interstate branching laws. Many of Bancorp’s competitors are significantly larger and have greater resources.
Bancorp continues to encounter significant competition from a number of sources, including bank holding
companies, financial holding companies, commercial banks, thrift institutions, credit unions and other financial
institutions and financial intermediaries. Bancorp competes in its market areas with some of the largest banking
organizations in the Southeast and nationally, several of which have numerous branches in NC and VA.
Bancorp’s competition is not limited to financial institutions based in NC and VA. The enactment of federal
legislation authorizing nationwide interstate banking has greatly increased the size and financial resources of
some of Bancorp’s competitors. Consequently, many of its competitors have substantially higher lending limits
due to their greater total capitalization, and many perform functions for their customers that Bancorp generally
does not offer. Bancorp primarily relies on providing quality products and services at a competitive price within
its market areas. As a result of interstate banking legislation, Bancorp’s market is open to future penetration by
banks located in other states, provided that the other states also permit de novo branching and acquisitions by NC
and VA banking institutions, thereby increasing competition.
In the Piedmont Triad Region, as of June 30, 2009, Bancorp competed with 33 commercial banks and savings
institutions, as well as numerous credit unions. As of that date, Bancorp competed with 19 commercial banks
and savings institutions, and several credit unions, in the Coastal Region and 16 commercial banks and several
credit unions in the Shenandoah Valley Region.
7
Employees
At December 31, 2009, Bancorp and its subsidiaries had 494 full time equivalent employees, all of whom were
compensated by the Bank or its subsidiaries. None of Bancorp’s employees are represented by a collective
bargaining unit, and Bancorp has not recently experienced any type of strike or labor dispute. Bancorp considers
its relationship with its employees to be good.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under both federal and state law. The
following is a brief summary of certain statutes and rules and regulations that affect or will affect Bancorp, the
Bank and the 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 Federal Deposit Insurance Corporation (the “FDIC”) insurance
fund in the event the depository institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms
of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the
lesser of (i) an amount equal to 5% of the 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
acceptable capital standards as of the time the bank fails to comply with such capital restoration plan. Bancorp,
as a registered bank holding company, is subject to the regulation of the Board of Governors of the Federal
Reserve System (“Federal Reserve”). Under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such institutions in circumstances where it
might not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to require a
bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary (other than a
non-bank subsidiary of a bank) upon the Federal 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.
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 subject to supervision and regulation by the North Carolina
Commissioner of Banks (the “Commissioner”).
U.S. Treasury Capital Purchase Program. Pursuant to the U.S. Department of the Treasury (the “U.S.
Treasury”) Capital Purchase Program (the “CPP”), on December 12, 2008, Bancorp issued and sold to the U.S.
Treasury (i) 52,372 shares of Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series
A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 2,567,255 shares of Bancorp’s common stock,
par value $5.00 per share, for an aggregate purchase price of $52,372,000 in cash. The Securities Purchase
Agreement, dated December 12, 2008, pursuant to which the securities issued to the U.S. Treasury under the
CPP were sold, currently restricts Bancorp, without the prior approval of the U.S. Treasury, from increasing
dividends payable on its common stock from the last quarterly cash dividend per share ($0.05) declared on the
common stock prior to October 14, 2008, limits Bancorp’s ability to repurchase shares of its common stock (with
certain exceptions, including the repurchase of its common stock to offset share dilution from equity-based
compensation awards), grants the holders of the Series A Preferred Stock, the Warrant and the common stock of
Bancorp to be issued under the Warrant, certain registration rights, and subjects Bancorp to certain of the
8
executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”),
the American Recovery and Reinvestment Act of 2009 (“ARRA”) and subsequent regulations issued by the U.S.
Treasury.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve has adopted capital
adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve System and
have consolidated assets of $150 million or more. Bank holding companies subject to the Federal 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,
2009.
Capital Requirements for the Bank. The Bank, as a NC commercial bank, is required to maintain a surplus
account equal to 50% or more of its paid-in capital stock. As a FDIC insured commercial bank that is not a
member of the Federal Reserve, the Bank is also subject to capital requirements imposed by the FDIC. Under
the FDIC’s regulations, state nonmember banks that (a) receive the highest rating during the examination process
and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage
ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2%
above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all
applicable minimum capital requirements as of December 31, 2009.
Dividend and Repurchase Limitations. Bancorp’s participation in the CPP limits our ability to repurchase
shares of our common stock (with certain exceptions, including the repurchase of our common stock to offset
share dilution from equity-based compensation awards), except with the prior approval of the U.S. Treasury. See
“Supervision and Regulation—U.S. Treasury Capital Purchase Program.” Additionally, Bancorp must obtain
Federal Reserve approval prior to repurchasing common stock for consideration in excess of 10% of its net worth
during any 12-month period unless Bancorp (i) both before and after the redemption satisfies capital
requirements for a “well capitalized” bank holding company; (ii) received a one or two rating in its last
examination; and (iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by Bancorp are subject to certain requirements and
limitations of NC corporate law, except as set forth in this section, neither the Commissioner nor the FDIC have
promulgated any regulations specifically limiting the right of Bancorp to pay dividends and repurchase shares.
The ability of Bancorp to pay dividends or repurchase shares is dependent upon 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. NC commercial banks may only pay dividends from undivided profits,
which are determined by deducting and charging certain items against actual profits, including any contributions
to surplus required by NC law. The Bank is currently restricted from paying dividends to Bancorp unless it
receives advance approval from the FDIC and the Commissioner. Also, an insured depository institution, such
as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making
such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law
and regulations).
During 2008, the Company first reduced its quarterly cash dividend, and later suspended the payment of cash
dividends. As a result of the Company’s participation in the CPP, the Company currently requires prior approval
9
of the U.S. Treasury to increase dividends payable on its common stock to more than the last quarterly cash
dividend ($0.05 per share) declared prior to October 14, 2008.
Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under
current law, the insurance assessment to be paid by members of the Deposit Insurance Fund, such as the Bank, is
specified in a schedule required to be issued by the FDIC. In 2009, FDIC assessments for deposit insurance
ranged from 12 to 50 basis points per $100 of insured deposits, depending on the institution’s capital position
and other supervisory factors. During the first quarter of 2009, the FDIC instituted a one-time special assessment
equal to 5 cents per $100 of domestic deposits on FDIC insured institutions, which resulted in an additional
$970,000 in FDIC insurance expense for 2009. The assessment rate schedule can change from time to time at
the discretion of the FDIC, subject to certain limits. On November 12, 2009, the FDIC adopted a rule requiring
banks to prepay three years’ worth of estimated deposit insurance premiums by December 31, 2009. The FDIC
exempted the Bank from this rule, and the Bank continues to pay premiums on a quarterly basis.
Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock
in the FHLB of Atlanta in an amount at least equal to 0.20% of the 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, 2009, the
Bank was in compliance with these requirements.
Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations
of the FDIC, an insured institution has a continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions,
nor does it limit an 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 June 2008.
Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of
insured depository institutions. The extent of these powers will depend upon whether the institution in question
is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized”. Under the regulations, an institution is considered “well capitalized” if it has (i) a total risk-
based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of
5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level
for any capital measure. An “adequately capitalized” institution is defined as one that has (i) a total risk-based
capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4%
or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is
considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-
based capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution
with the highest examination rating); (B) “significantly undercapitalized” if the institution has (i) a total risk-
based capital ratio of less than 6%, (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of
less than 3%; and (C) “critically undercapitalized” if the institution has a ratio of tangible equity to total assets
equal to or less than 2%. At December 31, 2009, the Bank had the requisite capital levels to qualify as “well
capitalized”.
Changes in Control. The BHCA prohibits Bancorp from acquiring direct or indirect control of more than 5% of
the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or
consolidating with another bank or financial holding company or savings bank holding company without prior
approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of Bancorp. Control is conclusively presumed to exist if,
10
among other things, a person acquires more than 25% of any class of voting stock of Bancorp or controls in any
manner the election of a majority of the directors of Bancorp. Control is presumed to exist if a person acquires
more than 10% of any class of voting stock, the stock is registered under Section 12 of the Securities Exchange
Act of 1934 (the “Exchange Act”), and the acquiror will be the largest shareholder after the acquisition.
Federal Securities Law. Bancorp has registered its common stock with the SEC pursuant to Section 12(g) of
the Exchange Act. As a result of such registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to
Bancorp.
Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions
contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and
principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own
more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000
in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the 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 the
Commissioner, which are substantially the same as those applicable to national banks. Under these limits, no
loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the Bank. At
December 31, 2009, this limit was $32.3 million. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus, or $21.5
million.
Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”),
dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB
Act expanded opportunities for banks and bank holding companies to provide services and engage in other
revenue-generating activities that previously were prohibited to them. In doing so, it increased competition in
the financial services industry, presenting greater opportunities for our larger competitors, which were more able
to expand their service and products than smaller, community-oriented financial institutions, such as the Bank.
USA Patriot Act of 2001. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that
occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act was intended to
strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat
terrorism on a variety of fronts. The impact of the Act on financial institutions of all kinds has been significant
and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and
requires various regulations, including standards for verifying customer identification at account opening, and
rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (“SOX”) was signed into law in 2002 and addresses
accounting, corporate governance and disclosure issues. The impact of SOX is wide-ranging as it applies to all
public companies and imposes significant requirements for public company governance and disclosure
requirements.
11
In general, SOX established new corporate governance and financial reporting requirements intended to enhance
the accuracy and transparency of public companies’ reported financial results. It established new responsibilities
for corporate chief executive officers, chief financial officers and audit committees in the financial reporting
process and created a new regulatory body to oversee auditors of public companies. It backed these
requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities
fraud, and created new criminal penalties for document and record destruction in connection with federal
investigations. It also increased the opportunity for more private litigation by lengthening the statute of
limitations for securities fraud claims and providing new federal corporate whistleblower protection.
The economic and operational effects of SOX on public companies, including the Company, have been and will
continue to be significant in terms of the time, resources and costs associated with compliance with its
requirements.
Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured
depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the
same type of charter in such depository 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 Bank are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the “Code”), in the same general manner as other corporations.
The Bank computes its bad debt deduction under the specific charge-off method.
State Taxation. Under NC law, the Bank is subject to corporate income taxes at a 6.90% rate and an annual
franchise tax at a rate of 0.15%.
Other. Additional regulations require annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state
chartered institutions examined by state regulators, and establish operational and managerial, asset quality,
earnings and stock valuation standards for insured depository institutions, as well as compensation standards.
The Bank is subject to examination by the FDIC and the Commissioner. In addition, it is subject to various other
state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit,
equal credit and fair credit reporting laws and laws relating to branch banking. The Bank, as an insured NC
commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national
banks, unless (i) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance
Fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.
Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering the
structures, regulations and competitive relationships of financial institutions, are introduced regularly. Neither
Bancorp nor the Bank can predict whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of Bancorp or the Bank may be affected by such statute or regulation.
Available Information
Bancorp makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-
K and amendments to those reports available free of charge on its internet website www.newbridgebank.com, as
soon as reasonably practicable after the reports are electronically filed with the SEC. Any materials that Bancorp
files with the SEC may be read and/or copied at the SEC’s Public Reference Room at 100 F Street, NE,
12
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 at www.sec.gov.
Additionally, Bancorp’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 Bancorp’s
website. A written copy of the foregoing corporate governance policies is available upon written request to
Bancorp.
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 Related to Recent Economic Conditions and Governmental Response Efforts
Our business has been and may continue to be adversely affected by current conditions in the financial
markets and economic conditions generally. The global, U.S. and North Carolina economies are continuing to
experience significantly reduced business activity and consumer spending as a result of, among other factors,
disruptions in the capital and credit markets that first occurred during 2008. Since 2008, dramatic declines in the
housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including government-sponsored entities and
major commercial and investment banks. A sustained weakness or weakening in business and economic
conditions generally or specifically in the principal markets in which we do business could have one or more of
the following adverse effects on our business:
•
•
•
•
•
•
a decrease in the demand for loans or other products and services offered by us;
a decrease in the value of our loans or other assets secured by consumer or commercial
real estate;
a decrease in deposit balances due to overall reductions in the accounts of customers;
an impairment of certain intangible assets or investment securities;
a decreased ability to raise additional capital on terms acceptable to us or at all; or
an increase in the number of borrowers who become delinquent, file for protection under
bankruptcy laws or default on their loans or other obligations to us. An increase in the
number of delinquencies, bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs and provision for credit losses, which would
reduce our earnings.
Until conditions improve, we expect our business, financial condition and results of operations to continue to be
adversely affected.
Increases in FDIC insurance premiums may adversely affect Bancorp’s net income and profitability. Since
2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the
deposit insurance fund. In addition, the FDIC instituted two temporary programs to further insure customer
deposits at FDIC insured banks: deposit accounts are now insured up to $250,000 per customer (up from
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$100,000) and noninterest-bearing transactional accounts are currently fully insured (unlimited coverage). These
programs have placed additional stress on the deposit insurance fund. In order to maintain a strong funding
position and restore reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of
insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three
years’ worth of estimated deposit insurance premiums by December 31, 2009. The FDIC exempted the Bank
from this prepayment requirement, and the Bank continues to pay these premiums on a quarterly basis. Bancorp
is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If
there are additional bank or financial institution failures, or the cost of resolving prior failures exceeds
expectations, the Bank may be required to pay even higher FDIC premiums than the recently increased levels.
These announced increases and any future increases or required prepayments of FDIC insurance premiums may
adversely impact Bancorp’s earnings and financial condition.
The capital and credit markets have experienced unprecedented levels of volatility. During the economic
downturn, the capital and credit markets experienced extended volatility and disruption. In some cases, the
markets produced downward pressure on stock prices and credit capacity for certain issuers without regard to
those issuers’ underlying financial strength. If these levels of market disruption and volatility continue, worsen or
abate and then arise at a later date, Bancorp’s ability to access capital could be materially impaired. Bancorp’s
inability to access the capital markets could constrain the Bank’s ability to make new loans, to meet the Bank’s
existing lending commitments and, ultimately jeopardize the Bank’s overall liquidity and capitalization.
Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or
other legislation or regulations intended to strengthen the U.S. financial system, could adversely affect us.
Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA,
EESA, the TLGP and special assessments imposed by the FDIC, subject participants to additional regulatory fees
and requirements, including corporate governance requirements, executive compensation restrictions, restrictions
on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax
deductions and prohibitions against golden parachute payments. These requirements, and any other requirements
that may be subsequently imposed, may have a material and adverse affect on our business, financial condition,
and results of operations.
Our participation in the CPP imposes restrictions and obligations on us that limit our ability to increase
dividends, repurchase shares of our common stock and access the capital markets. On December 12, 2008, we
issued and sold (i) 52,372 shares of Series A Preferred Stock and (ii) a Warrant to purchase 2,567,255 shares of
Bancorp’s common stock, par value $5.00 per share, to the U.S. Treasury as part of its CPP. Prior to December
12, 2011, unless we have redeemed all of the Series A Preferred Stock or the U.S. Treasury has transferred all of
the Series A Preferred Stock to a third party, the Securities Purchase Agreement pursuant to which such
securities were sold, among other things, limits the payment of dividends on our common stock to a maximum
quarterly dividend of $0.05 per share without prior regulatory approval, limits our ability to repurchase shares of
our common stock (with certain exceptions, including the repurchase of our common stock to offset share
dilution from equity-based compensation awards), and grants the holders of such securities certain registration
rights which, in certain circumstances, impose lock-up periods during which we would be unable to issue equity
securities. In addition, unless we are able to redeem the Series A Preferred Stock during the first five years, the
dividends on this capital will increase substantially at that point, from 5% to 9%. Depending on market
conditions at the time, this increase in dividends could significantly impact our liquidity.
The limitations on incentive compensation contained in the ARRA and subsequent regulations may adversely
affect our ability to retain our highest performing employees. In the case of a company such as Bancorp that
received CPP funds, the ARRA, and subsequent regulations issued by the U.S. Treasury, contain restrictions on
bonus and other incentive compensation payable to the company’s senior executive officers. As a consequence,
we may be unable to create a compensation structure that permits us to retain our highest performing employees
and attract new employees of a high caliber. If this were to occur, our businesses and results of operations could
be adversely affected.
The soundness of other financial institutions could adversely affect us. Since mid-2007, the financial services
industry as a whole, as well as the securities markets generally, have been materially and adversely affected by
14
significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Financial
institutions in particular have been subject to increased volatility and an overall loss in investor confidence.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading,
clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties,
and we routinely execute transactions with counterparties in the financial services industry, including brokers
and dealers, commercial banks, and other institutional clients.
From time to time, we utilize derivative financial instruments, primarily to hedge our exposure to changes in
interest rates, but also to hedge cash flow. By entering into these transactions and derivative instrument contracts,
we expose ourselves to counterparty credit risk in the event of default of our counterparty or client. When the fair
value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit
risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings,
limiting our exposure to any single counterparty and regularly monitoring our market position with each
counterparty. Nonetheless, defaults by, or even rumors or questions about, one or more financial services
companies, or the financial services industry generally, have led to market-wide liquidity problems and could
lead to losses or defaults by us or by other institutions. In addition, our credit risk may be exacerbated when the
collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the
loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses,
financial condition or results of operations.
Market developments may adversely affect our industry, business and results of operations. Significant
declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by many financial institutions, including government-
sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed
securities but spreading to credit default swaps and other derivative securities, caused many financial institutions
to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Bancorp has
experienced significant challenges, its credit quality has deteriorated and its net income and results of operations
have been adversely impacted. Reflecting concern about the stability of the financial markets generally and the
strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers including other financial institutions. Although to date Bancorp and the Bank
remain “well capitalized,” and have performed better than many of their peers, we are part of the financial
system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in
the financial markets and/or reduced business activity could materially adversely affect our business, financial
condition and results of operations.
Risks Associated with Our Business
We rely on dividends from the Bank for most of our revenue. Bancorp is a separate and distinct legal entity
from the Bank. Bancorp receives substantially all of its revenue from dividends received from the Bank. These
dividends are the principal source of funds to pay dividends on Bancorp’s common and preferred stock, and
interest and principal on its outstanding debt securities. Various federal and/or state laws and regulations limit
the amount of dividends that the Bank may pay to Bancorp. In the event the Bank is unable to pay dividends to
Bancorp, Bancorp may not be able to service debt, pay obligations, or pay dividends on Bancorp’s common
stock. The 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 19 of the Notes to the Consolidated Financial Statements.
The Bank is exposed to risks in connection with the loans it makes. A significant source of risk for Bancorp
and the Bank arises from the possibility that losses will be sustained by the Bank because borrowers, guarantors
and related parties may fail to perform in accordance with the terms of their loans. The Bank has underwriting
and credit monitoring procedures and credit policies, including the establishment and review of the allowance for
loan losses, that it believes are appropriate to minimize this risk by assessing the likelihood of nonperformance,
15
tracking loan performance and diversifying its loan portfolio. Such policies and procedures, however, may not
prevent unexpected losses that could adversely affect the Bank’s results of operations.
Our allowance for loan losses may be insufficient. All borrowers carry the potential to default and our
remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.) may not fully satisfy money
previously lent. We maintain an allowance for loan losses, which is a reserve established through a provision for
loan losses charged to expense, which represents 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 loan losses and risks inherent in the loan portfolio. The level of the allowance for loan
losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political, and regulatory conditions; and
unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the
allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant
estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans, and other factors, both within and outside of our control, may
require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our
allowance for loan losses and may require an increase in the provision for loan losses or the recognition of
additional loan charge offs, based on judgments different than those of management. An increase in the
allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a
material adverse effect on our financial condition and results of operations.
If the value of real estate in the markets we serve were to decline materially, a significant portion of our loan
portfolio could become under-collateralized, which could have a material adverse effect on us. At December
31, 2009, our loans secured by real estate totaled $1.22 billion, or 83.4% of total loans. With these loans
concentrated within our three markets, the Piedmont Triad Region, Coastal Region and Shenandoah Valley
Region, a decline in local economic conditions in these markets could adversely affect the value of the real estate
collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted
loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans.
See Allocation of Allowance for Credit Losses in the accompanying 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 loan losses through increased provisions for loan losses,
which would negatively impact our profits. Also, a decline in local economic conditions may have a greater
effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate loan
portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local
economic conditions, including, among other things, changes in general or regional economic conditions,
governmental rules or policies, and natural disasters.
Our commercial real estate lending may expose us to risk of loss and hurt our earnings and profitability. We
regularly make loans secured by commercial real estate. These types of loans generally have higher risk-adjusted
returns and shorter maturities than traditional one-to-four family residential mortgage loans. Further, loans
secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk
than one to four family residential mortgage loans. Payments on loans secured by these properties are often
dependent on the income produced by the underlying properties which, in turn, depends on the successful
operation and management of the properties. Accordingly, repayment of these loans is subject to adverse
conditions in the real estate market or the local economy. In addition, many economists believe that deterioration
in income producing commercial real estate is likely to worsen as vacancy rates continue to rise and absorption
rates of existing square footage continue to decline. Because of the current general economic slowdown, these
loans represent higher risk, could result in an increase in our total net-charge offs and could require us to increase
our allowance for loan losses, which could have a material adverse effect on our financial condition or results of
operations. At December 31, 2009, our loans secured by commercial real estate totaled $636.5 million, which
represented 43.5% of total loans, which is below the average percentage concentration for our peer group. For
the year ended December 31, 2009, we had net charge-offs of loans secured by commercial real estate of $18.9
million, an increase of $8.7 million when compared to the same year-ago period. While we seek to minimize
16
these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related
losses.
Our construction loans and land development loans involve a higher degree of risk than other segments of
our loan portfolio. A portion of our commercial real estate portfolio described above is comprised of
construction loans and land development loans. Construction financing typically involves a higher degree of
credit risk than other commercial real estate lending. Risk of loss on a construction loan is largely dependent
upon the accuracy of the initial estimate of the 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. Construction and land development loans are dependent on the successful completion of the projects
they finance, however, in many cases such construction and development projects in our primary market areas
are not being completed in a timely manner, if at all. At December 31, 2009, we had loans of $177.3 million, or
12.1% of total loans, outstanding to finance construction and land development, which is below the average
percentage concentration for our peer group. For the year ended December 31, 2009, we had net charge-offs of
construction and land development loans of $11.6 million, an increase of $4.4 million when compared to the
same year-ago period.
Our lending on unimproved land may expose us to a greater risk of loss and may have an adverse effect on
results of operations. A portion of our residential and commercial lending is secured by unimproved land.
Loans secured by unimproved land are generally more risky than loans secured by improved property for one to
four family residential mortgage loans. Since unimproved land is generally held by the borrower for investment
purposes or future use, payments on loans secured by unimproved land will typically rank lower in priority to the
borrower than a loan the borrower may have on their primary residence or business. These loans are susceptible
to adverse conditions in the real estate market and local economy. At December 31, 2009, loans secured by
unimproved property totaled $44.7 million, or 3.1% of our loan portfolio.
If the Bank loses key employees with significant business contacts in its market areas, its business may suffer.
The 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’s growth strategy may not be successful. As a strategy, Bancorp seeks to increase the size of its
franchise by pursuing business development opportunities. Bancorp can provide no assurance that it will be
successful in increasing the volume of Bancorp’s loans and deposits at acceptable risk levels and upon
acceptable terms, expanding its asset base while managing the costs and implementation risks associated with
this growth strategy. There can be no assurance that any expansion will be profitable or that Bancorp will be able
to sustain its growth, either through internal growth or through successful expansions of its banking markets, or
that Bancorp will be able to maintain sufficient levels of capital to support its continued growth. If further
deterioration of the Bank’s credit quality should occur, the need to preserve capital levels above the minimum to
be deemed “well capitalized” could further restrict the Bank’s ability to pursue a growth strategy.
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,
17
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 deposit-pricing pressures, which may, among other things, reduce our profitability.
Checking and savings account balances and other forms of deposits can decrease when our deposit customers
perceive alternative investments, such as the stock market or other non-depository investments, as providing
superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance
coverage. Furthermore, technology and other changes have made it more convenient for bank customers to
transfer funds into alternative investments, including products offered by other financial institutions or non-bank
service providers. Additional increases in short-term interest rates could increase transfers of deposits to higher
yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing,
can increase our costs. When bank customers move money out of bank deposits in favor of alternative
investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively
inexpensive source of funds, thus increasing our funding costs.
Bancorp’s operating results and financial condition would likely suffer if there is deterioration in the general
economic condition of the areas in which the Bank does business. Unlike larger national or other regional
banks that are more geographically diversified, the Bank primarily provides services to customers located in the
Piedmont Triad Region and Coastal Region in NC and the Shenandoah Valley Region in VA. Because the
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 affect on the Bank’s financial condition and results of operations. Even though the Bank’s customers’
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 customers to repay
their loans and generally affect Bancorp’s financial condition and results of operations. A further decline in
general economic conditions in the Bank’s market areas, caused by inflation, recession, unemployment or other
factors which are beyond the Bank’s control would also impact these local economic conditions and could have
an adverse affect on Bancorp’s financial condition and results of operations.
Bancorp and the Bank compete with much larger companies for some of the same business. The banking and
financial services business in our market areas continues to be a competitive field and it is becoming more
competitive as a result of:
•
•
•
Changes in regulations;
Changes in technology and product delivery systems; and
The accelerating pace of consolidation among financial services providers.
We may not be able to compete effectively in our markets, and our results of operations could be adversely
affected by the nature or pace of change in competition. We compete for loans, deposits and customers with
various bank and nonbank financial services providers, many of which are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader array of financial services.
18
Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from
negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to
keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion
could result from our actual or alleged conduct in any number of activities, including lending practices, corporate
governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of
customer information, and from actions taken by government regulators and community organizations in
response to that conduct.
The Bank is subject to environmental liability risk associated with lending activities. A significant portion of
the 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 customers and
counterparties. In deciding whether to extend credit or enter into other transactions, we may rely on information
furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and
other financial information. We may also rely on representations of those customers, counterparties, or other
third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on
inaccurate or misleading financial statements, credit reports, or other financial information could cause us to
enter into unfavorable transactions, which could have a material adverse effect on our financial condition and
results of operations.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of
operations and cash flows. Liquidity is essential to our business. Our ability to implement our business strategy
will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and
other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under
repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our
liquidity. We do not anticipate that our retail and commercial deposits will be sufficient to meet our funding
needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances,
securities sold under agreements to repurchase and other wholesale funding sources to obtain the funds necessary
to implement our growth strategy.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to
us could be impaired by factors that affect us specifically or the financial services industry or economy in
general, including a decrease in the level of our business activity as a result of a downturn in the markets in
which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be
impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and
expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking
organizations and the continued deterioration in credit markets. To the extent we are not successful in obtaining
such funding, we will be unable to implement our strategy as planned which could have a material adverse effect
on our financial condition, results of operations and cash flows.
Changes in our accounting policies or in accounting standards could materially affect how we report our
financial results and condition. Our accounting policies are fundamental to understanding our financial results
and condition. Some of these policies require use of estimates and assumptions that may affect the value of our
assets or liabilities and financial results. Some of our accounting policies are critical because they require
management to make difficult, subjective and complex judgments about matters that are inherently uncertain and
19
because it is likely that materially different amounts would be reported under different conditions or using
different assumptions.
From time to time the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial
accounting and reporting standards or the interpretation of those standards that govern the preparation of our
external financial statements. These changes are beyond our control, can be hard to predict and could materially
impact how we report our results of operations and financial condition. We could be required to apply a new or
revised standard retroactively, resulting in our restating prior period financial statements in material amounts.
Impairment of investment securities, certain other intangible assets, or deferred tax assets could require
charges to earnings, which could result in a negative impact on our results of operations. In assessing the
impairment of investment securities, management considers the length of time and extent to which the fair value
has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability
of Bancorp to retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value in the near term. Under current accounting standards, certain other intangible assets with
indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when
impairment indicators are present. Assessment of certain other intangible assets could result in circumstances
where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such
circumstances, the intangible 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 deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The impact of each of these impairment
matters could have a material adverse effect on our business, results of operations, and financial condition.
Core processing system conversion planned. The Bank plans to convert its core processing system during 2010
in order to enhance its level of customer service and internal efficiency. The replacement of our core processing
systems has wide-reaching impacts on our internal operations and business. We can provide no assurance that the
amount of this investment will not exceed our expectations and result in materially increased levels of expense or
asset impairment charges. There is no assurance that this initiative will achieve the expected cost savings or
result in a positive return on our investment. Additionally, if our new core system does not operate as intended,
or is not implemented as planned, there could be disruptions in our business which could adversely affect our
financial condition and results of operations.
Technological advances impact Bancorp’s business. The banking industry continues to undergo technological
changes with frequent introductions of new technology-driven products and services. In addition to improving
customer services, the effective use of technology increases efficiency and enables financial institutions to
reduce costs. Bancorp’s future success will depend, in part, on our ability to address the needs of the Bank’s
customers by using technology to provide products and services that will satisfy customer demands for
convenience as well as to create additional efficiencies in operations. Many competitors have substantially
greater resources to invest in technological improvements. The Bank may not be able to effectively implement
new technology-driven products and services or successfully market such products and services to its customers.
We rely on other companies to provide key components of our business infrastructure. Third party vendors
provide key components of our business infrastructure such as internet connections, network access and core
application processing. While we have selected these third party vendors carefully, we do not control their
actions. Any problems caused by these third parties, including as a result of their not providing us their services
for any reason or their performing their services poorly, could adversely affect our ability to deliver products and
services to our customers and otherwise to conduct our business. Replacing these third party vendors could also
entail significant delay and expense.
Our information systems may experience an interruption or breach in security. We rely heavily on
communications and information systems to conduct our business. Any failure, interruption, or breach in security
or operational integrity of these systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed
20
to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot
assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they
will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our
information systems could damage our reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.
Government regulations may prevent or impair Bancorp’s ability to pay dividends, engage in mergers or
operate in other ways. Current and future legislation and the policies established by federal and state regulatory
authorities will affect our operations. The Bank is subject to supervision and periodic examination by the FDIC
and the Commissioner. Bancorp is subject to regulation by the Federal Reserve and the Commissioner. Banking
regulations, designed primarily for the protection of depositors, may limit the growth and the return to Bancorp’s
stockholders by restricting certain activities, such as:
•
•
•
•
•
•
•
The payment of dividends to our stockholders;
Possible mergers with or acquisitions of or by other institutions;
Our desired investments;
Loans and interest rates on loans;
Interest rates paid on our deposits;
The possible expansion of our branch offices; and
Our ability to provide securities or trust services.
The Bank also is subject to capitalization guidelines set forth in federal legislation, and could be subject to
enforcement actions to the extent that it is found by regulatory examiners to be undercapitalized. Bancorp cannot
predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect
that such changes may have on Bancorp’s future business and earnings prospects. The cost of compliance with
regulatory requirements may adversely affect our ability to operate profitably.
Unpredictable catastrophic events could have a material adverse effect on Bancorp. The occurrence of
catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods,
severe winter weather (including snow, freezing water, ice storms and blizzards), fires and other catastrophes
could adversely affect 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 customers to access the financial services offered by the Bank. The
incidence and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to
mitigate its exposure to certain catastrophic events, these events could nevertheless reduce 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 resell your common
stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a
variety of factors including, among other things:
•
•
•
•
•
•
Actual or anticipated variations in quarterly results of operations;
Recommendations by securities analysts;
Operating results and stock price performance of other companies that investors deem
comparable to us;
News reports relating to trends, concerns, and other issues in the financial services
industry;
Perceptions in the marketplace regarding us and/or our competitors;
New technology used or services offered by competitors;
21
•
•
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. Bancorp’s common stock
is traded on the NASDAQ Global Select Market. However, the trading volume of Bancorp’s common stock is
relatively low when compared with more seasoned companies listed on the NASDAQ, the NYSE or other
consolidated reporting systems or stock exchanges. Thus, the market in Bancorp’s common stock may be limited
in scope relative to other larger companies. In addition, Bancorp cannot say with any certainty that a more active
and liquid trading market for its common stock will develop.
Bancorp has issued preferred stock and subordinated debentures, all of which rank senior to our common
stock. Bancorp has issued 52,372 shares of Series A Preferred Stock. This series of preferred stock ranks senior
to shares of our common stock. As a result, Bancorp must make dividend payments on the preferred stock before
any dividends can be paid on the common stock and, in the event of our bankruptcy, dissolution or liquidation,
the holders the preferred stock must be satisfied before any distributions can be made on the common stock. If
Bancorp does not remain current in the payment of dividends on the Series A Preferred Stock, no dividends may
be paid on the common stock. In addition, Bancorp has issued $25.8 million in subordinated debentures in
connection with its issuance of trust preferred securities. These debentures also rank senior to the common stock.
Our preferred stock reduces net income available to holders of our common stock and earnings per common
share and the Warrant may be dilutive to holders of our common stock. The dividends declared on our
preferred stock will reduce any net income available to holders of common stock and our earnings per common
share. The preferred stock will also receive preferential treatment in the event of sale, merger, liquidation,
dissolution or winding up of our company. Additionally, the ownership interest of holders of our common stock
will be diluted to the extent the Warrant is exercised.
There may be future sales of additional common stock or preferred stock or other dilution of our equity,
which may adversely affect the market price of our common stock. We are not restricted from issuing
additional common stock or preferred stock, including any securities that are convertible into or exchangeable
for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities.
The market value of our common stock could decline as a result of sales by us of a large number of shares of
common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
There may be future issuances of additional subordinated debentures, which may adversely affect the market
price of our common stock. We may issue additional subordinated debentures in connection with the issuance of
additional trust preferred securities. Such additional debentures would rank senior to the common stock. The
market value of our common stock could decline as a result of future issuances or the perception that such
issuances could occur.
Our common stock is not FDIC insured. 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
22
Item 2.
PROPERTIES
Bancorp 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, 2009, the Bank operated 38 branch offices and two loan
production offices in its three markets: the Piedmont Triad Region and Coastal Region of NC and the
Shenandoah Valley Region of VA. The location of the Bank’s executive and banking offices, their form of
occupancy, deposits as of December 31, 2009, and year opened, is described in the accompanying table:
Location
Owned or Leased
1501 Highwoods Boulevard, Greensboro, NC (1)
38 West First Avenue, Lexington, NC (2)
202 South Main Street, Reidsville, NC (3)
11651-D North Main Street, Archdale, NC
301 East Fremont Street, Burgaw, NC
2386 Lewisville-Clemmons Road, Clemmons, NC
1101 North Main Street, Danbury, NC
801 South Van Buren Road, Eden, NC
2132 New Garden Road, Greensboro, NC
4638 Hicone Road, Greensboro, NC
3202 Randleman Road, Greensboro, NC
1702 Battleground Avenue, Greensboro, NC
201 North Elm Street, Greensboro, NC
200 Westchester Drive, High Point, NC
120 East Main Street, Jamestown, NC
131 East Mountain Street, Kernersville, NC
647 South Main Street, King, NC
1926 Cotton Grove Road, Lexington, NC
500 South Main Street, Lexington, NC (4)
285 Talbert Boulevard, Lexington, NC (5)
60 New U.S. Highway 64 West, Lexington, NC (5)
605 North Highway Street, Madison, NC
11492 Old U.S. Highway 52, Midway, NC
1646 Freeway Drive, Reidsville, NC
202 Turner Drive, Reidsville, NC (4) (5)
8055 Broad Street, Rural Hall, NC (5)
724 National Highway, Thomasville, NC
941 Randolph Street, Thomasville, NC
4481 Highway 150 South, Tyro, NC
3000 Old Hollow Road, Walkertown, NC
10335 North NC Highway 109, Wallburg, NC
6123 Old U.S. Highway 52, Welcome, NC
161 South Stratford Road, Winston-Salem, NC
3500 Old Salisbury Road, Winston-Salem, NC
3384 Robinhood Road, Winston-Salem, NC (5)
Leased
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Leased
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
23
Deposits
(in thousands)
$ -
183,940
71,699
12,450
36,808
20,621
20,679
56,276
81,055
33,487
46,231
13,687
46
35,806
28,215
18,468
45,017
33,575
-
18,902
30,799
31,021
30,944
56,658
26,887
14,408
24,642
26,763
20,705
23,529
29,472
51,040
46,768
41,263
18,491
Year
2004
1949
1910
2003
1999
2001
1997
1996
1997
2000
2000
2008
2009
2001
2004
1997
1997
1968
2004
1983
1969
1997
1973
1972
1969
1997
1993
1987
2002
1997
1992
1958
1997
1978
1997
Location
Owned or Leased
704 South College Road, Wilmington, NC
1001 Military Cutoff Road, Wilmington, NC
440 South Main Street, Harrisonburg, VA
1925 Reservoir Street, Harrisonburg, VA (6)
Leased
Leased
Owned
Owned
Deposits
(in thousands)
41,894
31,239
48,943
20,069
Year
1997
2006
1988
2003
(1) Executive offices of Bancorp and the Bank since July 2007 and November 2007, respectively.
(2) Former headquarters of LSB and LSB Bank. Serves as a full service branch as well as an operations center for the Bank.
(3) Former headquarters of FNB Southeast. Serves as a full service branch as well as an operations center for the Bank.
(4) This location is an express drive through facility that only processes transactions and does not open customer accounts.
(5) During the first quarter of 2010 the Bank closed two branches in Lexington and one branch each in Winston-Salem, Reidsville
and Rural Hall, as part of a plan to restructure operations in the Piedmont Triad Region.
(6) On January 27, 2010 the Bank announced that it will close one of its branches in Harrisonburg, VA during the second quarter of
2010.
Peoples Finance operates from a leased 3,200 square foot, one-story building located at 126 Forest Hill Road,
Lexington, NC.
The Bank also operates loan production offices in leased premises in Burlington and Greensboro, NC.
In addition, as of December 31, 2009, the Bank also operated 16 offsite ATM machines in various locations
throughout its markets.
Further, on December 31, 2009 the Bank assumed the leases for five offices in connection with the acquisition of
the business operations of Bradford Mortgage Company.
Item 3.
LEGAL PROCEEDINGS
In the ordinary course of operations, Bancorp and its subsidiaries are often involved in legal proceedings. In the
opinion of management, neither Bancorp nor its subsidiaries is a party to, nor is their property the subject of, any
material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any
such proceeding been terminated during the fourth quarter of Bancorp’s fiscal year ended December 31, 2009.
24
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices and Dividend Policies
Bancorp’s 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. The table also indicates the cash dividends paid per share during each quarter within the
last two fiscal years. One cash dividend was paid during each of the first three fiscal quarters of 2008. No cash
dividends have been paid in any of the last five fiscal quarters.
Quarter ended
December 31, 2009
September 30, 2009
June 30, 2009
March 31, 2009
December 31, 2008
September 30, 2008
June 30, 2008
March 31, 2008
High
$ 2.78
3.11
2.70
3.04
$ 6.00
9.11
9.60
10.99
Low
$ 1.89
1.82
1.39
0.94
$ 2.01
3.90
6.76
8.00
Close Dividends Paid
$ -
$ 2.22
-
2.74
-
2.07
-
2.11
$ 2.38
4.51
6.90
8.75
$ -
0.05
0.17
0.17
As of March 10, 2010, there were approximately 7,300 beneficial owners, including 3,331 holders of record, of
Bancorp’s common stock.
Holders of Bancorp’s common stock are entitled to receive ratably such dividends as may be declared by
Bancorp’s Board of Directors out of legally available funds. The ability of Bancorp’s Board of Directors to
declare and pay dividends on its common stock is subject to the terms of applicable North Carolina law and
banking regulations. Further, except with the U.S. Treasury’s approval, until such time as Bancorp has redeemed
all of the Series A Preferred Stock or the U.S. Treasury has transferred all of the Series A Preferred Stock to a
third party, prior to December 12, 2011, the payment of dividends on its common stock is limited to a maximum
quarterly dividend of $0.05 per share. Also, Bancorp may not pay dividends on its capital stock if it is in default
or has elected to defer payments of interest under its junior subordinated debentures. The declaration and
payment of future dividends to holders of 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 outstanding options and shares available for future
issuance under equity compensation plans as of December 31, 2009. Individual equity compensation
arrangements are aggregated and included within this table. This table excludes any plan, contract or
arrangement that provides for the issuance of options, warrants or other rights that are given to Bancorp’s
shareholders on a pro rata basis and any employee benefit plan that is intended to meet the qualification
requirements of Section 401(a) of the Code.
25
Number of Shares
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(excluding shares
reflected in
column (a))
(c)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
896,991
$
14.45 1,364,718
Plan Category
Equity Compensation Plans
Approved by Shareholders (1)…..
Equity Compensation Plans Not
Approved by Shareholders ……..
Total …………………………….
-
896,991
-
14.45
$
-
1,364,718
(1) Includes 568,925 shares to be issued upon the exercise of outstanding options, warrants and rights assumed in connection with the
Merger and having a weighted average exercise price of $13.36.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Bancorp did not repurchase any of its equity securities during 2009.
Recent Sales of Unregistered Securities
Except as previously reported in a Current Report on Form 8-K, Bancorp did not sell any of its equity securities
in the last fiscal year which were not registered under the Securities Act of 1933, as amended.
26
FIVE-YEAR STOCK PERFORMANCE TABLE
The following table illustrates the cumulative total shareholder return on Bancorp’s common stock over
the five-year period ended December 31, 2009 and the cumulative total return over the same period of the S&P
500 Index (U.S.) and The Carson Medlin Company Independent Bank Index of 25 independent community
banks located in eight southeastern states. The table assumes $100 originally invested on December 31, 2004 and
that all subsequent dividends were reinvested in additional shares.
NEWBRIDGE BANCORP
Five Year Performance Index
X
E
D
N
I
140
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
2009
NEWBRIDGE
BANCORP
YEAR
INDEPENDENT
BANK INDEX
S&P 500
INDEX
NEWBRIDGE BANCORP
Comparison of Cumulative Total Shareholder Return
Years Ended December 31
NewBridge Bancorp
The Carson Medlin Company's
Independent Bank Index1
S&P 500 Index
2004
2005
2006
2007
2008
2009
100
100
100
109
108
105
108
125
121
73
91
128
17
73
81
16
85
102
1 The Carson Medlin Company’s Independent Bank Index is the compilation of the total return to shareholders over the past five years of a group of 25
independent community banks located in the southeastern states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia and
West Virginia. The total five year return was calculated for each of the banks in the peer group taking into consideration changes in stock price, cash
dividends, stock dividends and stock splits since December 31, 2004. The individual results were then weighted by the market capitalization of each bank
relative to the entire peer group. The total return approach and the weighting based upon market capitalization are consistent with the preparation of the
S&P 500 total return index.
27
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 29 and page 54 below, respectively.
(In thousands, except per share data and performance
measures)
SUMMARY OF OPERATIONS
Years Ended December 31
2009
2008
2007
2006
2005
Interest income........................................................ $
Interest expense ......................................................
98,500 $
117,286 $
97,621 $
39,156
53,852
42,368
67,323 $
24,195
60,425
16,726
Net interest income .................................................
Provision for credit losses.......................................
59,344
35,749
63,434
25,262
55,253
18,952
43,128
5,510
43,699
3,219
Net interest income after provision for credit losses
Noninterest income .................................................
Goodwill impairment ..............................................
Noninterest expense ................................................
23,595
19,177
-
69,546
38,172
20,630
50,437
72,191
36,301
14,998
-
62,356
37,618
14,290
-
43,324
Income (loss) before income taxes..........................
Income taxes ...........................................................
(26,774)
(11,641)
(63,826)
(6,924)
(11,057)
(5,394)
8,584
2,584
(15,133)
Net income (loss) ....................................................
Dividends and accretion on preferred stock............
(2,917)
Net income (loss) available to common shareholders $ (18,050)
(56,902)
(170)
(5,663)
-
$ (57,072) $ (5,663) $
6,000
-
6,000 $
40,480
13,792
-
39,770
14,502
4,865
9,637
-
9,637
Cash dividends declared .........................................
$ - $ 6,106 $ 8,255 $
5,755 $
5,805
SELECTED YEAR END ASSETS
AND LIABILITIES
Investment Securities.............................................. $ 325,339 $ 288,572 $ 369,423 $
Loans, net of unearned income ...............................
Assets......................................................................
Deposits ..................................................................
Shareholders’ equity ...............................................
1,463,094
1,946,526
1,499,310
164,604
1,604,525
2,078,627
1,663,463
179,236
1,490,084
2,057,358
1,627,720
193,153
147,129 $ 128,159
755,398
759,978
975,795
987,746
822,173
817,683
91,829
89,309
PERFORMANCE MEASURES
Net income (loss) to average total assets ................
Net income (loss) to average shareholders’ equity..
Dividend payout......................................................
Average shareholders’ equity to average
(0.88) % (2.72) % (0.40) %
(11.75)
-
(29.38)
N/M
(3.76)
N/M
total assets............................................................
8.30
Average tangible shareholders’ equity to average
tangible total assets ..............................................
8.05
9.25
6.73
9.18
7.51
9.44
9.40
PER SHARE DATA
Earnings (loss) per share:
Basic ....................................................................
Diluted .................................................................
Cash dividends declared .........................................
Book value at end of year .......................................
-
7.17
Tangible book value at end of year……………….. 6.83
$ (1.15) $ (3.64) $ (0.49) $ 0.71
0.71
(1.15) (3.64) (0.49)
0.68
0.39
10.60
8.10
10.54
7.72
0.68
12.30
9.10
28
1.00 %
10.49
0.61 %
6.47
95.92
60.24
9.53
9.49
$ 1.13
1.12
0.68
10.77
10.71
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following presents management’s discussion and analysis of Bancorp’s consolidated financial condition and
results of operations and should be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking
statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated
in forward-looking statements as a result of various factors. The following discussion is intended to assist in
understanding the consolidated financial condition and results of operations of Bancorp.
Bancorp’s principal source of income is from dividends declared and paid by the Bank on its issued and
outstanding capital stock. The majority of Bancorp’s operations occur at the Bank level. Throughout this
discussion, and elsewhere in this Annual Report on Form 10-K, results of operations will often be discussed by
referring to the Bank’s operations, unless a specific reference is made to Bancorp and its operating results apart
from those of the Bank.
Executive Overview
The year ended December 31, 2009 was another challenging year for the U.S., including the areas served by the
Bank, which continued to suffer from the effects of the economic down-turn that began more than a year earlier.
A depressed real estate market, increasing numbers of foreclosures, historically high levels of unemployment,
and reduced business activity and consumer spending resulted in significant write-downs of asset values by
financial institutions, in turn causing many financial institutions to seek additional capital, to merge with larger
and stronger institutions and, in some cases, to fail.
Despite these difficult economic conditions, we experienced a number of successes during 2009, including:
• Returning to profitability during the fourth quarter of 2009;
• Achieving significant reductions in operating and credit-related costs;
• Establishing an allowance for credit losses that compares favorable with peer institutions through early
recognition of credit losses;
• Completing the acquisition of the business operations of Bradford Mortgage Company; and
• Maintaining Bancorp’s and the Bank’s capital levels well above the regulatory levels required to be
considered “well capitalized.”
Our goal is to put this adverse credit cycle behind us as quickly as possible, through early recognition of credit
losses. We believe we have been largely successful in identifying and taking aggressive action with our problem
credits, and have positioned Bancorp to take advantage of opportunities that arise when we emerge from the
recession and to reward our shareholders.
Our Community Bank Strategy and Operating Plan
Background. Bancorp was created in July 2007, following the merger of equals between FNB and LSB. In
November, 2007 the subsidiary banks of FNB and LSB, FNB Southeast and LSB Bank, merged to form
NewBridge Bank, which became the largest community bank in the Piedmont Triad Region of North Carolina.
In July 2008 Pressley A. Ridgill was named Chief Executive Officer of Bancorp, having become President of
Bancorp, and Chief Executive Officer and President of the Bank in 2007. Mr. Ridgill was previously President
and Chief Executive Officer of FNB.
During 2008 Mr. Ridgill enhanced his executive management team. The management team members were
selected for their talents, experience and commitment to Bancorp’s Guiding Principles and basic concept that
“Financial Success Begins with Integrity”. During 2009 the executive management team began to re-define and
implement our Community Bank Strategy and Operating Plan.
29
Strategy. As a community bank, we believe that the Bank’s ability to secure significant returns for our
shareholders can best be achieved through consistent delivery of superior client service to small- and mid-size
businesses and consumers in a manner that the large national and super regional banks are unable or unwilling to
emulate. As of December 31, 2009 all but five of the Bank’s 38 branch offices are located in the Piedmont Triad
Region, a market with approximately $33 billion of deposits. This market is dominated by large national and
regional banks, with approximately 80% of the market’s deposits residing in banks with more than $10 billion of
assets, and only 3% of those balances held at our Bank. Consequently, our strategy is to focus on growing the
Bank’s market share in the Piedmont Triad Region, where a relatively small increase in market share has the
potential to deliver extraordinary gains for Bancorp.
Operating Plan. To ensure the effective implementation of our strategy, management developed our 2009 and
2010 Operating Plans to include measurable goals that communicate throughout the organization the steps
needed to improve Bancorp’s financial results. The Operating Plan objectives for 2010 include:
Improve asset quality;
(cid:131)
(cid:131) Manage the net interest margin;
(cid:131)
Increase noninterest income;
(cid:131) Control noninterest expense; and
(cid:131) Position the Company to fulfill its Vision and Mission.
Improve Asset Quality Management’s primary objective is to put the adverse affects of the recession behind us
as quickly as possible through early recognition of credit losses. We believe we have been largely successful in
identifying and taking appropriate aggressive action with our problem credits. We believe that this prudent
approach allows us to continue through the remainder of 2010 with the expectation that our future financial
performance will benefit from lower credit-related costs.
At December 31, 2009 non-performing assets increased $36.9 million to $85.6 million or 4.40% of total assets,
from $48.6 million or 2.34% of total assets at December 31, 2008. Non-performing loans totaled $58.2 million
at December 31, 2009 and were down 9%, or $5.8 million, from their peak level at June 30, 2009. At December
31, 2009 the allowance for credit losses totaled $35.8 million, or 2.45% of total loans and 62% of non-
performing loans. With most specific losses being recognized directly as charge-offs, the Bank’s allowance for
loan losses consists primarily of non-specific allowances for loans that are not impaired. Specific impairments
have been largely recognized in net charge-offs that totaled $35.7 million for the twelve months ending
December 31, 2009. Since the beginning of the 2008 declining credit cycle, charge-offs have totaled $55
million. Of the remaining $58.2 million of non-performing loans, we believe that losses have largely been
recognized through the $55 million of charge-offs.
Manage the Net Interest Margin Net interest income is the Bank’s primary source of revenue, and is the
difference between interest income and interest expense. In order to effectively manage our net interest income,
management must manage the Bank’s net interest margin, which is the net yield on earning assets less the cost of
interest bearing liabilities, as well as its level of earning assets and funding mix.
During 2009 management began to implement several steps to improve its management and control of the net
interest margin, including:
(cid:131) Enhance our interest rate risk management tools. Early in 2009 management engaged an outside
consultant to begin preparing management’s interest rate risk management tools. Our selected vendor
works with more than 300 banks across the country and has been a leader in the asset liability
management field since the 1980’s.
(cid:131) Reduce the Bank’s dependence on high-cost time deposits in favor of lower-cost core accounts,
including DDA, NOW checking, money market and savings accounts.
(cid:131) Price loans consistently while considering relationship pricing for deposit and other key relationships.
30
(cid:131)
Implement a more disciplined and accountable budget process to include monitoring loan, investment
and deposit yields and balances so that variances are questioned and controllable items are controlled.
While net interest income declined $4.1 million in 2009 to $59.3 million, net interest income and the net interest
margin improved steadily throughout 2009. In the fourth quarter of 2009 net interest income exceeded net
interest income during the 2008 fourth quarter by $2.0 million, totaling $16.5 million for the three months ending
December 31, 2009.
The increase in net interest income for the fourth quarter of 2009 was due primarily to a 72 basis point rise in the
Bank’s net interest margin from 2.91% during the three months ended June 30, 2009 to 3.63% for the three
months ended December 31, 2009. The margin improved during the year as the cost of time deposits fell. The
weighted average deposit cost fell 126 basis points to 1.60% for the quarter ending December 31, 2009,
compared to 2.86% for the quarter ending December 31, 2008. During 2008 the Bank faced irrational deposit
pricing pressure from competing financial institutions. The dramatically increased cost of deposits caused
intense margin compression during late 2008 and the first two quarters of 2009. As management shifted liability
strategies, high-cost time deposits left the Bank for higher rates elsewhere and were replaced with lower-cost
core deposit accounts. NOW checking accounts were featured in the Bank’s marketing campaigns, resulting in
an increase of $90.7 million, or 50.2%, in NOW account balances between June 30, 2009 and December 31,
2009. At December 31, 2009 DDA, NOW, money market and savings account balances totaled 55.0% of the
Bank’s deposits compared to 45.9% at December 31, 2008.
Increase Noninterest Income While the Bank’s primary source of revenue is net interest income, management is
also actively searching for opportunities to diversify revenues through the growth in fee income which will
provide additional value to our clients. We believe market conditions remain favorable to grow our existing
investment services and mortgage banking activities through organic development and through acquisitions, to
the extent that the business models fit with our Vision and Mission.
Noninterest income declined $1.5 million in 2009 to $19.2 million compared to $20.6 million in 2008. The
decline in revenues (excluding one-time events) was due primarily to reduced retail banking revenues, which
was a result of industry-wide trends that we believe are favorable to consumers as the banking industry
implements improved consumer protection processes and policies. The Bank took steps to increase mortgage
banking fees in 2010 through the acquisition on December 31, 2009 of the business operations of Bradford
Mortgage Company, an established community mortgage company operating principally in the Piedmont Triad
Region.
Control noninterest expense We believe that the Bank will emerge from the recession as a more disciplined and
efficient business, with greater opportunities for long-term success. Core to the execution of management’s
operating plan is the implementation of a disciplined cost management culture where “that which is within our
control is controlled.” While certain items such as FDIC insurance costs have proven to be outside our control,
the vast majority of noninterest-related expenses are controllable.
A key element to changing the Bank’s cost management culture is the implementation of a line-item accountable
budget process. Our budgets are now built around a philosophy we termed as the “CAST” philosophy, which is
an acronym for:
(cid:131) Conservative in forecasts and expectations;
(cid:131) Accountable on an account by account basis;
(cid:131) Specific to each individual in the organization so goals and budgets are understood; and
(cid:131) Timely, so that continued monitoring and adjustments can be made
In an extraordinary demonstration of this philosophy, the Bank lowered its 2009 noninterest expense by $8.9
million compared to 2008, excluding one time costs, such as the impairment of goodwill and losses on disposal
of branch locations, and a $3.5 million increase in the cost of FDIC insurance. We are pleased that our
efficiency ratio declined from over 90% early in 2009 to 71% during the fourth quarter of 2009. The
improvement in our efficiency ratio was due in large part to management’s ability to focus the Bank’s attention
31
on eliminating excess costs and inefficient products, services and delivery channels from legacy operations. As
we continue through 2010 we believe the improved cost management culture will significantly improve the
organization’s financial performance.
Position the Bank to fulfill its Vision and Mission We are keenly aware that the Bank is a community bank. We
live in our communities, serve our communities and take deposits and lend them back to our communities. Our
community bank model encourages growth in our communities. It is unlike the business model of many large
regional and national banks, which take wealth in deposits from our communities and redeploy this wealth as
investments in large metropolitan areas. In order to position our Bank to fulfill its Vision and Mission, we must
ensure the organization has the right products, people and delivery channels to be able to serve our communities
in the manner that fulfills our Vision and Mission.
In 2009 the Bank made a number of disciplined but difficult decisions, including a thorough assessment of
branch locations. The assessment targeted the elimination of waste, inefficiency and duplication throughout our
franchise. Management developed a methodology that evaluated each location’s pre-tax contributions, age and
state of the facility, ease of closure, market demographics and overall fit within our strategic plan. When the
assessment was completed, management announced that seven low-performing branch offices would eventually
be closed, and three new branch offices would be added to support current and future customers. The first of
these new branches was opened in downtown Greensboro late in 2009.
Finally, capital planning has remained paramount in this environment. Despite a challenging year, during which
reserves grew and loans were charged-off, Bancorp’s capital levels remain well above the regulatory levels
required to be considered “well capitalized”. At December 31, 2009 Bancorp’s total risk based capital was
12.27%, well above the minimum “well capitalized” level of 10.00%.
Financial Condition at December 31, 2009 and 2008
Bancorp’s consolidated assets of $1.95 billion at year end 2009 reflects a decrease of 6.4% from year end 2008,
following an increase of 1.0% during the previous year. The decrease from year end 2008 to year end 2009 is
primarily a result of a decline in Bancorp’s loan portfolio, while the increase from year end 2007 to year end
2008 was primarily due to loan growth, partially offset by the write off of goodwill. Total average assets
decreased 1.8% from $2.09 billion in 2008, to $2.05 billion in 2009, while average earning assets increased
0.9%, from $1.91 billion in 2008, to $1.93 billion in 2009. The decrease in total average assets was also
primarily the result of a decrease in loans outstanding, while the slight increase in average earning assets was
driven by an increase in interest bearing bank balances.
Gross loans decreased $141.4 million during 2009, or 8.8%, compared to increases of 7.7% in 2008 and 96.1%
in 2007. The decrease in loans is due primarily to principal repayment on existing loans coupled with soft loan
demand in the current economic down turn. Loans secured by real estate totaled $1.22 billion in 2009 and
represented 83.4% of total loans, compared with 82.3% at year end 2008. Within this category, residential real
estate loans decreased 4.4% to $605.0 million and construction loans decreased 19.0% to $177.3 million.
Commercial loans totaled $593.4 million at year end 2009, a decrease of 3.9% from the end of 2008. Consumer
loans decreased 38.3% during 2009, ending the year at $75.5 million. Management believes the Bank is not
dependent on any single customer or group of customers concentrated in a particular industry, the loss of whose
deposits or whose insolvency would have a material adverse effect on operations.
Investment securities (at amortized cost) totaled $317.9 million at year end 2009, a 12.0% increase from $283.7
million at year end 2008. U.S. Government agency securities totaled $49.0 million, or 15.4% of the portfolio at
year end 2009, compared to $56.6 million, or 20.0% of the portfolio one year earlier. Management believes that
the additional risk of owning agency securities over U.S. Treasury securities is negligible and has capitalized on
the favorable spreads available on the former. Mortgage backed securities totaled $77.4 million, or 24.4% of the
portfolio, at December 31, 2009, compared to $97.8 million, or 34.5% of the portfolio at the previous year end.
State and municipal obligations amounted to $105.2 million at year end 2009, and comprised 33.1% of the
portfolio, compared to $115.6 million, or 40.8% of the portfolio a year earlier. During 2009, the Company also
32
began investing in corporate bonds and collateralized mortgage obligations (CMOs). Corporate bonds totaled
$34.0 million, or 10.7% of the portfolio, of which $29.1 million were covered bonds, while CMOs totaled $35.1
million, or 11.0% of the portfolio. The 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, and longer maturity municipal bonds are purchased for
yield and income generation. The Company categorizes the majority of its investment portfolio as “Available for
Sale,” while a small portion is categorized as “Held to Maturity”. The table, “Investment Securities,” presents
the composition of the securities portfolio for the last three years, as well as information about cost, fair value
and weighted average yield.
The competition for deposits within the Bank’s market areas increased significantly during 2008 as larger
national and regional banks increased their rates in an effort to attract deposits and maintain adequate liquidity.
The Bank, which historically has relied on appropriate pricing and high quality customer service to retain and
increase its retail deposit base, was forced to compete with higher rates offered by the larger national and
regional banks in order to satisfy its deposit requirements. During 2009, the Company shifted its liability
strategy, reducing its dependence on high cost time deposits in favor of lower cost core accounts, including
DDA, NOW checking, money market and savings accounts.
Total deposits decreased $164.2 million to $1.50 billion at December 31, 2009, a 9.9% decrease from a total of
$1.66 billion one year earlier. This change was the result of a reduction in time deposits, as the interest rates
offered by the Bank declined substantially during the year. This decrease was partially offset by increases in
money market deposits, as the Bank’s new “FastForward Checking” product, introduced in the third quarter of
2009, grew to $79.7 million at December 31, 2009.
In order to attract additional deposits when necessary, the Bank uses several different sources such as
membership in an electronic deposit gathering network that allows it to post interest rates and attract deposits
from across the U.S. (bulletin board deposits), brokered certificates of deposit secured through broker/dealer
partnerships and deposits obtained through the Promontory InterFinancial Network, also known as CDARS. The
Bank’s reliance on bulletin board deposits has continued to decrease during 2009. Brokered deposits decreased
from $37.6 million at year end 2008 to $15.0 million at year end 2009, while CDARS has increased from $51.6
million at year end 2008 to $58.0 million at year end 2009.
The Bank also has a credit facility available with the FHLB of Atlanta. The Bank utilized a portion of the
approximately $401.5 million credit line with the FHLB of Atlanta to fund earning assets. FHLB borrowings
totaled $165.2 million at year end 2009. In addition to the credit line at the FHLB, the Bank has borrowing
capacity at the Federal Reserve Bank totaling $75.5 million, of which there was $27.6 million outstanding at
December 31, 2009. Management believes these credit lines are a cost effective and prudent alternative to
deposit balances, since particular amounts, terms and structures may be selected to meet current needs.
Financial Condition at December 31, 2008 and 2007
As discussed in Item 1 “Business – General”, Bancorp was created as a result of the Merger of LSB and FNB,
effective July 31, 2007. When reading the following discussion of financial condition at December 31, 2008 and
2007, note that Bancorp’s results of operations for the full year 2007 do not include the operating results for FNB
prior to July 31, 2007.
Bancorp’s consolidated assets of $2.08 billion at year end 2008 reflect an increase of 1.0% over year end 2007.
The increase from year end 2007 to year end 2008 is primarily a result of growth in Bancorp’s loan portfolio,
partially offset by the write off of goodwill. Total average assets increased 46.9% from $1.42 billion in 2007, to
$2.09 billion in 2008. During 2008, Bancorp experienced a 45.2% increase in average earning assets, as average
earning assets totaled $1.91 billion in 2008, compared to $1.32 billion in 2007. The increases in total average
assets and average earning assets were primarily attributable to the Merger, as the assets of the former FNB are
only included for five months of 2007.
33
Gross loans increased $114.4 million during 2008, or 7.7%, compared to increases of 96.1% in 2007 and 0.6% in
2006. Loans secured by real estate totaled $851.5 million in 2008 and represented 53.1% of total loans,
compared with 55.3% at year end 2007. Within this category, residential real estate loans increased 10.0% to
$632.7 million and construction loans decreased 11.9% to $218.7 million. Commercial loans totaled $617.6
million at year end 2008, an increase of 8.1% from the end of 2007. Consumer loans increased 33.3% during
2008, ending the year at $122.4 million.
Investment securities (at amortized cost) totaled $283.7 million at year end 2008, a 22.3% decrease from $365.1
million at year end 2007. U.S. Government agency securities totaled $56.6 million, or 20.0% of the portfolio at
year end 2008, compared to $140.8 million, or 38.6% of the portfolio one year earlier. Management believes
that the additional risk of owning agency securities over U.S. Treasury securities is negligible and has capitalized
on the favorable spreads available on the former. Mortgage backed securities totaled $97.8 million, or 34.5% of
the portfolio, at December 31, 2008, compared to $106.8 million, or 29.2% of the portfolio at the previous year
end. State and municipal obligations amounted to $115.6 million at year end 2008, and comprised 40.8% of the
portfolio, compared to $105.7 million, or 29.0% of the portfolio a year earlier.
Total deposits increased $35.7 million to $1.66 billion at December 31, 2008, a 2.2% increase from a total of
$1.63 billion one year earlier. This change was the result of increased time deposits, partially offset by decreases
in demand deposits and money market deposits.
Net Interest Income
Like most financial institutions, the primary component of the Company’s earnings is net interest income. Net
interest income is the difference between interest income, principally from loans and investments, and interest
expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in
volume and changes in interest rates earned and paid. Volume refers to the average dollar level of interest-
earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income
divided by average interest-earning assets. Spread and margin are influenced by the levels and relative mix of
interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities.
Average Balances and Net Interest Income Analysis. The accompanying table sets forth, for the years 2007
through 2009, information with regard to average balances of assets and liabilities, as well as the total dollar
amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or rates, net interest income, net interest spread, net interest margin and ratio of average interest-
earning assets to average interest-bearing liabilities. Average loans include nonaccruing loans, the effect of
which is to lower the average yield.
34
Average Balances and Net Interest Income Analysis
Fully taxable equivalent basis(1) (Dollars in thousands)
2009
Average
Balance
Interest
Income/
Average
Expense Yield/Rate
Average
Balance
2008
Interest
Income/
Expense
Average
Yield/Rate
Average
Balance
2007
Interest
Income/
Expense
Average
Yield/Rate
Earning assets:
Loans receivable(2) ......................... $ 1,538,777
197,132
Taxable securities ..........................
109,622
Tax exempt securities....................
FHLB stock ……………………... 11,177
Interest-bearing bank balances 54,667
18,751
Federal funds sold..........................
$ 84,089
9,425
6,754
4
186
46
8.06 %
6.49 % $ 1,060,522 $ 85,460
5.46 % $ 1,575,064 $ 101,550
4.89
8,560
175,139
5.33
10,229
191,766
4.78
5.62
3,415
60,717
5.76
6,539
113,480
6.16
467
7,512
3.58
6.22
368
0.04 10,281
3,829
267
0.34 10,189
209 5.41
2.62
424 4.72
9,077
114 1.02
11,187
0.25
Total earning assets................. 1,930,126
100,504
5.21 1,911,967
119,067
6.23
1,316,796
98,535
7.48
Non-earning assets:
24,120
Cash and due from banks...............
Premises and equipment ................
42,889
Other assets ................................... 97,936
(40,584)
Allowance for credit losses............
41,829
45,415
124,075
(31,020)
38,845
29,583
54,067
(15,516)
Total assets.............................. $ 2,054,487
$ 2,092,266
$ 1,423,775
Interest-bearing liabilities:
Savings deposits............................. $
NOW deposits................................
Money market deposits..................
Time deposits.................................
Other Borrowings ..........................
Borrowings from Federal
40,703
195,626
390,042
853,100
75,462
$
41
778
4,327
26,746
2,559
0.10 % $
0.40
1.11
3.14
3.39
41,430 $
65
170,221
802
429,322 10,145
838,205 33,660
3,697
92,296
0.16 %
0.47
2.36
4.02
4.01
35,688
$
146,843
337,413
499,802
38,677
121
$
1,041
13,070
22,454
1,048
0.34 %
0.71
3.87
4.49
2.69
Home Loan Bank ......................
149,559
4,706
3.15
148,206
5,483
3.70
90,201
4,634
5.15
Total interest-bearing liabilities
1,704,492
39,157
2.30
1,719,680
53,852
3.13
1,148,624
42,368
3.69
Other liabilities and shareholders’
equity:
Demand deposits............................
Other liabilities ..............................
Shareholders’ equity ......................
158,436
20,988
170,571
Total liabilities and
shareholders’ equity.............. $ 2,054,487
Net interest income and net
interest margin(3) .....................
Interest rate spread(4) ..........................
164,712
14,223
193,651
132,066
12,320
130,765
$ 2,092,266
$ 1,423,775
_________
$ 61,347
3.18 %
$
65,215
3.41 %
$ 56,167
4.27 %
2.91 %
3.10 %
3.79%
(1)
(2)
(3)
(4)
Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax
rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable-
equivalent basis were $2,004 for 2009, $1,781 for 2008, and $914 for 2007.
Average loans receivable include non-accruing loans. Amortization of loan fees, net of deferred costs, of $1,449, $2,231, and $2,224 for
2009, 2008 and 2007, respectively, are included in interest income.
Net interest margin is computed by dividing taxable-equivalent net interest income by average earning assets.
Interest rate spread is computed by subtracting interest-bearing liability rate from earning asset yield.
35
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) (in thousands)
Volume
Variance(2)
2009 2008
Rate
Variance(2)
Volume
Variance(2)
Total
Variance
Rate
Variance(2)
Total
Variance
Interest income:
Loans receivable ................. ………………………… $
Taxable investment securities ………………………
Tax exempt investment securities ...... ………………
FHLB stock................................. ……………………
Interest-bearing bank balances ....... …………………
Federal funds sold... …………………………………
Total interest income ......... ………………………
$ (15,247)
(2,214)
(1,082)
278
443
(228)
29
(393)
320 (401)
(117)
49
(16,799)
(1,764)
$ (19,606)
$ 16,090
812 1,669
$ (17,461)
$ 35,696
(804) 857
215 3,037 87 3,124
(99)
(364)
(237)
138
58
(81) 207 (149)
(310)
(393)
(68) 83
20,532
(19,486)
40,018
(18,563)
Interest expense:
(56)
Savings deposits ................. …………………………
NOW deposits………………………………………. 107 (131) (24) 149 (388) (239)
Money market deposits……………………………… (857) (4,961) (5,818) 1,356 (4,281) (2,925)
Time deposits……………………………………….. 589 (7,503) (6,914) 13,775 (2,569) 11,206
(1,138) 1,956 693 2,649
Other borrowings.........................................................
(777) 2,410
Borrowings from FHLB ..................................... ……
19,663
(14,695)
Total interest expense ……………………………
(616) (522)
49 (826)
(13,966)
(24) 17 (73)
(1) (23)
(1,561)
(8,179)
849
11,484
(729)
Increase (decrease) in net interest income ..... ……… $ (1,035)
$ (2,833)
$ (3,868)
$ 20,355
$ (11,307) $ 9,048
(1)
Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 35% and is then reduced by the non-deductible portion of interest expense.
(2) The volume/rate variance for each category has been allocated on a consistent basis between rate and volume variances, based on
the percentage of rate, or volume, variance to the sum of the two absolute variances.
Results of Operations –Years Ended December 31, 2009 and 2008
Net Income. Net loss available to common shareholders for 2009 was $18.1 million, representing a net loss per
diluted share of $1.15, compared to net loss to common shareholders of $57.1 million, or $3.64 per diluted share
the prior year. Excluding the goodwill impairment, the net loss available to common shareholders for 2008 was
$6.6 million, representing a net loss per diluted share of $0.42. The decrease in net loss for 2009 is mostly
attributed to the write off of $50.4 million of goodwill during 2008, partially offset by an increase in the
provision for credit losses as a result of the continued weakness in the national and regional economies. Net
interest income after provision for credit losses decreased by $14.6 million, or 38.2%, as compared to 2008. The
taxable equivalent net interest margin decreased 23 basis points during 2009, to 3.18%, from 3.41% for 2008.
Noninterest income decreased $1.5 million, or 7.0%, in 2009, while noninterest expense for 2009 decreased
$53.1 million, or 43.3%. The provision for loan losses in 2009 was $35.7 million, up $10.5 million, or 41.5%
from $25.3 million in 2008. Return on average assets for 2009 was (0.98)% compared to (2.72)% for 2008.
Return on average shareholders' equity for 2009 was (11.75)% compared to (29.38)% in 2008. The Company
experienced some balance sheet contraction during 2009, primarily as a result of a decrease in the loan portfolio.
There was a decrease in loans of $141.4 million, or 8.8%. Consolidated assets in 2009 decreased $132.1 million,
or 6.4% compared to 2008. Consolidated deposits decreased in 2009 by $164.2 million, or 9.9% compared to
2008.
36
Net Interest Income. Net interest income represents the gross profit from the lending and investment activities of
a banking organization and is the most significant factor affecting the earnings of the Company. Net interest
income is influenced by changes in interest rates, volume and the mix of these various components. Net interest
income for 2009, on a taxable-equivalent basis, decreased $3.9 million, or 5.9%, compared to 2008. This was
primarily due to a decline in net interest margin, which decreased 23 basis points. Average earning assets in
2009 increased $18.2 million, or 0.9%, to $1.93 billion, compared to $1.91 billion in 2008. Average interest-
bearing liabilities for 2009 decreased $15.2 million, or 0.9%, to $1.70 billion, compared to $1.72 billion for
2008.
The taxable-equivalent net interest margin for 2009 decreased to 3.18%, compared to 3.41% for 2008, a decline
of 23 basis points. During 2009, the Bank reduced its dependence on high cost time deposits, and, as a result, net
interest income and the net interest margin improved steadily throughout 2009. In 2009, the average yield on
earning assets decreased by 102 basis points while the average rate on interest-bearing liabilities decreased by 83
basis points, which resulted in a decrease in the interest rate spread in 2009 of 19 basis points compared to the
prior year.
The table, “Average Balances and Net Interest Income Analysis,” summarizes net interest income and average
yields earned, and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate
Variance Analysis” presents the changes in interest income and interest expense attributable to volume and rate
changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses. The Company recorded a $35.7 million provision
for credit losses during the year ended December 31, 2009, compared to a $25.3 million provision during the
previous year. The increase in 2009 is primarily a result of continued weakness in asset and credit quality caused
by the downturn in the real estate market, disruption and volatility in the financial markets, and the overall
decline in the local and national economies. In addition, during 2009, the Company has improved its process for
identifying and taking appropriate aggressive action with its problem credits. The Company’s allowance for
credit losses remained essentially unchanged from the prior year end and was $35.8 million at December 31,
2009. The allowance for credit losses expressed as a percentage of total loans increased from 2.23% at December
31, 2008 to 2.45% at December 31, 2009.
Noninterest Income. In 2009, noninterest income decreased $1.5 million, or 7.0%, and totaled $19.2 million
compared to $20.6 million in 2008. Fee income from service charges on deposit accounts for 2009 decreased
$0.8 million, or 8.6%, compared to 2008. Noninterest income for 2009 includes $0.4 million in gains from the
sales of investment securities, compared to $2.5 million of such gains during the previous year. These declines were
partially offset by growth in mortgage banking revenue and investment services income, which increased 51.8%
and 35.7%, respectively from the previous year. Other income for 2009 includes a $1.1 million gain from the
sale of merchant card services, and also includes $0.6 million of income on an investment in bank-owned life
insurance, compared to $1.1 million of income from bank-owned life insurance in 2008. For the detailed change
in other operating income please see the table “Other Operating Income and Expenses” in Note 13 of the Notes
to Consolidated Financial Statements of this Annual Report on Form 10-K.
Noninterest Expense. In 2009, noninterest expense was $69.5 million, representing a decrease of $53.1 million,
or 43.3%, from 2008. The decrease was primarily the result of the write off of $50.4 million of goodwill in
2008. Excluding one time costs, such as the impairment of goodwill, losses on disposal of branch locations, and
a $3.5 million increase in the cost of FDIC insurance, non-interest expense declined $8.9 million for the twelve
months ending December 31, 2009 compared to the same period in 2008. Personnel expense, consisting of
employee salaries and benefits, decreased $4.3 million, or 12.2%, primarily as a result of headcount reductions
taken during the year. For the detailed changes in other operating expenses, please see the table “Other
Operating Income and Expense” in Note 13 of the Notes to Consolidated Financial Statements of this Annual
Report on Form 10-K.
Provision for Income Taxes. Bancorp recorded a tax benefit of $11.6 million in 2009, compared to a tax benefit
totaling $6.9 million in 2008. The tax benefits in both years are primarily attributable to the provisions for credit
losses and asset writedowns recorded during those years. Bancorp’s effective tax rates were (43.5)% in 2009 and
37
(10.8)% in 2008. Excluding the goodwill impairment in 2008, the effective rate for 2008 was (51.7)%. In 2009,
the difference between the effective tax rate and the statutory rate was principally due to tax exempt interest
income. In 2008, the difference between the effective rate and the statutory rate was primarily the result of the
write off of goodwill.
Results of Operations –Years Ended December 31, 2008 and 2007
Net Income. Net loss available to common shareholders for 2008 was $57.1 million, representing a net loss per
diluted share of $3.64, compared to net loss of $5.7 million, or $0.49 per diluted share the prior year. Excluding
the goodwill impairment, the net loss available to common shareholders for 2008 was $6.6 million, representing
a net loss per diluted share of $0.42. The increase in net loss for 2008 is mostly attributed to the write off of
$50.4 million of goodwill during 2008, and to an increase in the provision for credit losses as a result of the
deterioration in the national economy during the year, as well as lower net interest margin caused by the Federal
Reserve’s interest rate reductions. Net interest income after provision for credit losses increased by $2.5 million,
or 7.0%, as compared to 2007. The taxable equivalent net interest margin decreased 83 basis points during 2008,
to 3.41%, from 4.27% for 2007. Noninterest income increased $5.6 million, or 37.2%, in 2008, while
noninterest expense for 2008 increased $60.9 million, or 97.7%. The provision for loan losses in 2008 was $25.3
million, up $6.3 million, or 33.3% from $19.0 million in 2007. Return on average assets for 2008 was (2.72)%
compared to (0.40)% for 2007. Return on average shareholders' equity for 2008 was (29.38)% compared to
(3.76)% in 2007. The Company experienced a small amount of balance sheet growth during 2008, primarily as a
result of an increase in the loan portfolio. There was an increase in loans of $114.4 million, or 7.7%.
Consolidated assets in 2008 increased $21.3 million, or 1.0% compared to 2007. Consolidated deposits
increased in 2008 by $35.7 million, or 2.2% compared to 2007.
Net Interest Income. Net interest income represents the gross profit from the lending and investment activities of
a banking organization and is the most significant factor affecting the earnings of the Company. Net interest
income is influenced by changes in interest rates, volume and the mix of these various components. Net interest
income for 2008, on a taxable-equivalent basis, increased $9.7 million, or 17.2%, compared to 2007. This was
primarily due to substantial increases in both earning assets and interest-bearing liabilities as a result of the
Merger, partially offset by the decline in net interest margin. Average earning assets in 2008 increased $595.2
million, or 45.2%, to $1.91 billion, compared to $1.32 billion in 2007. Average interest-bearing liabilities for
2008 increased $571.1 million, or 49.7%, to $1.72 billion, compared to $1.15 billion for 2007.
The taxable-equivalent net interest margin for 2008 decreased to 3.41%, compared to 4.27% for 2007, a decline
of 83 basis points. The market for deposits continued to be very competitive in 2008, requiring the Bank to keep
deposit rates at a relatively high level in order to attract and retain deposits, while a series of Federal Reserve
interest rate reductions substantially lowered yields on loans. In 2008, the average yield on earning assets
decreased by 122 basis points while the average rate on interest-bearing liabilities decreased by 56 basis points,
which resulted in a decrease in the interest rate spread in 2008 of 66 basis points compared to the prior year.
The table, “Average Balances and Net Interest Income Analysis,” summarizes net interest income and average
yields earned and rates paid for the years indicated, on a taxable-equivalent basis. The table, “Volume and Rate
Variance Analysis” presents the changes in interest income and interest expense attributable to volume and rate
changes between the years indicated.
Provision for Credit Losses and Allowance for Credit Losses. Bancorp recorded a $25.3 million provision for
credit losses during the year ended December 31, 2008, compared to a $19.0 million provision during the
previous year. The increase in 2008 is primarily a result of weakening asset and credit quality caused by the
downturn in the real estate market, disruption and volatility in the financial markets, and the overall decline in
the local and national economies. Bancorp’s allowance for credit losses increased from $30.4 million at
December 31, 2007 to $35.8 million at December 31, 2008. The allowance for credit losses expressed as a
percentage of total loans increased from 2.04% at December 31, 2007 to 2.23% at December 31, 2008.
Noninterest Income. In 2008, noninterest income increased $5.6 million, or 37.2%, and totaled $20.6 million
compared to $15.0 million in 2007. Fee income from service charges on deposit accounts for 2008 increased
38
$1.5 million, or 19.7%, compared to 2007, as a result of the additional deposit accounts acquired in the Merger.
Noninterest income for 2008 includes $2.5 million in gains from the sales of investment securities. Other
operating income for 2008 increased $1.5 million, or 22.1% to $8.4 million, from $6.9 million in 2007. Other
income for 2008 includes $1.1 million of income on an investment in bank-owned life insurance, compared to
$462,000 in 2007. For the detailed change in other operating income please see the table “Other Operating
Income and Expenses” in Note 13 of the Notes to Consolidated Financial Statements of this Annual Report on
Form 10-K.
Noninterest Expense. In 2008, noninterest expense was $123.3 million, representing an increase of $60.9 million,
or 97.7%, from 2007. The increase was primarily the result of the write off of $50.4 million of goodwill.
Personnel expense, consisting of employee salaries and benefits, increased $5.1 million, or 16.5%, primarily as a
result of the increased personnel due to the Merger, partially offset by headcount reductions taken during the
year. Occupancy expense increased to $4.5 million for 2008 compared to $2.9 million in 2007, and furniture and
equipment expense increased to $4.7 million for 2008 compared to $3.6 million in 2007, as a result of the
Merger. Other expense includes increases in automated services and advertising expenses during 2008 compared
to 2007, also related to the Merger. For the detailed changes in other operating expenses, please see the table
“Other Operating Income and Expense” in Note 13 of the Notes to Consolidated Financial Statements of this
Annual Report on Form 10-K.
Provision for Income Taxes. Bancorp recorded a tax benefit of $6.9 million in 2008, compared to a tax benefit
totaling $5.4 million in 2007. The tax benefits in both years are primarily attributable to the provisions for credit
losses and asset writedowns recorded during those years. Bancorp’s effective tax rates were (10.8)% in 2008 and
(48.8)% in 2007. Excluding the goodwill impairment in 2008, the effective rate for 2008 is (51.7)%. In 2008,
the difference between the effective rate and the statutory rate was primarily the result of the write off of
goodwill. In 2007, the difference between the effective tax rate and the statutory rate was principally due to tax
exempt interest income.
Liquidity and Cash Flow
Market and public confidence in our financial strength and in the strength of financial institutions in general will
largely determine our access to appropriate levels of liquidity. This confidence is significantly dependent on our
ability to maintain sound asset quality and appropriate levels of capital resources. Liquidity management refers
to the policies and practices that ensure the Bank has the ability to meet day-to-day cash flow requirements based
primarily on activity in loan and deposit accounts of the Bank’s customers. Management measures our liquidity
position by giving consideration to both on- and off-balance sheet sources of, and demands for, funds on a daily
and other periodic bases. Deposit withdrawals, loan funding and general corporate activity create the primary
needs for liquidity for the Bank. Sources of liquidity include cash and cash equivalents, net of federal
requirements to maintain reserves against deposit liabilities, investments available for sale, loan repayments, loan
sales, increases in deposits, and increases in borrowings from the FHLB secured with pledged loans and
securities, and from correspondent banks under overnight federal funds credit lines and securities sold under
repurchase agreements.
Bancorp has sufficient cash and cash equivalents on hand at December 31, 2009 to provide for Bancorp’s
obligations and service its debt for approximately three years.
The investment portfolio at December 31, 2009 included securities with a par value of approximately $135.4
million with call features, whereby the issuers of such securities have the option to repay the security before the
contractual maturity date. Bancorp anticipates that a number of these debt instruments may be called by their
issuers during 2010, due to the continued low interest rates available for short term debt issuance.
The Bank has the ability to manage, within competitive and cost of funds constraints, increases in deposits within
its market areas. The Bank is a member of an electronic network that allows it to post interest rates and attract
certificates of deposit nationally. It also utilizes CDARS and brokered deposits to supplement in-market deposit
growth.
39
The Bank has established wholesale repurchase agreements with regional brokerage firms. The Bank can access
this additional source of liquidity by pledging investment securities with the brokerage firms.
Liquidity is further enhanced by a line of credit with the FHLB, amounting to approximately $401.5 million,
collateralized by FHLB stock, investment securities, qualifying 1 to 4 family residential mortgage loans, and
qualifying commercial real estate loans. Based upon collateral pledged, as of December 31, 2009, the borrowing
capacity under this line was $263.6 million, with $48.4 million available to be borrowed. The Bank provides
various reports to the FHLB on a regular basis to maintain the availability of the credit line. Each borrowing
request to the FHLB is initiated through an advance application that is subject to approval by the FHLB before
funds are advanced under the line of credit. In addition to the credit line held at the FHLB, the Bank has
borrowing capacity at the Federal Reserve Bank of Richmond (“Federal Reserve Bank”) totaling $75.5 million,
of which $27.6 million was outstanding at December 31, 2009.
As presented in the Consolidated Statement of Cash Flows, Bancorp generated $12.1 million in operating cash
flow during 2009, compared to $21.9 million in 2008 and $19.1 million in 2007. The decrease from 2008 to
2009 was primarily a result of an increase in loans held for sale during 2009 compared to a decrease in loans held
for sale during 2008. The increase from 2007 to 2008 is the result of an increase in the provision for credit
losses, as well as an increase in loans held for sale, which was partially offset by a decline in other assets
compared to the previous year.
Cash provided by investing activities was $102.2 million in 2009, compared to cash used for investing activities
of $115.6 million and $45.1 million in 2008 and 2007, respectively. Cash flows for 2009 included an inflow of
$83.9 million related to a decrease in the loan portfolio, compared to cash outflows of $156.3 million in 2008 as
the loan portfolio increased. The increase in cash used in 2008 compared to 2007 was primarily a result of an
increase in loans made to customers, partially offset by net proceeds from maturities of available for sale
securities. In addition, Bancorp acquired $14.8 million in cash as a result of the Merger in July 2007.
Cash used in financing activities was $115.4 million in 2009, compared to cash provided by financing activities
of $80.8 million in 2008 and $38.2 million in 2007. Cash flows for 2009 included an outflow of $225.8 million
related to a decrease in time deposits, while 2008 included cash inflows of $85.9 million from increases in time
deposits. The increase in cash provided from 2007 to 2008 is primarily the result of the proceeds from issuance
of preferred stock and warrants. The cash provided by financing activities in 2007 was reduced by payments to
the Federal Home Loan Bank to reduce outstanding borrowings.
Contractual Obligations and Commitments
In the normal course of business there are various outstanding contractual obligations of Bancorp that will
require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments
to extend credit, which may or may not require future cash outflows. Payments for borrowings do not include
interest. Payments related to leases are based on actual payments specified in the underlying contracts. The
following table reflects the material contractual obligations of Bancorp outstanding as of December 31, 2009.
40
Contractual Obligations
(in thousands)
Junior subordinated notes and wholesale
repurchase agreements
Federal Home Loan Bank borrowings
Federal Reserve Bank borrowings
Operating lease obligations
Purchase obligations
Other long-term liabilities
Total contractual cash obligations
excluding deposits
Within One
Year
$ 10,000
112,500
27,600
1,657
4,454
2,383
Payments Due by Period
One Year
to Three
Years
Three Years
to Five
Years
After
Five
Years
$ 15,000
37,700
-
$ -
15,000
-
2,198
1,477
2,657
1,534
682
2,941
$ 46,774
-
-
727
580
8,613
Total
$ 71,774
165,200
27,600
6,116
7,193
16,594
158,594
59,032
20,157
56,694
294,477
Deposits
Total contractual cash obligations
1,415,830
$ 1,574,424
76,399
$ 135,431
6,722
$ 26,879
359
$ 57,053
1,499,310
$ 1,793,787
Capital Resources
Banks, bank holding companies, and financial holding companies, as regulated institutions, must meet required
levels of capital. The Federal Reserve and the FDIC have minimum capital regulations or guidelines that
categorize components and the level of risk associated with various types of assets. Financial institutions are
required to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance
with the guidelines. On August 26, 2005, FNB completed a private placement of trust preferred securities in the
amount of $25.0 million, and contributed $24.0 million of the proceeds to its bank subsidiary as capital to
support the bank’s growth. See Note 8 of the Notes to the Consolidated Financial Statements for a discussion of
FNB’s issuance of trust preferred securities. On December 12, 2008, the Company sold Series A Preferred Stock
and a Warrant to the U.S. Treasury for $52.4 million as part of the CPP. As shown in Note 19 of the Notes to
the Consolidated Financial Statements, the Company and the Bank both maintained capital levels exceeding the
minimum levels required to be categorized as “well capitalized” for each of the three years presented.
The Company’s stock repurchase program expired on May 31, 2009. The Company did not repurchase any
shares under the stock repurchase program during 2009.
On July 31, 2007, the Company issued 7,554,362 shares of its common stock valued at approximately $117
million in the Merger.
Lending Activities
General. The Bank offers a broad array of lending services, including construction, real estate, commercial and
consumer loans, to individuals and small to medium-sized businesses and retail clients that are located in or
conduct a substantial portion of their business in the Bank’s market areas. The Bank’s total loans at December
31, 2009, were $1.46 billion, or 75.2% of total assets. At December 31, 2009, the Bank had no large loan
concentrations (exceeding 10% of its portfolio) in any particular industry, other than real estate. The Bank’s
legal lending limit at December 31, 2009 was $32.3 million and the largest credit relationship was approximately
$14.2 million.
Loan Composition. The following table summarizes, at the dates indicated, the composition of the Bank’s loan
portfolio and the related percentage composition. A substantial portion of the increases from 2006 to 2007 are as
a result of the Merger.
41
Summary of Loan Portfolio
(dollars in thousands)
2009
% Of
Total
Amount Loans
2008
% Of
Total
Amount Loans
December 31
2007
% Of
Total
Amount Loans
40.6 % $ 617,591 38.5 % $ 571,575 38.4 % $ 279,372 36.8 % $ 288,240
38,179
12.1
354,322
41.3
72,336
5.2
2,321
0.8
248,222 16.6
575,139 38.6
6.2
91,826
0.2
3,322
218,741 13.6
632,729 39.5
7.6
122,412
0.8
13,052
2005____
% Of
Total
Amount Loans
38.1 %
5.0
46.9
9.6
0.4
% Of
Total
Amount Loans
59,959
357,772
60,953
1,922
7.9
47.1
8.0
0.2
2006
Commercial .................................................... $ 593,423
Real estate – construction............................... 177,285
Real estate – mortgage ................................... 605,060
Consumer........................................................ 75,469
Other ............................................................... 11,857
Total ................................................$ 1,463,094 100.0 % $ 1,604,525 100.0 % $ 1,490,084 100.0 % $ 759,978 100.0 % $ 755,398 100.0 %
The Company has no foreign loan activity.
Real Estate Loans. Loans secured by real estate for a variety of purposes constituted $782.3 million, or 53.5%,
of the Bank’s total loans at December 31, 2009. At year end 2009, the Bank had real estate loan relationships of
various sizes ranging up to $13.1 million and commitments up to $14.2 million, secured by office buildings,
retail establishments, residential development and construction, warehouses, motels, restaurants and other types
of property. Loan terms are typically limited to five years, with payments through the date of maturity generally
based on a 15-20 year (15-30 year for owner-occupied single and multi-family properties) amortization schedule.
Interest rates may be fixed or adjustable, based on market conditions, and the Bank generally charges an
origination fee. Management has attempted to reduce credit risk in the real estate portfolio by emphasizing loans
on owner-occupied office, multi-family and retail buildings where the loan to value ratio, established by
independent appraisals, does not exceed 70% to 80%, and net projected cash flow available for debt service
amounts to at least 120% to 135% of the debt service requirement. The Bank also often requires personal
guarantees and personal financial statements from the principal owners in such cases.
During the second quarter of 2005, Prince George Court Holdings, Inc, a subsidiary of the Bank, acquired a
partially completed residential condominium development project in Georgetown, South Carolina by means of a
deed-in-lieu of foreclosure in satisfaction of a $3.4 million loan previously made to develop the project.
Writedowns were recorded for $400,000 in 2005 and $1.0 million in 2006. In the first quarter of 2007, the Bank
began to build out the project in preparation for future sale. In the fourth quarter of 2007, management made the
property available for sale, while at the same time continuing to build out the project, and recorded an additional
$2.0 million writedown. A further writedown of $1.3 million was recorded during the fourth quarter of 2008.
As of December 31, 2009, construction of the project is complete, two units have been sold and marketing of the
remaining 14 units continues. The property has a carrying value of approximately $4.1 million as of December
31, 2009.
The Bank originates fixed and adjustable rate mortgages as well as FHA, VA and USDA Government supported
loans for resale into the secondary market. The Bank provides a bank-held mortgage product to accommodate
qualified borrowers who do not meet all the standards for a conventional secondary market mortgage. During
2009 the Bank originated $97.4 million of loans in these various categories. Included in real estate mortgage
loans are home equity revolving lines of credit, with $234.7 million outstanding as of December 31, 2009.
Real Estate - Construction Loans. The Bank’s current lending strategy is to reduce exposure in this portfolio
segment. The Bank expects that the majority of its new construction and development loans on commercial and
residential projects will be in the range of $300,000 to $5.0 million. At December 31, 2009 and 2008, the Bank
held $177.3 million and $218.7 million of such loans. To reduce credit risk associated with such loans, the Bank
emphasizes small commercial centers that are substantially preleased, or residential projects that are substantially
presold and built in strong, proven markets. The leases on commercial projects must generally result in a loan to
appraised value of 75% to 80% or less and a net cash flow to debt service at no less than 120% to 135%. The
Bank typically requires a personal guarantee from the developer or builder. Loan terms are generally 12-15
months, although the Bank occasionally will make a “mini-permanent” loan for purposes of construction and
development of up to a five year term. Rates can be either fixed or variable, and the Bank usually charges an
origination fee. The Bank experienced net charge-offs from real estate loans of $28.5 million in 2009, $12.0
million in 2008, and $3.6 million in 2007.
42
Commercial Loans. The Bank makes loans for commercial purposes to various types of businesses. At
December 31, 2009, the Bank held $593.4 million of commercial loans, or 40.6% of its total loan portfolio.
Equipment loans are typically made on terms up to five years at fixed or variable rates, with the financed
equipment pledged as collateral to the Bank. The Bank attempts to reduce its credit risk on these loans by
limiting the loan to value percentage to 80%. Working capital loans are made on terms typically not exceeding
one year. These loans may be secured or unsecured, but the Bank attempts to limit its credit risk by requiring the
borrower to demonstrate its capacity to produce net cash flow available for debt service equal to 120% to 150%
of its debt service requirements. The Bank experienced net charge-offs from commercial loans of $3.4 million in
2009, $4.1 million in 2008, and $3.3 million in 2007.
Consumer Loans. Using a centralized underwriting process, the Bank makes a variety of loans to individuals for
personal and household purposes, including (i) secured and unsecured installment and term loans originated
directly by the Bank; (ii) unsecured revolving lines of credit, and (iii) amortizing secured lot loans. Certain of
the direct loans are secured by the borrowers’ residences. At December 31, 2009, the Bank held $75.5 million of
consumer loans. During 2009, 2008, and 2007, the Bank experienced net consumer chargeoffs of $3.9 million,
$3.7 million, and $1.5 million, respectively.
Loan Approval and Review. When the aggregate outstanding loans to a single borrower or related entities
exceed an individual officer’s lending authority, the loan request must be considered and approved by an officer
with a higher lending limit. All consumer purpose loan decisions are made by the Bank’s Central Underwriting
Support Group. Area executives can generally approve commercial relationships up to $750,000. If the lending
request exceeds the area executive’s lending limit, the loan must be submitted to and approved by a senior credit
officer. A senior credit officer has authority to approve commercial relationships up to $2,500,000 on a secured
basis. All loan relationships in excess of $2,500,000 must be approved by the Chief Credit Officer (“CCO”),
who may approve loan relationships up to $5,000,000. Loan relationships exceeding $5,000,000 up to
$10,000,000 must be unanimously approved by a committee of a senior credit officer, the CCO, and the Bank’s
Chief Executive Officer (“CEO”). Loan relationships over $10,000,000 must be approved by the Credit
Management Committee of the Bank’s Board of Directors.
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, and an
additional number of loan reviews to be completed by independent loan review consulting firms. In addition, all
loan officers are charged with the responsibility of reviewing their portfolios and making adjustments to the risk
ratings as needed. The “Watch Loan Committee”, which includes the CCO, the Special Assets Manager and the
Special Assets Officers, reviews all loans graded special mention, substandard, doubtful and loss on a monthly
basis, and this meeting is observed by the Loan Review Manager and summarized for the Credit Management
Committee, also on a monthly basis.
The 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. A specified
minimum percentage of loans in each adverse asset classification category, based on the historical loss
experience of the Bank in each such category, are used to determine the adequacy of the Bank’s allowance for
credit losses monthly. These loans are also individually reviewed by the Watch Loan Committee of the Bank to
determine whether a greater allowance allocation is justified due to the facts and circumstances of a particular
adversely classified loan.
The Bank’s loan portfolio is analyzed on an ongoing basis to evaluate current risk levels, and risk grades are
adjusted accordingly. The Bank’s allowance for credit losses is also analyzed monthly by management. This
analysis includes a methodology that separates the total loan portfolio into homogeneous loan classifications for
purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve
requirement to the dollar volume of loans within a homogenous group. Major loan portfolio subgroups include:
risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. The
provisions of ASC 310-10-35 “Loans that Are Identified for Evaluation or that Are Individually Considered
43
Impaired” are applied to individually significant loans. Finally, individual reserves may be recorded based on a
review of loans on the watch list. See also Note 5 in the Notes to Consolidated Financial Statements of this
Annual Report on Form 10-K.
Loan Portfolio – Maturities and Interest Rate Sensitivities
(in thousands)
One Year
or Less
$ 125,825
95,549
68,726
26,846
1,100
$ 318,046
Maturity
Over One
Year to
Five Years
$ 378,585
56,996
171,877
44,712
58
$ 652,228
Over
Five
Years
$ 89,013
24,740
364,457
3,911
10,699
$ 492,820
Maturity Greater Than One Year
Floating or
Adjustable
Rate
Fixed Interest
Rate
$ 355,145
59,085
123,740
44,301
725
$ 582,996
$ 112,453
22,651
412,594
4,322
10,032
$ 562,052
Total
$ 593,423
177,285
605,060
75,469
11,857
$ 1,463,094
Commercial
Real estate – construction
Real estate – mortgage
Consumer
Other
Total
Asset Quality
The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process
to ensure adherence to its lending policy as approved by the Bank’s Board of Directors. See “Lending Activities
– Loan Approval and Review”. It is the responsibility of each lending officer to assign an appropriate risk grade
to every loan originated. Credit Administration, through the loan review process, validates the accuracy of the
initial risk grade assessment. In addition, as a given loan’s credit quality improves or deteriorates, it is the
lending officer’s responsibility to recommend appropriate changes in the borrower’s risk grade.
Currently, the grading process utilized by the Bank is segmented by product type. This methodology does not
provide a direct correlation with groupings utilized in the other tables presenting loan information.
The Bank’s loan portfolio consists of loans made for a variety of commercial and consumer purposes. Because
commercial loans are made based to a great extent on the Bank’s assessment of a borrower’s income, cash flow,
character and ability to repay, such loans are generally viewed as involving a higher degree of credit risk than is
the case with residential mortgage loans or consumer loans. To manage this risk, the Bank’s commercial loan
portfolio is managed under a defined process which includes underwriting standards and risk assessment,
procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration and
portfolio reviews to assess loss exposure and to ascertain compliance with the Bank’s credit policies and
procedures.
Allocation of Allowance for Credit Losses
(in thousands)
2009
% Of
Total
Amount Loans
2008
% Of
Total
Amount Loans
December 31
2007
% Of
Total
Amount Loans
% Of
Total
Amount Loans
2006
Commercial .................................................... $ 10,648
Real estate – construction............................... 11,662
9,615
Real estate – mortgage ...................................
3,858
Consumer........................................................
60
Other ...............................................................
40.6 % $ 7,351 38.5 % $ 11,185 38.4 % $ 2,724
1,032
12.1
3,827
41.3
1,606
5.2
375
0.8
13,039 13.6
8,555 39.5
7.6
6,742
0.8
118
6,945 16.6
7,928 38.6
6.2
4,295
0.2
17
2005____
% Of
Total
Amount Loans
38.1 %
5.0
46.9
9.6
0.4
36.8 % $ 2,404
911
7.9
3,377
47.1
1,417
8.0
331
0.2
Total .................................................. $ 35,843 100.0 % $ 35,805 100.0 % $ 30,370 100.0 % $ 9,564 100.0 % $ 8,440 100.0 %
The allowance for credit losses has been allocated on an approximate basis. The entire amount of the allowance is available to absorb
losses occurring in any category. The allocation is not necessarily indicative of future losses.
In general, consumer loans (including mortgage and home equity) have a lower risk profile than commercial
loans. Commercial loans (including commercial real estate, commercial non real estate and construction loans)
are generally larger in size and more complex than consumer loans. Commercial real estate loans are deemed less
44
risky than commercial non real estate and construction loans, because the collateral value of real estate generally
maintains its value better than non real estate or construction collateral. The Bank has little or no exposure to
subprime lending. Consumer loans, which are smaller in size and more geographically diverse across the Bank’s
entire primary market areas, provide risk diversity across the portfolio. Because mortgage loans are secured by
first liens on the consumer’s residential real estate, they are the Bank’s lowest risk profile loan type. Home
equity loans are deemed less risky than unsecured consumer loans because home equity loans and lines are
secured by first or second deeds of trust on the borrower’s residential real estate. A centralized decision-making
process is in place to control the risk of the consumer, home equity and mortgage loan portfolio. The consumer
real estate appraisal process is also centralized relative to appraisal engagement, appraisal review, and appraiser
quality assessment. These processes are detailed in the underwriting guidelines, which cover each retail loan
product type from underwriting, servicing, compliance issues and closing procedures.
Management follows a loan review program designed to evaluate the credit risk in its loan portfolio. Through
this loan review process, the Bank maintains an internally classified watch list that helps management assess the
overall quality of the loan portfolio and the adequacy of the allowance for credit losses. In establishing the
appropriate classification for specific assets, management considers, among other factors, the estimated value of
the underlying collateral, the 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 and reserves are allocated based on management’s judgment and historical experience.
The function of determining the allowance for credit losses is fundamentally driven by the risk grade system.
The allowance for credit losses represents 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 allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the 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.
Management believes the allowance for credit losses of $35.8 million at December 31, 2009 is adequate to cover
probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires
continuous evaluation and considerable judgment. 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.
The following table presents an analysis of the changes in the allowance for credit losses.
45
Analysis of Allowance for Credit Losses
(in thousands, except ratios)
2009
Average amount of loans outstanding........... $ 1,538,777
Amount of loans outstanding ........................
1,463,094
Allowance for credit losses:
Balance on January 1 ................................ $
Loans charged off:
Secured by real estate ...............................
Commercial ..............................................
Installment ................................................
Credit Card ...............................................
Total charge-offs...................................
29,870
3,699
4,649
276
38,494
35,805
Recoveries of loans previously charged off:
Secured by real estate ...............................
Commercial ..............................................
Installment ................................................
Credit Card ...............................................
Total recoveries.....................................
Net loans charged off....................................
Provision for loan losses ...............................
Allowance acquired via merger ....................
Balance on December 31 ...................... $
Ratio of net charge-offs of loans to average
1,392
316
1,023
52
2,783
35,711
35,749
-
35,843
$
loans outstanding during the year .............
Ratio of allowance to loans outstanding……
Ratio of non-performing assets to
loans outstanding…………………………
Ratio of allowance to non-performing loans..
Ratio of allowance to non-performing loans,
net of non-performing loans for which the
full loss has been charged off…………..…
As of or for the Years Ended
December 31
2007
$ 1,060,522
1,490,084
$
2008
$ 1,575,064
1,604,525
2006
756,088
759,978
2005
$ 752,420
755,398
$
30,370
$
9,564
$
8,440
$
7,962
12,335
5,062
4,771
300
22,468
338
978
1,240
85
2,641
19,827
25,262
-
35,805
3,793
3,384
2,014
221
9,412
152
100
603
101
956
8,456
18,952
10,310
30,370
$
$
144
1,864
3,153
286
5,447
11
406
580
64
1,061
4,386
5,510
-
9,564
$
267
1,324
1,414
234
3,239
66
256
134
42
498
2,741
3,219
-
8,440
2.32 %
2.45 %
1.26 %
2.23 %
0.79 %
2.04 %
0.58 %
0.36 %
1.26 % 1.12 %
5.85 %
61.56 %
3.03 %
90.52 %
1.16 % 1.30 %
234.35 %
0.54 %
161.50 % 228.35 %
104.52 %
90.52 %
234.35 %
161.50 % 228.35 %
Commercial loans. All commercial loans within the portfolio are risk graded among nine risk grades based on
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. There is an increased reserve percentage for each successively higher risk grade. As a result, the
allowance is adjusted upon any migration of a loan to a higher risk grade within the commercial loan portfolio.
The reserve percentages utilized have been determined by management to be appropriate based on historical loan
loss levels and the risk for each corresponding risk grade. Following the Merger, the Bank elected to adjust the
reserve percentage for certain risk grades, based on its analysis of the history of the combined loan portfolio and
the associated chargeoffs, as well as current economic conditions. Based on these revisions, approximately $1.4
million was added to the allowance for credit losses at the end of 2007. The Bank had 76.08% of its total
commercial loans in risk grades that are deemed acceptable or better at year end 2009, compared to 82.14% at
year end 2008.
Mortgage, home equity, and credit lines. Reserves are calculated on mortgage, home equity, and credit lines
based on historical loss experience and current economic conditions. The average rolling eight quarter net loss
percentage is calculated for each of these loan categories. The reserve requirement also includes a reserve
percentage for current economic conditions. The sum of these two components is applied to the dollar balance of
loans in each of these categories to determine the required reserve.
Retail loans. The retail loans are pooled together to determine the reserve requirement. The average rolling
eight quarter net loss percentage is calculated for this loan category. The reserve requirement also includes a
reserve percentage for current economic conditions. The sum of these two components is applied to the dollar
balance of retail loans to determine the required reserve for current loans and loans past due less than 90 days. A
separate reserve is calculated for loans past due 90 days or more. A reserve amount equal to 25.0% of all retail
46
loans past due 90 days or more is added to the above mentioned requirement to determine the total reserve
requirement for retail loans.
Specific impairment. Management evaluates significant loans graded substandard, doubtful and loss on an
individual basis for impairment. The specific allowance is calculated based upon a review of these loans and the
estimated losses at the balance sheet date. At December 31, 2009 and 2008, the recorded investment in
significant loans considered impaired was approximately $47.1 million and $78.2 million, respectively and the
specific allowance for credit losses associated with those loans was approximately $2.7 million and $9.2 million,
respectively. The decrease in the amount of significant impaired loans held by the Bank and the associated
allowance for credit losses resulted, primary, from the Bank’s decision to take appropriate aggressive action with
our problem credits through chargeoffs and foreclosure.
Watch list review. Specific allowances may be determined based on a review of specific watch list loans.
Specific losses are estimated at each measurement date. The Bank has established a Watch List Committee to
review all loans placed on the watch list. The watch list primarily consists of loans classified as special mention,
substandard and doubtful. An action plan is established for each watch list loan. By reviewing these watch list
loans, the Bank is able to update original probable loss amounts in light of developing conditions. This serves to
reduce the differences between estimated and actual observed losses. During 2009, the Bank continued to focus
on reviewing its loan portfolio and reclassifying its loans, as required. Watch list loans increased to $214.0
million at year end 2009, from $175.0 million at year end 2008. The reserve requirement for watch list loans
totaled $19.9 million and $16.0 million for 2009 and 2008, respectively.
Provision for credit losses. The 2009 provision for credit losses totaled $35.7 million, compared to $25.3 million
in 2008. As of December 31, 2009, nonperforming assets totaled $85.6 million, comprised of $58.2 million in
nonperforming loans and $27.4 million in other real estate owned. Those figures compare to $39.5 million in
nonperforming loans and $9.1 million in other real estate owned at the end of 2008, totaling $48.6 million in
nonperforming assets. Net charge-offs increased in 2009 to $35.7 million, or 2.32% of average loans
outstanding, compared with $19.8 million, or 1.26% of average loans outstanding in the prior year. At
December 31, 2009 and 2008 the allowance for credit losses as a percentage of year end loans was 2.45% and
2.23%, respectively. The 2009 and 2008 results have been impacted by ongoing evaluations of our credit
portfolio, prompted by the continued weakness in the regional and national economies.
Nonperforming Assets
(in thousands, except ratios)
December 31
2009
Nonaccrual loans .......................................... $ 53,337
Restructured loans ........................................
1,442
Accruing loans which are contractually
past due 90 days or more ..........................
Total nonperforming loans............................
Real estate acquired in settlement
of loans .....................................................
Total nonperforming assets........................... $
Nonperforming loans to
3,450
58,229
27,337
85,566
2008
$ 38,029
250
2007
$ 12,236
651
2006
$ 3,686
133
2005
$ 929
856
1,277
39,556
9,080
48,636
72
12,959
4,280
17,239
$
$
$
2,103
5,922
3,969
9,891
$
1,911
3,696
4,391
8,087
loans outstanding at end of year............
3.98 %
2.47 %
0.87 %
0.78 %
0.49 %
Nonperforming assets to
total assets at end of year ......................
4.40 %
2.34 %
0.84 %
1.00 %
0.83 %
Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more,
restructured loans, and real estate acquired in settlement of loans. Loans are placed on nonaccrual status when:
(i) management has concerns relating to the ability to collect the loan principal and interest and (ii) generally
when such loans are 90 days or more past due. No assurance can be given, however, that economic conditions
will not adversely affect borrowers and result in increased credit losses.
47
Investment Activities
Our investment portfolio plays a primary role in the management of liquidity and interest rate sensitivity and,
therefore, is managed in the context of the overall balance sheet. In 2009, the securities portfolio generated a
substantial percentage of our interest income and served as a necessary source of liquidity.
Management attempts to deploy investable funds into instruments that are expected to increase the overall return
of the portfolio given the current assessment of economic and financial conditions, while maintaining acceptable
levels of credit, interest rate and liquidity risk, as well as capital usage and risk.
The following tables present the carrying values, fair values, and weighted average yields of our investment
portfolio at December 31, 2009, 2008 and 2007 and the interval of maturities or repricings at December 31, 2009
Investment Securities
(in thousands)
December 31, 2009
December 31, 2008 December 31, 2007
Amortized
Cost
Market
Value
Amortized
Cost
Market
Value
Amortized Market
Cost Value
U.S. government agencies obligations .......... $
Mortgage backed securities…………………
Corporate bonds……………………………
Collateralized mortgage obligations………..
State and municipal obligations ....................
Total debt securities……………………… ..
Other equity ..................................................
Total securities.............................................. $
49,005 $
77,430
33,978
35,124
105,169
300,706
17,189
317,895 $
49,519 $
81,690
35,604
35,368
105,994
308,175
17,694
325,869 $
56,622 $
97,843
-
-
115,627
270,092
13,642
283,734 $
57,954 $
102,042
-
-
114,912
274,908
13,896
288,804 $
140,759 $ 142,483
109,170
106,757
-
-
-
-
105,993
105,689
357,646
353,205
11,909
11,850
365,055 $ 369,555
Investment Securities Portfolio Maturity Schedule
(dollars in thousands)
December 31, 2009
Market
Value
U. S. government agencies and mortgage backed obligations:
Within one year ………………………………………………………………… $
One to five years ………………………………………………………………..
Five to ten years ……………………………………………………………… ..
After ten years ………………………………………………………………….
4,042
45,476
12,046
105,013
Total ……………………………………………………………………..
166,577
Obligations of states and political subdivisions:
Within one year …………………………………………………………………
One to five years ……………………………………………………………….
Five to ten years ………………………………………………………………...
After ten years ………………………………………………………………….
1,496
15,633
25,602
63,263
Total ..........................................................................................................
105,994
Corporate Bonds:
Within one year …………………………………………………………………
One to five years ……………………………………………………………….
-
35,604
Five to ten years………………………………………………………………... -
After ten years ………………………………………………………………….
-
Total ..........................................................................................................
35,604
Weighted
Average
Yield(1)
1.81%
3.44
4.91
5.58
4.85
4.34
4.02
4.06
4.25
4.17
-
5.25
-
-
5.25
Total debt securities ……………………………………………
$ 308,175
4.68%
(1) The yield related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal
income tax rate of 35%.
See also Note 4 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
48
Off-Balance Sheet Arrangements
Information about the Company’s off-balance sheet risk exposure is presented in Note 17 in the Notes to the
Consolidated Financial Statements of this Annual Report on Form 10-K.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair values of financial instruments or other
assets caused by changes in interest rates, currency exchange rates, or equity prices. Interest rate risk is the
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 bank operations, which rely on net
interest margins as a major source of earnings. Noninterest expense, such as salaries and wages, occupancy and
equipment cost are also negatively affected by inflation.
Application of Critical Accounting Policies
The 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. The
following is a summary of the Bank’s allowance for credit losses, one of the most complex and judgmental
accounting policies of the Company.
The allowance for credit losses, which is utilized to absorb actual losses in the loan portfolio, is maintained at a
level consistent with management’s best estimate of probable credit losses incurred as of the balance sheet date.
The Bank’s allowance for credit losses is also analyzed monthly by management. This analysis includes a
methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of
evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the
dollar volume of loans within a homogenous group. Major loan portfolio subgroups include: risk graded
commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management also
analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted
accordingly. While management uses the best information available to make evaluations, future adjustments
may be necessary, if economic or other conditions differ substantially from the assumptions used. See additional
discussion under “Asset Quality” above.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The 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.
49
The Company uses several interest rate risk measurement tools provided by a national asset liability management
consultant to help manage this risk. Management provides key assumptions to the consultant, which are used as
inputs into the measurement tools. Following is a summary of two different tools management uses on a
quarterly basis to monitor and manage interest rate risk.
Earnings Simulation Modeling. Net income is affected by changes in the level of interest rates, the shape of the
yield curve and the general market pressures affecting current market interest rates at the time of simulation.
Many interest rate indices do not move uniformly, creating certain disunities between them. For example, the
spread between a 30 day, prime-based asset and a 30 day, FHLB advance may not be uniform over time. The
earnings simulation model projects changes in net interest income caused by the effect of changes in interest
rates on interest-earning assets and interest-bearing liabilities. Simulation results are measured as a percentage
change in net interest income compared to the static-rate or “base case” scenario. The model considers increases
and decreases in asset and liability volumes using prepayment assumptions as well as rate changes. Rate changes
are modeled gradually over a 12 month period, referred to as a “rate ramp.” The model projects only changes in
interest income and expense and does not project changes in non-interest income, non-interest expense, provision
for loan losses or the impact of changing tax rates. At December 31, 2009, net interest income simulation showed
a negative 3.02% change from the base case in a 200 basis point ramped rising rate environment and a positive
1.79% change from the base case in a 100 basis point ramped declining rate environment. The projected decrease
in net interest income is within the Asset/Liability Committee’s guidelines in a 200 basis point increasing or 100
basis point decreasing interest rate environment. However, management continually monitors signs of elevated
risks and takes certain actions to limit these risks.
The following table summarizes the results of the Company’s income simulation model as of December 31,
2009.
Change in Market Interest Rates:
200 basis point ramped increase
Base case – no change
100 basis point ramped decrease
Change in Net Interest Income
Year 2
Year 1
(3.02) %
—
1.79 %
(5.70) %
0.94 %
4.74 %
Net Portfolio Value Analysis. Net portfolio value (“NPV”) represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance
sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden
and sustained 100 to 200 basis point increase or decrease in market interest rates with no effect given to any
actions management might take to counter the effect of that interest rate movement. The following is a summary
of the results of the report compiled by the Company’s outside consultant using data and assumptions
management provided as of December 31, 2009.
Change in Market Interest Rates:
200 basis point increase
Base case – no change
100 basis point decrease
Estimated Change in Net Portfolio Value
Amount in 000s
Percent
$ (26,052)
—
$ (224)
(11.79) %
—
(0.10) %
The preceding table indicates that, at December 31, 2009, in the event of a 200 basis point increase in prevailing
market interest rates, NPV would be expected to decrease by $26.1 million, or 11.8% of the base case scenario
value of $220.9 million. In the event of a decrease in prevailing market rates of 100 basis points, NPV would be
expected to decline by $0.2 million, or 0.1% of the base case scenario value. The projected decrease in NPV is
within the Asset Liability Committee’s 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.
50
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”), CCO, Investment Officer, Chief Risk Officer and other
senior executives. The Committee meets on a monthly basis to review the asset/liability management activities
of the Bank and monitor compliance with established policies. Activities of the Asset and Liability Committee
are reported to the Audit and Risk Management Committee of the Company’s Board of Directors.
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.
Interest Sensitivity Analysis
At December 31, 2009
(in thousands, except ratios)
1 – 90
Day
Sensitive
91 – 365
Day
Sensitive
Total
Sensitive
Within
One Year
Total
Sensitive
Over
One Year
Total
Interest earning assets:
Loans, net of unearned income
U. S. government agency
State and municipal obligations
Corporate bonds and collateralized
mortgage obligations
Other investment securities
Overnight funds
Total interest earning assets
Interest bearing liabilities:
NOW
MMI
Savings
Time deposits
Federal Reserve Bank borrowings
Junior subordinated notes
FHLB borrowings
Wholesale repurchase agreements
Total interest bearing liabilities
$ 826,846
1,001
315
-
11,414
15,166
854,742
271,208
358,165
39,502
277,583
27,600
25,774
63,000
46,000
1,108,832
$ 53,251
3,041
1,165
-
-
-
57,457
-
-
-
313,332
-
-
69,500
-
382,832
$ 880,097
4,042
1,480
-
11,414
15,166
912,199
271,208
358,165
39,502
590,915
27,600
25,774
132,500
46,000
1,491,664
$582,997
127,167
103,984
$ 1,463,094
131,209
105,464
70,972
6,280
-
891,400
-
-
-
83,480
-
-
32,700
-
116,180
70,972
17,694
15,166
1,803,599
271,208
358,165
39,502
674,395
27,600
25,774
165,200
46,000
1,607,844
Interest sensitivity gap
$ (254,090)
$ (325,375)
$ (579,465)
$ 775,220
$ 195,755
Ratio of interest sensitive assets to
liabilities
0.77
0.15
0.61
7.67
1.12
The measurement of the 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, 2009, to be 0.61X. This ratio indicates that a
larger balance of liabilities, compared to assets, could potentially reprice during the upcoming 12 month period.
Included in rate sensitive liabilities are certain deposit accounts (NOW, MMI, and savings) that are subject to
51
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 54.4% of the total loan portfolio has a variable
interest rate and reprices in accordance with the underlying rate index subject to terms of individual note
agreements.
In addition to the traditional gap analysis, the Bank also utilizes a computer based interest rate risk simulation
model prepared by an independent consultant. This comprehensive model includes rate sensitivity gap analysis,
net interest income analysis, and present value of equity analysis, under various rate scenarios. The Bank uses
this model to monitor interest rate risk on a quarterly basis and to detect trends that may affect the overall net
interest income of the Bank. This simulation incorporates the dynamics of balance sheet and interest rate changes
and calculates the related effect on net interest income. As a result, management believes that this analysis more
accurately projects the risk to net interest income over the upcoming 12-month period. The Bank’s asset/liability
policy provides guidance for levels of interest rate risk and potential remediations, if necessary, to mitigate
excessive levels of risk. The modeling results indicate the Bank is subject to an acceptable level of interest rate
risk.
The table, “Market Sensitive Financial Instruments Maturities,” presents the Company’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, 2009.
Market Sensitive Financial Instruments Maturities
(Dollars in thousands)
Contractual Maturities as of December 31, 2009
2010
2011
2012
2013
2014
After
Five
Years
Total
Financial assets:
Debt securities
Loans:
Fixed rate
Variable rate
Total
$ 5,522
$ 18,290
$39,976
$22,572
$ 15,660
$ 205,625
$307,645
83,304
229,256
$ 318,082
67,360
46,653
$ 132,303
156,036
43,853
$ 239,865
161,079
68,456
$ 252,107
70,663
38,238
$ 124,561
127,859
370,337
$ 703,821
666,301
796,793
$ 1,770,739
Financial liabilities:
NOW
MMI
Savings
Time deposits
Wholesale repurchase
agreements
FHLB borrowing
Federal Reserve Bank borrowings
Junior subordinated notes
Total
$ 271,208
358,165
39,502
590,915
10,000
112,500
27,600
-
$1,409,890
$ -
-
-
40,116
15,000
35,000
-
$ 90,116
$ -
-
-
36,283
-
2,700
-
$ 38,983
$ -
-
-
5,211
-
-
$ -
-
-
1,511
-
15,000
$ -
-
-
359
21,000
-
-
$ 5,211
-
$ 16,511
25,774
$ 47,133
$ 271,208
358,165
39,502
674,395
46,000
165,200
27,600
25,774
$ 1,607,844
52
Market Sensitive Financial Instruments Maturities (continued)
(Dollars in thousands)
Financial assets:
Debt securities
Loans:
Fixed rate
Variable rate
Total
Financial liabilities:
NOW
MMI
Savings
Time deposits
Wholesale repurchase agreements
FHLB borrowing
Junior subordinated notes
Federal Reserve Bank borrowings
Total
Average
Interest
Rate
Estimated Fair
Value
4.68 %
$ 308,175
6.50
4.63
0.61
0.92
0.10
1.89
4.12
2.86
1.76
0.50
678,291
796,793
$ 1,783,259
$ 271,208
358,165
39,502
679,207
46,931
167,810
12,586
27,600
$ 1,603,009
53
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL INFORMATION
The following table sets forth, for the periods indicated, certain of Bancorp’s consolidated quarterly financial
information. This information is derived from Bancorp’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 Bancorp’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)
2009
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income (loss) after provision for
credit losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Provision for income taxes
$ 23,933
7,466
$ 24,471
9,441
$ 24,725
10,856
$ 25,371
11,395
16,467
5,569
10,898
4,884
15,653
129
78
15,030
10,808
4,222
5,555
19,818
(10,041)
(4,347)
(5,694)
(729)
$ (6,423)
13,869
10,853
3,016
4,726
18,093
(10,351)
(4,440)
13,976
8,518
5,458
4,014
15,983
(6,511)
(2,933)
(5,911)
(729)
$ (6,640)
(3,578)
(729)
$ (4,307)
Net income (loss)
Dividends and accretion on preferred stock
Net income (loss) available to common shareholders
51
(729)
$ (678)
Earnings per share:
Basic
Diluted
$ (0.04)
$ (0.04)
$ (0.41)
$ (0.41)
$ (0.42)
$ (0.42)
$ (0.28)
$ (0.28)
2008
4th Qtr
3rd Qtr
2nd Qtr
1st Qtr
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income (loss) after provision
for credit losses
Noninterest income
Goodwill impairment
Noninterest expense
Income (loss) before income taxes
Provision for income taxes
$ 27,428
13,014
$ 28,468
12,913
$ 29,956
13,280
$ 32,110
14,645
14,414
14,580
(166)
4,626
50,437
20,304
(66,281)
(7,698)
15,555
4,656
10,899
4,626
-
17,840
(2,315)
(726)
16,676
5,567
11,109
6,781
-
17,495
395
135
17,465
459
17,006
4,549
-
17,180
4,375
1,365
Net income (loss)
Dividends and accretion on preferred stock
Net income (loss) available to common shareholders
(58,583)
(170)
$ (58,753)
(1,589)
-
$ (1,589)
260
-
$ 260
3,010
-
$ 3,010
Earnings per share:
Basic
Diluted
$ (3.75)
$ (3.75)
$ (0.10)
$ (0.10)
$ 0.02
$ 0.02
$ 0.19
$ 0.19
54
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 as of
December 31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders’ equity and
comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009. These
financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of NewBridge Bancorp and Subsidiary as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), NewBridge Bancorp’s internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 18, 2010, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 18, 2010
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
NewBridge Bancorp
We have audited NewBridge Bancorp’s internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). NewBridge Bancorp’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 report on internal control over financial reporting. Our
responsibility is to express an opinion on NewBridge Bancorp’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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the 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. In our opinion, NewBridge Bancorp maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of NewBridge Bancorp and Subsidiary as of December 31, 2009 and 2008,
and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2009, and our report dated March 18, 2010,
expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 18, 2010
56
NewBridge Bancorp and Subsidiary
Consolidated Balance Sheets
December 31, 2009 and 2008
(Dollars in thousands, except per share data)
ASSETS
Cash and due from banks………………………………………………………….
Interest-bearing bank balances…………………………………………………….
Federal funds sold…………………………………………………………………
Investment securities:
Held to maturity, market value $20,487 in 2009 and $27,269 in 2008……
Available for sale………………………………………………….……….….
Loans held for sale………………………………………………………………..
Loans………………………………………………………………………………
Less allowance for credit losses …………………………………………….…
Net Loans……………………………………………………………………….
Premises and equipment, net………………………………………………………
Real estate acquired in settlement of loans………………………………………..
Bank-owned life insurance………………………………………………………..
Deferred tax assets………………………………………………………………...
Accrued income and other assets………………………………………………….
Total assets………………………………………………………………….
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing……………………………………………………………
Savings, NOW and money market accounts…………………………………
Time deposits……………………………..……………………………..……
Total deposits……………………………………………………………….
Borrowings from the Federal Home Loan Bank………….……………………….
Other borrowings………...……………………………………………………….
Accrued expenses and other liabilities…………………………………………….
Total liabilities………………………………………………………………
Commitments and contingent liabilities
Shareholders’ equity:
Preferred stock, par value $.01 per share;
Authorized – 10,000,000 shares; issued and outstanding (liquidation
preference $1,000 per share) – 52,372 ………………………………………..
Common stock, par value $5.00 per share;
Authorized – 50,000,000 shares; issued and outstanding - 15,655,868……….
Paid-in capital……………………………………………………………………..
Directors’ deferred compensation plan……………………………………………
Retained earnings (deficit)………………………………………………………...
Accumulated other comprehensive income (loss)…..…………………………….
Total shareholders’ equity………………………………………………….
Total liabilities and shareholders’ equity………………………………….............
See notes to consolidated financial statements
57
2009
2008
$ 29,674
15,166
-
$ 32,993
12,824
42,043
19,957
305,382
6,568
1,456,526
(35,843)
1,427,251
40,406
27,337
28,614
26,022
26,717
$1,946,526
27,037
261,535
937
1,603,588
(35,805)
1,568,720
45,253
9,080
28,084
21,864
29,194
$2,078,627
$ 156,040
668,875
674,395
1,499,310
165,200
99,374
18,038
1,781,922
$ 149,583
613,732
900,148
1,663,463
139,000
76,815
20,113
1,899,391
51,190
50,891
78,279
86,969
(634)
(52,477)
1,277
164,604
$1,946,526
78,279
86,852
(650)
(34,427)
(1,709)
179,236
$2,078,627
NewBridge Bancorp and Subsidiary
Consolidated Statements of Income
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except per share data)
Interest Income
Interest and fees on loans
Interest on investment securities:
Taxable
Tax exempt
Interest-bearing bank balances
Federal funds sold
Total interest income
Interest Expense
Deposits
Borrowings from the Federal Home Loan Bank
Other borrowings
Total Interest Expense
Net Interest Income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest Income
Service charges on deposit accounts
Gain on sales of mortgage loans
Gain (loss) on sales of investment securities
Gain on sale of merchant services
Other operating income
Total Noninterest Income
Noninterest Expense
Personnel
Occupancy
Furniture and equipment
Goodwill impairment
FDIC insurance
Other operating
Total Noninterest Expense
Loss Before Income Taxes
Income Taxes
Net Loss
Dividends and accretion on preferred stock
Net Loss available to common shareholders
Loss Per Share
Basic
Diluted
2009
2008
2007
$ 84,089
$ 101,550
$ 85,259
9,416
4,759
190
46
98,500
31,891
4,706
2,559
39,156
59,344
35,749
23,595
8,527
601
389
1,177
8,483
19,177
10,229
4,758
635
114
117,286
44,672
5,483
3,697
53,852
63,434
25,262
38,172
9,333
396
2,459
-
8,442
20,630
8,505
2,501
833
523
97,621
36,686
4,634
1,048
42,368
55,253
18,952
36,301
7,791
366
(38)
-
6,879
14,998
30,901
5,436
6,012
-
4,528
22,669
69,546
(26,774)
(11,641)
(15,133)
(2,917)
$ (18,050)
35,175
4,546
4,679
50,437
1,037
26,754
122,628
(63,826)
(6,924)
(56,902)
(170)
$ (57,072)
30,744
2,919
3,554
-
146
24,993
62,356
(11,057)
(5,394)
(5,663)
-
$ (5,663)
$ (1.15)
$ (1.15)
$ (3.64)
$ (3.64)
$ (0.49)
$ (0.49)
Weighted Average Shares Outstanding – basic and diluted
15,655,868
15,663,719
11,485,353
See notes to consolidated financial statements
58
NewBridge Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands, except share data)
Preferred Common Stock
Shares
Stock
8,422,610
-
$
Amount
$ 42,113
Paid-In
Capital
$ 8,177
Directors’
Deferred
Comp Plan
$ (1,390)
Accumulated
Other
Comprehensive Shareholders’
Income (Loss) Equity
Total
Retained
Earnings
$ 42,669 $
(2,260)
$
(5,663)
89,309
(5,663)
Balances at December 31, 2006 ……….
Net Loss……….………………………
Change in unrealized gain on securities
available for sale……………………
Change in funded status of pension plans
Comprehensive loss………….
Cash dividends declared on common stock
Stock-based compensation………..……
Common stock issued in merger ……
7,554,362
Common stock acquired and cancelled…
(282,904)
Balances at December 31, 2007………… $ - 15,694,068
Net Loss……….………………………
Change in unrealized gain on securities
available for sale……………………
Change in funded status of pension plans
Comprehensive loss………….
Cash dividends declared on common stock
Preferred stock issued, including Warrant 50,875
Dividends and accretion on preferred stock 16
Stock-based compensation ………………
Common stock distributed………………
(38,200)
Common stock acquired and cancelled…….
Balances at December 31, 2008………… $ 50,891 15,655,868
Net Loss……….………………………
Change in unrealized gain on securities
available for sale……………………
Change in funded status of pension plans
Comprehensive loss………….
Dividends and accretion on preferred stock 299
Stock-based compensation ……….……
Common stock distributed………………
Balances at December 31, 2009………… $ 51,190
15,655,868
37,771
(1,414)
$ 78,470
149
79,094
(2,008)
$ 85,412
89
$ (1,301)
$ 28,751 $
(8,255)
(56,902)
(6,106)
(170)
1,497
93
651
3,641
440
3,641
440
(1,582)
(8,255)
149
116,865
(3,333)
$ 193,153
(56,902)
1,821
205
(3,735)
205
(3,735)
(60,432)
(6,106)
52,372
(154)
93
651
(341)
$ 179,236
(15,133)
(191)
$ 78,279
(150)
$ 86,852
$
(650)
$ (34,427) $
(1,709)
(15,133)
117
(2,917)
$ 78,279
$ 86,969
16
(634)
$
$
(52,477)
$
1,577
1,409
1,577
1,409
(12,147)
(2,618)
117
16
1,277 $ 164,604
See notes to consolidated financial statements
59
NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2009, 2008 and 2007
(Dollars in thousands)
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss…………………………………………………..
Adjustments to reconcile net loss to net cash provided by
operating activities:
2009
2008
2007
$
(15,133)
$
(56,902)
$ (5,663)
Depreciation and amortization ………………………………..
6,968
Securities premium amortization and discount accretion, net…
591
Gain on sale of loans held for sale……… …………………….
(601)
Originations of loans held for sale…………………………….
(97,360)
Proceeds from sales of loans held for sale…………………….
92,330
Goodwill impairment………………………………………….
-
(Increase) decrease in deferred tax assets …………………
(4,158)
(Increase) decrease in income taxes receivable
(2,560)
(Increase) decrease in interest earned but not received ………
700
Increase (decrease) in interest accrued but not paid ………….
(1,470)
Net (increase) decrease in other assets ………………………..
(115)
(589)
Net increase (decrease) in other liabilities …………………….
Provision for credit losses……………………………………… 35,749
117
Stock-based compensation ........................................................
572
(Gain) loss on sales of premises and equipment……………….
15,041
Net cash provided by operating activities ……………….
4,737
565
3,192
(375)
(396) (366)
(101,989)
(130,027)
102,355
141,837
-
50,437
(9,759)
(8,360)
738
(2,800)
(6,199)
3,014
1,414
(572)
7,455
(9,849)
8,609
4,287
18,952
25,262
149
93
584
731
19,097
22,057
CASH FLOW FROM INVESTING ACTIVITIES
-
Proceeds from maturities of securities held to maturity ……………
(108,828)
Purchases of securities available for sale …………………………..
Proceeds from maturities of securities available for sale …………..
78,325
Net (increase) decrease in loans…………………….……………….. 83,853
Purchases of premises and equipment and expenditures for
improvements to real estate acquired in settlement of loans …………… (1,894)
8,794
Proceeds from sales of premises and equipment……………………
Cash acquired in merger ……………………………………………
-
Net (increase) decrease in federal funds sold ………………………
Net cash provided by (used in) investing activities ……
102,293
42,043
-
(128,665)
210,355
(156,319)
(5,808)
4,686
-
(39,870)
(115,621)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW, money
market and savings accounts........................................................
Net increase (decrease) in time deposits ...........................................
Net increase (decrease) in other borrowings
Net increase (decrease) in borrowings from FHLB ..........................
Dividends paid ..................................................................................
Stock issuance costs..........................................................................
Proceeds from issuance of preferred stock and warrants…………...
Common stock distributed (acquired)………………………………
Net cash provided by (used in) financing activities...........
Increase (decrease) in cash and cash equivalents ..............................
Cash and cash equivalents at the beginning of the years...................
Cash and cash equivalents at the end of the years............................. $
(50,204)
61,600
85,945
(225,753)
22,543 (22,471)
21,000
(6,260)
-
52,372
310
80,692
(12,872)
58,689
45,817
26,200
(2,917)
-
-
16
(118,311)
(977)
45,817
44,840
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest………………………………………………………… $
Income taxes ………………………………………………….
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
40,626
$
-
54,424
3,500
1,964
(105,954)
140,110
(95,676)
(5,098)
80
14,803
4,672
(45,099)
(7,857)
77,033
9,347
(30,000)
(6,983)
(10)
-
(3,333)
38,197
12,195
$
$
46,494
58,689
40,954
3,885
Transfer of loans to other real estate owned ……………………….. $
Unrealized gain on securities available for sale:
26,216
$
9,963
$
9,009
Change in securities available for sale ………………………..
Change in deferred income taxes ……………………………..
Change in shareholders’ equity ……………………………….
Common stock issued in Merger…………………..………………...
(5,308)
3,731
1,577
-
See notes to consolidated financial statements
60
(298)
93
205
3,641
- 116,865
(5,813)
2,172
NewBridge Bancorp and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
Note 1 – Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the accounts of NewBridge Bancorp (“Bancorp” or
the “Company”) and its wholly owned subsidiary NewBridge Bank (the “Bank”). All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of operations
The Bank provides a variety of financial services to individual and corporate customers in North Carolina
(“NC”) and Virginia (“VA”). As of December 31, 2009, the Bank operated 36 branches in the Piedmont Triad
Region and Coastal Region of NC and two branches in the Shenandoah Valley Region of VA. The majority of
the Bank’s NC clients are located in Davidson, Rockingham, Guilford, Forsyth and New Hanover Counties. The
majority of the Bank’s VA customers are located in Rockingham and Augusta 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
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for credit losses. A majority of the 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 collectibility of a large portion of the Bank’s loan portfolio would be affected
by changes in local economic conditions.
Cash and cash equivalents
Cash and cash equivalents include cash and due from banks and interest-bearing bank deposits. Cash and cash
equivalents are defined as cash and short-term investments with maturities of three months or less at the time of
acquisition.
Investment securities
The Bank classifies its investment securities at the time of purchase into three categories as follows:
- Held to Maturity – reported at amortized cost,
- Trading – reported at fair value with unrealized gains and losses included in earnings, or
- Available for Sale – reported at fair value with unrealized gains and losses reported in other
comprehensive income.
The Bank is required to maintain certain levels of Federal Home Loan Bank (“FHLB”) of Atlanta stock based on
various criteria established by the individual issuer. Gains and losses on sales of securities are recognized when
realized on a specific identification basis. Premiums and discounts are amortized into interest income using
methods that approximate the level yield method.
61
Other Than Temporary Impairment of Investment Securities
Bancorp’s policy regarding other than temporary impairment of investment securities requires continuous
monitoring. Individual investment securities with a fair market value that is less than 80% of original cost over a
continuous period of two quarters are evaluated for impairment during the subsequent quarter. The evaluation
includes an assessment of both qualitative and quantitative measures to determine whether, in management’s
judgment, the investment is likely to recover its original value. If the evaluation concludes that the investment is
not likely to recover its original value, the unrealized loss is reported as an other than temporary impairment, and
the loss is recorded as a securities transaction on the Consolidated Statement of Income.
Loans
Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of
interest on impaired loans is discontinued when, in 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 only to the extent payments are received. Loans may be returned to accrual status when
all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance (generally a minimum of six months) of
interest and principal by the borrower in accordance with the contractual terms. Mortgage loans held for sale are
valued at the lower of cost or market as determined by outstanding commitments from investors or current
investor yield requirements, calculated on the aggregate loan basis.
Loan origination fees and costs
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the
yield on the related loan.
Impaired loans
A loan is considered impaired, based on current information and events, if it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Generally, a loan will be considered impaired if it exhibits the same level of underlying
weakness and probability of loss as loans classified doubtful or loss.
The impairment evaluation compares the recorded book value of the loan, or loan relationship, to the present
value of the expected future principal, interest and collateral value (if applicable) cash flows. The expected cash
flows are discounted at the contractual interest rate for the individual note. A specific reserve is established if
the present value of expected future cash flows is less than the recorded book value of the loan.
Allowance for credit losses
The Bank’s allowance for credit losses is based on management’s best estimate of probable loan losses incurred
as of the balance sheet date. Factors impacting estimated probable loan losses include credit quality trends, past
loan loss experience, current economic conditions, and loan volume among loan categories.
While management uses the best available information to establish the allowance for credit losses, future
additions to the allowance may be necessary based on the factors cited above. In addition, the allowance is
reviewed by regulatory agencies as an integral part of their examination processes. Such agencies may require
the Company to recognize changes to the allowance based on their judgments about information available to
them at the time of their examination.
Real estate acquired in settlement of loans
Real estate acquired in settlement of loans, through partial or total satisfaction of loans, is initially recorded at
fair market value, less estimated costs to sell, which becomes the property’s new basis. At the date of
acquisition, losses are charged to the allowance for credit losses. Subsequent write-downs are charged to
expense in the period they are incurred.
62
Premises and equipment
Premises and equipment are stated at cost (or at fair value for premises and equipment acquired in business
combinations) less accumulated depreciation and amortization. The provision for depreciation and amortization
is computed principally by the straight-line method over the estimated useful lives of the assets. Useful lives are
estimated at 20 to 40 years for buildings and three to ten years for equipment. Leasehold improvements are
amortized over the expected terms of the respective leases or the estimated useful lives of the improvements,
whichever is shorter. Expenditures for maintenance and repairs are charged to operations, and the expenditures
for major replacements and betterments are added to the premises and equipment accounts. The cost and
accumulated depreciation of premises and equipment retired or sold are eliminated from the appropriate asset
accounts at the time of retirement or sale and the resulting gain or loss is reflected in current operations.
Income taxes
Provisions for income taxes are based on taxes payable or refundable, for the current year (after exclusion of
non-taxable income such as interest on state and municipal securities and bank owned life insurance and non-
deductible expenses) and deferred taxes on temporary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Per share data
In accordance with GAAP, the Company discloses two earnings per share amounts: basic net income per share
of common stock and diluted net income per share of common stock. Basic net income per share of common
stock is computed by dividing net income available to common shareholders by the weighted average number of
shares of common stock outstanding during each year. Diluted net income per share of common stock is
computed by dividing net income available to common shareholders plus any adjustments to net income related
to the issuance of dilutive potential common shares, comprised of outstanding options and/or warrants to
purchase shares of common stock and restricted stock grants, by the weighted average number of shares of
common stock outstanding during each year plus the number of potential dilutive common shares.
Sales of loans
Gains and losses on the sales of loans are accounted for by imputing gain or loss on those sales where a yield rate
guaranteed to the buyer is more or less than the contract interest rate being collected. Such gains or losses are
recognized in the financial statements at the time of the sale.
Off-balance sheet arrangements
In the ordinary course of business, the Bank enters into off-balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
Segment information
The Company reports segment information in accordance with GAAP, which requires that public business
enterprises report certain information about operating segments in their annual financial statements and in
condensed financial statements for interim periods issued to shareholders. It also requires that public business
enterprises report related disclosures and descriptive information about products and services by significant
segments, geographic areas, and major customers, differences between the measurements used in reporting
segment information and those used in the enterprise’s general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
Operating segments are components of an enterprise with separate financial information available for use by the
chief operating decision maker to allocate resources and to assess performance. The Company has determined
that it has one significant operating segment, providing financial services through the Bank, including banking,
mortgage, and investment services, to customers located principally in Davidson, Rockingham, Guilford, Forsyth
63
and New Hanover Counties in NC, and in Rockingham and Augusta Counties in VA, and in the surrounding
communities. The various products are those generally offered by community banks, and the allocation of
resources is based on the overall performance of the Bank, rather than the individual branches or products.
There are no differences between the measurements used in reporting segment information and those used in the
Company’s general-purpose financial statements.
Recent accounting pronouncements
On July 1, 2009, the Financial Accounting Standards Board (“FASB”) GAAP Codification became effective as
the sole authoritative source of GAAP. This Codification reorganizes current GAAP for non-governmental
entities into a topical index to facilitate accounting research and to provide users additional assurance that they
have referenced all related literature pertaining to a given topic. Existing GAAP prior to the Codification was not
altered in compilation of the GAAP Codification. The Codification encompasses all FASB Statements of
Financial Accounting Standards (“SFAS”), Emerging Issues Task Force statements, FASB Staff Positions,
FASB Interpretations, FASB Derivative Implementation Guides, American Institute of Certified Public
Accountants Statement of Positions, Accounting Principals Board Opinions and Accounting Research Bulletins
along with the remaining body of GAAP effective as of June 30, 2009. Financial statements issued for all interim
and annual periods ending after September 15, 2009 need to reference accounting guidance embodied in the
Codification as opposed to referencing the previously authoritative pronouncements. Accounting literature
included in the Codification is referenced by Topic, Subtopic, Section and paragraph.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at
Fair Value, which is codified as Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and
Disclosures. This Update provides amendments to Topic 820-10, Fair Value Measurements and Disclosures –
Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not available, a reporting entity is required to
measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as
an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with
the principles of Topic 820. The amendments in this Update also clarify that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the
existence of a restriction that prevents transfer of the liability. The amendments in this Update also clarify that
both a quoted price in an active market for the identical liability at the measurement date and the quoted price for
the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. The guidance provided in this Update is effective for the
first reporting period (including interim periods) beginning after issuance. The adoption of this Update did not
have a significant impact to the Company’s financial condition, results of operations or cash flows.
The Company adopted ASC 855 “Subsequent Events” (“ASC 855”) effective June 30, 2009. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or available to be issued. ASC 855 defines (i) the period after the balance
sheet date during which a reporting entity's management should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements (ii) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii)
the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The
Company’s adoption of ASC 855 did not result in any material effect on the Company’s financial position or
operating results.
In June 2009 the FASB issued new guidance impacting “Transfers and Servicing”. The objective of this
guidance is to improve the relevance, representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its
financial position, financial performance, and cash flows; and a transferor’s continuing involvement in
transferred financial assets. The Company’s adoption of this new guidance did not result in any material effect
on the Company’s financial position or operating results.
64
In June 2009, the FASB issued new guidance impacting “Consolidation” of variable interest entities. The
objective of this guidance is to improve financial reporting by enterprises involved with variable interest entities
and to provide more relevant and reliable information to users of financial statements. This guidance is effective
as of January 1, 2010. The adoption of this guidance is not expected to be material to the Company’s
consolidated financial statements.
Reclassification
Certain items for 2008 and 2007 have been reclassified to conform to the 2009 presentation. Such
reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.
Note 2 – Merger of Equals
Bancorp is a bank holding company incorporated under the laws of the state of North Carolina (“NC”) and
registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp is the successor
entity to LSB Bancshares, Inc. (“LSB”), which was incorporated on December 8, 1982. On July 31, 2007, FNB
Financial Services Corporation (“FNB”), a bank holding company, also incorporated in NC and registered under
the BHCA, merged with and into LSB in a merger of equals (the “Merger”). LSB’s name was then changed to
“NewBridge Bancorp”.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of February 26, 2007 (the "Merger
Agreement"), by and between LSB and FNB, each share of common stock of FNB outstanding at the effective
time of the Merger was converted into the right to receive 1.07 shares of Bancorp’s common stock. The
Company issued approximately $117 million of its common stock to FNB shareholders, based on 7,059,823
shares of FNB common stock outstanding as of July 31, 2007 and the closing price of the Company’s common
stock on July 31, 2007.
The Merger was accounted for under the purchase method of accounting and was structured to qualify as a tax-
free reorganization under Section 368(a) of the Internal Revenue Code. The Merger initially resulted in $49.9
million of goodwill and $6.6 million of core deposit intangibles. The goodwill was not tax deductible. The core
deposit intangible was determined by an independent valuation and is being amortized over the estimated life of
10 years, based on undiscounted cash flows.
As of December 31, 2008, the Company wrote off $50.4 million of goodwill. At December 31, 2009, the
carrying value of other intangibles was $5.3 million.
Note 3 – Restriction on cash and due from banks
The Bank maintains required reserve balances with the Federal Reserve Bank of Richmond. The amounts of
these reserve balances at December 31, 2009 and 2008 were $15,831,000 and $5,115,000, respectively.
65
Note 4 – Investment securities
Investment securities at December 31 consist of the following (in thousands):
2009:
Available for sale:
U.S. government agency securities………
Mortgage backed securities………………
State and municipal obligations…………
Corporate bonds…………………………
Collateralized mortgage obligations…….
Federal Home Loan Bank stock………..
Other equity securities………………….
Total available for sale………………….
Municipal obligations held to maturity…
Total investment securities…………
2008:
Available for sale:
U.S. government agency securities………
Mortgage backed securities………………
State and municipal obligations…………
Federal Home Loan Bank stock………
Other equity securities………………….
Total available for sale………………….
Municipal obligations held to maturity…
Total investment securities…………
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$ 49,005
77,430
85,212
33,978
35,124
11,414
5,775
297,938
19,957
$ 317,895
$ 56,622
97,843
88,590
9,867
3,775
256,697
27,037
$ 283,734
$ 529
4,260
1,747
1,626
346
-
725
9,233
550
$ 9,783
$ 1,332
4,199
1,064
-
570
7,165
444
$ 7,609
$ (15)
-
(1,452)
-
(102)
-
(220)
(1,789)
(20)
$ (1,809)
$ -
-
(2,011)
-
(316)
(2,327)
(212)
$ (2,539)
$ 49,519
81,690
85,507
35,604
35,368
11,414
6,280
305,382
20,487
$ 325,869
$ 57,954
102,142
87,643
9,867
4,029
261,535
27,269
$ 288,804
The aggregate cost of the Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled
$11,414,000 at December 31, 2009. Because of the redemption provisions of this stock, and the financial
condition of the FHLB of Atlanta, the Company estimates that the fair value equals the cost of this investment
and that it is not impaired.
The following table shows the 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, 2009 and 2008. The unrealized losses relate to debt securities that have incurred fair
value reductions due to higher market interest rates since the securities were purchased. The unrealized losses are
not likely to reverse unless and until market interest rates decline to the levels that existed when the securities
were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s
ability to honor redemption obligations, and the Company has the intent and ability to hold until recovery, none
of the securities are deemed to be other than temporarily impaired.
2009
(In thousands)
Investment securities:
U.S. government agency
securities
Collateralized mortgage
obligations
Other equity securities
State and municipal obligations
Total temporarily impaired
securities
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Total
Fair
value
Unrealized
Fair value
Unrealized
losses
losses
$ 3,985
$ 15
$ -
$ -
$ 3,985
$ 15
17,380
-
21,479
102
-
761
-
839
4,795
-
220
711
17,380
839
26,274
102
220
1,472
$ 42,844
$ 878
$ 5,634
$ 931
$ 48,478
$ 1,809
66
2008
(In thousands)
Investment securities:
State and municipal obligations
Other equity securities
Total temporarily impaired
securities
Less than 12 months
Fair
value
Unrealized
losses
12 months or more
Total
Fair
value
Unrealized
Fair value
Unrealized
losses
losses
$ 44,255
523
$ 1,753
316
$ 6,343
-
$ 470
-
$ 50,598
523
$ 2,223
316
$ 44,778
$ 2,069
$ 6,343
$ 470
$ 51,121
$ 2,539
The amortized cost and estimated market value of debt securities at December 31, 2009, by contractual
maturities, are shown in the accompanying schedule. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties
(in thousands).
Due in one year or less……………………………………………………..
Due after one through five years……………………………………………
Due after five through ten years……………………………………………
Due after ten years………………………………………………………….
Total debt securities …………………………………………………….
Amortized
Cost
$ 5,485
93,983
36,355
164,883
$ 300,706
Estimated
Fair Value
$ 5,538
96,713
37,648
168,276
$ 308,175
A recap of the maturities of held to maturity securities follows. There were no sales of held to maturity securities
during the years presented (in thousands):
Proceeds from maturities ………………… $
Years Ended December 31
2009
-
2008
$ -
2007
$ 1,964
A recap of the maturities and sales of available for sale securities follows (in thousands):
Years Ended December 31
2008
Proceeds from sales and maturities ……… $ 10,977 $ 210,535
2,475
Gross realized gains ……………………...
16
Gross realized losses ……………………..
389
-
2009
2007
$140,110
101
139
Investment securities with amortized costs of approximately $154,352,000 and $187,275,000 and market values
of approximately $158,450,000 and $190,620,000 as of December 31, 2009 and 2008, respectively, were
pledged to secure public deposits and for other purposes. The Bank has obtained $50,000,000 in letters of credit,
which are used in lieu of securities to pledge against public deposits.
Note 5 – Loans
Loans are summarized as follows (in thousands):
December 31
2008
2009
$ 617,591
Commercial................................................................... $ 593,423
218,741
Real estate-construction ................................................ 177,285
632,729
Real estate-mortgage.....................................................
605,060
122,412
Consumer ...................................................................... 75,469
Other ............................................................................. 11,857
13,052
Total loans, net of unearned income …......................... $1,463,094 $ 1,604,525
67
As of December 31, 2009 and December 31, 2008, loans totaling approximately $575,108,000 and
$524,441,000, respectively, were pledged to secure the line of credit with the FHLB and Federal Reserve Bank.
Nonperforming assets are summarized as follows (in thousands):
December 31
2009
53,337
Nonaccrual loans........................................................... $
Restructured loans......................................................... 1,442
3,450
Loans past due 90 days or more ....................................
58,229
Total nonperforming loans ............................................
27,337
Real estate acquired in settlement of loans....................
85,566
Total nonperforming assets ........................................... $
2008
$ 38,029
250
1,277
39,556
9,080
$ 48,636
Impaired loans and related information are summarized in the following tables (in thousands):
December 31
2008
2009
2007
Loans identified as impaired
Commercial and real estate ........................................... $ 118,771 $ 84,422 $ 47,133
Consumer…………………………………………… ... 6,183
6,889 1,857
Total…………………………………………………..... $ 124,954 $ 91,311 $ 48,990
Allowance for credit losses associated with impaired
loans ............................................................................ $ 16,723 $ 12,768 $ 11,128
2007
Average balances of impaired loans for the years ........... $ 117,777 $ 73,349 $ 28,554
Years Ended December 31
2008
2009
Interest income recorded for impaired loans ................... $
905 $
380 $
535
An analysis of the changes in the allowance for credit losses follows (in thousands):
2007
Balances at beginning of years........................................ $ 35,805 $ 30,370 $ 9,564
18,952
Provision for credit losses ...............................................
Loans charged off............................................................
(9,412)
2,783 2,641 956
Recoveries.......................................................................
- - 10,310
Allowance acquired via acquisition…………………….
Balances at end of years .................................................. $ 35,843 $ 35,805 $ 30,370
35,749
(38,494) (22,468)
25,262
Years Ended December 31
2008
2009
The Bank’s policy for impaired loan accounting subjects all loans to impairment recognition except for large
groups of smaller balance homogeneous loans such as credit card, residential mortgage and consumer loans. The
Bank generally considers loans 90 days or more past due and all nonaccrual loans to be impaired.
Note 6 – Premises and equipment
The following is a summary of premises and equipment (in thousands):
December 31
2009
Land ............................................................................... $ 15,043
21,974
Buildings .........................................................................
31,081
Equipment .......................................................................
2,109
Leasehold improvements.................................................
70,207
Premises and equipment, total cost…………………...
Less, accumulated depreciation.......................................
29,801
Premises and equipment, net ........................................ $ 40,406
2008
$ 13,626
23,256
31,535
2,152
70,569
25,316
$ 45,253
68
Depreciation and amortization expense amounting to $4,630,000, $4,737,000 and $3,192,000, for the years
ended December 31, 2009, 2008, and 2007, respectively, is included in occupancy expense and furniture and
equipment expense in the consolidated statements of income.
Note 7 – Deposits
The aggregate amount of certificates of deposit of $100,000 or more was approximately $239,057,000 and
$347,305,000 at December 31, 2009 and 2008, respectively. The accompanying table presents the scheduled
maturities of total time deposits at December 31, 2009 (in thousands).
Years ending December 31,
2010…………………………………………………………
2011…………………………………………………………
2012…………………………………………………………
2013………………………………………………………
2014…………………………………………………………
Thereafter……………………………………………………
Total time deposits…………………………………
$ 590,915
40,116
36,283
5,211
1,511
359
$ 674,395
Note 8 – Short-term borrowings and long-term debt
The following is a schedule of short-term borrowings and long-term debt (in thousands, except percentages):
2009
Federal funds purchased and
repurchase agreements
Federal Reserve Bank borrowings
Trust preferred securities
FHLB borrowings……………………..
Total…………………………….
2008
Federal funds purchased and
repurchase agreements
Trust preferred securities
FHLB borrowings……………………..
Total…………………………….
Balance
as of
December 31
Interest Rate
as of
December 31
Average
Balance
Average
Interest
Rate
Maximum
Outstanding
at Any
Monthend
$ 46,000
27,600
25,774
165,200
$ 264,574
4.12 %
0.50 %
1.76 %
2.86 %
$ 47,220
2,467
25,774
149,559
$ 225,020
4.03 %
0.48 %
2.39 %
3.15 %
$ 53,841
27,600
25,774
174,000
$ 281,215
$ 51,041
25,774
139,000
$ 215,815
3.78 %
5.22 %
3.13 %
$ 64,328
25,774
148,206
$ 238,308
3.66 %
5.06 %
3.70 %
$ 97,139
25,774
242,860
$ 365,773
At December 31, 2009, the Bank had a $401,520,000 line of credit with the FHLB under which $165,200,000
was outstanding. This line of credit is secured with FHLB stock, certain pledged securities and a blanket floating
lien on qualifying 1 to 4 family residential mortgage loans and qualifying commercial real estate. Based upon
collateral pledged, as of December 31, 2009, the borrowing capacity under this line was $263,609,000, with
$48,409,000 available to be borrowed. The outstanding amounts consist of $112,500,000 maturing in 2010,
$35,000,000 maturing in 2011, $2,700,000 maturing in 2012 and $15,000,000 maturing in 2014. In addition to
the credit line at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $75,471,000,
of which there was $27,600,000 outstanding at December 31, 2009, all of which matures in 2010.
Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank.
Retail repurchase agreements represent short-term borrowings by the Bank, with overnight maturities
collateralized by securities of the United States Government or its agencies.
69
FNB Southeast, the banking subsidiary of FNB, sold securities under an agreement to repurchase (a “wholesale
repurchase agreement”) on December 8, 2006. This $21,000,000 transaction has a maturity date of December 8,
2016, became callable after one year, and has quarterly calls thereafter at a fixed rate of 4.03%. The investment
securities serving as collateral for this borrowing had a market value of approximately $25,905,000 at December
31, 2009.
FNB Southeast also entered into a wholesale repurchase agreement on June 28, 2007. The $15,000,000
transaction has a maturity date of June 28, 2011, became callable after one year, and has quarterly calls
thereafter. The transaction has a fixed rate of 4.42%. In addition, the Bank entered into a wholesale repurchase
agreement on December 20, 2007. The $10,000,000 transaction has a maturity date of December 20, 2010,
became callable after two years, and has quarterly calls thereafter. The transaction has a fixed rate of 3.85%. The
investment securities serving as collateral for these two borrowings had a market value of approximately
$32,098,000 at December 31, 2009.
FNB and FNB Financial Services Capital Trust I, a Delaware statutory trust (the “Trust,” now wholly owned by
the Company), issued and sold in a private placement, on August 26, 2005, $25,000,000 of the 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 month LIBOR plus 1.46% (the “Preferred Securities”) and a
maturity date of September 30, 2035. The Preferred Securities become callable after five years. Interest payment
dates are March 30, June 30, September 30 and December 30 of each year. The Preferred Securities are fully and
unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts
payable upon liquidation, redemption or repayment. The entire proceeds from the sale by the Trust to the holders
of the Preferred Securities was combined with the entire proceeds from the sale by the Trust to the Company of
its common securities (the “Common Securities”), and was used by the Trust to purchase $25,774,000 in
principal amount of the Floating Rate Junior Subordinated Notes (the “Junior Subordinated Notes”) of the
Company. The Company has not included the Trust in the consolidated financial statements. FNB contributed
$24,000,000 of the proceeds from the sale of the Junior Subordinated Notes to FNB as Tier I Capital to support
FNB’s growth. Currently, regulatory capital rules allow trust preferred securities to be included as a component
of regulatory capital.
The following is a schedule of the components of other borrowings (in thousands):
Federal funds purchased………………………………….…………………….
Federal Reserve Bank borrowings……………………………………………..
Retail repurchase agreements…………………………………………………..
Wholesale repurchase agreements……………………………………………..
Junior subordinated notes………………………………………………………
Total …………………………………………………………………
2009
2008
$ -
27,600
-
46,000
25,774
$ 99,374
$ 4,600
-
441
46,000
25,774
$ 76,815
70
Note 9 – Other assets and other liabilities
The components of other assets and liabilities for the years ended December 31 are as follows (in thousands):
Other assets:
Core deposit intangible………………………………………
Accrued interest receivable…………………………………...
Other ………………………………………….……………..
Total…………………………………...…………….
Other liabilities:
Accrued interest payable……………………..………………
Accrued compensation…………………………………..……
Dividends payable…..…………………………………..……
Retirement plans and deferred compensation…………………
Other………………………………………….…….………..
Total………………………………….…………….
Note 10 – Income taxes
2009
2008
$ 5,252
8,313
13,152
$ 26,717
1,534
1,731
335
11,156
3,282
$ 18,038
$ 5,978
9,014
14,202
$ 29,194
2,823
3,402
177
9,460
4,251
$ 20,113
The components of income tax expense (benefit) for the years ended December 31 are as follows (in thousands):
Current tax expense
Federal…………………………………….
State……………………………………….
Total current……………………….….
Deferred tax (benefit) expense
Federal…………………………………….
State……………………………………….
Total deferred…………………………
Total income tax expense (benefit)...
2009
2008
2007
$ (4,808)
(613)
(5,421)
$ (70)
563
493
$ 377
426
803
(5,133)
(1,087)
(6,220)
$ (11,641)
(6,121)
(1,296)
(7,417)
$ (6,924)
(5,144)
(1,053)
(6,197)
$ (5,394)
The significant components of deferred tax assets at December 31 are as follows (in thousands):
Deferred tax assets:
Allowance for credit losses………………………………….
Non-qualified deferred compensation plans…….…………..
Accrued compensation………………………………………
Writedowns on loans and real estate acquired in
settlement of loans………………………………………
Net operating losses………………………………………....
Pension plans – Other comprehensive income……………...
Other ………………………………………………………..
Valuation allowance…………………………………………
Total………………………………….…………….
Deferred tax liabilities:
Depreciable basis of property and equipment………………
Deferred loan fees…………………………………..……….
Net unrealized gain on available for sale securities…………
Other………………………………………….……………..
Total………………………………….…………….
Net deferred tax assets…………..…………….……………..
2009
2008
$ 14,142
1,441
628
7,400
9,434
2,106
4,877
(544)
$ 39,484
5,829
438
3,026
4,169
13,462
$ 26,022
$ 14,470
1,063
699
2,386
8,027
3,079
4,024
-
$ 33,748
5,278
833
1,935
3,838
11,884
$ 21,864
Management has evaluated the realizability of the recorded deferred tax assets at December 31, 2009. This
evaluation included a review of recent improving trends and expected near term levels in the net interest margin,
non performing assets, operating expenses and other factors. It also included a current forecast of performance
71
for 2010 as well as projections for several years based on management’s expectations of performance, adjusted
to assume a continuation of credit quality issues and future net interest margin erosion. It further included the
consideration of the items that have given rise to the deferred tax assets, as well as tax planning strategies.
Management has concluded that, with the exception of contribution and tax credit carryforwards which begin
expiring in three years, it is more likely than not that the deferred taxes will be realized and therefore, no
valuation allowance is necessary, except for those contribution and tax credit carryforwards.
The provision for income taxes differs from that computed by applying the federal statutory rate of 35% as
indicated in the following analysis (in thousands, except percentages):
Tax based on statutory rates………………..
Increase (decrease) resulting from:
Effect of tax-exempt income……………
Write off of goodwill……………………
State income taxes, net of federal benefit
Income on bank-owned life insurance…..
Other, net………………………………..
Total provision (benefit) for income taxes……
Effective tax rate
Note 11 – Lease commitments
2009
2008
2007
$ (9,371)
$ (22,339)
$ (3,870)
(1,570)
-
(1,105)
(205)
610
$ (11,641)
(43.5%)
(1,456)
17,653
(476)
(386)
80
$ (6,924)
(10.8%)
(726)
-
(407)
(182)
(209)
$ (5,394)
(48.8%)
The minimum annual lease commitments under noncancelable operating leases in effect at December 31, 2009,
are as follows (in thousands):
Years Ending December 31
2010………………………………………………………………...
2011………………………………………………………………...
2012………………………………………………………………...
2013………………………………………………………………...
2014………………………………………………………………...
Thereafter …………………………………………………………..
Total lease commitments………………………………………..
$ 1,657
1,271
927
823
711
727
$ 6,116
Payments under these leases amounted to approximately $2,671,000, $2,452,000 and $1,677,000 for the years
ended December 31, 2009, 2008, and 2007, respectively.
Note 12 – Related party transactions
The Bank had loans outstanding to principal officers and directors and their affiliated entities during each of the
past two years. Such loans were made substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other borrowers, and, at the time that they were
made, did not involve more than the normal risks of collectibility. The following table summarizes the
transactions for the past two years (in thousands):
Balance, beginning of year
Amounts removed as a result of director resignations
Advances (repayments), net, during year
Balance, end of year
2009
$ 11,575
(1,801)
455
$ 10,229
2008
$ 10,283
-
1,292
$ 11,575
72
Note 13 - Other operating income and expenses
The components of other operating income and other operating expense for the years ended December 31, 2009,
2008 and 2007 are as follows (in thousands):
Years Ended December 31
2009 2008 2007
Other operating income:
Bankcard income ……………………...………………………..
Fee income ............................................ ………………………..
Investment services commissions .......... ………………………..
Insurance commissions .......................... ………………………..
Trust income ......................................... ………………………..
Gain (loss) on sales of real estate .......... ………………………..
Income on bank-owned life insurance ... ………………………..
Other income .......................................... ………………………..
$
2,228
4,013
1,186
78
563
(591)
$ 2,545 $ 2,627
3,126 1,860
874 862
153 155
571 639
(508)
(437)
587
419
8,483
1,103 462
578
711
$ 8,442 $ 6,879
$
Other operating expenses:
Advertising ........................................... ………………………. $ 1,428 $ 1,940 $ 1,144
4,909
Automated services ............................... ……………………….
6,006
2,413
Bankcard expense .................................. ……………………….
2,256
3,448 4,920
Legal and professional fees.................... ……………………….
1,040
Postage................................................... ……………………….
908
1,169
909
Stationery, printing and supplies............ ……………………….
807 674
Other real estate owned expense ........... ……………………….
3,565
3,064
Other real estate owned write-downs..... ……………………….
Other expenses....................................... ……………………….
5,448
7,127
$ 22,669 $ 26,754 $ 24,993
5,724
2,225
3,460
873
590
919
703
6,747
Note 14 – Stock based compensation
In accordance with GAAP, the Company recorded $117,000, or less than $0.01 per diluted share, of total stock-
based compensation expense during 2009, compared to $93,000, or less than $0.01 per diluted share, in 2008.
The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related
stock options or restricted stock units. This expense had no impact on the 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 with the following weighted-average
assumptions:
Year Ended December 31, 2008
Dividend yield ................................................................
7.40 %
2.50 %
Risk-free interest rate......................................................
Expected stock volatility................................................. 36.32 %
Expected years until exercise..........................................
6.25
There were no stock options granted during 2009 or 2007.
For restricted stock units, the fair value is considered to be the market price on the date the restricted stock unit is
granted.
As of December 31, 2009, there was $170,000 of total unrecognized compensation expense related to stock
options and restricted stock units granted under the NewBridge Bancorp Amended and Restated Comprehensive
Equity Compensation Plan (formerly the LSB Bancshares Inc. Comprehensive Equity Compensation Plan for
73
Directors and Employees) (the “Comprehensive Benefit Plan”). This expense will be fully amortized by March
of 2013.
As of December 31, 2009, 31,000 restricted stock units granted to certain executive officers were outstanding. The
weighted average fair value of these restricted stock units is $6.58, which was the weighted average closing price of
the Company’s common stock on the dates they were granted. The restricted stock units vest based on certain
performance criteria that the Company did not meet during 2009, and does not expect to meet during 2010. The
stock-based compensation expense for these awards was immaterial for the period ended December 31, 2009.
As of December 31, 2009, the Company’s Compensation Committee administered the Company’s six stock-
based compensation plans, including two stock-based compensation plans assumed by the Company pursuant to
the Merger.
The Company’s Compensation Committee administers the following legacy LSB plans to the extent that awards
remain outstanding and unexercised: (a) the 1986 Employee Incentive Stock Option Plan; (b) the 1994 Director
Stock Option Plan; and (c) the 1996 Omnibus Stock Incentive Plan (collectively, the “Previous Benefit Plans”).
Each of the Previous Benefit Plans has expired and no additional awards may be granted thereunder.
At their 2004 annual meeting, LSB’s shareholders approved the Comprehensive Benefit Plan. Under the
Comprehensive Benefit Plan, 750,000 shares of common stock are available for issuance to plan participants in
the form of stock options, restricted stock, restricted stock units, performance units and other stock-based
awards.
At their 1996 annual meeting, FNB shareholders approved the FNB Omnibus Equity Compensation Plan (the
“1996 FNB Omnibus Plan”). The 1996 FNB Omnibus Plan authorizes the Board of Directors to grant stock
options to directors, executives and key employees. Options granted under the 1996 FNB Omnibus Plan have a
term of up to ten years and generally vest over a four-year period beginning on the date of the grant. Options
under the 1996 FNB Omnibus Plan were granted at a price not less than the fair market value at the date of grant.
The 1996 FNB Omnibus Plan expired in 2006 and no more options may be granted thereunder.
The FNB Long Term Stock Incentive Plan (the “2006 FNB Omnibus Plan”) was approved by FNB’s
shareholders at their 2006 annual meeting and authorized the issuance of up to 500,000 shares of FNB common
stock pursuant to the exercise of various rights granted under the 2006 FNB Omnibus Plan. Under the 2006 FNB
Omnibus Plan, participants may be granted or awarded eligible options, rights to receive restricted shares of
common stock and/or performance units. Except with respect to awards then outstanding, all awards must be
granted or awarded on or before May 18, 2016.
Upon the Merger, each option to acquire a share of FNB common stock granted pursuant to the 2006 FNB
Omnibus Plan and the 1996 FNB Omnibus Plan that was outstanding and unexercised immediately prior to the
Merger was converted into an option to acquire 1.07 shares of the Company’s common stock.
74
The following is a summary of stock option activity and related information for the years ended December 31:
2009
Weighted
Avg.
Exercise
Price
2008
Weighted
Avg.
Exercise
Price
Options
2007
Weighted
Avg.
Exercise
Price
Options
$ 14.32
-
-
-
13.55
1,394,517
-
24,000
-
(366,000)
$ 14.84
-
9.18
-
15.96
604,425
866,860
-
-
(76,768)
$ 17.31
13.08
-
-
15.21
Options
1,052,517
-
-
-
(155,526)
896,991
$ 14.45
1,052,517
$ 14.32
1,394,517
$ 14.84
811,041
$ 14.41
940,517
$ 14.23
1,247,517
$ 14.62
Outstanding -
Beginning of year…
Acquired via merger
Granted……………..
Exercised…………...
Forfeited……………
Outstanding – End
of year……………
Exercisable – End
of year……………...
The following is a summary of information on outstanding and exercisable options at December 31, 2009:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$5.81 – 10.05
$11.06 – 15.42
$15.56 – 16.93
$17.10 – 18.00
Number
212,606
290,151
143,109
251,125
896,991
Weighted Average
Remaining Contractual
Life (Years)
2.72
4.02
5.01
3.79
3.81
Weighted
Average Exercise
Price
$ 8.92
14.98
16.40
17.43
$ 14.45
Number
198,356
290,151
89,609
232,925
811,041
Weighted
Average
Exercise Price
$ 8.91
14.98
16.90
17.44
$ 14.41
Note 15 – Net loss per share
The following is a reconciliation of the numerator and denominator of basic and diluted net loss per share of
common stock as required by GAAP (in thousands, except share data):
Basic and diluted:
Net loss available to common shareholders…
For the years ended December 31,
2009
2008
2007
$ (18,050)
$ (57,072)
$ (5,663)
Weighted average shares outstanding…………………
15,655,868
15,663,719
11,485,353
Net loss per share, basic and diluted………..
$ (1.15)
$ (3.64)
$ (0.49)
No securities were dilutive during any of the periods presented, and therefore, basic and diluted loss per share are
identical for all three years presented above.
On December 31, 2009, there were 896,991 options, 31,000 restricted stock units and a warrant to purchase
2,567,255 shares outstanding. On December 31, 2008, there were 1,049,517 options, 24,000 restricted stock units
and a warrant to purchase 2,567,255 shares outstanding. On December 31, 2007, there were 1,108,264 options
outstanding. In each case the options, the restricted stock units and the warrant were antidilutive as a result of
the Company’s net loss for each of the three years.
See Note 22 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for a
description of the warrant.
75
Note 16 – Parent company only
The parent company’s principal asset is its investment in its subsidiary, the Bank. The principal source of
income of the parent company is dividends received from the Bank. The following presents condensed financial
information of the parent company (in thousands):
Condensed balance sheets
Assets
Cash and due from banks………………………………………...
Investment in wholly-owned subsidiary..………………………..
Other assets……………………………………………………….
Total assets……………………………………………………….
Trust preferred securities……………………………………………
Other liabilities....................................................................................
Shareholders’ equity…………………………………………………
Total liabilities and shareholders’ equity……………………….…..
2009
2008
$ 9,933
180,911
1,097
$ 191,941
$ 26,308
175,746
4,507
$ 206,561
$ 25,774
1,563
164,604
$ 191,941
$ 25,774
1,551
179,236
$ 206,561
Condensed statements of income
Dividends from subsidiary…………………………………………..
Other operating expense ……………….……..……………………..
Income before equity in undistributed net income of subsidiary..….
Equity in undistributed net loss of subsidiary………….…
Net loss………….…………………………………………………..
2009
2008
2007
$ -
824
(824)
(14,309)
$ (15,133)
$ 8,175
51,319
(43,144)
(13,758)
$ (56,902)
$ 12,999
944
12,055
(17,718)
$ (5,663)
Condensed statements of cash flows
Cash flows from operating activities
Net loss ............................................................................... ..........
Adjustments to reconcile net loss to net cash provided
by operating activities:
Other changes, net…………………………………………….
Change in investment in wholly-owned subsidiary……
Net cash provided by operating activities ..................
Cash flows from investing activities
Investments in wholly-owned subsidiary
(Increase) decrease in other assets .....................................
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from issuance of preferred stock and warrants
Dividends paid ...................................................................
Common stock acquired ....................................................
Increase in other liabilities .................................................
Net cash provided by (used in) financing activities ...
Increase (decrease) in cash .....................................................
Cash at beginning of year .......................................................
Cash at end of year .................................................................
Supplemental non-cash financing activities:
Common stock issued in acquisition
$ (15,133)
$ (56,902)
$ (5,663)
3,243
14,309
2,419
(16,372)
-
(16,372)
49,283
13,758
6,139
(26,000)
-
(26,000)
(2,626)
17,718
9,429
-
898
898
-
(2,422)
-
-
(2,422)
(16,375)
26,308
$ 9,933
52,372
(6,122)
(341)
38
45,947
26,086
222
$ 26,308
-
(6,983)
(3,422)
(6)
(10,411)
(84)
306
$ 222
-
-
$ 116,865
76
Note 17 – Off-balance sheet arrangements
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):
Loan commitments……………………………………………………
Credit card lines………………………………………………………
Standby letters of credit………………………………………………
Total commitments and contingent liabilities…………………….
Contractual Amount
2009
2008
$ 295,041
21,790
3,994
$ 320,825
$ 363,044
21,213
3,686
$ 387,943
The Bank’s exposure to credit loss in the event of nonperformance by the other party to these commitments is
equal to the contractual amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.
Note 18 – Employee benefit plans
The Company has three defined benefit retirement plans as follows:
1) A pension plan, which is the result of the merger of two legacy pension plans. The first plan was a
plan covering substantially all of the former employees of Lexington State Bank, and which was
curtailed in December 2006. The second plan was a plan covering substantially all of the former
employees of FNB Southeast, which was curtailed prior to the Merger. These two plans were merged
into one plan, effective December 31, 2008.
2) A supplemental executive retirement plan (“SERP”) covering certain executive and former executive
officers, which was curtailed in 2008; and
3) A retiree health benefit plan, which provides partial health insurance benefits for certain early retired
former employees of Lexington State Bank, which was curtailed in 2007.
The disclosures presented represent combined information for all of the employee benefit plans. The retiree
health benefit plan is not a material part of the aggregate information.
The pension plan, the retiree health benefit plan and the SERP provide for benefits to be paid to eligible
employees at retirement based primarily upon years of service with the Company and a percentage of qualifying
compensation during the employee’s final years of employment. Contributions to the pension plan were based
upon the projected unit credited actuarial funding method and comply with the funding requirements of the
Employee Retirement Income Security Act. Contributions prior to the curtailments were intended to provide not
only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets
consist primarily of cash and cash equivalents, U.S. government securities, and securities. The following tables
outline the changes in these pension obligations, assets and funded status for the years ended December 31, 2009
and 2008, and the assumptions and components of net periodic pension cost for the two and three years in the
period ended December 31, 2009 (in thousands):
77
Change in benefit obligation
Projected benefit obligation at beginning of year……….………………
Service cost………………………………………………………………
Interest cost………………………………………………………………
Actuarial (gain) loss…………..………….……………………………...
Benefits paid……………………………………………………………..
Curtailment……………………………………………………………..
Projected benefit obligation at end of year……………………………...
Change in plan assets
Fair value of plan assets at beginning of year……………………………
Actual return on plan assets……………………………………………...
Employer contribution…………………………………………………...
Benefits paid……………………………………………………………..
Fair value of plan assets at end of year…………………………………..
Funded status at end of year
Plan assets less projected benefit obligation………………………..
Unrecognized transitional obligation………………………………………
Pension asset (liability)…………………………………………………….
Amounts recognized in the consolidated balance sheets consist of:
Pension liability…………………………………………………………….
Deferred tax asset………………………………………….…………………..
Accumulated comprehensive income, net……………………………………
Net amount recognized………………………………………………………..
2009
2008
$ 24,104
43
1,494
1,346
(1,271)
-
25,716
14,644
4,351
964
(1,271)
18,688
(7,028)
-
$ (7,028)
$ 24,537
213
1,520
(103)
(1,423)
(640)
24,104
20,526
(4,870)
411
(1,423)
14,644
(9,460)
-
$ (9,460)
2009
2008
$ (7,028)
3,256
3,227
$ (545)
$ (9,460)
4,142
4,637
$ (681)
2009
2008
2007
Components of net periodic pension cost
Service…………………………………………………
Interest…………………………………………………
Expected return on plan assets…………………….
Amortization of prior service cost…………………
Amortization of transition obligation………………
Amortization of net gain (loss)…………………….
Curtailment…………………………………………
Net periodic pension cost
$ 43
1,494
(1,197)
1
-
416
-
$ 757
$ 213
1,520
(1,630)
82
-
54
(241)
$ (2)
$ 156
1,085
(1,262)
2
10
5
-
$ (4)
Weighted-average assumptions
Discount rate………………………………………….
Expected return on plan assets ………………………..
Rate of compensation increases……………..………..
6.00%
8.25%
2.25%
6.25%
8.25%
4.75%
6.25%
8.25%
4.75%
Target asset allocations are established based on periodic evaluations of risk/reward under various economic
scenarios and with varying asset class allocations. The near-term and long-term impact on obligations and asset
values are projected and evaluated for funding and financial accounting implications. Actual allocation and
investment performance is reviewed quarterly. The current target allocation ranges, along with the actual
allocation as of December 31, 2009, are included in the accompanying table.
78
Plan Assets
Equity securities..................................
Debt securities.....................................
Total................................................
Market Value as of
December 31, 2009
(in thousands)
$ 11,082
7,606
$ 18,688
Actual Allocation as of
December 31, 2009
Long-Term
Allocation Target
59.3%
40.7%
100%
40% - 75%
25% - 60%
100%
The assumed expected return on assets considers the current level of expected returns on risk-free investments
(primarily government bonds), the historical level of risk premium associated with the other asset classes in the
portfolio and the expectation for future returns of each asset class. The expected return of each asset class is
weighted based on the target allocation to develop the expected long-term rate of return on assets. This resulted
in the selection of the 8.25% rate used in 2009 and to be used for 2010. The required contributions for 2009
were approximately $964,000, and the required contributions for 2010 are expected to be approximately
$859,000. The expected benefit payments for the next ten years are as follows: (1) 2010 - $1,259,000, (2) 2011 -
$1,305,000, (3) 2012 - $1,352,000, (4) 2013 - $1,472,000, (5) 2014 - $1,469,000, and (6) 2015 through 2019 -
$8,613,000.
The Company also has a separate contributory 401(k) savings plan covering substantially all employees. Prior to
year end 2007, the separate plans of the two legacy banks were merged into the current 401(k) savings plan. The
401(k) savings plan allows eligible employees to contribute up to a fixed percentage of their compensation, with
the Bank matching a portion of each employee’s contribution. The Bank’s contributions were $748,000 for
2009, $878,000 for 2008 and $587,000 for 2007. The 401(k) savings plan contribution expense is reported under
personnel expense in the consolidated statements of income.
Three deferred compensation plans allow the directors of the Company to defer compensation. Each plan
participant makes an annual election to either receive that year’s compensation or to defer receipt until his or her
death, disability or retirement. The deferred compensation balances of two of these plans are maintained in a
rabbi trust. The balances in the trust at December 31, 2009 and 2008 were $3,134,000 and $2,412,000,
respectively. The third plan acquires shares of the Company’s common stock in the open market and holds these
shares in a trust at cost, as a component of shareholders’ equity, until distributed.
Note 19 – Regulatory matters
The primary source of funds for the dividends paid by the Company to its shareholders is dividends received
from the Bank. The Bank is restricted as to dividend payout by state laws applicable to banks and may pay
dividends only out of undivided profits. At December 31, 2009, the Bank had undivided profits of
approximately $52.3 million. Additionally, dividends paid by the Company and the Bank may be limited by
minimum capital requirements imposed by banking regulators. During 2008, the Company first reduced its
quarterly cash dividend, and later suspended the payment of cash dividends, based on the highly uncertain
economic conditions and in the interest of preserving capital. As a consequence of the Company’s participation
in the U.S. Department of the Treasury (the “U.S. Treasury”) Capital Purchase Program (the “CPP”), regulatory
approval is currently required before the Company may increase dividends payable on its common stock to more
than the last quarterly cash dividend ($0.05) declared prior to October 14, 2008.
The Company and the Bank are subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possible
additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the
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.
79
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).
Management believes that as of December 31, 2009, both the Company and the Bank meet all capital adequacy
requirements to which they are subject.
The most recent notification from the NC Commissioner of Banks categorized the Bank as “well capitalized”
under the regulatory framework for prompt corrective action. There are no conditions or events since that
notification that management believes have changed the 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 (in thousands, except percentages).
Actual
For Capital
Adequacy
Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2009
Total Capital (To Risk Weighted Assets)
Consolidated…………………………….
Bank… ………………………................
Tier 1 Capital (To Risk Weighted Assets)
Consolidated…………………………….
Bank… ………………………................
Tier 1 Capital (To Average Assets)
Consolidated…………………………….
Bank... …………………….....................
December 31, 2008
Total Capital (To Risk Weighted Assets)
Consolidated…………………………….
Bank… ………………………................
Tier 1 Capital (To Risk Weighted Assets)
Consolidated…………………………….
Bank… ………………………................
Tier 1 Capital (To Average Assets)
Consolidated…………………………….
Bank... …………………….....................
$ 195,658
185,579
12.3%
11.7
$ 127,551
127,414
≥8.0%
≥8.0
N/A
$ 159,268
≥10.0%
175,304
165,246
175,304
165,246
11.0
10.4
8.9
8.4
63,776
63,707
≥4.0
≥4.0
78,531
78,439
≥4.0
≥4.0
N/A
95,561
N/A
98,049
≥6.0%
≥5.0%
$ 217,130
187,810
12.4%
10.8
$ 140,110
139,745
≥8.0%
≥8.0
N/A
$ 174,681
≥10.0%
194,990
165,726
194,990
165,726
11.2
9.5
9.4
8.0
70,055
69,872
≥4.0
≥4.0
83,223
83,171
≥4.0
≥4.0
N/A
104,809
N/A
103,964
≥6.0%
≥5.0%
Note 20 - Fair value of financial instruments
The following methods and assumptions were used to estimate the fair value for each class of the 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. In accordance with GAAP, the fair value of investment securities is based on quoted
prices in active markets for identical assets, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities, corresponding to the “significant other observable
inputs” definition of GAAP. The fair value of equity investments in the restricted stock of the FHLB equals the
carrying value.
Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit ratings and for the same remaining
maturities. Substantially all residential mortgage loans held for sale are pre-sold and their carrying value
80
approximates fair value. The fair value of variable rate loans with frequent repricing and negligible credit risk
approximates book value.
Investment in bank-owned life insurance. The carrying value of bank-owned life insurance approximates fair
value because this investment is carried at cash surrender value, as determined by the insurer.
Deposits. The fair value of noninterest-bearing demand deposits and NOW, savings, and money market deposits
are the amounts payable on demand at the reporting date. The fair value of time deposits is estimated using the
rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Retail Repurchase Agreements. The carrying value of federal funds purchased
and retail repurchase agreements are considered to be a reasonable estimate of fair value.
Wholesale Repurchase Agreements and Other borrowings. The fair values of these liabilities are estimated using
the discounted values of the contractual cash flows. The discount rate is estimated using the rates currently in
effect for similar borrowings.
Accrued interest. The carrying amounts of accrued interest approximate fair value.
Financial instruments with off-balance sheet risk. The carrying value of financial instruments with off-balance
sheet risk is considered to approximate fair value, since a large majority of these future financing commitments
would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments,
generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The
various financial instruments were disclosed in Note 17.
The estimated fair values of financial instruments for the years ending December 31 (in thousands):
Financial assets:
Cash and short term investments……………
Investment securities…………………………
Loans…………………………………………
Less allowance for loan losses………….…
Net loans………………….……………….…
Financial liabilities:
Deposits………………………………………
Federal funds purchased and retail repurchase
agreements………………………………..
Federal Reserve Bank borrowings…………..
Wholesale repurchase agreements………..…
Junior subordinated notes……………………
FHLB borrowings……………………………
2009
2008
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$ 44,840
325,339
1,463,094
(35,843)
1,427,251
$ 44,840
325,869
1,475,084
-
1,475,084
$ 87,860
288,572
1,604,525
(35,805)
1,568,720
$ 87,860
288,804
1,585,355
-
1,585,355
1,499,310
1,504,123
1,663,463
1,674,364
-
27,600
46,000
25,774
165,200
-
27,600
46,931
12,586
167,810
5,041
-
46,000
25,774
139,000
5,041
-
47,328
11,294(1)
141,693
(1) The 2008 fair value disclosure has been revised to reflect more correct assumptions.
The fair value estimates are made at a specific point in time based on relevant market and other information
about the financial instruments. Because no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on current economic conditions, risk characteristics of various
financial instruments, and such other factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in
the estimates.
81
The table below presents the assets measured at fair value on a recurring basis categorized by the level of inputs
used in the valuation of each asset (in thousands):
December 31, 2009 - Assets measured at fair value, recurring
Available for sale securities
Real estate acquired in settlement of loans
Core deposit intangible
Mortgage loans held for sale
Total
Quoted prices in active
markets for identical assets
(Level 1)
$219,875
-
-
-
$219,875
Significant other
observable inputs
(Level 2)
$85,507
-
-
6,568
$92,075
Significant
unobservable inputs
(Level 3)
-
27,337
5,252
-
32,589
The table below presents the assets measured at fair value on a non-recurring basis categorized by the level of
inputs used in the valuation of each asset (in thousands):
December 31, 2009 - Assets measured at fair value, non-recurring
Impaired loans, net of allowance
Total
Quoted prices in active
markets for identical assets
(Level 1)
-
-
Significant other
observable inputs
(Level 2)
-
-
Significant
unobservable inputs
(Level 3)
$108,231
$108,231
Note 21 – Pro Forma Financial Statements (unaudited)
Pursuant to the terms of the Merger Agreement, each share of common stock of FNB outstanding at the effective
time of the Merger was converted into the right to receive 1.07 shares of the Company’s common stock. The
Company issued approximately $117 million of its common stock to FNB shareholders, based on 7,059,823
shares of FNB common stock outstanding as of July 31, 2007 and the closing price of the Company’s common
stock on July 31, 2007.
The Merger transaction was accounted for under the purchase method of accounting and was structured to
qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The Merger initially
resulted in $49.9 million of goodwill and $6.6 million of core deposit intangibles. The goodwill acquired was
not tax deductible. The Company subsequently wrote off the goodwill as of December 31, 2008. The core
deposit intangible was determined by an independent valuation and is being amortized over the estimated life of
10 years, based on undiscounted cash flows.
82
A summary of the estimated fair values of assets and liabilities of FNB as of July 31, 2007 is presented in the
table below. The Company acquired the assets and assumed the liabilities as of that same date (in thousands).
Cash and cash equivalents
Loans receivable, net of allowance for credit losses
Investment securities
Premises and equipment
Core deposit intangible
Goodwill
Other assets
Deposits
Borrowings
Other liabilities
Investment in subsidiary, net of capitalized acquisition costs $ 120,005_
$ 14,803
632,576
252,223
22,523
6,613
49,947
50,184
(734,131)
(161,044)
(13,689)
The Company’s consolidated financial statements include the results of operations of FNB only from the date of
acquisition. The following unaudited summary presents the consolidated results of operations of the Company
on a pro forma basis for the year ended December 31, 2007 as if FNB had been acquired on January 1, 2007.
The pro forma summary information does not necessarily reflect the results of operations that would have
occurred if the acquisition had occurred at the beginning of the period presented, or of results which may occur
in the future.
A summary of the pro forma financial statement is as follows (dollars in thousands, except per share data):
Net interest income
Provision for loan losses
Net interest income after provisions for loan losses
Noninterest income
Noninterest expense
Income (loss) before income tax expense
Income tax expense
Net income (loss)
Weighted Average Common Shares:
Basic
Diluted
Per Common Share Data:
Basic income (loss)
Diluted income (loss)
For the Year
Ended
December 31, 2007
73,818
20,943
52,875
22,442
80,511
(5,194)
(2,932)
$
(2,262)
15,694,068
15,694,068
$
(0.14)
(0.14)
83
Note 22 – U.S. Treasury Capital Purchase Program
Pursuant to the CPP, on December 12, 2008, Bancorp issued and sold to the U.S. Treasury (i) 52,372 shares of
Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a
warrant (the “Warrant”) to purchase 2,567,255 shares of Bancorp’s common stock at an exercise price of $3.06
per share, representing an aggregate market price of approximately $7.9 million, for an aggregate purchase price
of $52,372,000 in cash. The Warrant may be exercised by U.S. Treasury at any time before it expires on
December 12, 2018. Subject to the approval of the federal banking regulators, the Series A Preferred Stock, may
be redeemed in whole or in part, at any time and from time to time. Once an institution notifies the U.S. Treasury
that it would like to repay its investment, the U.S. Treasury must permit repayment subject to consultation with
the federal banking regulators. All such redemptions will be at 100% of the issue price, plus any accrued and
unpaid dividends. The fair value of the Warrant of $1,497,000 was estimated on the date of the grant using the
Black-Scholes option-pricing model. The holders of the Series A Preferred Stock are entitled to receive
cumulative dividends of 5 percent for the first five years and 9 percent thereafter.
84
Item 9.
DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
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, 2009. Based upon that evaluation, the Company’s CEO, CFO and CAO each
concluded that as of December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, the
Company effectively maintained disclosure controls and procedures.
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. 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, 2009. In making its assessment of internal control over financial reporting,
management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control—Integrated Framework. Based on this assessment, management
believes that, as of December 31, 2009, 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.
The Company’s independent registered public accounting firm, Grant Thornton LLP, has issued an audit report
on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. This
Report of Independent Registered Public Accounting Firm is included in Item 8, Financial Statements and
Supplementary Data.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s CEO, CFO, and CAO,
changes in the Company’s internal control over financial reporting during the fourth quarter of 2009. In
connection with such evaluation, the Company has determined that there have been no changes in internal
control over financial reporting during the fourth quarter that have materially affected or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B.
OTHER INFORMATION
None.
85
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 Bancorp is set forth under the Proxy Statement sections captioned “Proposal 1 – Election of
Directors,” “Executive Officers of the Corporation,” and “Board Committees - Audit Committee,” which
sections are incorporated herein by reference.
(b) Section 16(a) Compliance – The information required by this Item regarding compliance with Section 16(a)
of the Exchange Act is set forth under the Proxy Statement section captioned “Section 16(a) Beneficial
Ownership Reporting Compliance,” which section is incorporated herein by reference.
(c) Audit Committee – The information required by the Item regarding Bancorp’s Audit Committee, including
the Audit Committee Finance Expert, is set forth under the Proxy Statement sections captioned “Board
Committees - Audit Committee” and “Board Committees - Audit Committee Report,” which sections are
incorporated by reference.
(d) Code of Ethics – The information required by the Item regarding codes of ethics is set forth under the Proxy
Statement section captioned “Code of Business Conduct and Ethics,” which section is incorporated by reference.
Item 11.
EXECUTIVE COMPENSATION
The information required by this Item is set forth under the Proxy Statement sections captioned “Compensation
Discussion and Analysis”, “Grant of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year-End”,
“Option Exercises and Stock Vested”, “ Pension Benefits”, “Nonqualified Deferred Compensation”, “Potential
Payments Upon Termination or Change in Control”, “Director Compensation”, “Director Fees and Practices”,
“Board Committees - Compensation Committee Interlocks and Insider Participation” and “Board Committees -
Compensation Committee Report,” which sections are incorporated by reference.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth under the Proxy Statement sections captioned “Security
Ownership of Certain Beneficial Owners” and “How Much Common Stock do our Directors and Executive
Officers Own?” and in Item 5 of this Annual Report on Form 10-K, which sections and Item are incorporated
herein by reference.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item is set forth under the Proxy Statement sections captioned “Proposal 1 –
Election of Directors,” “Certain Relationships and Related Transactions,” “Board Committees” and “Board
Committees — Compensation Committee Interlocks and Insider Participation,” which sections are incorporated
herein by reference.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is set forth under the Proxy Statement section captioned “Proposal 2:
Ratification of Appointment of Grant Thornton LLP as Our Registered Independent Accounting Firm for 2010,”
which section is incorporated herein by reference.
86
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(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……………………………………………………….
Reports of Independent Registered Public Accounting Firm………………....………..
Consolidated Balance Sheets as of December 31, 2009 and 2008…………………….
Consolidated Statements of Income for the years ended December 31, 2009, 2008
and 2007……………………………………………………………………………….
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive
Income for the years ended December 31, 2009, 2008 and 2007……………………...
Consolidated Statements of Cash Flows for the years ended December 31, 2009,
2008 and 2007…………………………………….……………………………………
Notes to Consolidated Financial Statements…………………………………………...
54
55
57
58
59
60
61
(a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation
S-X have been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed below. The management
contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K are listed as
exhibits 10.1 through 10.37 (excluding exhibits 10.30 and 10.35) in the Exhibit Index.
(b) The exhibits to the Form 10-K begin on page 94 of this Report.
(c) See 15(a)(2) above.
87
EXHIBIT INDEX
Exhibit
No.
Description
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
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).
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).
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).
Specimen certificate of common stock, $5.00 par value, incorporated by reference to Exhibit 4.1 of the
Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9,
2007 (SEC File No. 000-11448).
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).
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).
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).
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).
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).
Warrant for Purchase of Shares of Common Stock issued by Bancorp to the United States Department of the
Treasury on December 12, 2008, incorporated herein by reference to Exhibit 4.3 of the Current Report on
Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
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).
1994 Director Stock Option Plan, incorporated herein by reference to Exhibit 4 of the Registration Statement
on Form S-8 filed with the SEC on July 15, 1994 (SEC File No. 33-81664).
1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on
Form 10-K for the year ended December 31, 1995 filed with the SEC on March 28, 1996 (SEC File No. 000-
11448).
88
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
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).
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)
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).
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).
Form of Employment Continuity Agreement effective as of January 1, 2004 between LSB and Robert E.
Lineback, Jr. and Philip G. Gibson with a Schedule setting forth the material details in which such documents
differ from the document a copy of which is filed, incorporated herein by reference to Exhibit 10.10 of the
Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 15, 2004
(SEC File No. 000-11448).
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).
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).
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).
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).
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).
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).
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).
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).
Employment and Change of Control Agreement with William W. Budd, Jr. incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 11, 2010 (SEC File No. 000-
11448).
89
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Employment and Change of Control Agreement with Jerry W. Beasley, incorporated herein by reference to
Exhibit 99.3 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-
11448).
Employment and Change of Control Agreement with Robin S. Hager, incorporated herein by reference to
Exhibit 99.4 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-
11448).
Employment and Change of Control Agreement with Paul McCombie, incorporated herein by reference to
Exhibit 99.5 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-
11448).
Employment and Change of Control Agreement with George Richard Webster, incorporated herein by
reference to Exhibit 99.6 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File
No. 000-11448).
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).
Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors
Retirement Policy Trust Agreement among Regions bank d/b/a/ Regions Morgan Keegan Trust, Bancorp and
the Bank, incorporated herein by reference to Exhibit 99.8 of the Current Report on Form 8-K, filed with the
SEC on March 14, 2008 (SEC File No. 000-11448).
Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated
herein by reference to Exhibit 99.9 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008
(SEC File No. 000-11448).
First Amendment to the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior
Management, incorporated herein by reference to Exhibit 99.10 of the Current Report on Form 8-K, filed with
the SEC on March 14, 2008 (SEC File No. 000-11448).
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).
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).
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).
Employment and Change of Control Agreement with David P. Barksdale, incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on October 17, 2008 (SEC File No. 000-
11448).
Letter Agreement, dated December 12, 2008, between Bancorp and the United States Department of the
Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K
filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
Form of Employment Agreement Amendment, dated December 12, 2008 among Bancorp, the Bank and the
senior executive officers of Bancorp, incorporated herein by reference to Exhibit 10.2 of the Current Report on
Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).
90
10.32
10.33
10.34
10.35
10.36
10.37
Bancorp Management Incentive Plan, dated February 18, 2008, incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 6, 2009 (SEC File No. 000-
11448).
Employment and Change of Control Agreement with Ramsey K. Hamadi, incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on March 30, 2009 (SEC File No. 000-
11448).
Promissory Note by Ramsey K. Hamadi in favor of the Bank incorporated herein by reference to Exhibit 99.1
of the Current Report on Form 8-K, filed with the SEC on April 21, 2009 (SEC File No. 000-11448).
Excessive and Luxury Expenditure Policy of Bancorp and the Bank, incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 9, 2009 (SEC File No. 000-
11448).
Employment and Change of Control Agreement among Bancorp, the Bank and Pressley A. Ridgill, executed
September 9, 2009, and effective January 1, 2010, incorporated herein by reference to Exhibit 99.1 of the
Current Report on Form 8-K filed with the SEC on September 11, 2009 (SEC File No. 000-11448).
Form of Amendment to Employment and Change of Control Agreement, dated September 16, 2009, among
Bancorp, the Bank and the senior executive officers of Bancorp, incorporated herein by reference to
Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on September 16, 2009 (SEC File No. 000-
11448).
21.01
Schedule of Subsidiaries
23.01
Consent of Grant Thornton LLP
31.01
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.01
99.02
Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American
Recovery and Reinvestment Act of 2009.
Certification Pursuant to the Emergency Economic Stabilization Act of 2008, as amended by the American
Recovery and Reinvestment Act of 2009.
91
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.
SIGNATURES
NEWBRIDGE BANCORP
Date:
March 17, 2010
By: /s/ PRESSLEY A. RIDGILL
Pressley A. Ridgill,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ PRESSLEY A. RIDGILL
Pressley A. Ridgill
President, Chief Executive Officer, Director
(Principal Executive Officer)
March 17, 2010
/s/ RAMSEY K. HAMADI
Ramsey K. Hamadi
/s/ RICHARD M. COBB
Richard M. Cobb
/s/ MICHAEL S. ALBERT
Michael S. Albert
/s/ BARRY Z. DODSON
Barry Z. Dodson
/s/ J. DAVID BRANCH
J. David Branch
/s/ C. ARNOLD BRITT
C. Arnold Britt
/s/ ROBERT C. CLARK
Robert C. Clark
/s/ ALEX A. DIFFEY, JR.
Alex A. Diffey, Jr.
/s/ JOSEPH H. KINNARNEY
Joseph H. Kinnarney
/s/ ROBERT F. LOWE
Robert F. Lowe
Executive Vice President, Chief Financial
Officer
(Principal Financial Officer)
Senior Vice President, Chief Accounting
Officer, Controller
(Principal Accounting Officer)
March 17, 2010
March 17, 2010
Chairman of the Board
March 17, 2010
Vice Chairman of the Board
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
Director
Director
Director
Director
Director
Director
92
Signature
Capacity
Date
/s/ ROBERT V. PERKINS, II
Robert V. Perkins, II
/s/ MARY E. RITTLING
Mary E. Rittling
/s/ BURR W. SULLIVAN
Burr W. Sullivan
/s/ E. REID TEAGUE
E. Reid Teague
/s/ ELIZABETH S. WARD
Elizabeth S. Ward
/s/ JOHN F. WATTS
John F. Watts
/s/ G. ALFRED WEBSTER
G. Alfred Webster
/s/ KENAN C. WRIGHT
Kenan C. Wright
/s/ JULIUS S. YOUNG, JR.
Julius S. Young, Jr.
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
March 17, 2010
Director
Director
Director
Director
Director
Director
Director
Director
Director
93
Intentionally left blank
Intentionally left blank
Intentionally left blank
BOARD OF DIRECTORS
Michael S. Albert
Chairman, NewBridge Bancorp and NewBridge Bank;
partner of Entrepreneurial Resources of NC, LLC.
Barry Z. Dodson
Vice Chairman, NewBridge Bancorp and NewBridge
Bank; certified public accountant and owner of
Barry Z. Dodson, CPA, PLLC.
Pressley A. Ridgill
President, Chief Executive Officer and Director,
NewBridge Bancorp and NewBridge Bank.
J. David Branch
Ophthalmologist in private practice.
C. Arnold Britt
President and owner, Carolina Apothecary, Inc.,
Belmont Pharmacy, Inc. and RxCare, Inc.
Robert C. Clark
President and owner, FTS/Leesona Corporation, a
manufacturer and distributor of industrial winding
equipment; member, Winston-Salem City Council.
Alex A. Diffey, Jr.
Independent banking consultant.
Joseph H. Kinnarney
Doctor of Veterinary Medicine; President and owner
of Reidsville Veterinary Hospital, Inc., Bel-Air
Veterinary Hospital, Mebane Veterinary Hospital,
Greensboro Pet Spa & Resort, Inc. and Carolina
Equine Hospital.
Robert F. Lowe
Former Chairman of NewBridge Bancorp and
NewBridge Bank; retired executive of
NewBridge Bancorp and NewBridge Bank.
Robert V. Perkins
President and co-owner of NAI Piedmont Triad,
a commercial real estate services firm; member,
Greensboro City Council.
Mary E. Rittling
President, Davidson County Community College.
Burr W. Sullivan
President and CEO of the Lexington Area Chamber
of Commerce.
E. Reid Teague
President and owner, Eden Oil Co., Inc.
Elizabeth S. Ward
Executive Vice President and Chief Financial Officer,
Wellmont Health System.
John F. Watts
Owner, Watts Realty, a North Carolina
Limited Partnership.
G. Alfred Webster
Director and Chair of the Executive
Committee, Unifi, Inc; retired Executive Vice
President, Unifi, Inc.
Kenan C. Wright
President, The Wright Co. of N.C., Inc., a general
contracting firm.
Julius S. Young, Jr.
President, Jay Young Management, Inc., an asset
management firm.
ExECuTIVE MANAGEMENT TEAM
Pressley A. Ridgill
President and Chief Executive Officer,
NewBridge Bancorp and NewBridge Bank.
Angelika I. Gambetta
Vice President and Corporate Secretary,
NewBridge Bancorp and NewBridge Bank.
David P. Barksdale
Executive Vice President and Chief Banking Officer,
NewBridge Bank.
Robin S. Hager
Executive Vice President and Chief Resource Officer,
NewBridge Bank.
William W. Budd, Jr.
Executive Vice President and Chief Credit Officer,
NewBridge Bank.
Ramsey K. Hamadi
Executive Vice President and Chief Financial Officer,
NewBridge Bancorp and NewBridge Bank.
CORPORATE INFORMATION
ABOUT THE COMPANY
NewBridge Bancorp is the parent company of
NewBridge Bank*, which is a full service state
chartered community bank with headquarters in
Greensboro, North Carolina.
CORPORATE HEADQUARTERS
NewBridge Bancorp
1501 Highwoods Boulevard
Suite 400
Greensboro, NC 27410
STOCK LISTING
NewBridge Bancorp common stock trades on the
NASDAQ Global Select Market under the ticker
symbol NBBC.
STOCK TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
(800) 633 – 4236
www.computershare.com/investor
Inquiries related to stock transfers, address or
registration changes and lost certificates should be
directed to Computershare.
INVESTOR RELATIONS CONTACT
Angelika I. Gambetta
Vice President and Corporate Secretary
NewBridge Bancorp
1501 Highwoods Boulevard
Suite 400
Greensboro, NC 27410
(336) 369 – 0905
angelika.gambetta@newbridgebank.com
MORE INFORMATION
Press releases, SEC filings, quarterly financial results and information about the Company’s products and services can be
accessed through its website at www.newbridgebank.com. Additional information about the Company is available online
on the SEC’s website at www.sec.gov.
Harrisonburg
VA
NC
Stokes County
Rockingham County
Forsyth County
Greensboro
Davidson County
Alamance County
Guilford County
Randolph County
As of March 22, 2010,
NewBridge Bank has 33
banking offices in the
Piedmont Triad region of
North Carolina, the
Wilmington, NC area
and Harrisonburg, VA.
Pender County
New Hanover
County
Corporate Headquarters
*
Many thanks to all of our dedicated professionals*
Karen Adkins
Kim Allen
Margot Allman
Kofi Amadi
Chris Andrews
Cathy Atkins
Melissa Atkins
Ken Banner
Ben Barbee
Ed Barber
Pat Barker
David Barksdale
Scott Barney
Vickie Barnhardt
Edgar Barrientos
Mindy Batchelor
Jennifer Bates
Amy Battle
Pattie Bayliff
Jerry Beasley
Dee Beck
Kent Beck
Wassila Bedja
Bonnie Belaj
Sonya Belcher
Angela Bell
Samantha Benfield
Darlene Bennett
Cathy Berrier
Coretta Bigelow
Wendi Binkley
Ben Bishop
Stephanie Blair
Judy Blake
Samantha Blankenship
Richard Bobay
Pam Boles
Tammy Bowles
Deric Brady
Crystal Bragg
Stephanie Breeden
Ginger Bridges
Pattie Brinkle
Jason Brooks
Eugene Broome
Amy Brown
Kellie Brown
Melinda Brown
Rosetta Brown
Sabrina Brown
Tammy Brown
Tatia Brown
John Bruggman
Wes Budd
Susan Buffkin
Randall Bullin
Danielle Burgess
Susan Burke
Morgan Bush
Rick Byrd
Janet Call
Amanda Callahan
Sara Camp
Theresa Campbell
Lisa Carpenter
Candi Carter
BJ Case
Leslie Cash
April Cassidy
Sharon Caudle
Robin Cecil
Keith Chalmers
Jeff Chandler
Carolyn Charette
Aubrey Chatham
Sandra Chilcote
Traci Chisholm
Frank Chorpenning
Lisa Christensen
Barbara Clarke
Michelle Clarke
Jane Clodfelter
Dick Cobb
Karen Coe
Carol Columbus
Jeff Cook
Kim Cook
Sheila Cooper
Donna Cope
Sue Cowan
Crystal Cox
Donna Craigg
John Cranor
Vickie Craun
Lynn Creech
Chris Crockett
Tara Cruise
Cora Cunningham
Tracy Cupp
Nan Dagenhardt
Cecil Dalton
Holly Daniels
Jenna Daniels
Teresa Darnell
Angel Davis
Catherine Davis
Chad Davis
Kyle Ann Davis-Dunn
Jesse Dehass
Stephanie Dejournette
Angela Dixon
Shannon Donathan
Lori Doremus
Holly Dorton
Helen Doss
Diana Dotson
Liz Dunican
Nicole Dunn
Patricia Dunning
Debbie Durham
Kristen Durham
Linda Durham
Donna Durrett
Paul Edmond
Lauren Edmonds
Derek Edwards
Alan Efting
Beth Eller
JJ Elliott
Pam Ellis
Grant Emrick
Chris England
Christine England
Angela English
Mindy Engstrom
Francise Estes
Lakeisha Estes
Tim Evans
Clay Everett
Amy Everhart
Heidi Everhart
Angel Ezzell
Natalie Faircloth
Cangie Farlow
Bailey Finney
Dana Fisher
Oneita Flanegin
Shaylen Foust
Lynn Fowler
Debra Frank
Terry Freeman
Whitney Freeman
Shirley French
Julie Frey
Julie Fricault
Pat Fritts
Jessica Frye
Linda Fulk
Angelika Gambetta
Holly Gammons
Sherry Garrett
Tanya Gatewood
Erica Gibson
Jillian Gibson
Rebecca Gibson
Brittany Ginn
Greg Godsey
Chris Grady
Philip Grande
Eve Green
Serelyn Green
Melissa Gregory
Brenda Griffin
Mona Griffin
Dorothy Griffith
Shirley Gross
Kathy Habermeyer
Robin Hager
Natalie Haire
Larry Hall
Ramsey Hamadi
Cheryl Hancock
Sheila Handy
Dee Harden
DeeDee Harper
Donna Harper
Andrea Harris
Matthew Harris
Tiffany Harris
Monica Harron
Betty Hartman
Robin Hartman
Connie Hathaway
Barbara Hayes
Matt Hearn
Heidi Heath
Amber Hedrick
Ashley Hedrick
Nissa Hegler
Donna Hench
Mike Hendricks
Jeffrey Hendrix
Sara Hensley
Chassidy Hepler
Chad Hester
Danyelle Hickinbotham
Donna Hill
Holly Hill
Kelli Hill
Shaun Hill
Glenda Hobbs
Nathan Hockersmith
Deann Holmes
Debra Holmes
Alane Holste
Courtney Holt
Deborah Honeycutt
Robin Horn
Jerry Hudson
Bill Hudson
Rhonda Huffman
Tonya Hull
Gladys Hunt
Landa Hunt
Carrie Hutchens
Christy Hutchens
Jay Hutchens
Tony Hyde
Katrina Jackson
Buzz Jackson
Cathy James
Terry Jankosky
Brandon Johnson
Mark Johnson
Lesa Johnston
JoAnn Jordan
Betty Joyce
Tiffany Junious
Dora Kanoy
Elizabeth Kearns
Lynn Kelley
Lacy Kennedy
Maxine Kennedy
Mike Kidd
David Kilpatrick
Wayne Kimbrell
Cynthia Kistler
Gene Klump
John Knox
John Kolessar
Joretta Koontz
Bill Kosin
Irene Kyere
Carl Labonge
Sheryl Lambeth
Alex Lane
Missy Langley
Michelle Langley
Anna Lanier
Nathaniel Lanier
Irene Law
Amanda Laws
Melanie Laws
Bukra Lazimi
Linda Lee
Matt Leggett
Kelly Lemons
Jerrie Leonard
Jessica Leonard
Tracy Leonard
Brian Lewis
Tanya Lewis
Sharon Lindsey
Cynthia Lindsley
Robert Lineback
Toni Linker
Liz Livingston
Courtney Lollis
Cassandra Loman
Alan Lomax
Leslie Long
Janell Lynch
Margaret Maddox
Heather Majors
Ryan Marks
Cindy Martin
Jennifer Martin
Kamelda Martin
Steve Martin
Sterlin Martin
Amanda Martino
Courtney Martiny
Terri Maxcy
Tracy May
Wendy Mayfield
Linda Maynard
Joel Maynor
Aundria McCandies
Jackie McClanahan
Nancy McCollum
Paul McCombie
John W McDaniel
Andy McDowell
Deborah McDuffie
Jason McGath
Meg McGee
Jo Marie McKinney
Katie Mecum
*Includes full-time and part-time employees
Randy Mercer
Suzanne Michael
Savanah Mick
Chris Mickey
Isaac Miller
Erin Miller
Michael Miller
Rebecca Miller
Ward Miller
Laverne Miner
Missy Minor
Sherri Mize
Tina Montgomery
Janet Mooney
Deborah Moore
Janice Moore
Deborah Morris
Ruby Morris
Eric Morrison
Bud Munnelly
Julie Murr
Christy Musgrave
Patty Myers
Jeff Nadzak
Amy Nance
Tom Nance
Suzanne Nazim
Keith Neely
Dianne Nelson
Lynn Nelson
Tonya Nelson
Ann New
Kathy Newbold
Lois Nichols
Cindy Norman
Cyenthia Ree Nunn
Karen Oddon
Stacy Oldham
Jed Orman
Beth Orman
Kevin Ott
Debbie Overby
Steve Owen
Janet Pagans
Doug Page
Alexi Pappas
Yates Parker
Justin Parker
Ed Parrish
Ginger Patterson
Merriett Payne
Tammy Peace
Melanie Pearman
Cindy Pearson
Jeff Peeler
Michelle Pennington-
Walker
Jo Peoples
Debbie Pepper
Andy Perryman
Susette Pfannes
Evalyn Pheysey
Felita Phipps
Andrea Pierce
Glenda Pierce
Connie Piner
Debbie Pitts
Ashley Poirier
Sarah Poling
Danielle Michelle Pool
Rhonda Potter
Eddie Potts
Ked Powell
Richard Landis Powell
Tammy Pressley
Nicholas Priddy
Tammi Privott
Gail Proctor
Leon Pruzan
Shirley Putnam
Judy Queen
Jim Raby
Angelia Ragin
Dava Rayle
Lisa Reaser
Larry Reddick
Susan Reece
Tammy Reid
Bertha Reyes
Ginger Richardson
Pressley Ridgill
Judy Rinere
Kristen Rives
Brooks Roach
Hall Roberts
Janet Roberts
Amy Robinson
Ashley Roe
Lee Rogers
Pam Rose
Amber Roseberry
Donna Rushin
Jennifer Russell
Wendy Russell
Kristin Salimeno
Elaine Salmons
Angela Sams
Melissa Sands
Pattie Satterfield
Kellie Saum
Helen Scales
Yvette Scales
Pic Schrum
Melissa Schwartz
Teena Scott
Bryanne Scyphers
Cheryl Searles
Mary Beth Segars
Tammy Sharpe
Mitzi Sharron
Robert A. Shaw
Lisa Shawver
Annita Shivdyal
Jennifer Shore
Marilyn Silk
Tom Simms
Don Singleton
Christy Sink
Gerald Sink
Lisa Sink
Ron Sink
Zachary Sink
Charles Skara
Sandra Slade
Sheila Slaydon
Nicole Small
Angie Smith
Arthur Smith
Candy Smith
Jamie Smith
Jessica Smith
Lenny Smith
Lisa Smith
Marcus Smith
Melissa Smith
Nancy Catherine Smith
Nikki Smith
Pat Smith
Rita S. Smith
Stan Smith
Steve Smith
Wendy Smith
William F. Smith
Pete Snider
Heather Southers
Randy Spivey
Lynne Stallings
Jennie Still
Dana Stout
Jamie Stowe
Deana Strader
Ember Styers
Ashleigh Clark Sumlin
James Taylor
Tammy Teeple
Sandy Thomas
Allison Thomason
Tamika Thompson
Thom Thompson
Christine Thornburg
Aimee Tilley
Karen Tilley
Erica Tobin
Carlene Toler
Marcia Trantham
Jennifer Trent
Amber Tritt
Amber Trotter
Becky Tucker
Sandra Turner
Lisa Tussey
Donna Tuttle
Pam Tuttle
Angie Tysinger
Bernice Tysinger
Kristen Tysinger
Jill Vale
Laura Varner
Stuart Vaughn
Melissa Walds
Melissa Walker
Stacy Walker
Judy Wall
Joe Wallace
Robert Walser
Rodney Walser
Ann Warren
Tammy Warren
Vickie Washburn
Warren Watts
Jennifer Weavil
Rick Webster
Kim Wehrle
Marshan Weifenbach
Jennifer Welch
Marsha Wells
Grayson Whitt
Julie Whitt
Ellen Wigington
Cathy Wilkerson
Dax Williamson
Dana Wilmouth
Angela Wilson
April Wilson
Belinda Wilson
Martha Wilson
Michelle Wilson
Katie Wittke
Judy Womble
Melinda Wood
Heidi Woody
Shannon Wright
Patrick Wynn
Kaitlan Yale
Jan Yates
Melissa Yates
Tammy Young
Tracy Younts
NewBridge Bancorp
1501 Highwoods Boulevard, Suite 400
Greensboro, NC 27410
(336) 369-0900
www.newbridgebank.com