Form 10-K

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, 2008		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:


		Name of each exchange
Title of each class		on which registered
Common Stock, par value $5.00 per share		Nasdaq Global Select Market

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company o

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

The aggregate market value of the 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 $104.5 million. As of March 9, 2009 (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 2009 Annual Meeting of Shareholders of NewBridge Bancorp (the “Proxy Statement”) are incorporated by reference into Part III hereof.

The Exhibit Index begins on page 85.

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: (1) in October of 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law, followed in February 2009 by the American Recovery and Reinvestment Act of 2009 (the “ARRA”). In addition, the U.S. Department of the Treasury (the “U.S. Treasury”) and federal banking regulators are implementing a number of programs to address capital and liquidity issues in the banking system, all of which may have significant effects on Bancorp and the banking industry, the exact nature and extent of which cannot be determined at this time; (2) the strength of the United States economy generally, and the strength of the local economies in which Bancorp conducts operations, may be different than expected, resulting in, among other things, a continued deterioration in credit quality, including the resultant effect on Bancorp’s loan portfolio and allowance for credit losses; (3) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); (4) inflation, deflation, interest rate, market and monetary fluctuations; (5) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate and market liquidity conditions) and the impact of such conditions on Bancorp’s capital markets and capital management activities; (6) the timely development of competitive new products and services by Bancorp and the acceptance of these products and services by new and existing customers; (7) the willingness of customers to accept third party products marketed by Bancorp; (8) the willingness of customers to substitute competitors’ products and services for Bancorp’s products and services and vice versa; (9) the impact of changes in financial services’ laws and regulations (including laws concerning taxes, banking and securities); (10) technological changes; (11) changes in consumer spending and saving habits; (12) the effect of corporate restructurings, acquisitions and/or dispositions, and the failure to achieve the expected revenue growth and/or expense savings from such corporate restructurings, acquisitions and/or dispositions; (13) the current stresses in the financial and real estate markets, including possible continued deterioration in property values; (14) unanticipated regulatory or judicial proceedings; (15) the impact of changes in accounting policies by the Securities and Exchange Commission (the “SEC”); (16) adverse changes in financial performance and/or condition of Bancorp’s borrowers which could impact repayment of such borrowers’ outstanding loans; and (17) Bancorp’s success at managing the risks involved in the foregoing. Bancorp cautions that the foregoing list of important factors is not exhaustive. See also “Risk Factors” which begins on page 14. 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.

PART I


Item 1.		Business

General

Bancorp is a bank holding company incorporated under the laws of the state of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). 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. 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 member 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 other organizations 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.

In addition, as of December 31, 2008, the Bank also operated three active non-bank subsidiaries: Peoples Finance Company of Lexington, Inc. (“Peoples Finance”), LSB Properties, Inc. (“LSB Properties”) and Prince George Court Holdings, Inc. (“Prince George”). Peoples Finance is a NC licensed finance company. As a finance company, Peoples Finance offers secured and unsecured loans to individuals up to a maximum of $30,000 secured, and $10,000 unsecured, as well as dealer originated loans. The Company announced during the second quarter of 2008 that Peoples Finance will no longer proactively solicit new loans to the Bank loan portfolio. As of December 31, 2008, Peoples Finance had approximately $7.3 million of loans outstanding. LSB Properties owns the majority of other real estate of the Bank, while Prince George owns a condominium project in Georgetown, South Carolina, acquired through a deed-in-lieu of foreclosure, as described in greater detail in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the heading “Lending Activities”.

During 2007, the Bank also operated three other non-bank subsidiaries, all of which were dissolved on December 21, 2007: LSB Investment Services, Inc. (“LSB IS”), FNB Southeast Investment Services, Inc. (“FNB IS”) and FNB Southeast Mortgage Corporation (“FNB Mortgage”). Prior to the Bank Merger, LSB IS was a subsidiary of LSB Bank, and FNB IS and FNB Mortgage were subsidiaries of FNB Southeast. LSB IS and FNB IS offered uninsured, nondeposit investment and insurance products and services through registered broker dealers and an investment advisory group. FNB Mortgage operated as a mortgage brokerage company.

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 dependant 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.

Market Areas

The Bank’s primary market area is the Piedmont Triad Region of NC. On December 31, 2008, the Bank operated 37 branches and three loan productions 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:		Piedmont Triad Region (continued):
Lexington (five offices)		Madison
Greensboro (four offices)		Midway
Winston-Salem (four offices)		Rural Hall
Reidsville (three offices)		Tyro ⁽¹⁾
Thomasville (two offices)		Walkertown
Archdale		Welcome
Clemmons
Danbury		Coastal Region:
Eden		Wilmington (two offices)
High Point		Burgaw
Jamestown
Kernersville		Shenandoah Valley Region:
King		Harrisonburg (two offices)


⁽¹⁾		On March 6, 2009, the Company announced that it will close its branch in Tyro during the second quarter of 2009.

As of December 31, 2008, the Bank operated 32 branches and two loan production offices in the Piedmont Triad Region. 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, fifth 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”), by Dell to construct a manufacturing and distribution facility a few miles to the west of 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). Greensboro 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.

As of June 30, 2008, the Bank was the largest community bank in the Piedmont Triad Region, based on deposit market share.

As a result of the Bank Merger, the Bank increased its presence in the Piedmont Triad Region and entered the Coastal Region of NC and the Shenandoah Valley Region of VA.

As of December 31, 2008, 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 160,000. 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, 2008, 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 deposit market share and branch locations by region at December 31, 2008 (in thousands):

Deposit Market Share and Branch Locations

December 31, 2008


			Number of		Deposit Market
Region	Deposits		Branches		Share Rank⁽¹⁾
Piedmont Triad:	$	1,456,093		32		1
Coastal:		124,381		3		3
Shenandoah Valley		82,989		2		4


⁽¹⁾		As of June 30, 2008. Rank for community financial institutions; excludes banks greater than $10 billion in assets

Deposits

The Bank offers a variety of deposit products to individuals and to small and medium-sized businesses and other organizations at interest rates generally competitive with local market conditions. The table below sets forth the mix of depository accounts at the Bank as a percentage of total deposits of the Bank at the dates indicated.


	As of December 31,
	2008			2007			2006
Noninterest-bearing demand		9.0	%		10.8	%		13.0	%
Savings, NOW, MMI		36.9			39.2			52.4
Certificates of deposit		54.1			50.0			34.6

		100.0	%		100.0	%		100.0	%

For 2006, certain deposits previously reported as demand deposits have been reclassified to money market deposits. See Note 7 of the Notes to the Consolidated Financial Statements for further information.

The Bank accepts deposits at its 37 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 and, to a certain extent, through promotional product offerings. Such promotional activities include the Bank’s recently introduced BridgeWORKS banking package of personal banking services, as well as special money market and certificate of deposit offerings.

At December 31, 2008, the Bank had $347.3 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, 2008.


Scheduled maturity of time deposits of $100,000 or more
(In thousands)
Less than three months	$	32,521
Three through six months		77,809
Seven through twelve months		191,886
Over twelve months		45,089

Total time deposits — $100,000 or more	$	347,305

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 resources on the greatest opportunities in the marketplace to support the Bank’s overall goals. Traditionally, the Bank promotes its brand, financial products, and services through a multitude of marketing methods, including:

	•		Traditional advertising including print, radio and outdoor;

	•		Community sponsorships and volunteerism;

	•		In-branch merchandising;

	•		Strategic marketing partnerships;

	•		Promotions and giveaways;

	•		Product enhancement;

	•		Naming rights of NewBridge Bank Park, the Greensboro, NC, minor league baseball stadium;

	•		Public relations and endorsements;

	•		Presence at networking events and philanthropic galas; and

	•		NewBridge Bank Invitational Football and Cheerleading Jamboree.

To maximize the effectiveness of these methods, the Bank conducts customer analyses and competitive research to better promote and position the Bank’s products and services in the marketplace.

In order to launch the NewBridge Bank name and brand, the Bank entered into a ten-year naming rights agreement for the minor league baseball stadium in Greensboro, NC during the fourth quarter of 2007. The stadium naming rights heightens the NewBridge Bank brand throughout the Piedmont Triad area that is home to 32 branches and the corporate headquarters. The agreement provides the Bank with co-marketing opportunities in print and outdoor advertising, places the NewBridge Bank name in front of spectators, and provides for the use of the facility to support our NewBridge Bank Invitational Football and Cheerleading Jamboree, which is the premier community service event sponsored by the Bank.

The Bank is focused on increasing noninterest income and growing core deposits with competitive products, targeted media campaigns, and compelling creative advertising. Additionally, by applying the brand’s “Bridge” metaphor, highlighting the “Your Way Forward” message, and leveraging the Bank’s guiding principles (Always do your best; Do what is right; Treat others as you want to be treated; Financial success begins with integrity), the Bank is building brand equity to position the franchise for future growth.

Competition

Commercial banking in North Carolina and Virginia is extremely competitive, due in large part to intrastate and interstate branching laws. Currently, 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 2008, Bancorp competed with 33 commercial banks and savings institutions, as well as numerous credit unions. As of that date, Bancorp competed with 20 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.

Employees

At December 31, 2008, Bancorp and its subsidiaries had 520 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 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. Treasury’s 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, 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 executive compensation limitations included in the EESA.

FDIC Temporary Liquidity Guarantee Program. Bancorp and the Bank have chosen to participate in the FDIC’s Temporary Liquidity Guarantee Program (the “TLGP”), which applies to, among others, all U.S. depository institutions insured by the FDIC and all United States bank holding companies, unless they have opted out. Under the TLGP, the FDIC guarantees certain senior unsecured debt of Bancorp and the Bank, as well as noninterest bearing transaction account deposits at the Bank. Under the transaction account guarantee component of the TLGP, all noninterest bearing transaction accounts maintained at the Bank are insured in full by the FDIC until December 31, 2009, regardless of the standard maximum deposit insurance amounts. Under the debt guarantee component of the TLGP, the FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest.

Comprehensive Financial Stability Plan of 2009. On February 10, 2009, the Secretary of the U.S. Treasury announced a new comprehensive financial stability plan (the “Financial Stability Plan”), which builds upon existing programs and earmarks the second $350 billion of unused funds originally authorized under the EESA.

The major elements of the Financial Stability Plan include: (i) a capital assistance program that will invest in convertible preferred stock of certain qualifying institutions, (ii) a consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances, (iii) a new public-private investment fund that will leverage public and private capital with public financing to purchase $500 billion to $1 trillion of legacy troubled assets from financial institutions, and (iv) assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

Institutions receiving assistance under the Financial Stability Plan going forward will be subject to higher transparency and accountability standards, including restrictions on dividends, acquisitions and executive compensation and additional disclosure requirements. Bancorp cannot predict at this time the effect that the Financial Stability Plan may have on it or its business, financial condition or results of operations.

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, 2008.

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 NC chartered 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, 2008.

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. The Bank may 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. 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 will require prior approval of the U.S. Treasury to increase dividends payable on its common stock to more than the last quarterly cash dividend ($0.05) 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. Prior to January 1, 2007, FDIC assessments for deposit insurance ranged from 0 to 27 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. During 2007 and 2008, the assessments ranged from 5 to 43 basis points per $100 of insured deposits. On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an annual basis, for the first quarter of 2009. Under the final rule, risk-based rates would range between 12 and 50 basis points (annualized) for the first quarter 2009 assessment. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are charged quarterly. During the first quarter of 2009, the FDIC adopted an interim rule, with request for comment, which would institute a one-time special assessment estimated to be approximately 10 cents per $100 of domestic deposits on FDIC insured institutions. If approved, the Bank estimates that its assessment would total approximately $1.7 million.

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, 2008, 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, 2008, 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, 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. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus.

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 became some of the most sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of SOX is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.

In general, SOX established new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

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.

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.

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%.

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, 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, 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.

Bancorp’s business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.

The capital and credit markets have been experiencing unprecedented levels of volatility and disruption for more than a year. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. As a consequence of the recession that the United States now finds itself in, business activity across a wide range of industries face serious difficulties due to the lack of consumer spending and the extreme lack of liquidity in the global credit markets. Unemployment has also increased significantly.

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 businesses:

	•		A decrease in the demand for loans and other products and services offered by us;

	•		A decrease in the value of our loans and investments;

	•		An impairment of certain intangible assets, such as goodwill;

	•		An increase in the number of clients and counterparties 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, provision for loan losses, and valuation adjustments on loans.

Overall, during the past year, the general business environment has had an adverse effect on our business, and there can be no assurance that the environment will improve in the near term. Until conditions improve, we expect our businesses, financial condition and results of operations to be adversely affected.

Current market developments may adversely affect our industry, business and results of operations.

Declines in the housing market during the prior year, with falling home prices and increasing foreclosures and unemployment, have resulted in, and may continue to result in, significant write-downs of asset values by us and other 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, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. 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 financial institutions.

This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.

Further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provisions for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry.

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 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.

Bancorp’s 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. As a result, 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. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. 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.

There can be no assurance that the EESA and other recently enacted government programs will help stabilize the U.S. financial system.

On October 3, 2008, President Bush signed into law the EESA. The U.S. Treasury and federal banking regulators are implementing a number of programs under this legislation to address capital and liquidity issues in the banking system, including the CPP, in which Bancorp participated. In addition, other regulators have taken steps to attempt to stabilize and add liquidity to the financial markets, such as the FDIC’s TLGP.

On February 10, 2009, the Secretary of the U.S. Treasury announced the Financial Stability Plan, which earmarks the second $350 billion originally authorized under the EESA. The Financial Stability Plan is intended to, among other things, make capital available to financial institutions, purchase certain legacy loans and assets from financial institutions, restart securitization markets for loans to consumers and businesses and relieve certain pressures on the housing market, including the reduction of mortgage payments and interest rates.

In addition, the ARRA, which was signed into law on February 17, 2009, includes, among other things, extensive new restrictions on the compensation arrangements of financial institutions participating in the CPP.

There can be no assurance, however, as to the actual impact that the EESA, as supplemented by the Financial Stability Plan, the ARRA and other programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of the EESA, the ARRA, the Financial Stability Plan and other programs to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our businesses, financial condition, results of operations, access to credit or the trading price of our common stock.

The EESA, ARRA and the Financial Stability Plan are relatively new initiatives and, as such, are subject to change and evolving interpretation. There can be no assurances as to the effects that any further changes will have on the effectiveness of the government’s efforts to stabilize the credit markets or on our businesses, financial condition or results of operations.

The limitations on incentive compensation contained in the ARRA may adversely affect Bancorp’s ability to retain its highest performing employees.

In the case of a company such as Bancorp that received CPP funds, the ARRA contains restrictions on bonus and other incentive compensation payable to the company’s senior executive officers. Depending upon the limitations placed on incentive compensation by the final regulations issued under the ARRA, it is possible that Bancorp may be unable to create a compensation structure that permits Bancorp to retain its highest performing employees and/or attract new employees of a high caliber. If this were to occur, Bancorp’s businesses and results of operations could be adversely affected.

Bancorp is subject to extensive governmental regulation, which could have an adverse impact on our operations.

The banking industry is extensively regulated and supervised under both federal and state law. Current and future legislation and the policies established by federal and state regulatory authorities will affect Bancorp’s operations. Bancorp is subject to supervision and periodic examination by the Federal Reserve and the Commissioner. The Bank, as a state chartered non-member commercial bank, receives regulatory scrutiny from the FDIC and the Commissioner. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to you as an investor in Bancorp, by restricting Bancorp’s activities, such as:

	•		the payment of dividends to shareholders;

	•		possible transactions with or acquisitions by other institutions;

	•		desired investments;

	•		loans and interest rates;

	•		the level of its allowance for credit losses;

	•		imposing higher capital requirements;

	•		interest rates paid on deposits;

	•		the possible expansion of branch offices; and

	•		the ability to provide other services.

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 its business. Given the current disruption in the financial markets and regulatory initiatives that are likely to be proposed by the new administration and Congress, new regulations and laws that may affect us are increasingly likely. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific programs may subject us to additional restrictions. We cannot assure you that such modifications or new laws will not adversely

affect us. Our regulatory position is discussed in greater detail under Item 1. “Business—Supervision and Regulation” of this Annual Report on Form 10-K.

In addition, Bancorp will be required to pay significantly higher FDIC premiums because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.

We may need to raise additional capital in the future and such capital may not be available when needed or at all.

We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial performance. The ongoing liquidity crisis and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of capital, including, but not limited to, inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve.

We cannot assure you that such capital will be available to us on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our businesses, financial condition and results of operations.

Bancorp Relies on Dividends from the Bank for Most of its Revenue.

Bancorp is a separate and distinct legal entity from the Bank. It 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 consolidated financial statements.

Bancorp may have higher credit losses than Bancorp’s allowance for credit losses.

The Bank maintains an allowance for credit losses, which is a reserve established through a provision for credit losses charged to expense that represents management’s best estimate of probable losses that will be incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated credit losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific loan risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current loan risks and future trends, 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 the Bank’s control, may require an increase in the allowance for credit losses. Approximately 52% of the Bank’s loan portfolio is composed of real estate — construction and commercial loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. In addition, bank regulatory agencies periodically review the Bank’s allowance for credit losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for credit losses, the Bank will need additional provisions to increase the allowance for credit losses. Any increases in the allowance for credit losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on Bancorp’s financial condition and results of operations. 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.

Risk Relating to the Completed Merger and Bank Merger.

The Merger and the Bank Merger were completed in July 2007 and November 2007, respectively. Bancorp may fail to realize the anticipated benefits and cost savings associated with the Merger and Bank Merger or such integration may be more difficult, time-consuming or costly than expected; expected revenue synergies and cost savings may not be fully realized or realized within the expected time frame; revenues may be lower than expected; and customer and employee relationships and business operations may be disrupted. Any such events could have a material negative impact on Bancorp’s results of operations and financial condition and could adversely affect Bancorp’s stock price.

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 capital sufficient to support its continued growth.

The Bank is Subject to Interest Rate Risk.

The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of the Bank’s financial assets and liabilities, and (iii) the average duration of certain of the Bank’s interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Bank’s net interest income and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, there are costs associated with the Bank’s risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable and, therefore, there can be no assurances of the Bank’s ability to continue to maintain a consistent, positive spread between the interest earned on the Bank’s earning assets and the interest paid on the Bank’s interest-bearing liabilities.

See Market Risk Management — Asset-Liability Management and Interest Rate Risk in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations located elsewhere in this report for further discussion related to Bancorp’s management of interest rate risk.

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 hurt 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 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 Shenendoah 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 significant decline in general economic conditions in the Bank’s market areas, or the entire country, 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 is subject to security and operational risks related to the technology Bancorp uses that could result in a loss of customers, increased costs and other damages which could be material.

Bancorp depends on data processing, software and communication and information exchange on a variety of platforms, networks and over the internet. Despite safeguards, Bancorp cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. Any failure or interruptions or breach of security of these systems could result in failures or disruptions in its customer relationships, general ledger, deposits and servicing or loan origination systems. The occurrence of any such failures or difficulties could result in a loss of customer business, damage the Bank’s reputation, subject the Bank to additional regulatory scrutiny or expose the Bank to civil litigation and possible financial liability, any of which could have a material adverse effect on Bancorp’s results of operations and financial condition.

Bancorp faces strong competition in our market areas, which may limit our asset growth and profitability.

The banking business in the Bank’s market areas is very competitive, and the level of competition facing the Bank may increase further, which may limit the Bank’s asset growth and/or profitability. Bancorp experiences competition in both lending and attracting deposits from other banks and nonbank financial institutions located within its market areas, some of which are significantly larger institutions and may have more financial resources than the Bank. Such competitors primarily include national, regional and local financial institutions within the Bank’s market areas. Additionally, various out-of-state banks have begun to enter or have announced plans to enter the market areas in which the Bank currently operates.

Nonbank competitors for deposits and deposit-type accounts include savings associations, credit unions, savings banks, securities firms, money market funds, life insurance companies and the mutual funds industry. For loans, the Bank encounters competition from other banks, savings associations, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts, securities firms and major retail stores that offer competing financial services. Many of these competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Bank can offer.

The Bank is Subject to Environmental Liability Risk Associated with Lending Activities.

A significant portion of Bancorp’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.

Our participation in the U.S. Treasury’s CPP imposes restrictions and obligations on us that limit our ability to increase dividends, repurchase shares of our common stock and access the equity capital markets.

On December 12, 2008, we issued and sold Series A Preferred Stock and a Warrant 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. See “Supervision and Regulation—U.S. Treasury Capital Purchase Program.”

Bancorp common stock is not FDIC insured.

Bancorp 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 Bancorp’s 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 Bancorp’s common stock may lose some or all of their investment.

If we cannot meet NASDAQ’s continued listing requirements, NASDAQ may delist our common stock, which would have an adverse impact on the liquidity and market price of our common stock.

Our common stock is currently listed on NASDAQ GSM. Under NASDAQ rules, a stock can be delisted and not allowed to trade on NASDAQ if the closing bid price of the stock over a 30 consecutive trading-day period is less than $1.00. Since the beginning of the financial markets crisis, we have and continue to experience significant volatility, including substantial decreases, in the price of our common stock. On March 11, 2009, the closing price of our common stock was a $1.35 per share. NASDAQ implemented a temporary suspension of the rules requiring a minimum $1.00 closing bid price on October 16, 2008, and later extended the suspension until April 20, 2009. If the suspension is not extended further, there is a risk in light of the continued depressed state of the economy and credit and capital markets that our common stock could further decline in share price below the minimum listing requirement, and thus be delisted from the NASDAQ GSM if the suspension is not further extended. A delisting of our common stock could negatively impact us by reducing the liquidity and market price of our common stock and the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing.

Item 1B. Unresolved Staff Comments

None

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. The Bank has 35 banking offices located in NC and two located in VA, as well as two loan production offices in NC and one in VA. The location of the Bank’s executive and banking offices, their form of occupancy, deposits as of December 31, 2008, and year opened, is described in the accompanying table:



Location	Owned or Leased	Deposits		Year
		(in thousands)
1501 Highwoods Boulevard, Greensboro, NC (1)	Leased	$	—		2004
38 West First Avenue, Lexington, NC (2)	Owned		178,618		1949
202 South Main Street, Reidsville, NC (3)	Owned		68,592		1910
11651-D North Main Street, Archdale, NC	Owned		19,440		2003
301 East Fremont Street, Burgaw, NC	Leased		38,121		1999
2386 Lewisville-Clemmons Road, Clemmons, NC	Owned		23,622		2001
1101 North Main Street, Danbury, NC	Owned		19,039		1997
801 South Van Buren Road, Eden, NC	Owned		63,398		1996
2132 New Garden Road, Greensboro, NC	Owned		106,687		1997
4638 Hicone Road, Greensboro, NC	Owned		37,534		2000
3202 Randleman Road, Greensboro, NC	Owned		49,080		2000
1702 Battleground Avenue, Greensboro, NC	Owned		12,574		2008
200 Westchester Drive, High Point, NC	Owned		40,063		2001
120 East Main Street, Jamestown, NC	Owned		28,641		2004
131 East Mountain Street, Kernersville, NC	Leased		20,553		1997
647 South Main Street, King, NC	Owned		48,538		1997
1926 Cotton Grove Road, Lexington, NC	Owned		33,660		1968
285 Talbert Boulevard, Lexington, NC	Leased		21,136		1983
500 South Main Street, Lexington, NC (4)	Owned		—		2004
60 New U.S. Highway 64 West, Lexington, NC	Leased		34,557		1969
605 North Highway Street, Madison, NC	Owned		33,963		1997
11492 Old U.S. Highway 52, Midway, NC	Owned		31,624		1973
1646 Freeway Drive, Reidsville, NC	Owned		61,608		1972
202 Turner Drive, Reidsville, NC (4)	Owned		31,901		1969
8055 Broad Street, Rural Hall, NC	Owned		19,555		1997
724 National Highway, Thomasville, NC	Owned		34,805		1993
941 Randolph Street, Thomasville, NC	Owned		24,200		1987
4481 Highway 150 South, Tyro, NC (5)	Owned		18,548		2002
3000 Old Hollow Road, Walkertown, NC	Owned		25,203		1997
6123 Old U.S. Highway 52, Welcome, NC	Owned		51,399		1958
3384 Robinhood Road, Winston-Salem, NC	Leased		23,208		1997
161 South Stratford Road, Winston-Salem, NC	Leased		51,479		1997
10335 North NC Highway 109, Winston-Salem, NC	Owned		29,361		1992
3500 Old Salisbury Road, Winston-Salem, NC	Owned		48,380		1978
704 South College Road, Wilmington, NC	Leased		55,997		1997
1001 Military Cutoff Road, Wilmington, NC	Leased		30,263		2006
440 South Main Street, Harrisonburg, VA	Owned		56,717		1988
1925 Reservoir Street, Harrisonburg, VA	Owned		26,271		2003


(1)		Headquarters 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)		On March 6, 2009, the Bank announced that it will close its branch in Tyro during the second quarter of 2009.

Peoples Finance operates from a leased 3,200 square foot, one-story building located at 126 Forest Hill Road, Lexington, NC 27295.

The Bank also operates loan production offices in leased premises in Burlington and Greensboro, NC and Waynesboro, VA.

In addition, the Bank also operates 21 offsite ATM machines in various locations throughout its markets.

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, 2008.

Item 4. Submission of Matters To a Vote of Security Holders

There were no matters submitted to a vote of the security holders of Bancorp during the fourth quarter of Bancorp’s fiscal year ended December 31, 2008.

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 for each share during each quarter within the last two fiscal years. One cash dividend was paid during each of the fiscal quarters listed, except for the fourth quarter of 2008, when no dividend was paid.


Quarter ended	High		Low		Close		Dividends Paid
March 31, 2008	$	10.99	$	8.00	$	8.75	$	0.17
June 30, 2008		9.60		6.76		6.90		0.17
September 30, 2008		9.11		3.90		4.51		0.05
December 31, 2008		6.00		2.01		2.38	—

March 31, 2007	$	17.95	$	14.51	$	14.60	$	0.17
June 30, 2007		15.00		13.00		13.65		0.17
September 30, 2007		14.25		10.75		12.70		0.17
December 31, 2007		12.95		9.61		10.79		0.17

As of March 6, 2009, there were approximately 7,400 beneficial owners, including 3,405 holders of record, of Bancorp’s common stock. For a 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, 2008. 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.

Number of Shares

Remaining Available

for Future Issuance

under Equity

Number of Shares to be

Weighted-Average

Compensation Plans

Issued Upon Exercise of

Exercise Price of

(excluding shares

Outstanding Options,

reflected in

Warrants and Rights

column (a))

Plan Category

(a)

(b)

(c)

Equity Compensation Plans Approved by Shareholders (1)

1,052,517

14.32

1,319,609

Equity Compensation Plans Not Approved by Shareholders

—

Total

1,052,517

14.32

1,319,609


(1)		Includes 679,342 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 $13.04.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Bancorp’s stock repurchase program was originally announced in November 1998. It was subsequently amended and extended in August 1999, May 2004 and May 2006. On October 17, 2007, the Board of Directors of Bancorp (the “Board” or “Board of Directors”) approved a further extension through May 31, 2009, and authorized Bancorp to repurchase up to 650,000 additional shares of Bancorp’s common stock under the extended program. Immediately prior to the most recent extension 135,187 shares remained available under the program for repurchase by Bancorp. The stock repurchase program provides that Bancorp may repurchase its common stock in the open market or privately negotiated transactions on a time-to-time and ongoing basis, depending upon market conditions and subject to compliance with all applicable securities laws and regulations. Notwithstanding the stock repurchase program, Bancorp’s participation in the CPP limits Bancorp’s ability to repurchase its common stock (with certain exceptions, including the repurchases 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.”

Bancorp did not repurchase any shares under the stock repurchase program during the fourth quarter of 2008.

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.

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, 2008 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, 2003 and that all subsequent dividends were reinvested in additional shares.

NEWBRIDGE BANCORP
Comparison of Cumulative Total Shareholder Return
Years Ended December 31


	2003		2004		2005		2006		2007		2008

NewBridge Bancorp		100		101		110		109		73		17

The Carson Medlin Company’s Independent Bank Index¹		100		118		127		144		103		81

S&P 500 Index		100		111		116		135		142		90


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, 2003. 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.


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 49 below, respectively.


				Years Ended December 31
(In thousands, except per share data and performance
measures)	2008			2007			2006			2005			2004
SUMMARY OF OPERATIONS
Interest income	$	117,962		$	97,621		$	67,323		$	60,425		$	49,319
Interest expense		53,852			42,368			24,195			16,726			10,367


Net interest income		64,110			55,253			43,128			43,699			38,952
Provision for credit losses		25,262			18,952			5,510			3,219			3,017


Net interest income after provision for credit losses		38,848			36,301			37,618			40,480			35,935
Noninterest income		20,582			14,998			14,290			13,792			14,063
Noninterest expense		123,256			62,356			43,324			39,770			37,687


Income (loss) before income taxes		(63,826	)		(11,057	)		8,584			14,502			12,311
Income taxes		(6,924	)		(5,394	)		2,584			4,865			3,931


Net income (loss)		(56,902	)		(5,663	)		6,000			9,637			8,380
Dividends and accretion on preferred stock		(154	)		—			—			—			—

Net income (loss) available to common shareholders	$	(57,056	)	$	(5,663	)	$	6,000		$	9,637		$	5,490


Cash dividends declared	$	6,106		$	8,255		$	5,755		$	5,805		$	5,490

SELECTED YEAR END ASSETS AND LIABILITIES
Investment Securities	$	288,572		$	369,423		$	147,129		$	128,159		$	129,194
Loans, net of unearned income		1,604,525			1,490,084			759,978			755,398			712,185
Assets		2,078,627			2,057,358			987,746			975,795			914,988
Deposits		1,663,463			1,627,720			817,683			822,173			722,275
Shareholders’ equity		179,236			193,153			89,309			91,829			90,742
PERFORMANCE MEASURES
Net income (loss) to average total assets		(2.72	)%		(0.40	)%		0.61	%		1.00	%		0.94	%
Net income (loss) to average shareholders’ equity		(29.38	)		(3.76	)		6.47			10.49			9.26
Dividend payout		N/M			N/M			95.92			60.24			65.51
Average shareholders’ equity to average total assets		9.25			9.18			9.44			9.53			10.15
Average tangible shareholders’ equity to average tangible total assets		6.73			7.51			9.40			9.49			10.11
PER SHARE DATA
Earnings per share:
Basic	$	(3.64	)	$	(0.49	)	$	0.71		$	1.13		$	0.98
Diluted		(3.64	)		(0.49	)		0.71			1.12			0.97
Cash dividends declared		0.39			0.68			0.68			0.68			0.64
Book value at end of year		8.10			12.30			10.60			10.77			10.57
Tangible book value at end of year		7.72			9.10			10.54			10.71			10.51


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 financial condition and results of operations and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of Bancorp.

Executive Overview

Bancorp was created as a result of the merger of FNB and LSB, effective July 31, 2007. Accordingly, the fiscal year ended December 31, 2008 marked the first full year of operation of the combined company. Bancorp’s results of operations for the full year 2007 do not include the operating results for FNB prior to July 31, 2007. In accordance with purchase accounting rules, prior year financial information does not include any data for FNB. Bancorp operated two separate NC chartered commercial banks until November 2007, when FNB Southeast merged with and into LSB Bank, and the Bank was renamed “NewBridge Bank”.

The year ended December 31, 2008 was a turbulent year for the U.S. economy and the financial services industry in particular. Deteriorating home values, among other factors, provided a catalyst for declining valuations across nearly all asset classes, including loans and securities. The property value declines, which began in late 2007, continued to build throughout 2008. While Bancorp did not have material exposure to many of the issues that plagued the industry (e.g., sub-prime loans, structured investment vehicles, collateralized debt obligations), Bancorp’s exposure to the residential housing sector, primarily within its commercial real estate and construction loan portfolios, pressured its loan portfolio, resulting in increased credit costs and other real estate expenses. Nevertheless, the Company experienced loan and deposit growth during the first half of 2008 and announced net income in the first and second quarters. During the second half of 2008, Bancorp experienced a slowdown in balance sheet growth, higher levels of past due and nonperforming loans, higher provision and allowance levels, and recorded net losses in the third and fourth quarters.

Assets at December 31, 2008 totaled $2.08 billion, an increase of $21.3 million since December 31, 2007. This is primarily due to growth in the Company’s loan portfolio, partially offset by the writeoff of goodwill. Compared to December 31, 2007, loans increased $114.4 million to $1.60 billion, investment securities decreased $80.9 million to $288.6 million, deposits increased $35.7 million to $1.66 billion, total borrowings decreased $1.7 million to $215.8 million, and shareholders’ equity decreased $13.9 million to $179.2 million. Book value per common share was $8.10 at December 31, 2008, compared to $12.30 at year end 2007, while tangible book value per common share was $7.72 at December 31, 2008 compared to $9.10 at December 31, 2007.

The negative operating results over the second half of 2008 were influenced by the considerable stress upon the national, state and local economies that resulted in lower economic output and higher unemployment in Bancorp’s markets. This had the overall effect of reducing income and cash flow for retail and commercial customers of Bancorp, and caused higher levels of past due loans and nonperforming assets. Bancorp was also negatively affected by the stress on the financial markets caused by the actual or perceived failure of large, individually significant financial institutions. This resulted in expensive funding costs relative to the federal funds rate and the prime lending rate, and significantly reduced the Bank’s interest rate spread — one of the most significant factors in determining the profitability of a bank.

As a result of the deteriorating national economic situation, and the substantial declines in U.S. and world stock markets, the price of the Company’s common stock declined substantially during the second half of the year. In accordance with accounting regulations, the Company, with the assistance of a third party valuation specialist, re-evaluated its goodwill at December 31, 2008. The Company concluded that the goodwill was impaired, and, as of December 31, 2008, the Company wrote off all of the $50.4 million of goodwill in its financial statements, which had been recorded primarily as the result of the Merger.

Based primarily on the economic factors described above, for the full year 2008 the Company recorded a net loss available to common shareholders of $57.1 million ($3.64 per diluted share) or, excluding the goodwill impairment, a net loss of $6.6 million ($0.42 per diluted share), compared to a net loss of $5.7 million ($0.49 per diluted share) for 2007.

Strategic Initiatives

Strengthening Capital Position. In response to the current economic operating environment and uncertain future trends, Bancorp took action to strengthen its capital position in 2008. During 2008, Bancorp reduced its common dividend due to the outlook for a continued negative credit environment, preserving over $4.5 million of capital in 2008 relative to the prior level. On December 12, 2008, Bancorp received $52.4 million as part of the U.S. Treasury CPP and issued senior preferred stock and ten-year warrants under the terms of the program, which had the effect of increasing Bancorp’s three regulatory capital ratios by approximately 250 to 300 basis points. Both Bancorp and the Bank’s capital ratios exceed the “well-capitalized” guidelines. As of December 31, 2008, Bancorp’s total risk-based capital ratio was 12.42%, Tier 1 capital ratio was 11.15%, and Tier 1 leverage ratio was 9.39%. As of December 31, 2008, the Bank’s total risk-based capital ratio was 10.80%, Tier 1 capital ratio was 9.54%, and Tier 1 leverage ratio was 8.01%.

Improve loan portfolio performance. A sustained recession in Bancorp’s markets and an increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans during 2009. In order to mitigate these effects, the Company has developed an action plan, designed to improve loan quality and loan portfolio performance. Included in the plan are actions to conduct regularly scheduled meetings to develop effective plans to more efficiently manage individual past due loans and loan relationships, and credit forums with credit administration and loan production staff to more actively monitor past due loans and other pertinent credit issues. In an effort to increase the yield on the loan portfolio, the plan includes an action to establish new pricing parameters for commercial loans, based on risk grade and by loan type. The plan seeks to rebalance the loan portfolio by reducing the percentage of commercial real estate loans and increasing the percentage of commercial and industrial type loans. The plan also requires loan officers to attend targeted training classes to strengthen their skills regarding calling strategies and identifying target customers, and to refine their credit skills to support the planned migration to a greater emphasis on commercial and industrial loans.

Increase non-interest income. Bancorp is actively seeking to increase the operational profitability of existing non-interest income lines of business. Material improvements in the profitability level of investment and trust services are sought as Bancorp intends to focus more attention on managing its sales and marketing efforts, conduct a thorough review of its fee schedules, and better coordinate its cross-selling efforts and referral arrangements. It is anticipated that intensified sales and marketing initiatives will increase profitability in lines of business such as cash management and merchant services.

Grow core deposits. The intensified financial crisis during the second half of 2008 has made it increasingly difficult to secure wholesale funding at reasonable cost. During the coming year, the Bank intends to emphasize core deposit growth. Because competition for core deposits has increased, it is anticipated that pricing may not always be favorable to the Bank. Nevertheless, the market currently places a premium on liquidity, and thus maintaining increased liquidity will continue to be a priority.

The Bank plans to develop several marketing plans to emphasize its superior customer service, commitment to local communities, and both its ability and willingness to serve clients in a consultative partnership. New bundled deposit packages have been developed to add value to the retail and commercial customer base. The Bank has developed a marketing plan targeting commercial and non-profit organizations that value the high touch style of banking and recognize the value added services provided by the Bank.

In addition, the Bank has aligned its organizational structure, job duties and goals to emphasize core deposit generation. Production goals assigned to calling officers are heavily weighted toward core deposit generation.

The Bank has also implemented regular sales meetings to report and monitor overall deposit goals with actual results.

Control and reduce expenses. Over the course of 2008, Bancorp has conducted an intense and detailed review of all noninterest expenses on a line-by-line basis throughout the entire organization. As a result, Bancorp executed on significant expense reduction initiatives that it believes will benefit operating results in future periods. Expense reductions are expected to be realized in the areas of personnel, occupancy, professional services, information technology, as well as other categories. Bancorp significantly revised its expense approval procedures to align decision making authority with accountability for meeting budgets. Bancorp also migrated to a new budget and variance reporting system during the second half of 2008, in order to increase the levels of accountability throughout the organization.

Position the franchise for future growth. To promote continued and sustainable business growth, Bancorp has thoroughly examined its opportunities to create a uniquely positioned community bank that is able to bring value to small to mid size businesses and targeted retail segments. The branch network has been analyzed to identify opportunities to reposition existing offices and opportunities to open new offices in selected markets. Performance metrics have been developed to drive improved efficiencies through our branch network. Demographic information has been used to identify markets that match the targeted customer profiles for the Bank. Bancorp intends to increase its market share in dynamic growth markets by pursuing its comprehensive business growth plan to expand the branch network in targeted markets concentrated in the Piedmont Triad area of North Carolina. During 2008, Bancorp began implementation of this plan by closing four branches, acquiring a full service branch and opening a new loan production office.

Financial Condition at December 31, 2008 and 2007

Bancorp’s consolidated assets of $2.08 billion at year end 2008 reflect an increase of 1.0% over year end 2007, following an increase of 108.6% during the previous year. 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, while the increase from year end 2006 to year end 2007 is primarily a result of the Merger. 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.

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. 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 $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. The Company’s investment strategy is to achieve acceptable total returns, while investing 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.

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.

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.

In order to attract additional deposits when necessary, the Bank uses several different sources such as membership in electronic deposit gathering networks that allow 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 2008, while the use of brokered deposits has increased from $20.2 million at year end 2007 to $37.6 million at year end 2008. The Bank has used the CDARS program in 2008 as the preferred method for gathering non core deposits and will likely continue that trend in 2009.

The Bank also has a credit facility available with the FHLB of Atlanta. The Bank utilized a portion of the approximately $331.4 million credit line with the FHLB of Atlanta to fund earning assets. FHLB borrowings totaled $139.0 million at year end 2008. Management believes this is 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, 2007 and 2006

Bancorp’s consolidated assets of $2.06 billion at year end 2007 reflected an increase of 108.6% over the previous year. Total average assets increased 44.9% from $982.5 million in 2006 to $1.42 billion in 2007. During 2007, Bancorp experienced a 43.6% increase in average earning assets. Average earning assets totaled $1.32 billion in 2007, compared to $917.1 million in 2006. All of the increases in 2007 were primarily attributable to the Merger.

Gross loans increased $730.1 million during 2007, or 96.1%, compared to an increase of 0.6% in 2006. Loans secured by real estate totaled $823.4 million in 2007 and represented 55.3% of total loans, compared with 55.0% at year end 2006. Within this category, residential real estate loans increased 60.8% to $575.1 million and construction loans increased 314.0% to $248.2 million. Commercial loans totaled $571.6 million at year end 2007, an increase of 104.6% from the end of 2006. Consumer loans increased 50.7% during 2007, ending the year at $91.8 million.

Investment securities (at amortized cost) totaled $365.1 million at year end 2007, a 145.7% increase from $148.6 million at year end 2006. U.S. Government agency securities totaled $140.8 million, or 38.6% of the portfolio at year end 2007, compared to $110.9 million, or 74.7% of the portfolio one year earlier. Mortgage backed securities totaled $106.8 million, or 29.2% of the portfolio, at December 31, 2007. The Company did not have any mortgage backed securities at the previous year end. State and municipal obligations amounted to $105.7 million at year end 2007, compared to $32.4 million a year earlier.

Total deposits increased $810.0 million to $1.63 billion at December 31, 2007, a 99.1% increase from a total of $817.7 million one year earlier. This increase was reflected throughout the deposit portfolio and was primarily the result of the Merger.

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 Average Rates Earned and Paid. The accompanying table sets forth, for the years 2006 through 2008, 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 costs, 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.

Average Balances and Net Interest Income Analysis

Fully taxable equivalent basis⁽¹⁾ (Dollars in thousands)


	2008								2007								2006
				Interest								Interest								Interest
	Average			Income/		Average			Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate


Earning assets:
Loans receivable⁽²⁾	$	1,575,064		$	102,187		6.49	%	$	1,060,522		$	85,460		8.06	%	$	756,088		$	60,396		7.99	%
Taxable securities		191,766			10,229		5.33			175,139			8,560		4.89			106,754			4,528		4.24
Tax exempt securities		113,480			6,539		5.76			60,717			3,415		5.62			31,302			1,655		5.29
FHLB stock		10,281			368		3.58			7,512			467		6.22			4,605			279		6.06
Interest-bearing bank balances		10,189			267		2.62			3,829			209		5.41			1,562			71		4.55
Federal funds sold		11,187			114		1.02			9,077			424		4.72			16,761			812		4.84


Total earning assets		1,911,967			119,704		6.26			1,316,796			98,535		7.48			917,072			67,741		7.39

Non-earning assets:
Cash and due from banks		41,829								38,845								36,367
Premises and equipment		45,415								29,583								19,638
Other assets		124,075								54,067								17,856
Allowance for credit losses		(31,020	)							(15,516	)							(8,447	)


Total assets	$	2,092,266							$	1,423,775							$	982,486


Interest-bearing liabilities:
Savings deposits	$	41,430		$	65		0.16	%	$	35,688		$	121		0.34	%	$	33,277		$	116		0.35	%
NOW deposits		170,221			802		0.47			146,843			1,041		0.71			134,535			944		0.70
Money market deposits		429,322			10,145		2.36			337,413			13,070		3.87			288,522	⁽⁵⁾		8,237		2.85
Time deposits		838,205			33,660		4.02			499,802			22,454		4.49			277,898			11,760		4.23
Other Borrowings		92,296			3,697		4.01			38,677			1,048		2.69			1,040			12		1.15
Borrowings from Federal Home Loan Bank		148,206			5,483		3.70			90,201			4,634		5.15			59,521			3,126		5.25


Total interest-bearing liabilities		1,719,680			53,852		3.13			1,148,624			42,368		3.69			794,793			24,195		3.04

Other liabilities and shareholders’ equity:
Demand deposits		164,712								132,066								88,637	⁽⁵⁾
Other liabilities		14,223								12,320								6,290
Shareholders’ equity		193,651								130,765								92,766


Total liabilities and shareholders’ equity	$	2,092,266							$	1,423,775							$	982,486


Net interest income and net interest margin⁽³⁾				$	65,852		3.44	%				$	56,167		4.27	%				$	43,546		4.75	%


Interest rate spread⁽⁴⁾							3.13	%							3.79	%							4.35	%


⁽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% in 2008 and 2007 and 34% in 2006, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $1,742 for 2008, $914 for 2007, and $418 for 2006.

⁽²⁾		Average loans receivable include non-accruing loans. Amortization of loan fees, net of deferred costs, of $2,906, $2,224 and $1,424 for 2008, 2007 and 2006, respectively, are included in interest income.

⁽³⁾		Net interest margin is computed by dividing taxable-equivalent net interest income by average earning assets.

⁽⁴⁾		Interest rate spread is computed by subtracting interest-bearing liability rate from earning asset yield.

⁽⁵⁾		For 2006, certain deposits previously reported as demand deposits have been reclassified to money market deposits. See Note 7 of the Notes to the Consolidated Financial Statements for further information.

Rate/Volume 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 distinguishes between (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) has been allocated based on the absolute value to both the changes attributable to volume and the changes attributable to rate.

Volume and Rate Variance Analysis

Fully taxable-equivalent basis⁽¹⁾ (in thousands)


	2008								2007
	Volume		Rate			Total			Volume			Rate			Total
	Variance⁽²⁾		Variance⁽²⁾			Variance			Variance⁽²⁾			Variance⁽²⁾			Variance


Interest income:
Loans receivable	$	35,696	$	(18,969	)	$	16,727		$	24,528		$	536		$	24,862
Taxable investment securities		857		812			1,669			3,257			775			4,032
Tax exempt investment securities		3,037		87			3,124			1,662			98			1,760
FHLB stock		138		(237	)		(99	)		181			7			188
Interest-bearing bank balances		207		(149	)		58			121			17			236
Federal funds sold		83		(393	)		(310	)		(360	)		(28	)		(284	)

Total interest income		40,018		(18,849	)		21,169			29,389			1,405			30,794

Interest expense:

Savings deposits		17		(73	)		(56	)		8			(3	)		5
NOW deposits		149		(388	)		(239	)		87			10			97
Money market deposits		1,356		(4,281	)		(2,925	)		1,556			3,277			4,833
Time deposits		13,775		(2,569	)		11,206			9,928			766			10,694
Other borrowings		1,956		693			2,649			999			37			1,036
Borrowings from FHLB		2,410		(1,561	)		849			1,570			(62	)		1,508

Total interest expense		19,663		(8,179	)		11,484			14,148			4,025			18,173


Increase (decrease) in net interest income	$	20,355	$	(10,670	)	$	9,685		$	15,241		$	(2,620	)	$	12,621


⁽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, 2008 and 2007

Net Income. Net loss available to common shareholders for 2008 was $57.1 million, representing a diluted net loss per 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 diluted net loss per share of $0.42. The increase in net loss for 2008 is mostly attributed to the write off of $50.4 million of goodwill, 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 3.44%, 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.

Taxable-equivalent net interest margin for 2008 decreased to 3.44%, 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 credit and asset quality following the downturn in the real estate market and credit environment and the extreme downturn in the financial markets. 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. As of December 31, 2008, management has concluded that the allowance for credit losses for Bancorp is adequate to absorb probable losses in the loan portfolio.

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 $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 expenses 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. No NC tax credit for the tax credit partnership was

taken during 2008 or 2007, as a result of the net loss for state tax purposes. 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.

Results of Operations —Years Ended December 31, 2007 and 2006

Net Income. Net loss for 2007 was $5.7 million, representing a diluted net loss per share of $0.49, compared to net income of $0.71 per diluted share the prior year. The decrease in net income for 2007 is primarily attributed to various charges recorded in the third and fourth quarters in connection with evaluations of the credit portfolio and expenses, including expense reduction initiatives, resulting from the Merger. Net interest income after provision for credit losses decreased by $1.3 million, or 3.5%, as compared to 2006. The taxable equivalent net interest margin decreased 48 basis points during 2007, to 4.27%, compared to 4.75% for 2006. Noninterest income increased $0.7 million, or 5.0%, in 2007, while noninterest expense for 2007 increased $19.0 million, or 43.9%. The provision for loan losses in 2007 was $19.0 million, up $13.4 million, or 244.0% from 2006. Return on average assets for 2007 was (0.40)% compared to 0.61% for 2006. Return on average shareholders’ equity for 2007 was (3.76)% compared to 6.47% in 2006. The Company experienced significant balance sheet growth during 2007 as a result of the Merger. There was an increase in loans of $730.1 million, or 96.1%. Consolidated assets in 2007 increased $1.07 billion, or 108.3% compared to 2006. Consolidated deposits increased in 2007 by $810.0 million, or 99.1% compared to 2006.

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 2007, on a taxable-equivalent basis, increased $12.6 million, or 29.0%, compared to 2006. This was primarily due to substantial increases in both earning assets and interest-bearing liabilities as a result of the Merger. Average earning assets in 2007 increased $399.7 million, or 43.6%, to $1.32 billion, compared to $917.1 million in 2006. Average interest-bearing liabilities for 2007 increased $353.8 million, or 44.5%, to $1.14 billion, compared to $794.8 million for 2006.

Taxable-equivalent net interest margin for 2007 decreased to 4.27%, compared to 4.75% for 2006, a decline of 48 basis points. The market for deposits continued to be very competitive in 2007, requiring the Bank to offer high-yield deposit products in order to attract deposits. In 2007, the average yield on earning assets increased by 9 basis points while the average rate on interest-bearing liabilities increased by 65 basis points, which resulted in a decrease in the interest rate spread in 2007 of 56 basis points compared to the prior year

Provision for Credit Losses and Allowance for Credit Losses. Bancorp recorded a $19.0 million provision for credit losses for the year ended December 31, 2007, compared to a $5.5 million provision during the year ended December 31, 2006. In the fourth quarter of 2007 a $14.4 million provision for credit losses included $5.2 million in specific reserves on loans primarily as a result of weakening credit and asset quality following the downturn in the real estate market and credit environment and the volatility in the financial markets. This provision also included $4.3 million of additional provision resulting from the increase in impaired loans during the fourth quarter, and $1.7 million to provide adequate reserves resulting from current conditions affecting the loan portfolio of Peoples Finance. It also includes approximately $1.4 million as a result of the adjustment to the reserve percentage for certain risk grades. Bancorp’s allowance for credit losses increased from $9.6 million at December 31, 2006 to $30.4 million at December 31, 2007. The allowance for credit losses expressed as a percentage of total loans increased from 1.26% at December 31, 2006 to 2.04% at December 31, 2007. As of December 31, 2007, management concluded that the allowance for credit losses for Bancorp was adequate to absorb probable losses inherent in the loan portfolio.

Noninterest Income. In 2007 noninterest income increased $708,000, or 5.0%, and totaled $15.0 million compared to $14.3 million in 2006. Fee income from service charges on deposit accounts for 2007 increased $907,000, or 13.2%, compared to 2006, as a result of the additional deposit accounts acquired in the Merger. Other operating income for 2007 decreased $175,000, or 2.5% to $6.8 million for 2007. Other income for 2007 includes $462,000 of income on an investment in bank-owned life insurance. For 2006, other income includes a one-time gain of approximately $509,000 from granting an easement on a portion of one of the Bank’s properties. 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 2007, noninterest expense was $62.4 million, an increase of $19.1 million, or 43.1%, from 2006. Personnel expense, consisting of employee salaries and benefits, increased $8.2 million, or 36.4%, primarily as a result of the increased personnel due to the Merger. In addition, personnel cost of $1.8 million related to early retirement, severance and employee retention payments were recorded. Other expenses included $1.4 million of Merger-related professional fees, processing system conversion expenses and costs associated with the Company’s campaign to establish its new brand. Writedowns of other real estate owned in 2007 totaled $3.6 million, including $2.6 million in the fourth quarter of 2007, compared to $1.2 million for the full year 2006. 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 $5.4 million in 2007, compared to an income tax provision totaling $2.6 million for 2006. The tax benefit in 2007 is primarily attributable to the $19.0 million aggregate provision for credit losses and asset writedowns recorded during the year. As a result, Bancorp posted a loss before taxes for 2007 of $11.1 million, compared to income before taxes of $8.6 million in 2006. No NC tax credit for the tax credit partnership was taken during 2007, as a result of the net loss for state tax purposes. Bancorp’s effective tax rates were (48.8%) in 2007 and 30.1% in 2006, with the change from 2006 to 2007, as well as the difference between these effective tax rates and the statutory rates, 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.

The investment portfolio at December 31, 2008 included securities with a par value of approximately $152.9 million with call features, whereby the issuers of such securities have the option to repay the security before the contractual maturity date. Due to the recent rapid decline in short-term market interest rates, Bancorp anticipates that a number of these debt instruments may be called by their issuers during 2009.

The Bank has the ability to manage, within competitive and cost of funds constraints, increases in deposits within its market area. 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.

The Bank also has unsecured overnight borrowing lines totaling $38.0 million available through relationships with four financial institutions. These lines are used to manage the day-to-day, short-term liquidity needs of the Bank. Each overnight line has a requirement to repay the line in full on a frequent basis, typically within five to ten business days. The Bank also 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 $331.4 million, collateralized by FHLB stock, investment securities, qualifying 1 to 4 family residential mortgage loans, and qualifying commercial real estate loans. The Bank provides various reports to the FHLB on a regular basis to maintain the availability of the credit line. Each borrowing request to the FHLB is initiated through an advance application that is subject to approval by the FHLB before funds are advanced under the line of credit. In addition to the credit line held at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $28.0 million.

As presented in the Consolidated Statement of Cash Flows, Bancorp generated $21.9 million in operating cash flow during 2008, compared to $19.1 million in 2007. The substantial increase in net loss was primarily a result of the write off of $50.4 million of goodwill. An increase in the provision for credit losses, as well as an increase in loans held for sale, was partially offset by a decline in other assets compared to the previous year. The operating cash flow generated in 2007 was essentially unchanged from 2006. An increase in the provision for credit losses, as well as a net increase in other liabilities, was primarily offset by a decline in net income for 2007 compared to the previous year.

Cash used in investing activities increased to $115.7 million in 2008, compared to $45.1 million in 2007 and $26.7 million in 2006. The increase in 2008 was primarily as a result of a much larger increase in loans made to customers, partially offset by net proceeds from maturities of available for sale securities. The same factors contributed to the increase from 2006 to 2007. In addition, Bancorp acquired $14.8 million in cash as a result of the Merger in July 2007.

Cash provided by financing activities increased to $80.8 million in 2008, compared to $38.2 million in 2007 and $7.1 million in 2006. The increase in 2008 is primarily the result of the proceeds from issuance of preferred stock and warrants, while the increase from 2006 to 2007 was primarily a result of a large increase in time deposits. 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 accompanying table reflects the material contractual obligations of Bancorp outstanding as of December 31, 2008.

Contractual Obligations
(in thousands)


	Payments Due by Period
			One Year		Three Years		After
	Within One		to Three		to Five		Five
	Year		Years		Years		Years		Total

Junior subordinated notes and wholesale repurchase agreements	$	—	$	25,000	$	—	$	46,774	$	71,774
Federal funds purchased and retail repurchase agreements		5,041		—		—		—		5,041
Federal Home Loan Bank borrowings		51,000		88,000		—		—		139,000
Operating lease obligations		1,655		2,366		1,048		1,003		6,072
Purchase obligations		4,086		1,439		601		870		6,996
Other long-term liabilities		1,769		679		539		1,347		4,334

Total contractual cash obligations excluding deposits		63,551		117,484		2,188		49,994		233,217

Deposits		1,556,479		99,791		6,870		323		1,663,463

Total contractual cash obligations	$	1,620,030	$	217,275	$	9,058	$	50,317	$	1,896,680

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 has had a stock repurchase program in place for several years, and during 2008, repurchased 38,200 shares of common stock at a cost of approximately $341,000.

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 other organizations that are located in or conduct a substantial portion of their business in the Bank’s market areas. The Bank has specialized lending departments for residential construction lending to homebuilders in selected markets. The Bank’s total loans at December 31, 2008, were $1.60 billion, or 77.2% of total assets. At December 31, 2008, 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, 2008 was $33.0 million and the largest credit relationship was approximately $15.3 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.

Summary of Loan Portfolio


	December 31,
(in thousands)	2008		2007		2006		2005		2004


Commercial	$	617,591	$	571,575	$	279,372	$	288,240	$	281,909
Real estate — construction		218,741		248,222		59,959		38,179		50,125
Real estate — mortgage		632,729		575,139		357,772		354,322		314,822
Consumer		122,412		91,826		60,953		72,336		62,987
Other		13,052		3,322		1,922		2,321		2,342

Total loans, net of unearned income	$	1,604,525	$	1,490,084	$	759,978	$	755,398	$	712,185

The Company has no foreign loan activity.

Real Estate Loans. Loans secured by real estate for a variety of purposes constituted $851.5 million, or 53.1%, of the Bank’s total loans at December 31, 2008. At year end 2008, the Bank had real estate loan relationships of various sizes ranging up to $14.0 million and commitments up to $15.0 million, secured by office buildings, retail establishments, residential development and construction, warehouses, motels, restaurants and other types of property. Loan terms are typically limited to five years, with payments through the date of maturity generally based on a 15-20 year (15-30 year for 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 80%, and net projected cash flow available for debt service amounts to at least 120% 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 decided to immediately make the property available for sale, while at the same time continuing to build out the project, and recorded an additional $2.0 million writedown. As of December 31, 2008, the construction project is complete, one unit has been sold and marketing of the remaining units continues. An additional writedown of $1.3 million was recorded during the fourth quarter of 2008, and at December 31, 2008, the property is carried on the books at approximately $3.3 million.

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 2008 the Bank originated $132.0 million of loans in these various categories. Included in real estate mortgage loans are home equity revolving lines of credit, with $231.5 million outstanding as of December 31, 2008.

The Bank’s current lending strategy is for the majority of construction and development loans on commercial and residential projects to be in the range of $300,000 to $5.0 million. At December 31, 2008, 2007, and 2006, the Bank held $218.7 million, $248.2 million, and $60.0 million, respectively, 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 80% or less and a net cash flow to debt service at no less than 120%. 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 $12.0 million in 2008, $3.6 million in 2007, and $0.1 million in 2006.

Commercial Loans. The Bank makes loans for commercial purposes to various types of businesses. At December 31, 2008, the Bank held $617.6 million of commercial loans, or 38.5% 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 110% to 150% of its debt service requirements. The Bank experienced net charge-offs from commercial loans of $4.1 million in 2008, $3.3 million in 2007, and $1.5 million in 2006.

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, (iii) amortizing secured lot loans and (iv) indirect automobile loans. Certain of the direct loans are secured by the borrowers’ residences. At December 31, 2008, the Bank held $122.4 million of consumer loans. During 2008, 2007, and 2006, the Bank experienced net consumer chargeoffs of $3.7 million, $1.5 million, and $2.8 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. Regional presidents can generally approve commercial relationships up to $750,000. If the lending request exceeds the Regional president’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 has a Loan Review Program, headed by the Loan Review Manager who reports directly to the Credit Management Committee of the Bank’s Board of Directors. Included in this program is an Annual Loan Review Coverage Plan which is approved by the Credit Management Committee and which stipulates a certain volume of loan reviews to be completed by the Loan Review Manager and employees under their 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. A “Watch Loan Committee”, which includes the CCO, the Special Assets manager and the Special Asset 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 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 Statement of Financial Accounting Standard (“SFAS”) No. 114, Accounting by Creditors for Impairment of a

Loan, and related pronouncements 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)


	Maturity								Maturity Greater Than One Year
			Over One		Over						Floating or
	One Year		Year to		Five				Fixed Interest		Adjustable
	or Less		Five Years		Years		Total		Rate		Rate


Commercial	$	140,806	$	374,585	$	102,200	$	617,591	$	373,169	$	103,616
Real estate — construction		113,802		77,940		26,999		218,741		62,317		42,622
Real estate — mortgage		73,190		177,447		382,092		632,729		168,161		391,378
Consumer		26,100		71,713		24,599		122,412		84,453		11,859
Other		143		127		12,782		13,052		1,030		11,879

Total	$	354,041	$	701,812	$	548,672	$	1,604,525	$	689,130	$	561,354

Asset Quality

The Bank considers asset quality to be of primary importance, and employs a formal internal loan review process (see “Lending Activities — Loan Approval and Review”) to ensure adherence to its lending policy as approved by the Bank’s Board of Directors. 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 a change in the borrower’s risk grade.

Currently, the grading process utilized by the Bank is segmented by product type (see discussion below). 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)


	December 31
	2008					2007					2006					2005					2004
			% Of					% Of					% Of					% Of					% Of
			Total					Total					Total					Total					Total
	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans

Commercial	$	7,351		38.5	%	$	11,185		38.4	%	$	2,724		36.8	%	$	2,404		38.1	%	$	2,268		39.6	%
Real estate — construction		13,039		13.6			6,945		16.6			1,032		7.9			911		5.0			859		7.0
Real estate — mortgage		8,555		39.5			7,928		38.6			3,827		47.1			3,377		46.9			3,186		44.2
Consumer		6,742		7.6			4,295		6.2			1,606		8.0			1,417		9.6			1,337		8.8
Other		118		0.8			17		0.2			375		0.2			331		0.4			312		0.4


Total	$	35,805		100.0	%	$	30,370		100.0	%	$	9,564		100.0	%	$	8,440		100.0	%	$	7,962		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 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 area, 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 as 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, 2008 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 loan losses.

Analysis of Allowance for Credit Losses
(in thousands, except ratios)


	As of or for the Years Ended
	December 31
	2008			2007			2006			2005			2004

Average amount of loans outstanding	$	1,575,064		$	1,060,522		$	756,088		$	752,420		$	689,034
Amount of loans outstanding		1,604,525			1,490,084			759,978			755,398			712,185
Allowance for credit losses:
Balance on January 1	$	30,370		$	9,564		$	8,440		$	7,962		$	7,846
Loans charged off:
Secured by real estate		12,335			3,793			144			267			45
Commercial		5,062			3,384			1,864			1,324			2,436
Installment		4,771			2,014			3,153			1,414			799
Credit Card		300			221			286			234			366

Total charge-offs		22,468			9,412			5,447			3,239			3,646

Recoveries of loans previously charged off:
Secured by real estate		338			152			11			66			49
Commercial		978			100			406			256			250
Installment		1,240			603			580			134			366
Credit Card		85			101			64			42			80

Total recoveries		2,641			956			1,061			498			745

Net loans charged off		19,827			8,456			4,386			2,741			2,901

Provision for loan losses		25,262			18,952			5,510			3,219			3,017

Allowance acquired via merger		—			10,310			—			—			—

Balance on December 31	$	35,805		$	30,370		$	9,564		$	8,440		$	7,962

Ratio of net charge-offs of loans to average loans outstanding during the year		1.26	%		0.79	%		0.58	%		0.36	%		0.42	%

Ratio of allowance to loans outstanding		2.23	%		2.04	%		1.26	%		1.12	%		1.12	%

Ratio of non-performing assets to loans outstanding		3.03	%		1.16	%		1.30	%		0.54	%		0.82	%

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 82.14% of its total commercial loans in risk grades that are deemed acceptable or better at year end 2008, compared to 88.61% at year end 2007.

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 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 under SFAS No. 114. 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, 2008 and 2007, the recorded investment in loans considered impaired was approximately $91.0 million and $49.0 million, respectively. Impaired loans at December 31, 2008 consisted of $6.6 million of retail loans past due 90 days or more, or classified as non-accrual, $80.0 million of commercial and real estate loans graded substandard, and $4.4 million graded doubtful. Impaired loans at December 31, 2007 consisted of $1.8 million of retail loans past due 90 days or more, or classified as non-accrual, $40.5 million of commercial and real estate loans graded substandard, and $6.7 million graded doubtful. The increase in the amount of impaired loans held by the Bank resulted primarily from a reevaluation of the credit quality of the portfolio, considering current economic conditions and continuing efforts to resolve the quality issues identified through the combined efforts of internal and external loan reviews.

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 2008, the Bank continued to focus on reviewing its loan portfolio and reclassifying its loans, as required. Watch list loans increased to $346.0 million at year end 2008, from $104.0 million at year end 2007. The reserve requirement for watch list loans totaled $18.6 million and $13.4 million for 2008 and 2007, respectively.

Provision for Credit Losses. The 2008 provision for credit losses totaled $25.3 million, compared to $19.0 million in 2007. As of December 31, 2008, nonperforming assets totaled $48.6 million, comprised of $39.5 million in nonperforming loans and $9.1 million in other real estate owned. Those figures compare to $12.9 million in nonperforming loans and $4.3 million in other real estate owned at the end of 2007, totaling $17.2 million in nonperforming assets. Net charge-offs increased in 2008 to $19.8 million, or 1.26% of average loans outstanding, compared with $8.5 million, or 0.79% of average loans outstanding in the prior year. At December 31, 2008 and 2007 the allowance for credit losses as a percentage of year end loans was 2.23% and 2.04%, respectively. The 2008 results have been impacted by ongoing evaluations of our credit portfolio, prompted by the current volatile economic situation.

Nonperforming Assets
(in thousands, except ratios)


	December 31
	2008			2007			2006			2005			2004

Nonaccrual loans	$	38,029		$	12,236		$	3,686		$	929		$	685
Restructured loans		250			651			133			856			582
Accruing loans which are contractually past due 90 days or more		1,277			72			2,103			1,911			1,313

Total nonperforming loans		39,556			12,959			5,922			3,696			2,580
Other real estate acquired through foreclosed properties		9,080			4,280			3,969			4,391			1,531

Total nonperforming assets	$	48,636		$	17,239		$	9,891		$	8,087		$	4,111

Nonperforming loans to loans outstanding at end of year		2.47	%		0.87	%		0.78	%		0.49	%		0.36	%
Nonperforming assets to total assets at end of year		2.34	%		0.84	%		1.00	%		0.83	%		0.64	%

Nonperforming assets include nonaccrual loans, accruing loans contractually past due 90 days or more, restructured loans, and other real estate. 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.

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 2008, 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 accompanying tables present the carrying values, fair values, and weighted average yields of our investment portfolio at December 31, 2008, 2007 and 2006; and the intervals of maturities or repricings at December 31, 2008:

Investment Securities
(in thousands)


	December 31, 2008				December 31, 2007				December 31, 2006
	Amortized		Market		Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value		Cost		Value


U.S. government agencies obligations	$	56,622	$	57,954	$	140,759	$	142,483	$	110,920	$	109,577
Mortgage backed securities		97,843		102,042		106,757		109,170		—		—
State and municipal obligations		115,627		114,912		105,689		105,993		32,418		32,450

Total debt securities		270,092		274,908		353,205		357,646		143,338		142,027
Other equity		13,642		13,896		11,850		11,909		5,235		5,235

Total securities	$	283,734	$	288,804	$	365,055	$	369,555	$	148,573	$	147,262

Investment Securities Portfolio Maturity Schedule
(in thousands)


	December 31, 2008
			Weighted
	Market		Average
	Value		Yield⁽¹⁾

U. S. government agencies and mortgage backed obligations:
Within one year	$	5,009		3.24	%
One to five years		48,886		4.23
Five to ten years		9,718		5.05
After ten years		96,383		5.32


Total		159,996		4.91


Obligations of states and political subdivisions:
Within one year		1,702		2.99
One to five years		13,973		4.20
Five to ten years		31,992		4.04
After ten years		67,244		4.23


Total		114,911		4.16


Total debt securities	$	274,907		4.58	%


⁽¹⁾		The yield related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%.

See also Note 4 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

Information about the Company’s off-balance sheet risk exposure is presented in Note 17 in the Notes to the Consolidated Financial Statements.

Market Risk

Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of 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.

For a complete discussion on market risk and how Bancorp addresses this risk, see Item 7A of this Annual Report on Form 10-K.

Effects of Inflation

Inflation affects financial institutions in ways that are different from most commercial and industrial companies, which have significant investments in fixed assets and inventories. 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. Interest rate risk on our balance sheet arises from the maturity mismatch of interest-earning assets versus interest-bearing liabilities, as well as the potential for maturities to shorten or lengthen our interest-earning assets and interest-bearing liabilities. In addition, market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets, over interest expense on interest-bearing liabilities.

Interest rate risk management is a part of the Bank’s overall asset/liability management process. The primary oversight of asset/liability management rests with the Bank’s Asset and Liability Committee, which is comprised of the Bank’s CEO, Chief Financial Officer (“CFO”), 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 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, 2008
(in thousands, except ratios)


										Total
	1 — 90			91 — 365			Total			Sensitive
	Day			Day			Sensitive Within			Over
	Sensitive			Sensitive			One Year			One Year		Total
Interest earning assets:
Loans, net of unearned income	$	687,704		$	156,352		$	844,056		$	760,469	$	1,604,525
U. S. government agency		7,988			34,120			42,108			117,888		159,996
State and municipal obligations		15,424			3,291			18,715			95,965		114,680
Other investment securities		9,867			—			9,867			4,029		13,896
Overnight funds		54,867			—			54,867			—		54,867

Total interest earning assets		775,850			193,763			969,613			978,351		1,947,964


Interest bearing liabilities:
NOW		172,943			—			172,943			—		172,943
MMI		401,098			—			401,098			—		401,098
Savings		39,692			—			39,692			—		39,692
Time deposits		110,150			699,515			809,665			90,483		900,148
Fed funds purchased and retail repurchase agreements		5,041			—			5,041			—		5,041
Junior subordinated notes		25,774			—			25,774			—		25,774
FHLB borrowings		11,000			40,000			51,000			88,000		139,000
Wholesale repurchase agreements		46,000			—			46,000			—		46,000

Total interest bearing liabilities		811,698			739,515			1,551,213			178,483		1,729,696


Interest sensitivity gap	$	(35,848	)	$	(545,752	)	$	(581,600	)	$	799,868	$	218,268


Ratio of interest sensitive assets to liabilities		0.96			0.26			0.63			5.48		1.13

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, 2008, to be 0.63X. 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 immediate withdrawal and repricing, yet have no stated maturity. 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 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 rate index. Approximately 58.0% of the total loan portfolio has a variable 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. This comprehensive model includes rate sensitivity gap analysis, net interest income analysis, and present value of equity analysis, under various rate shock 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 Company considers the Bank’s interest rate risk to be its most significant market risk, which could potentially have the greatest impact on operating earnings. Based on actual experience, the Bank has demonstrated to be asset sensitive, which means that falling interest rates could result in a reduced amount of net interest income. The Bank is not subject to other types of market risk, such as foreign currency exchange rate risk, commodity or equity price 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, 2008.

Market Sensitive Financial Instruments Maturities
(Dollars in thousands)


	Contractual Maturities as of December 31, 2008
											After
	2009		2010		2011		2012		2013		Five Years		Total

Financial assets:
Debt securities	$	60,823	$	29,626	$	25,966	$	10,390	$	28,756	$	119,113	$	274,674
Loans:
Fixed rate		149,491		58,307		71,480		96,478		120,525		177,007		673,288
Variable rate		207,982		60,788		70,032		89,796		109,441		393,198		931,237

Total	$	418,296	$	148,721	$	167,478	$	196,664	$	258,722	$	689,318	$	1,879,199


Financial liabilities:
NOW	$	97,073	$	—	$	—	$	—	$	—	$	75,870	$	172,943
MMI		208,186		—		—		—		—		192,912		401,098
Savings		10,784		—		—		—		—		28,908		39,692
Time deposits		809,665		77,442		6,288		4,284		1,885		584		900,148
Wholesale repurchase agreements		—		10,000		15,000		—		—		21,000		46,000
FHLB borrowing		51,000		53,000		35,000		—		—		—		139,000
Junior subordinated notes		—		—		—		—		—		25,774		25,774
Fed funds purchased and retail repurchase agreements		5,041		—		—		—		—		—		5,041

Total	$	1,181,749	$	140,442	$	56,288	$	4,284	$	1,885	$	345,048	$	1,729,696

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, in the opinion of management, 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)



2008	4th Qtr			3rd Qtr			2nd Qtr		1st Qtr

Interest income	$	27,428		$	28,468		$	29,956	$	32,110
Interest expense		13,014			12,913			13,280		14,645


Net interest income		14,414			15,555			16,676		17,465
Provision for credit losses		14,580			4,656			5,567		459


Net interest income (loss) after provision for credit losses		(166	)		10,899			11,109		17,006


Noninterest income		4,626			4,626			6,781		4,549
Noninterest expense		70,741			17,840			17,495		17,180


Income (loss) before income taxes		(66,281	)		(2,315	)		395		4,375
Provision for income taxes		(7,698	)		(726	)		135		1,365


Net income (loss)		(58,583	)		(1,589	)		260		3,010
Dividends and accretion on preferred stock		(154	)		—			—		—


Net income (loss) available to common shareholders	$	(58,737	)	$	(1,589	)		260		3,010

Earnings per share:
Basic	$	(3.75	)	$	(0.10	)	$	0.02	$	0.19
Diluted	$	(3.75	)	$	(0.10	)	$	0.02	$	0.19



2007	4th Qtr			3rd Qtr		2nd Qtr		1st Qtr

Interest income	$	34,147		$	28,963	$	17,417	$	17,094
Interest expense		15,678			12,676		7,169		6,845


Net interest income		18,469			16,287		10,248		10,249
Provision for credit losses		14,411			2,393		1,191		957


Net interest income after provision for credit losses		4,058			13,894		9,057		9,292


Noninterest income		3,984			4,206		3,425		3,383
Noninterest expense		25,918			16,407		9,966		10,065


Income before income taxes		(17,876	)		1,693		2,516		2,610
Provision for income taxes		(7,309	)		268		807		840


Net income (loss)	$	(10,567	)	$	1,425	$	1,709	$	1,770

Earnings per share:
Basic	$	(0.67	)	$	0.11	$	0.20	$	0.21
Diluted	$	(0.67	)	$	0.11	$	0.20	$	0.21

Annual earnings per share amounts may not equal the total of the quarterly amounts because weighted average shares are not necessarily identical for each calculation.

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, 2008 and 2007, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2008. 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.

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, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 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, 2008, 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 16, 2009, expressed an unqualified opinion.



/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 16, 2009

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, 2008, 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, 2008, 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, 2008 and 2007, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2008, and our report dated March 16, 2009, expressed an unqualified opinion.



/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 16, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
NewBridge Bancorp
Greensboro, North Carolina

We have audited the accompanying consolidated balance sheets of NewBridge Bancorp and subsidiary (the “Corporation”) as of December 31, 2006, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income , and cash flows for each of the years in the two-year period ended December 31, 2006. We have also audited management’s assessment entitled “Controls and Procedures”, that the Corporation maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Corporation’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A corporation’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. Because management’s assessment and our audits were conducted to also meet the requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of NewBridge Bancorp’s internal control over financial reporting included controls over NewBridge Bank’s (a NewBridge Bancorp subsidiary) preparation of financial statements in accordance with the Federal Financial Institution’s Examination Council Instructions for Consolidated Reports of Condition and Income (“call report instructions”). A corporation’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 corporation; (2) provide reasonable assurance that transactions are recorded as necessary to

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)

permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’s assets that could have a material effect on the financial statements.

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, 2006, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, management’s assessment that NewBridge Bancorp and subsidiary maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Furthermore, in our opinion, NewBridge Bancorp and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Turlington and Company, L.L.P.
Lexington, North Carolina
March 14, 2007

NewBridge Bancorp and Subsidiary
Consolidated Balance Sheets

December 31, 2008 and 2007
(Dollars in thousands, except per share data)


	2008			2007

ASSETS
Cash and due from banks	$	32,993		$	54,011
Interest-bearing bank balances		12,824			4,678
Federal funds sold		42,043			2,173
Investment securities:
Held to maturity, market value $27,269 in 2008 and $28,033 in 2007		27,037			27,901
Available for sale		261,535			341,522
Loans		1,604,525			1,490,084
Less allowance for credit losses		(35,805	)		(30,370	)

Net Loans		1,568,720			1,459,714
Premises and equipment, net		45,253			43,886
Goodwill		—			50,312
Accrued income and other assets		88,222			73,161

Total assets	$	2,078,627		$	2,057,358


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	149,583		$	175,493
Savings, NOW and money market accounts		613,732			638,023
Certificates of deposit		900,148			814,204

Total deposits		1,663,463			1,627,720
Borrowings from the Federal Home Loan Bank		139,000			118,000
Other borrowings		76,815			99,524
Accrued expenses and other liabilities		20,113			18,961

Total liabilities		1,899,391			1,864,205

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 in 2008 and none in 2007		52,372			—
Common stock, par value $5.00 per share; Authorized — 50,000,000 shares; issued and outstanding - 15,655,868 in 2008 and 15,694,068 in 2007		78,279			78,470
Paid-in capital		85,355			85,412
Directors’ deferred compensation plan		(650	)		(1,301	)
Retained earnings (deficit)		(34,411	)		28,751
Accumulated other comprehensive income (loss)		(1,709	)		1,821

Total shareholders’ equity		179,236			193,153

Total liabilities and shareholders’ equity	$	2,078,627		$	2,057,358

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary
Consolidated Statements of Income

Years ended December 31, 2008, 2007 and 2006
(Dollars in thousands, except per share data)


	2008			2007			2006
Interest Income
Interest and fees on loans	$	102,187		$	85,259		$	60,396
Interest on investment securities:
Taxable		9,898			8,505			4,528
Tax exempt		4,797			2,501			1,237
Interest-bearing bank balances		966			833			350
Federal funds sold		114			523			812

Total interest income		117,962			97,621			67,323


Interest Expense
Deposits		44,672			36,686			21,057
Borrowings from the Federal Home Loan Bank		5,483			4,634			3,126
Other borrowings		3,697			1,048			12

Total Interest Expense		53,852			42,368			24,195


Net Interest Income		64,110			55,253			43,128
Provision for credit losses		25,262			18,952			5,510

Net interest income after provision for credit losses		38,848			36,301			37,618


Noninterest Income
Service charges on deposit accounts		9,328			7,791			6,884
Gain on sales of mortgage loans		397			366			390
Gain (loss) on sales of investment securities		2,459			(38	)		—
Other operating income		8,398			6,879			7,016

Total Noninterest Income		20,582			14,998			14,290


Noninterest Expense
Personnel		35,813			30,744			22,497
Occupancy		4,537			2,919			1,922
Furniture and equipment		4,679			3,554			2,206
Goodwill impairment		50,437			—			—
Other operating		27,790			25,139			16,699

Total Noninterest Expense		123,256			62,356			43,324

Income (Loss) Before Income Taxes		(63,826	)		(11,057	)		8,584
Income Taxes		(6,924	)		(5,394	)		2,584

Net Income (Loss)		(56,902	)		(5,663	)		6,000
Dividends and accretion on preferred stock		(154	)		—			—

Net Income (Loss) available to common shareholders	$	(57,056	)	$	(5,663	)	$	6,000


Earnings (Loss) Per Share
Basic	$	(3.64	)	$	(0.49	)	$	0.71
Diluted	$	(3.64	)	$	(0.49	)	$	0.71
Weighted Average Shares Outstanding
Basic		15,663,719			11,485,353			8,480,621
Diluted		15,663,719			11,485,353			8,509,679

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income

Years ended December 31, 2008, 2007 and 2006
(Dollars in thousands, except share data)


																		Accumulated
												Directors’						Other			Total
	Preferred		Common Stock						Paid-In			Deferred			Retained			Comprehensive			Shareholders’
	Stock		Shares			Amount			Capital			Comp Plan			Earnings			Income (Loss)			Equity
Balances at December 31, 2005	$	—		8,524,033		$	42,620		$	9,430		$	(1,334	)	$	42,424		$	(1,311	)	$	91,829
Net Income																6,000						6,000
Change in unrealized gain on securities available for sale, net of deferred tax effect																			423			423

Comprehensive income																						6,423
Adjustment to initially apply SFAS 158																			(1,372	)		(1,372	)
Cash dividends declared on common stock																(5,755	)					(5,755	)
Stock-based compensation expense										172												172
Common stock issued for stock options exercised				28,511			143			181												324
Common stock acquired and cancelled				(129,934	)		(650	)		(1,606	)		(56	)								(2,312	)

Balances at December 31, 2006	$	—		8,422,610		$	42,113		$	8,177		$	(1,390	)	$	42,669		$	(2,260	)	$	89,309
Net Loss																(5,663	)					(5,663	)
Change in unrealized gain on securities available for sale																			3,641			3,641
Change in funded status of pension plans																			440			440

Comprehensive loss																						(1,582	)
Cash dividends declared on common stock																(8,255	)					(8,255	)
Stock-based compensation expense										149												149
Common stock issued in merger				7,554,362			37,771			79,094												116,865
Common stock acquired and cancelled				(282,904	)		(1,414	)		(2,008	)		89									(3,333	)

Balances at December 31, 2007	$	—		15,694,068		$	78,470		$	85,412		$	(1,301	)	$	28,751		$	1,821		$	193,153
Net Loss																(56,902	)					(56,902	)
Change in unrealized gain on securities available for sale																			205			205
Change in funded status of pension plans																			(3,735	)		(3,735	)

Comprehensive loss																						(60,432	)
Cash dividends declared on common stock																(6,106	)					(6,106	)
Preferred stock issued, including Warrant		52,372																				52,372
Dividends and accretion on preferred stock																(154	)					(154	)
Stock-based compensation expense										93												93
Common stock distributed													651									651
Common stock acquired and cancelled				(38,200	)		(191	)		(150	)											(341	)

Balances at December 31, 2008	$	52,372		15,655,868		$	78,279		$	85,355		$	(650	)	$	(34,411	)	$	(1,709	)	$	179,236

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary
Consolidated Statements of Cash Flows

Years ended December 31, 2008, 2007 and 2006
(Dollars in thousands)


	2008			2007			2006

CASH FLOW FROM OPERATING ACTIVITIES
Net Income (Loss) available to common shareholders	$	(57,056	)	$	(5,663	)	$	6,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,737			3,192			2,008
Securities premium amortization and discount accretion, net		565			(375	)		126
(Increase) decrease in loans held for sale		11,414			—			6,839
Goodwill impairment		50,437			—			—
Deferred income taxes		(8,360	)		(9,759	)		(1,201	)
Increase (decrease) in income taxes payable		(2,800	)		738			(699	)
(Increase) decrease in income earned but not received		3,014			(6,199	)		(757	)
Increase (decrease) in interest accrued but not paid		(572	)		1,414			397
Net (increase) decrease in other assets		(9,849	)		7,453			1,406
Net increase (decrease) in other liabilities		4,287			8,609			(149	)
Provision for credit losses		25,262			18,952			5,510
Stock-based compensation		93			149			172
(Gain) loss on sales of premises and equipment		731			584			(545	)

Net cash provided by operating activities		21,903			19,097			19,107

CASH FLOW FROM INVESTING ACTIVITIES
Purchases of securities held to maturity		—			—			(4,747	)
Proceeds from maturities of securities held to maturity		—			1,964			2,258
Purchases of securities available for sale		(128,665	)		(105,954	)		(39,783	)
Proceeds from maturities of securities available for sale		210,355			140,110			23,865
Net increase in loans		(156,319	)		(95,676	)		(15,805	)
Purchases of premises and equipment		(5,808	)		(5,098	)		(2,677	)
Proceeds from sales of premises and equipment		4,686			80			723
Cash acquired in merger		—			14,803			—
Net (increase) decrease in federal funds sold		(39,870	)		4,672			9,510

Net cash used for investing activities		(115,621	)		(45,099	)		(26,656	)

CASH FLOW FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW, money market and savings accounts		(50,204	)		(7,857	)		(7,042	)
Net increase in time deposits		85,945			77,033			2,552
Net increase (decrease) in securities sold under agreements to repurchase		(22,471	)		9,347			(709	)
Proceeds from borrowings from FHLB		412,600			264,135			227,000
Payments on borrowings from FHLB		(391,600	)		(294,135	)		(207,000	)
Dividends paid		(6,106	)		(6,983	)		(5,755	)
Stock issuance costs		—			(10	)		—
Proceeds from issuance of common stock		—			—			324
Proceeds from issuance of preferred stock and warrants		52,372			—			—
Common stock distributed		651			—			—
Common stock acquired		(341	)		(3,333	)		(2,312	)

Net cash provided by financing activities		80,846			38,197			7,058

Increase (decrease) in cash and cash equivalents		(12,872	)		12,195			(491	)
Cash and cash equivalents at the beginning of the years		58,689			46,494			46,985

Cash and cash equivalents at the end of the years	$	45,817		$	58,689		$	46,494

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest	$	54,424		$	40,954		$	23,179
Income taxes		3,500			3,885			4,270
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Transfer of loans to other real estate owned	$	9,963		$	9,009		$	1,952
Unrealized gain on securities available for sale:
Change in securities available for sale		(298	)		(5,813	)		689
Change in deferred income taxes		124			873			(266	)
Change in shareholders’ equity		174			3,641			423
Common stock issued in Merger		—			116,865			—

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary
Notes to Consolidated Financial Statements

December 31, 2008, 2007, and 2006

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”) through its 35 full-service branches in the Piedmont Triad Region and Coastal Region of NC and two branches in its Shenandoah Valley Region in VA. The majority of the Bank’s NC customers 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 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 their 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 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.

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.

Other real estate

Other real estate, acquired 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.

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

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share. SFAS No. 128 requires disclosure of 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 follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 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 provided 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, the providing of financial services through the Bank, including banking, mortgage, and investment services, to customers located principally in Davidson, Rockingham, Guilford, Forsyth 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.

Accounting for Derivatives

The Company accounts and reports for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS 133 requires recognition of all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to accumulated other comprehensive income and/or current earnings, as appropriate. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged liability are recorded in current period net income. If a derivative has ceased to be highly effective, hedge accounting is discontinued prospectively. The Company does not have any material amounts of derivative instruments for any period presented.

Recent accounting pronouncements

The Company has adopted SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), which is an amendment of SFAS Statement No. 140 (“SFAS 140”). SFAS 156 deals with the servicing of financial assets and liabilities. This applies to the Company’s sales and servicing of mortgage loans. SFAS 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value, if practicable. This method was also required under SFAS 140 and therefore already implemented by the Company. SFAS 156 now permits an entity to choose either the amortization method or the fair value measurement method for subsequent measurement. Previously, the only subsequent method available was the amortization method which calls for amortizing servicing assets or liabilities in proportion to and over the period of estimated net servicing income or loss and assessing servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. The fair value measurement method measures servicing assets and liabilities at fair value at each reporting date and reports changes in fair value in earnings in the period in which the changes occur. Since the Company does not use derivative instruments to mitigate risk associated with their mortgage servicing rights, which is immaterial, the Company elected to continue using the amortization method upon adoption of SFAS 156 on January 1, 2007. The Company believes that adopting SFAS 156 has not resulted in any material effect on its financial position or operating results.

The Company adopted SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), as of January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value of assets and liabilities for financial statement purposes and expands disclosures about fair value measurements. SFAS 157 establishes a fair value hierarchy with the highest level priority given to quoted prices in active markets for identical assets or liabilities. The next level of priority is given to other than quoted prices that are observable for the asset or liability while the least priority is given to unobservable inputs. The fair value measurement requirements in SFAS 157 supersedes the requirements of various other statements of the Financial Accounting Standards Board (“FASB”) that required fair value valuation and establishes a more consistent basis for determining the fair value. SFAS 157 does not establish any new fair value measurements. The adoption of SFAS 157 did not result in any material effect on the Company’s financial position or operating results.

In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, which delayed until the first quarter of 2009 the effective date of SFAS 157 for nonfinancial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. As a result, the Company does not report fair value for such assets for the periods covered by this Report. The Company reports fair value on a limited basis, most notably for available for sale investment securities and mortgage loans held for sale. However, impairment, which could result in reporting at fair value, is considered for other purposes, including impaired loans and other than temporary impairment on held to maturity investment securities. The fair value for such impaired assets is measured on a non-recurring basis.

The Company’s nonfinancial assets and liabilities that meet the deferral criteria set forth in FSP No. 157-2 include goodwill, core deposit intangibles, net property and equipment and other real estate, which primarily represents collateral that is received in satisfaction of troubled loans. The Company has not yet determined what impact the adoption of SFAS 157 for these nonfinancial assets and liabilities will have on its financial position or results of operations.

In October 2008, the FASB issued FSP No. 157-3, which clarifies the application of SFAS 157 in a market that is not active. The Company adopted FSP 157-3 upon issuance. The adoption of this Staff Position did not have a material impact on the Company’s financial position or operating results.

The Company has adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R) as of January 1, 2006. SFAS No. 158 requires an employer to: (a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization. See Note 18 for further information.

In September 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (“EITF Issue 06-4”). EITF Issue 06-4 requires that for endorsement split-dollar insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with SFAS No. 106 or Accounting Principles Board (APB) Opinion No. 12 based on the substantive agreement of the employee. If the employee has effectively agreed to maintain a life insurance policy during postretirement periods, the costs of the life insurance policy during the postretirement periods should be accrued in accordance with either SFAS No. 106 or APB Opinion No. 12. EITF Issue 06-4 is effective for fiscal years beginning after December 15, 2007. The Company adopted EITF Issue 06-4 as of January 1, 2008, and has determined that the adoption did not have a material impact on the Company’s financial results.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 addresses the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. In addition, FIN 48 expands the disclosure requirements concerning unrecognized tax benefits as well as any significant changes that may occur in the next twelve months associated with such unrecognized tax benefits. The adoption of FIN 48 did not have a material impact on the Company’s financial results.

The Company has also adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB 115” (“SFAS 159”). SFAS 159 permits entities to elect to report eligible financial instruments at fair value subject to conditions stated in the pronouncement including adoption of SFAS 157 discussed above. The purpose of SFAS 159 is to improve financial reporting by mitigating volatility in earnings related to current reporting requirements. The Company adopted SFAS 159 effective January 1, 2008 and did not elect the fair value option for any asset or liability.

From time to time the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of exposure drafts.

Reclassification

Certain items for 2007 and 2006 have been reclassified to conform to the 2008 presentation. Such reclassifications had no effect on net income or shareholders’ equity as previously reported. As of December 31, 2006, $51,780,000 of previously reported noninterest bearing deposits were reclassified to money market accounts. See Note 7 for further explanation.

Note 2 — Merger of Equals

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 resulted in $49.9 million of goodwill and $6.6 million of core deposit intangibles. The goodwill acquired 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.

In accordance with purchase accounting rules, as of July 31, 2008 the Company, with the assistance of a third party valuation specialist, evaluated the goodwill it recorded in connection with the Merger, and concluded that there was no impairment in the value of the goodwill. As a result of the deteriorating national economic situation, the Company, with the assistance of the third party valuation specialist, re-evaluated the goodwill at December 31, 2008, and concluded that the goodwill was impaired. As a result, as of December 31, 2008, the Company wrote off $50.4 million of goodwill. At December 31, 2008, the carrying value of other intangibles was $6.0 million.

Note 3 — Restriction on cash and due from banks

The Bank maintains required reserve balances with the Federal Reserve Bank of Richmond. The average amounts of these reserve balances for the years ended December 31, 2008 and 2007 were $5,115,000 and $10,903,000, respectively. In addition, at December 31, 2008, the Bank had an obligation to maintain a balance of $3,644,000 with its check clearing agent.

Note 4 — Investment securities

Investment securities at December 31 consist of the following (in thousands):


			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
2008:
Available for sale:
U.S. government agency securities	$	56,622	$	1,332	$	—		$	57,954
Mortgage backed securities		97,843		4,199		—			102,042
State and municipal obligations		88,590		1,064		(2,011	)		87,643
Federal Home Loan Bank stock		9,867		—		—			9,867
Other equity securities		3,775		570		(316	)		4,029

Total available for sale		256,697		7,165		(2,327	)		261,535
Municipal obligations held to maturity		27,037		444		(212	)		27,269

Total investment securities	$	283,734	$	7,609	$	(2,539	)	$	288,804

2007:
Available for sale:
U.S. government agency securities	$	140,759	$	1,747	$	(23	)	$	142,483
Mortgage backed securities		106,757		2,413		—			109,170
State and municipal obligations		77,788		588		(416	)		77,960
Federal Home Loan Bank stock		8,906		—		—			8,906
Other equity securities		2,944		59		—			3,003

Total available for sale		337,154		4,807		(439	)		341,522
Municipal obligations held to maturity		27,901		430		(298	)		28,033

Total investment securities	$	365,055	$	5,237	$	(737	)	$	369,555

The aggregate cost of the Company’s investment in FHLB stock totaled $9,867,000 at December 31, 2008. Because of the redemption provisions of this stock, the Company estimates that the fair value equals the cost of this investment and that it is not impaired.

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2008 and 2007. 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.


	Less than 12 months				12 months or more				Total
2008	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
(In thousands)
Investment securities:
State and municipal obligations	$	44,255	$	1,753	$	6,343	$	470	$	50,598	$	2,223
Other equity securities		523		316		—		—		523		316

Total temporarily impaired securities	$	44,778	$	2,069	$	6,343	$	470	$	51,121	$	2,539


	Less than 12 months				12 months or more				Total
2007	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
(In thousands)
Investment securities:
U.S. government agency securities	$	3,004	$	8	$	13,612	$	15	$	16,616	$	23
State and municipal obligations		—		—		38,001		714		38,001		714

Total temporarily impaired securities	$	3,004	$	8	$	51,613	$	729	$	54,617	$	737

The amortized cost and estimated market value of debt securities at December 31, 2008, 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.


	Amortized		Estimated
	Cost		Fair Value
	(In thousands)
Due in one year or less	$	6,700	$	6,711
Due after one through five years		61,251		62,859
Due after five through ten years		40,525		41,710
Due after ten years		161,616		163,627

Total debt securities	$	270,092	$	274,907

A recap of the maturities of held to maturity securities follows. There were no sales of held to maturity securities during the years presented (in thousands):


	Years Ended December 31
	2008		2007		2006
Proceeds from maturities	$	—	$	1,964	$	2,258

A recap of the maturities and sales of available for sale securities follows (in thousands):


	Years Ended December 31
	2008		2007		2006
Proceeds from sales and maturities	$	210,535	$	140,110	$	23,865
Gross realized gains		2,475		101		0
Gross realized losses		16		139		0

Investment securities with amortized costs of approximately $187,275,000 and $212,260,000 and market values of approximately $190,620,000 and $215,898,000 as of December 31, 2008 and 2007, respectively, were pledged to secure public deposits and for other purposes.

Note 5 — Loans

Loans are summarized as follows (in thousands):


	December 31
	2008		2007

Commercial	$	617,591	$	571,575
Real estate-construction		218,741		248,222
Real estate-mortgage		632,729		575,139
Installment loans to individuals		122,412		91,826
Other		13,052		3,322

Total loans, net of unearned income	$	1,604,525	$	1,490,084

Loans totalling approximately $524,441,000 were pledged to secure the line of credit with the FHLB.

Nonperforming assets are summarized as follows (in thousands):


	December 31
	2008		2007

Nonaccrual loans	$	38,029	$	12,236
Restructured loans		250		651
Loans past due 90 days or more		1,277		72

Total nonperforming loans		39,556		12,959
Other real estate		9,080		4,280

Total nonperforming assets	$	48,636	$	17,239

Impaired loans and related information are summarized in the following tables (in thousands):


	December 31
	2008		2007		2006

Loans specifically identified as impaired Commercial and real estate	$	84,421	$	47,133	$	10,355
Consumer		6,625		1,857		305

Total	$	91,046	$	48,990	$	10,660

Allowance for credit losses associated with impaired loans	$	12,768	$	11,128	$	1,973


	Years Ended December 31
	2008		2007		2006

Average balances of impaired loans for the years	$	73,349	$	28,554	$	8,905


Interest income recorded for impaired loans	$	380	$	535	$	531

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


	Years Ended December 31
	2008			2007			2006

Balances at beginning of years	$	30,370		$	9,564		$	8,440
Provision for credit losses		25,262			18,952			5,510
Loans charged off		(22,468	)		(9,412	)		(5,447	)
Recoveries		2,641			956			1,061
Allowance acquired via acquisition		—			10,310			—

Balances at end of years	$	35,805		$	30,370		$	9,564

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
	2008		2007

Land	$	13,626	$	12,245
Buildings		23,256		22,386
Equipment		31,535		30,760
Leasehold improvements		2,152		1,385

		70,569		66,776
Less, accumulated depreciation		25,316		22,890

Total	$	45,253	$	43,886

Depreciation and amortization expense amounting to $4,737,000, $3,192,000 and $2,008,000, for the years ended December 31, 2008, 2007, and 2006, respectively, is included in occupancy expense and furniture and equipment expense.

Note 7 — Deposits

The aggregate amount of certificates of deposit of $100,000 or more was approximately $347,305,000 and $269,010,000 at December 31, 2008 and 2007, respectively. The accompanying table presents the scheduled maturities of total time deposits at December 31, 2008.


Years ending December 31,	(In thousands)
2009	$	791,902
2010		93,463
2011		7,590
2012		4,771
2013		2,099
Thereafter		323

Total time deposits	$	900,148

Bancorp has determined that there was a misstatement prior to December 31, 2007, whereby certain interest bearing deposit products were inadvertently reported as noninterest bearing deposits. Bancorp reclassified $51,780,000 of previously reported noninterest bearing deposits as of December 31, 2006 to money market accounts. There was no impact on total deposits, shareholders’ equity, or operating results.

Note 8 — Short-term borrowings and long-term debt

The following is a schedule of federal funds purchased, securities sold under agreements to repurchase and FHLB borrowings (in thousands, except percentages):


	Balance										Maximum Outstanding
	as of		Interest Rate as of			Average		Average Interest			at Any
	December 31		December 31			Balance		Rate			Month end

2008
Federal funds purchased and securities sold under agreements to repurchase	$	51,041		3.78	%	$	64,328		3.66	%	$	97,139
FHLB borrowings		139,000		3.13	%		148,206		3.70	%		242,860

Total	$	190,041				$	212,534				$	339,999


2007
Federal funds purchased and securities sold under agreements to repurchase	$	73,750		3.83	%	$	23,811		4.39	%	$	69,672
FHLB borrowings		118,000		4.86	%		89,518		5.18	%		145,000

Total	$	191,693				$	113,329				$	214,672


2006
Federal funds purchased and securities sold under agreements to repurchase	$	948		0.97	%	$	1,040		1.15	%	$	1,668
FHLB borrowings		73,000		4.41	%		59,521		5.25	%		81,000

Total	$	73,948				$	60,561				$	82,668

At December 31, 2008, the Bank had a $331,420,000 line of credit with the FHLB under which $139,000,000 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. The outstanding amounts consist of $51,000,000 maturing in 2009, $53,000,000 maturing in 2010, and $35,000,000 maturing in 2011. In addition to the credit line held at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $28,000,000, of which there were no borrowings outstanding at December 31, 2008.

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.

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% following the first year. The mortgage-backed securities serving as collateral for this borrowing had a market value of approximately $27,061,000 at December 31, 2008.

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, is callable after two years, and has quarterly calls thereafter. The transaction has a fixed rate of 3.85%. The mortgage-backed securities serving as collateral for these two borrowings had a market value of approximately $29,515,000 at December 31, 2008.

FNB and FNB Financial Services Capital Trust I, a Delaware statutory trust (the “Trust,” wholly owned by FNB), 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 adopted FIN 46, “Consolidation of Variable Interest Entities,” upon the establishment of the Trust and 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):


	2008		2007

Federal funds purchased	$	4,600	$	20,000
Retail repurchase agreements		441		7,727
Wholesale repurchase agreements		46,000		46,023
Junior subordinated notes		25,774		25,774

Total	$	76,815	$	99,524

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):


	2008		2007

Other assets:
Core deposit intangible	$	5,978	$	6,337
Bank-owned life insurance		28,084		26,476
Deferred income tax asset		21,864		12,988
Other real estate owned		9,080		4,280
Accrued interest receivable		9,014		12,028
Other		14,202		11,052

Total	$	88,222	$	73,161

Other liabilities:
Accrued interest payable		2,823		3,576
Accrued compensation		3,402		4,778
Dividends payable		177		2,690
Retirement plans and deferred compensation		9,460		3,868
Other		4,251		4,049

Total	$	20,113	$	18,961

Note 10 — Income taxes

The components of income tax expense (benefit) for the years ended December 31 are as follows (in thousands):


	2008			2007			2006

Current tax expense
Federal	$	(70	)	$	377		$	3,538
State		563			426			247

Total current		493			803			3,785

Deferred tax (benefit) expense
Federal		(6,121	)		(5,144	)		(986	)
State		(1,296	)		(1,053	)		(215	)

Total deferred		(7,417	)		(6,197	)		(1,201	)

Total income tax expense (benefit)	$	(6,924	)	$	(5,394	)	$	2,584

The significant components of deferred tax assets at December 31 are as follows (in thousands):


	2008		2007
Deferred tax assets:
Allowance for credit losses	$	14,470	$	11,992
Non-qualified deferred compensation plans		1,063		1,013
Accrued compensation		699		1,296
Writedowns on OREO		2,386		1,676
Net unrealized loss on securities available for sale		—		—
Net operating losses		8,027		1,515
Pension plans — OCI		3,079		638
Other		4,024		1,183

Total		33,748		19,313

Deferred tax liabilities:
Depreciable basis of property and equipment		5,278		4,980
Deferred loan fees		833		828
Net unrealized gain on available for sale securities		1,935		316
Other		3,838		201

Total		11,884		6,325

Net deferred tax assets	$	21,864	$	12,988

There is no valuation allowance for deferred tax assets, as management believes that realization of the deferred tax assets will more likely than not be realized. The Company does not have any material income tax positions.

The provision for income taxes differs from that computed by applying the federal statutory rate of 35% in 2008 and 2007 and 34% in 2006, as indicated in the following analysis (in thousands, except percentages):


	2008			2007			2006
Tax based on statutory rates	$	(22,339	)	$	(3,870	)	$	2,919
Increase (decrease) resulting from:
Effect of tax-exempt income		(1,456	)		(726	)		(369	)
Write off of goodwill		17,653			—			—
State income taxes, net of federal benefit		(476	)		(407	)		(52	)
Income on bank-owned life insurance		(386	)		(182	)		—
Other, net		80			(189	)		86

Total provision (benefit) for income taxes	$	(6,924	)	$	(5,394	)	$	2,584

Effective tax rate		(10.8	%)		(48.8	%)		30.1	%

Note 11 — Lease commitments

The minimum annual lease commitments under noncancelable operating leases in effect at December 31, 2008, are as follows (in thousands):


Years Ending December 31
2009	$	1,655
2010		1,376
2011		990
2012		573
2013		475
Thereafter		1,003

Total lease commitments	$	6,072

Payments under these leases amounted to approximately $2,452,000, $1,677,000 and $895,000 for the years ended December 31, 2008, 2007, and 2006, 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 do not involve more than the normal risks of collectibility. The following table summarizes the transactions for the past two years (in thousands):


	2008		2007
Balance, beginning of year	$	10,283	$	7,354
Amounts removed as a result of director retirements		—		(1,734	)
Amounts added as a result of new directors		—		5,854
Advances (repayments), net, during year		1,292		(1,191	)

Balance, end of year	$	11,575	$	10,283

Note 13 — Other Operating Income and Expenses

The components of other operating income and other operating expense for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands):


	Years Ended December 31
	2008			2007			2006

Other operating income:
Bankcard income	$	2,545		$	2,627		$	2,564
Fee income		3,126			1,860			2,044
Investment services commissions		874			862			862
Insurance commissions		153			155			197
Trust income		571			639			590
Gain (loss) on sales of real estate		(508	)		(437	)		(131	)
Income on bank-owned life insurance		1,103			462			—
Other income		534			711			890

	$	8,398		$	6,879		$	7,016


Other operating expenses:
Advertising	$	1,940		$	1,144		$	866
Automated services		6,006			4,909			3,870
Bankcard expense		2,413			2,256			2,018
Legal and professional fees		3,448			4,920			2,619
Postage		1,040			908			720
Stationery, printing and supplies		909			1,169			788
Other real estate owned expense		807			674			892
Other real estate owned write-downs		3,064			3,565			1,166
Other expenses		8,163			5,594			3,760

	$	27,790		$	25,139		$	16,699

Note 14 — Stock based compensation

Pursuant to the provisions of SFAS 123(R), the Company recorded $93,000, or less than $0.01 per diluted share of total stock-based compensation expense during 2008, compared to $153,000, or $0.01 per diluted share in 2007. The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related options. This expense had no impact on the Company’s reported cash flows. The stock-based compensation expense is reported under personnel expense.

To determine the amounts recorded in the financial statements, the fair value of each option or restricted stock grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	Years Ended December 31
	2008			2006

Dividend yield		7.40	%		4.01	%
Risk-free interest rate		2.50	%		4.50	%
Expected stock volatility		36.32	%		18.69	%
Expected years until exercise		6.25			7.80

There were no options granted during 2007.

As of December 31, 2008, there was $350,000 of total unrecognized compensation expense related to stock option arrangements granted under the NewBridge Bancorp Amended and Restated Comprehensive Equity Compensation Plan (formerly the LSB Bancshares Inc. Comprehensive Equity Compensation Plan for Directors and Employees) (the “Comprehensive Benefit Plan”). This expense will be fully amortized by March of 2013.

As of December 31, 2008, 24,000 restricted stock units that were granted to certain executive officers were outstanding. The fair value of these restricted stock units is $8.67, which was the closing price of the Company’s common stock on the date they were granted. The restricted stock units vest over a period of five years, and are subject to the Company achieving certain performance targets during the years 2008 to 2010. The stock-based compensation expense for these awards was immaterial for the period ended December 31, 2008.

As of December 31, 2008, 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 the 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 the 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 must be granted at a price not less than the fair market value at the date of grant. If an award grant is forfeited, or otherwise expires, terminates or is canceled without the delivery of shares, then the shares covered by the forfeited, expired, terminated or canceled award will again be available to be delivered pursuant to awards under the plan. 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 the 2006 annual meeting and authorized the issuance of up to 500,000 shares of FNB common stock which may be issued pursuant to the exercise of various rights granted under the 2006 FNB Omnibus Plan. Under the 2006 FNB Omnibus Plan, the 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.

The following is a summary of stock option activity and related information for the years ended December 31:


	2008					2007					2006
				Weighted					Weighted					Weighted
				Avg.					Avg.					Avg.
				Exercise					Exercise					Exercise
	Options			Price		Options			Price		Options			Price

Outstanding — Beginning of year		1,394,517		$	14.84		604,425		$	17.31		614,961		$	16.98
Acquired via merger		—			—		866,860			13.08		—			—
Granted		24,000			9.18		—			—		47,000			17.10
Exercised		—			—		—			—		(47,311	)		13.70
Forfeited		(366,000	)		15.96		(76,768	)		15.21		(10,225	)		13.49

Outstanding — End of year		1,052,517		$	14.32		1,394,517		$	14.84		604,425		$	17.31


Exercisable — End of year		940,517		$	14.23		1,247,517		$	14.62		463,750		$	17.28

The following is a summary of information on outstanding and exercisable options at December 31, 2008:


Options Outstanding							Options Exercisable
			Weighted Average
			Remaining		Weighted				Weighted
Range of			Contractual		Average Exercise				Average
Exercise Prices	Number		Life (Years)		Price		Number		Exercise Price
$5.81 — 10.47		279,050		3.24	$	8.82		260,050	$	8.80
$11.06 — 15.06		163,945		3.96		14.56		163,945		14.56
$15.42 — 16.93		317,647		5.82		15.93		264,147		16.00
$17.10 — 20.00		291,875		5.02		17.70		252,375		17.75

		1,052,517		4.62	$	14.32		940,517	$	14.23

Note 15 — Net income per share

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as required by SFAS No. 128 (in thousands, except share data):


	For the years ended December 31,
	2008			2007			2006
Basic:
Net income (loss) available to common shareholders	$	(57,056	)	$	(5,663	)	$	6,000

Weighted average shares outstanding		15,663,719			11,485,353			8,480,621

Net income (loss) per share, basic	$	(3.64	)	$	(0.49	)	$	0.71


Diluted:
Net income (loss) available to common shareholders	$	(57,056	)	$	(5,663	)	$	6,000

Weighted average shares outstanding		15,663,719			11,485,353			8,480,621
Effect of dilutive securities:
Stock options		—			—			29,058

Weighted average shares outstanding and dilutive potential shares outstanding		15,663,719			11,485,353			8,509,679

Net income (loss) per share, diluted	$	(3.64	)	$	(0.49	)	$	0.71

For the years ended December 31, 2008, 2007, and 2006, there were 1,049,517 options, 1,108,264 options and 336,730 options, respectively, that were antidilutive since the exercise price exceeded the average market price for the year.

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 Company is dividends received from the Bank. The following presents condensed financial information of the Company (in thousands):


	2008		2007
Condensed balance sheets
Assets
Cash and due from banks	$	26,308	$	222
Investment in wholly-owned subsidiary		175,746		167,064
Goodwill		—		49,822
Other assets		4,507		3,809

Total assets	$	206,561	$	220,917


Trust preferred securities	$	25,774	$	25,774
Other liabilities		1,551		1,990
Shareholders’ equity		179,236		193,153

Shareholders’ equity and other liabilities	$	206,561	$	220,917


	2008			2007			2006
Condensed statements of income
Dividends from subsidiary	$	8,175		$	12,999		$	8,004
Other operating expense		51,319			944			351

Income before equity in undistributed net income of subsidiary		(43,144	)		12,055			7,653
Equity in undistributed net income (loss) of subsidiary		(13,758	)		(17,718	)		(1,653	)

Net income (loss)	$	(56,902	)	$	(5,663	)	$	6,000


Condensed statements of cash flows
Cash flows from operating activities
Net income	$	(56,902	)	$	(5,663	)	$	6,000
Adjustments to reconcile net income to net cash provided by operating activities:
Other changes, net		49,283			(2,626	)		—
Change in investment in wholly-owned subsidiary		13,758			17,718			1,653

Net cash provided by operating activities		6,139			9,429			7,653
Cash flows from investing activities
Investments in subsidiaries		(26,000	)		—			—
(Increase) decrease in other assets		—			898			133

Net cash provided by (used in) investing activities		(26,000	)		898			133
Cash flows from financing activities
Proceeds from issuance of preferred stock and warrants		52,372			—			—
Proceeds from issuance of common stock		—			—			324
Dividends paid		(6,122	)		(6,983	)		(5,755	)
Common stock acquired		(341	)		(3,422	)		(2,312	)
Increase in other liabilities		38			(6	)		110

Net cash used for financing activities		45,947			(10,411	)		(7,633	)

Increase (decrease) in cash		26,086			(84	)		153
Cash at beginning of year		222			306			153

Cash at end of year	$	26,308		$	222		$	306

Supplemental non-cash financing activities:
Common stock issued in acquisition		—		$	116,865			—

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):


	Contractual Amount
	2008		2007

Loan commitments	$	363,044	$	474,300
Credit card lines		21,213		19,443
Standby letters of credit		3,686		3,820

Total commitments and contingent liabilities	$	387,943	$	497,563

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 LSB 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 insurance plan, which provides partial health insurance benefits for certain early retired former employees of LSB Bank, which was curtailed in 2007.

The disclosures presented represent combined information for all of the plans. The health benefit plan is not a material part of the aggregate information.

The pension plans, the retiree health insurance 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 final years of employment. Contributions to the pension plans 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 common stocks. The following table outlines the changes in these pension obligations, assets and funded status for the years ended December 31, 2008 and 2007, and the assumptions and components of net periodic pension cost for the two or three years in the period ended December 31, 2008 (in thousands):


	2008			2007
Change in benefit obligation
Projected benefit obligation at beginning of year	$	24,537		$	14,407
Obligation assumed in acquisition		—			10,425
Service cost		213			156
Interest cost		1,520			1,085
Actuarial (gain) loss		(103	)		(913	)
Benefits paid		(1,423	)		(623	)
Curtailment		(640	)		—

Projected benefit obligation at end of year		24,104			24,537

Change in plan assets
Fair value of plan assets at beginning of year		20,526			13,248
Assets acquired in acquisition		—			7,567
Actual return on plan assets		(4,870	)		(73	)
Employer contribution		411			407
Benefits paid		(1,423	)		(623	)

Fair value of plan assets at end of year		14,644			20,526

Funded status at end of year
Plan assets less projected benefit obligation		(9,460	)		(4,011	)
Unrecognized net actuarial loss		—			82
Unrecognized transitional obligation		—			61

Pension asset (liability)	$	(9,460	)	$	(3,868	)


	2008			2007
Amounts recognized in the consolidated balance sheets consist of:
Pension liability	$	(9,460	)	$	(3,868	)
Deferred tax asset		4,142			1,651
Accumulated comprehensive income, net		4,637			932

Net amount recognized	$	(681	)	$	(1,285	)


	2008			2007			2006
Components of net periodic pension cost
Service	$	213		$	156		$	796
Interest		1,520			1,085			890
Expected return on plan assets		(1,630	)		(1,262	)		(879	)
Amortization of prior service cost		82			2			66
Amortization of transition obligation		—			10			10
Amortization of net gain (loss)		54			5			217
Curtailment		(241	)		—			589

Net periodic pension cost costcost	$	(2	)	$	(4	)	$	1,689


Weighted-average assumptions
Discount rate		6.25	%		6.25	%		5.75	%
Expected return on plan assets		8.25	%		8.25	%		7.50	%
Rate of compensation increases		4.75	%		4.75	%		4.50	%

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, 2008, is included in the accompanying table.


	Market Value as of		Actual Allocation
	December 31, 2008		as of December 31,			Long-Term
Plan Assets	(in thousands)		2008			Allocation Target
Equity securities	$	7,007		47.8	%		40% - 75	%
Debt securities		7,637		52.2	%		25% - 60	%

Total	$	14,644		100	%		100	%

The assumed expected return on assets considers the current level of expected returns on risk-free investments (primarily government bonds), the historical level of risk premium associated with the other asset classes in the portfolio and the expectation for future returns of each asset class. The expected return of each asset class is weighted based on the target allocation to develop the expected long-term rate of return on assets. This resulted in the selection of the 8.25% rate used in 2008 and to be used for 2009. The required contributions for 2008 were approximately $410,000, and the required contributions for 2009 are expected to be approximately $1,012,000. The expected benefit payments for the next ten years are as follows: (1) 2009 — $1,142,000, (2) 2010 - $1,231,000, (3) 2011 — $1,285,000, (4) 2012 — $1,409,000, (5) 2013 — $1,516,000, and (6) 2014 through 2018 — $8,824,000.

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 $878,000 for 2008, $587,000 for 2007 and $220,000 for 2006.

Three deferred compensation plans allow the directors of the Company to defer the compensation they earn. Each plan participant makes an annual election to either receive that year’s compensation currently 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, 2008 and 2007 were $2,412,000 and $3,357,000, respectively. The third plan acquires shares of the Company’s common stock in the open market and holds these shares 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, 2008, the Bank had undivided profits of approximately $67.1 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 CPP, regulatory approval is 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.

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, 2008, 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).


											To Be Well
						For Capital					Capitalized Under
						Adequacy					Prompt Corrective
	Actual					Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2008

Total Capital (To Risk Weighted Assets)
Consolidated	$	217,130		12.4	%	$	140,110		>8.0	%		N/A
Bank		187,810		10.8			139,745		>8.0			174,681		>10.0	%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated		194,990		11.2			70,055		>4.0			N/A
Bank		165,726		9.5			69,872		>4.0			104,809		>6.0	%
Tier 1 Capital (To Average Assets)
Consolidated		194,990		9.4			83,223		>4.0			N/A
Bank		165,726		8.0			83,171		>4.0			103,964		>5.0	%

December 31, 2007

Total Capital (To Risk Weighted Assets)
Consolidated	$	179,870		11.2	%	$	128,364		>8.0	%		N/A
Bank		177,813		11.1			128,294		>8.0			160,368		>10.0	%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated		159,681		9.9			64,193		>4.0			N/A
Bank		157,640		9.8			64,147		>4.0			96,221		>6.0	%
Tier 1 Capital (To Average Assets)
Consolidated		159,681		7.8			81,366		>4.0			N/A
Bank		157,640		7.8			81,298		>4.0			101,622		>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 SFAS 157, 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 SFAS 157. 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 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 is considered to be a reasonable estimate of fair value.

Whole 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):


	2008					2007
	Carrying			Estimated		Carrying			Estimated
	Value			Fair Value		Value			Fair Value
Financial assets:
Cash and short term investments	$	87,860		$	87,860	$	60,862		$	60,862
Investment securities		288,572			288,804		369,423			369,555
Loans		1,604,525			1,585,355		1,490,084			1,482,655
Less allowance for loan losses		(35,805	)		—		(30,370	)		—

Net loans		1,568,720			1,585,355		1,459,714			1,482,655
Financial liabilities:
Deposits		1,663,463			1,674,364		1,627,720			1,637,043
Federal funds purchased and retail repurchase agreements		5,041			5,041		27,727			27,727
Wholesale repurchase agreements		46,000			47,328		46,023			46,305
Junior subordinated notes		25,774			25,774		25,774			25.774
FHLB borrowings		139,000			141,693		118,000			120,541

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

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

December 31, 2008 — Assets measured at fair value, recurring


	Quoted prices in
	active markets for		Significant other		Significant
	identical assets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
Available for sale securities	$	173,892	$	87,643		—
Mortgage loans held for sale		—		937		—

Total	$	173,892	$	88,580		—

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, 2008 — Assets measured at fair value, non-recurring


	Quoted prices in
	active markets for		Significant other		Significant
	identical assets		observable inputs		unobservable inputs
	(Level 1)		(Level 2)		(Level 3)
Impaired loans, net of allowance		—		—	$	81,581

Total		—		—	$	81,581

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 resulted in $49.9 million of goodwill and $6.6 million of core deposit intangibles. The goodwill acquired 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.

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.


(Dollars in thousands)
Cash and cash equivalents	$	14,803
Loans receivable, net of allowance for credit losses		632,576
Investment securities		252,223
Premises and equipment		22,523
Core deposit intangible		6,613
Goodwill		49,947
Other assets		50,184
Deposits		(734,131	)
Borrowings		(161,044	)
Other liabilities		(13,689	)

Investment in subsidiary, net of capitalized acquisition costs	$	120,005

The 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 years ended December 31, 2007 and 2006, as if FNB had been acquired on January 1, 2007 and 2006 respectively. 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 periods presented, or of results which may occur in the future.

A summary of pro forma financial statements is as follows:


	For the Year			For the Year
	Ended			Ended
	December 31, 2007			December 31, 2006
	(in thousands, except per share data)
	(unaudited)

Net interest income		73,818			88,067
Provision for loan losses		20,943			6,945


Net interest income after provisions for loan losses		52,875			81,122
Noninterest income		22,442			19,798
Noninterest expense		80,511			73,374


Income (loss) before income tax expense		(5,194	)		27,546
Income tax expense		(2,932	)		9,082


Net income (loss)	$	(2,262	)	$	18,464


Weighted Average Common Shares:
Basic		15,694,068			16,033,304
Diluted		15,694,068			16,243,704

Per Common Share Data:
Basic income (loss)	$	(0.14	)	$	1.15
Diluted income (loss)		(0.14	)		1.14

Note 22 — U.S. Treasury Capital Purchase Program

Pursuant to the U.S. Treasury’s 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 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. The Series A Preferred Stock can be redeemed in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years with any funds. The carrying value of the Warrant of $1,496,000 was estimated on the date of the grant using the Black-Scholes option-pricing model. The Series A Preferred Stock will pay cumulative dividends of 5 percent for the first five years and 9 percent thereafter, unless Bancorp redeems the shares.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its CEO, CFO, and Chief Accounting Officer (“CAO”), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2008. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of December 31, 2008, 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, 2008. 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, 2008, 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.

•

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, 2008. This Report of Independent Registered Public Accounting Firm begins on page 52 in Item 8, above.

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 2008. 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.

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”, “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 2009,” which section is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements. The following financial statements and supplementary data are included in Item 8 of this report.


Financial Statements	Page

Quarterly Financial Information		50

Reports of Independent Registered Public Accounting Firm		51

Consolidated Balance Sheets as of December 31, 2008 and 2007		55

Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006		56

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006		57

Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		58

Notes to Consolidated Financial Statements		59

(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 arrangements required to be filed as exhibits to this Form 10-K are listed as exhibits 10.1 through 10.38 (excluding exhibits 10.17, 10.18 and 10.36) in the Exhibit Index.

(b) The exhibits to the Form 10-K begin on page 92 of this Report.


Exhibit
No.		Description

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

3.2		Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, filed with the SEC on November 4, 2004 (SEC File No. 000-11448).

3.3		Amendments to Amended and Restated Bylaws, incorporated by reference to Item 5.03 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448).

3.4		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).


Exhibit
No.		Description

4.1		Specimen certificate of common stock, $5.00 par value, incorporated by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 9, 2007 (SEC File No. 000-11448).

4.2		Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.02 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086).

4.3		Guarantee Agreement, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.03 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086).

4.4		Indenture, regarding Trust Preferred Securities, dated August 23, 2005, incorporated herein by reference to Exhibit 4.04 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2005, filed with the SEC (SEC File No. 000-13086).

4.5		Articles of Amendment, filed with the North Carolina Department of the Secretary of State on December 12, 2008, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).

4.6		Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).

4.7		Warrant for Purchase of Shares of Common Stock issued by Bancorp to the United States Department of the Treasury on December 12, 2008, incorporated herein by reference to Exhibit 4.3 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).

10.1		Benefit Equivalency Plan of FNB Southeast, effective January 1, 1994 incorporated herein by reference to Exhibit 10 of the Quarterly Report on Form 10-QSB for the fiscal quarter ended June 30, 1995, filed with the SEC (SEC File No. 000-13086).

10.2		1994 Director Stock Option Plan, incorporated herein by reference to Exhibit 4 of the Registration Statement on Form S-8 filed with the SEC on July 15, 1994 (SEC File No. 33-81664).

10.3		1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995 filed with the SEC on March 28, 1996 (SEC File No. 000-11448).

10.4		Omnibus Equity Compensation Plan, incorporated herein by reference to Exhibit 10(B) of the Annual Report on Form 10-KSB40 for the fiscal year ended December 31, 1996, filed with the SEC on March 31, 1997 (SEC File No. 000-13086).

10.5		Amendment to Benefit Equivalency Plan of FNB Southeast, effective January 1, 1998., incorporated herein by reference to Exhibit 10.16 of the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed with the SEC on March 25, 1999 (SEC File No. 000-13086)

10.6		Amendment Number 1 to 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 4.5 of the Registration Statement on Form S-8, filed with the SEC on May 16, 2001 (SEC File No. 333-61046).

10.7		Long Term Stock Incentive Plan for certain senior management employees of FNB Southeast incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2002, filed with the SEC on March 27, 2003 (SEC File No. 000-13086).


Exhibit
No.		Description

10.8		Form of Employment Continuity Agreement effective as of January 1, 2004 between LSB and Robert E. Lineback, Jr. and Philip G. Gibson with a Schedule setting forth the material details in which such documents differ from the document a copy of which is filed, incorporated herein by reference to Exhibit 10.10 of the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 15, 2004 (SEC File No. 000-11448).

10.9		Form of Employment Continuity Agreement effective as of January 1, 2004 between LSB and Ronald E. Coleman, D. Gerald Sink, Robin A. Huneycutt and Ronald W. Sink 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 10.11 of the Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC on March 15, 2004 (SEC File No. 000-11448).

10.10		Form of Stock Option Award Agreement for a Director adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).

10.11		Form of Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2004 (SEC File No. 000-11448).

10.12		Form of Amendment to the applicable Grant Agreements under the 1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).

10.13		Form of Amendment to the Incentive Stock Option Award Agreement for an Employee adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.3 of the Current Report on Form 8-K filed with the SEC on April 15, 2005 (SEC File No. 000-11448).

10.14		Restated Form of Director Fee Deferral Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).

10.15		Form of Stock Appreciation Rights Award Agreement adopted under LSB Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K filed with the SEC on December 23, 2005 (SEC File No. 000-11448).

10.16		Employment Agreement dated January 25, 2007, between FNB and FNB Southeast, as employer, and Pressley A. Ridgill, President and Chief Executive Officer of the Bank and President of Bancorp, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on January 30, 2007 (SEC File No. 000-13086).

10.17		Agreement and Plan of Merger by and between LSB and FNB, incorporated herein by reference as Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on February 27, 2007 (SEC File No. 000-11448).

10.18		Agreement and Plan of Bank Merger by and between FNB Southeast, LSB Bank, LSB and FNB, incorporated herein by reference as Exhibit 2.2 of the Current Report on Form 8-K filed with the SEC on February 27, 2007 (SEC File No. 000-11448).

10.19		Amendment and Waiver to Employment and Change of Control Agreement, among FNB, FNB Southeast and Pressley A. Ridgill incorporated herein by reference to Exhibit 10.27 of the Registration Statement on Form S-4 POS filed with the SEC on June 18, 2007 (SEC File No. 000-11448).

10.20		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).


Exhibit
No.		Description

10.21		Amendment to the FNB Directors and Senior Management Deferred Compensation Plan Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, FNB Southeast and FNB, dated July 31, 2007, incorporated herein by reference to Exhibit 99.2 of the Current Report on Form 8-K, filed with the SEC on August 3, 2007 (SEC File No. 000-11448).

10.22		Employment and Change of Control Agreement among Bancorp, LSB Bank and Michael Shelton, dated September 27, 2007 incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on October 1, 2007 (SEC File No. 000-11448).

10.23		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 14, 2008 (SEC File No. 000-11448).

10.24		Employment and Change of Control Agreement with Jerry W. Beasley, incorporated herein by reference to Exhibit 99.3 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.25		Employment and Change of Control Agreement with Robin S. Hager, incorporated herein by reference to Exhibit 99.4 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.26		Employment and Change of Control Agreement with Paul McCombie, incorporated herein by reference to Exhibit 99.5 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.27		Employment and Change of Control Agreement with George Richard Webster, incorporated herein by reference to Exhibit 99.6 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.28		Directors and Senior Management Deferred Compensation Plan Trust Agreement between FNB Southeast and Morgan Trust Company, incorporated herein by reference to Exhibit 99.7 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.29		Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy Trust Agreement among Regions bank d/b/a/Regions Morgan Keegan Trust, Bancorp and the Bank, incorporated herein by reference to Exhibit 99.8 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.30		Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.9 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.31		First Amendment to the Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, incorporated herein by reference to Exhibit 99.10 of the Current Report on Form 8-K, filed with the SEC on March 14, 2008 (SEC File No. 000-11448).

10.32		Bancorp Amended and Restated Long Term Stock Incentive Plan, formerly the “FNB Long Term Stock Incentive Plan” (the “2006 Omnibus Plan”), incorporated herein by reference to Exhibit 10.27 of the Quarterly Report on Form 10-Q filed with the SEC on May 9, 2008 (SEC File No. 000-11448).

10.33		Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q, filed with the SEC on August 11, 2008 (SEC File No. 000-11448).

10.34		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).


Exhibit
No.		Description

10.35		Employment and Change of Control Agreement with David P. Barksdale, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K, filed with the SEC on October 17, 2008 (SEC File No. 000-11448).

10.36		Letter Agreement, dated December 12, 2008, between Bancorp and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on December 12, 2008 (SEC File No. 000-11448).

10.37		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).

10.38		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).

16.1		Letter from Turlington and Company, L.L.P., regarding change in certifying accountant, dated September 18, 2007, incorporated herein by reference to Exhibit 16.1 of the Current Report on Form 8-K, filed with the SEC on September 18, 2007 (SEC File No. 000-11448).

21.01		Schedule of Subsidiaries

23.01		Consent of Grant Thornton LLP

23.02		Consent of Turlington and Company, 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		Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


NEWBRIDGE BANCORP
Date: March 11, 2009	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 11, 2009

/s/ Michael W. Shelton Michael W. Shelton	Executive Vice President, Chief Financial Officer, Treasurer (Principal Financial Officer)	March 11, 2009

/s/ Richard M. Cobb Richard M. Cobb	Senior Vice President, Chief Accounting Officer, Controller (Principal Accounting Officer)	March 11, 2009

/s/ Robert F. Lowe Robert F. Lowe	Chairman of the Board	March 11, 2009

/s/ Barry Z. Dodson Barry Z. Dodson	Vice Chairman of the Board	March 12, 2009

/s/ Michael S. Albert Michael S. Albert	Director	March 11, 2009

/s/ Gary G. Blosser Gary G. Blosser	Director	March 12, 2009

/s/ J. David Branch J. David Branch	Director	March 12, 2009

/s/ C. Arnold Britt C. Arnold Britt	Director	March 12, 2009

/s/ Robert C. Clark Robert C. Clark	Director	March 12, 2009

/s/ Alex A. Diffey, Jr. Alex A. Diffey, Jr.	Director	March 13, 2009

/s/ Joseph H. Kinnarney Joseph H. Kinnarney	Director	March 13, 2009


Index		Page

PART I

Item 1.	Business		4
Item 1A.	Risk Factors		14
Item 1B.	unresolved staff comments		20
Item 2.	Properties		21
Item 3.	Legal Proceedings		22
Item 4.	Submission of Matters to a Vote of Security Holders		22

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		23
Item 6.	Selected Financial Data		26
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		50
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		83
Item 9A.	Controls and Procedures		83
Item 9B.	Other Information		83

PART III

Item 10.	Directors, Executive Officers And Corporate Governance		84
Item 11.	Executive Compensation		84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		84
Item 13.	Certain Relationships and Related Transactions and director independence		84
Item 14.	Principal Accountant Fees and Services		84

PART IV

Item 15.	Exhibits and Financial Statement Schedules		85
	Signatures		90
EX-21.01
EX-23.01
EX-23.02
EX-31.01
EX-31.02
EX-32.01


	Average
	Interest			Estimated Fair
	Rate			Value
Financial assets:
Debt securities		4.58	%	$	274,908
Loans:
Fixed rate		6.72			689,923
Variable rate		4.78			931,237

Total				$	1,896,068


Financial liabilities:
NOW		0.39		$	172,943
MMI		2.08			401,098
Savings		0.12			39,692
Time deposits		3.74			911,049
Wholesale repurchase agreements		4.12			47,328
FHLB borrowing		3.13			141,693
Junior subordinated notes		5.22			25,774
Federal funds purchased and retail repurchase agreements		0.70			5,041

Total				$	1,744,618


Name		Jurisdiction of Organization

NewBridge Bank ⁽¹⁾		North Carolina

Peoples Finance Company of Lexington, Inc.⁽²⁾		North Carolina

LSB Properties, Inc.⁽²⁾		North Carolina

Lexington Leasing Corp. ^{(2) (3)}		North Carolina

LSB Financial Services, Inc. ^{(2) (3)}		North Carolina

Prince George Court Holdings, Inc.⁽²⁾		South Carolina

FNB Financial Services Capital Trust I ⁽⁴⁾		Delaware


⁽¹⁾		All banking offices in NC and VA do business under the name “NewBridge Bank”.

⁽²⁾		Wholly owned subsidiary of NewBridge Bank.

⁽³⁾		Inactive.

⁽⁴⁾		In 2005, FNB formed a wholly owned Delaware statutory trust. All of the common securities of the trust were owned by FNB, and were acquired by the Company upon the Merger.

	1.		I have reviewed this Annual Report on Form 10-K of NewBridge Bancorp;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


	/s/ pressley a. ridgill
	Pressley A. Ridgill
	President and Chief Executive Officer


	/s/ Michael W. Shelton
	Michael W. Shelton
	Chief Financial Officer



Dated: March 16, 2009	/s/ pressley a. ridgill
	Pressley A. Ridgill
	President and Chief Executive Officer


Dated: March 16, 2009	/s/ Michael W. Shelton
	Michael W. Shelton
	Chief Financial Officer