10-Q 1 v392102_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:

September 30, 2014

Commission File Number: 000-11448

NewBridge Bancorp

(Exact name of Registrant as specified in its Charter)

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

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

(336) 369-0900

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

Smaller reporting company ¨

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

At November 6, 2014, the registrant had 34,008,795 shares of Class A Common Stock
outstanding and 3,186,748 shares of Class B Common Stock outstanding.

NEWBRIDGE BANCORP

FORM 10-Q

TABLE OF CONTENTS

		Page

	PART I Financial Information

Item 1	Financial Statements	3
	Consolidated Balance Sheets September 30, 2014 and December 31, 2013	3
	Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income Three Months and Nine Months Ended September 30, 2014 and 2013	5
	Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2014 and 2013	6
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2014 and 2013	7
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4	Controls and Procedures	53

	PART II Other Information

Item 6	Exhibits	54

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

NewBridge Bancorp and Subsidiary

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30,			December 31,
	2014			2013
	(Unaudited)
Assets
Cash and due from banks	$	37,350		$	29,598
Interest-bearing bank balances		2,407			3,915
Investment certificates of deposit		16,669			-
Loans held for sale		3,303			3,530
Available for sale investment securities		363,831			301,549
Held to maturity investment securities (market value of $133,467 and $65,439 at September 30, 2014 and December 31, 2013, respectively)		133,083			67,317
Loans		1,720,964			1,416,703
Less allowance for credit losses		(22,501	)		(24,550	)
Net loans		1,698,463			1,392,153
Premises and equipment		45,259			44,108
Goodwill and other intangible assets		27,108			8,388
Real estate acquired in settlement of loans		3,580			7,620
Bank-owned life insurance		52,571			48,161
Deferred tax assets		34,143			36,779
Other assets		24,983			22,114
Total assets	$	2,442,750		$	1,965,232

Liabilities
Noninterest-bearing deposits	$	310,441		$	240,979
NOW deposits		499,184			439,624
Savings and money market deposits		471,890			421,527
Time deposits		543,619			451,866
Total deposits		1,825,134			1,553,996
Borrowings from the Federal Home Loan Bank		274,000			170,000
Other borrowings		99,974			59,774
Accrued expenses and other liabilities		15,211			14,670
Total liabilities		2,214,319			1,798,440

Shareholders’ Equity
Preferred stock – Authorized 30,000,000 shares no par value		-			15,000
Series A preferred stock
Reserved – 52,372 shares liquidation preference $1,000 per share; issued and outstanding – none at 9/30/14 and 15,000 at 12/31/2013
Common stock		275,369			210,297
Class A, no par value – Authorized 90,000,000 shares; issued and outstanding – 34,007,093 at 9/30/2014 and 25,291,568 at 12/31/2013
Class B, no par value – Authorized 10,000,000 shares; issued and outstanding – 3,186,748 at 9/30/2014 and 12/31/2013
Directors’ deferred compensation plan		(324	)		(468	)
Accumulated deficit		(47,506	)		(56,880	)
Accumulated other comprehensive income (loss)		892			(1,157	)
Total shareholders’ equity		228,431			166,792
Total liabilities and shareholders’ equity	$	2,442,750		$	1,965,232

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Income

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

	Three Months Ended					Nine Months Ended
	September 30					September 30
	2014		2013			2014			2013
Interest Income
Interest and fees on loans	$	18,456	$	13,969		$	52,073		$	41,135
Interest on investment securities
Taxable		3,603		2,975			9,696			8,546
Tax exempt		281		196			717			576
Interest bearing bank balances and federal funds sold		39		2			80			15
Total interest income		22,379		17,142			62,566			50,272

Interest Expense
Deposits		1,033		737			2,940			2,247
Borrowings from the Federal Home Loan Bank		205		271			571			768
Other borrowings		665		338			1,688			994
Total interest expense		1,903		1,346			5,199			4,009
Net interest income		20,476		15,796			57,367			46,263
Provision for credit losses		89		33			833			2,049
Net interest income after provision for credit losses		20,387		15,763			56,534			44,214

Noninterest Income
Retail banking		2,657		2,614			7,909			7,592
Mortgage banking services		283		302			653			1,347
Wealth management services		719		682			2,148			1,932
Gain on sales of investment securities		-		458			-			736
Bank-owned life insurance		292		317			1,069			1,107
Other		153		124			857			671
Total noninterest income		4,104		4,497			12,636			13,385

Noninterest Expense
Personnel		8,685		8,052			26,671			23,387
Occupancy		1,265		1,034			3,692			3,073
Furniture and equipment		948		840			2,803			2,510
Technology and data processing		1,209		1,032			3,499			3,071
Legal and professional		715		603			2,178			2,031
FDIC insurance		407		444			1,220			1,329
Real estate acquired in settlement of loans		158		152			494			(285	)
Acquisition-related		10		69			4,910			69
Other		3,191		2,185			8,631			6,809
Total noninterest expense		16,588		14,411			54,098			41,994
Income before income taxes		7,903		5,849			15,072			15,605
Income tax expense (benefit)		2,804		2,861			5,361			(3,740	)
Net Income		5,099		2,988			9,711			19,345
Dividends and accretion on preferred stock		-		(208	)		(337	)		(1,616	)
Net Income available to common shareholders	$	5,099	$	2,780		$	9,374		$	17,729

Earnings per share
Basic	$	0.14	$	0.10		$	0.27		$	0.68
Diluted	$	0.14	$	0.10		$	0.27		$	0.61

Weighted average shares outstanding
Basic		37,166,736		28,478,316			34,186,201			26,025,601
Diluted		37,576,669		28,572,565			34,721,577			29,203,192

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2014			2013			2014			2013
Net Income	$	5,099		$	2,988		$	9,711		$	19,345
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of $(908), $(242), $1,425, and $(3,541), respectively		(1,426	)		(372	)		2,238			(5,428	)
Reclassification adjustment for (gains) losses included in net income, net of tax of $0, $(181), $0, and $(291), respectively		-			(277	)		-			(445	)
Change in fair value of cash flow hedge:
Change in unrecognized gain (loss) on cash flow hedge, net of tax of $(99), $0, $(99), and $0, respectively		(160	)		-			(160	)		-
Defined benefit pension plans:
Amortization of post retirement benefit, net of tax of $(6), $(6), $(18) and $(18), respectively		(10	)		(9	)		(29	)		(28	)
Adjustment to deferred tax asset resulting from North Carolina state income tax rate reduction		-			(135	)		-			(135	)
Total other comprehensive income (loss)		(1,596	)		(793	)		2,049			(6,036	)
Comprehensive Income	$	3,503		$	2,195		$	11,760		$	13,309

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2014 and 2013

(Unaudited; dollars in thousands)

																				Directors’						Accumulated
	Preferred			Preferred			Preferred			Common Stock										Deferred						Other			Total
	Stock			Stock			Stock			Class A		Class B					Paid-In			Compensation			Accumulated			Comprehensive			Shareholders’
	Series A			Series B			Series C			Shares		Shares		Amount			Capital			Plan			Deficit			Income (Loss)			Equity
Balances at December 31, 2012	$	52,089		$	42,246		$	14,022			15,655,868		-	$	78,279		$	83,259		$	(468	)	$	(75,697	)	$	2,284		$	196,014
Net Income																								19,345						19,345
Change in accumulated other comprehensive income (loss) net of deferred income taxes																											(6,036	)		(6,036	)
Conversion of preferred stock					(42,246	)		(14,022	)		9,601,262		3,186,748		139,527			(83,259	)											-
Expense of stock issuance															(117	)														(117	)
Redemption of preferred stock		(37,372	)																					(100	)					(37,472	)
Dividends and accretion on preferred stock		264																						(1,616	)					(1,352	)
Repurchase of stock warrant															(7,779	)														(7,779	)
Stock issuance pursuant to restricted stock units											34,438				(78	)														(78	)
Excess tax benefits from stock-based awards															26															26
Stock-based compensation															295															295
Balances at September 30, 2013	$	14,981		$	-		$	-			25,291,568		3,186,748	$	210,153		$	-		$	(468	)	$	(58,068	)	$	(3,752	)	$	162,846
Balances at December 31, 2013	$	15,000		$	-		$	-			25,291,568		3,186,748	$	210,297		$	-		$	(468	)	$	(56,880	)	$	(1,157	)	$	166,792
Net Income																								9,711						9,711
Change in accumulated other comprehensive income (loss) net of deferred income taxes																											2,049			2,049
Redemption of preferred stock		(15,000	)																											(15,000	)
Dividends on preferred stock																								(337	)					(337	)
Acquisition of CapStone Bank											8,075,228				62,264															62,264
Expense of stock issuance															(383	)														(383	)
Exercise of stock options											628,045				2,598															2,598
Stock issuance pursuant to restricted stock units											12,252				(49	)														(49	)
Excess tax benefits from stock-based awards															81															81
Stock-based compensation															561															561
Distributions																					144									144
Balances at September 30, 2014	$	-		$	-		$	-			34,007,093		3,186,748	$	275,369		$	-		$	(324	)	$	(47,506	)	$	892		$	228,431

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited; dollars in thousands)

	Nine Months Ended
	September 30
	2014			2013
Cash Flow from operating activities
Net Income	$	9,711		$	19,345
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,143			2,746
Securities premium amortization and discount accretion, net		493			336
(Gain) loss on sales of securities		-			(736	)
Earnings on bank-owned life insurance		(1,069	)		(1,107	)
Mortgage banking services		(653	)		(1,347	)
Originations of loans held for sale		(66,025	)		(72,975	)
Proceeds from sales of loans held for sale		66,906			80,042
Accretion on acquired loans		(4,134	)		-
Excess tax benefits from stock-based awards		(81	)		(26	)
Deferred income tax expense (benefit)		5,361			(3,740	)
Writedowns and (gains) losses on sales of real estate acquired in settlement of loans, net		115			(742	)
Provision for credit losses		833			2,049
Stock-based compensation		561			295
(Increase) decrease in income taxes receivable		316			-
(Increase) decrease in interest earned but not received		(84	)		(39	)
Increase (decrease) in interest accrued but not paid		(84	)		(32	)
Net (increase) decrease in other assets		(1,418	)		(2,054	)
Net increase (decrease) in other liabilities		(1,850	)		(2,428	)
Net cash provided by (used in) operating activities		13,041			19,587

Cash Flow from investing activities
Cash received from acquisition		6,198			-
Proceeds from maturities of investment certificates of deposit		1,489			-
Purchases of securities available for sale		(35,857	)		(94,858	)
Purchases of securities held to maturity		(69,846	)		(53,296	)
Proceeds from sales of securities available for sale		9,045			65,711
Proceeds from maturities, prepayments and calls of securities available for sale		16,919			109,334
Proceeds from maturities, prepayments and calls of securities held to maturity		4,138			82
Net (increase) decrease in loans		(18,432	)		(117,554	)
Proceeds from sales of loans		5,974			-
Purchases of premises and equipment		(1,895	)		(1,727	)
Proceeds from sales of premises and equipment		1,322			709
Proceeds from sales of real estate acquired in settlement of loans		5,684			6,672
Net cash provided by (used in) investing activities		(75,261	)		(84,927	)

Cash Flow from financing activities
Net increase (decrease) in demand deposits and NOW accounts		46,576			23,771
Net increase (decrease) in savings and money market accounts		(28,436	)		15,109
Net increase (decrease) in time deposits		(19,930	)		40,637
Net increase (decrease) in borrowings from Federal Home Loan Bank		43,000			49,700
Net increase (decrease) in other borrowings		40,200			-
Dividends paid		(337	)		(1,352	)
Redemption of preferred stock		(15,000	)		(37,472	)
Repurchase of stock warrant		-			(7,779	)
Exercise of stock options		2,598			-
Excess tax benefits from stock-based awards		81			26
Cash paid in lieu of issuing shares pursuant to restricted stock units		(49	)		(78	)
Common stock distributed		144			-
Expense of stock issuance		(383	)		(117	)
Net cash provided by (used in) financing activities		68,464			82,445
Increase (decrease) in cash and cash equivalents		6,244			17,105
Cash and cash equivalents at the beginning of the period		33,513			39,791
Cash and cash equivalents at the end of the period	$	39,757		$	56,896

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited; dollars in thousands)

	Nine Months Ended
	September 30
	2014			2013

Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest	$	4,867		$	4,041
Income taxes		35			-

Supplemental disclosures of noncash transactions
Transfer of loans to real estate acquired in settlement of loans	$	1,600		$	3,270
Unrealized gains (losses) on securities available for sale:
Change in securities available for sale		3,663			(9,705	)
Change in deferred income taxes		(1,425	)		3,832
Change in shareholders’ equity		(2,238	)		5,873
Unrealized gain (loss) on cash flow hedge:
Change in fair value of cash flow hedge		(259	)		-
Change in deferred income taxes		99			-
Change in shareholders’ equity		160			-
Conversion of preferred stock		-			56,268
Acquisition:
Fair value of assets acquired		381,589			-
Fair value of liabilities assumed		336,730			-

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and provisions for credit losses considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

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

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

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2014 (SEC File No. 000-11448) (the “Annual Report”). This Quarterly Report should be read in conjunction with the Annual Report.

Recent accounting pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This Update provides guidance on when an in-substance repossession or foreclosure occurs, which requires the mortgage loan to be derecognized and the related real estate be recognized. The amendments clarify that an in-substance repossession or foreclosure occurs upon either (i) a creditor obtaining legal title to the residential real estate or (ii) the borrower conveying all interest in the residential real estate through a deed in lieu of foreclosure (or a similar legal agreement). Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process. The amendments are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The amendments can be adopted on either a modified retrospective or a prospective method, and early adoption is permitted. This Update will require additional disclosure by the Company but will not otherwise materially affect our financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 660).” This Update sets new guidance to clarify principles for recognizing revenue and develops a common revenue standard with the International Accounting Standards Board. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently evaluating the effect of adopting ASU 2014-09 on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (Topic 860).” The amendments in this Update require two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Also, the amendments in this Update require disclosure for certain transactions accounted for as a sale and for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings. The accounting changes and the disclosure for certain transactions accounted for as a sale in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2015. Early adoption for a public business entity is prohibited. The Company is currently evaluating the effect of adopting ASU 2014-11 on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (i) the loan has a government guarantee that is not separable from the loan before foreclosure; (ii) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (iii) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted ASU 2014-04. The Company does not anticipate that the adoption of ASU 2014-14 will have a material effect on its consolidated financial statements as the Company has not historically had a material amount of government-guaranteed mortgage loans.

Reclassification

Certain items for 2013 have been reclassified to conform to the 2014 presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.

Note 2 – Business Combinations and Acquisitions

On April 1, 2014, the Company completed its acquisition of CapStone Bank (“CapStone”), headquartered in Raleigh, North Carolina, with branches in Cary, Clinton, Fuquay-Varina and Raleigh. Under the terms of the Agreement and Plan of Combination and Reorganization, CapStone’s shareholders received 2.25 shares of the Company’s Class A common stock for each share of CapStone common stock. The Company issued 8,075,228 shares of Class A common stock (based on 3,589,028 shares of CapStone common stock issued and outstanding as of the closing date) at a price of $7.14 per common share, the closing stock price of the Class A common stock on March 31, 2014. The implied value of the consideration received by CapStone shareholders was $16.065 per share of CapStone common stock. The total purchase price was $62.3 million, including the conversion of 617,270 CapStone stock options having a fair value of $4.6 million. No cash was issued in the transaction other than an immaterial amount of cash paid in lieu of fractional shares. The acquisition was a tax-free transaction.

The transaction was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of CapStone, as of April 1, 2014, were recorded at their respective fair values, and the excess of the acquisition consideration over the fair value of CapStone’s net assets was allocated to goodwill. For the acquisition of CapStone, estimated fair values of assets acquired and liabilities assumed are based on the information available, and the Company believes this information provides a reasonable basis for determining fair values. Management continues to evaluate these fair values, which are subject to revision as more detailed analyses are completed and additional information becomes available. Any changes resulting from the evaluation of these or other estimates as of the acquisition date may change the amount of the fair values recorded.

The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed based on their estimated fair values (dollars in thousands, except per share data):

	April 1, 2014
Fair value of assets acquired
Cash and cash equivalents	$	6,198
Investment certificates of deposit		18,250
Federal funds sold		1,000
Investment securities		49,357
Loans		292,848
Premises and equipment		3,185
Core deposit intangible		2,490
Real estate acquired in settlement of loans		164
Deferred tax assets		3,740
Other assets		4,357
Total assets acquired		381,589
Fair value of liabilities assumed
Deposits		273,665
Borrowings from the Federal Home Loan Bank		61,268
Other liabilities		1,797
Total liabilities assumed		336,730
Net assets acquired	$	44,859
Purchase price
Shares of common stock issued		8,075,228
Purchase price per share of the Company’s common stock	$	7.14
Company common stock issued and cash exchanged for fractional shares		57,658
Fair value of converted stock options		4,606
Total purchase price	$	62,264
Goodwill	$	17,405

During the third quarter of 2014, adjustments of $509,000 were made to deferred tax assets acquired and goodwill.

Purchased credit-impaired (“PCI”) loans acquired totaled $65.8 million at estimated fair value, and acquired performing loans totaling $227.0 million at estimated fair value were not credit impaired. The gross contractual amount receivable for PCI loans and acquired performing loans was $70.6 million and $230.5 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected is $2.5 million. Goodwill recorded for CapStone represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes. It is not practicable to present the revenue and earnings of CapStone since the acquisition as CapStone has not been maintained as a separate accounting entity.

Pro Forma

The following tables reflect (dollars in thousands) the pro forma total net interest income, noninterest income and net income for the three months and nine months ended September 30, 2014 and 2013 as though the acquisition of CapStone had taken place on January 1, 2013. The pro forma results are not adjusted for acquisition-related expense, and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2013, nor of future results of operations.

	Three Months Ended September 30
	2014		2013

Net interest income	$	20,479	$	19,587
Noninterest income		4,105		4,959
Net income		5,138		4,146

	Nine Months Ended September 30
	2014		2013

Net interest income	$	61,064	$	56,901
Noninterest income		12,871		19,079
Net income		9,909		26,473

Acquisition-related expense during the first nine months of 2014 totaled $4.9 million. These costs are recorded as noninterest expense as incurred. Acquisition-related expense during the first nine months of 2013 was $69,000 and was related to the acquisition of Security Savings Bank, SSB (“Security Savings”). The components of acquisition-related expense for 2014 are as follows (dollars in thousands):

Personnel	$	1,584
Furniture and equipment		14
Technology and data processing		2,674
Legal and professional		489
Marketing		6
Stationery, printing and supplies		70
Travel, dues and subscriptions		37
Other		36

Total acquisition-related expense	$	4,910

Note 3 — Net Income Per Share

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

	For the Three Months Ended September 30				For the Nine Months Ended September 30
	2014		2013		2014		2013
Basic:
Net income available to common shareholders	$	5,099	$	2,780	$	9,374	$	17,729
Weighted average shares outstanding		37,166,736		28,478,316		34,186,201		26,025,601
Net income per share, basic	$	0.14	$	0.10	$	0.27	$	0.68

Diluted:
Net income available to common shareholders	$	5,099	$	2,780	$	9,374	$	17,729
Weighted average shares outstanding		37,166,736		28,478,316		34,186,201		26,025,601
Effect of dilutive securities:
Stock options		279,808		687		414,389		269
Restricted stock units		130,125		93,562		120,987		85,524
Warrant		-		-		-		655,987
Convertible preferred stock		-		-		-		2,435,811
Weighted average shares outstanding and dilutive potential shares outstanding		37,576,669		28,572,565		34,721,577		29,203,192
Net income per share, diluted	$	0.14	$	0.10	$	0.27	$	0.61

Note 4 — Investment Securities

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

			Available for Sale – September 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾

U.S. government agency securities	$	49,602	$	-	$	(2,280	)	$	47,322		2.05	%		6.97
Agency mortgage backed securities		20,405		1,193		-			21,598		3.87			3.36
Collateralized mortgage obligations		11,289		232		(5	)		11,516		3.86			3.38
Commercial mortgage backed securities		33,972		1,286		-			35,258		3.40			2.82
Corporate bonds		128,798		4,140		(457	)		132,481		3.78			3.73
Covered bonds		49,966		2,338		(108	)		52,196		3.49			2.21
State and municipal obligations		34,431		1,076		(5	)		35,502		5.86	⁽²⁾		3.90
Total debt securities		328,463		10,265		(2,855	)		335,873		3.66	⁽²⁾		3.88
Federal Home Loan Bank stock		14,486		-		-			14,486
Federal Reserve Bank stock		3,828		-		-			3,828
Other equity securities		9,336		564		(256	)		9,644
Total investment securities	$	356,113	$	10,829	$	(3,111	)	$	363,831

			Available for Sale – December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾

U.S. government agency securities	$	49,094	$	-	$	(4,562	)	$	44,532		2.07	%		7.67
Agency mortgage backed securities		14,217		1,261		-			15,478		5.09			2.83
Collateralized mortgage obligations		6,611		163		-			6,774		5.63			2.60
Commercial mortgage backed securities		38,367		1,123		(102	)		39,388		3.32			3.36
Corporate bonds		105,772		4,066		(572	)		109,266		3.83			4.13
Covered bonds		49,937		2,924		(233	)		52,628		3.49			2.90
State and municipal obligations		15,836		161		(301	)		15,696		6.46	⁽²⁾		7.94
Total debt securities		279,834		9,698		(5,770	)		283,762		3.65	⁽²⁾		4.55
Federal Home Loan Bank stock		9,988		-		-			9,988
Other equity securities		7,672		596		(469	)		7,799
Total	$	297,494	$	10,294	$	(6,239	)	$	301,549

			Held to Maturity – September 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾

U.S. government agency securities	$	32,761	$	65	$	(738	)	$	32,088		2.15	%		5.55
Agency mortgage backed securities		56,736		1,030		-			57,766		2.54			5.17
Corporate bonds		37,453		92		(120	)		37,425		4.04			6.35
Covered bonds		4,983		10		-			4,993		2.08			4.17
State and municipal obligations		1,150		45		-			1,195		4.23	⁽²⁾		10.04
Total	$	133,083	$	1,242	$	(858	)	$	133,467		2.87	⁽²⁾		5.60

			Held to Maturity – December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾

U.S. government agency securities	$	28,729	$	-	$	(1,920	)	$	26,809		2.13	%		6.73
Agency mortgage backed securities		32,439		171		(34	)		32,576		2.64			5.90
Corporate bonds		5,000		-		-			5,000		7.63			9.61
State and municipal obligations		1,149		-		(95	)		1,054		4.25	⁽²⁾		13.58
Total	$	67,317	$	171	$	(2,049	)	$	65,439		2.81	⁽²⁾		6.66

⁽¹⁾Average duration to expected call or maturity, in years

⁽²⁾ Fully taxable-equivalent basis

Effective September 1, 2014, the Bank became a member of the Federal Reserve System. As a state-chartered Federal Reserve member bank, the Bank’s primary federal regulator is the Federal Reserve Bank of Richmond. In order to satisfy minimum stock ownership requirements, during the third quarter of 2014, the Bank purchased 76,566 shares of Federal Reserve Bank stock at $50.00 per share, or an aggregate of $3.8 million.

The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, as of September 30, 2014 (dollars in thousands):

	September 30, 2014⁽¹⁾
	Less than 1 year					1 Year or More					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Loss			Value		Loss			Value		Loss

U.S. government agency securities	$	3,993	$	(7	)	$	67,979	$	(3,011	)	$	71,972	$	(3,018	)
Collateralized mortgage obligations		2,580		(5	)		-		-			2,580		(5	)
Corporate bonds		42,059		(577	)		-		-			42,059		(577	)
Covered bonds		-		-			4,873		(108	)		4,873		(108	)
State and municipal obligations		177		(5	)		-		-			177		(5	)
Equity securities		1,022		(6	)		1,647		(250	)		2,669		(256	)
Total securities	$	49,831	$	(600	)	$	74,499	$	(3,369	)	$	124,330	$	(3,969	)

⁽¹⁾Data for December 31, 2013 not shown since unchanged from the Company’s Annual Report on Form 10-K

Declines in the fair value of available for sale debt securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. Declines in the fair value of held to maturity securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost. The other-than-temporary impairment review for available for sale equity securities includes an analysis of the facts and circumstances of each individual investment and focuses on the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the financial condition and near-term prospects of the issuer, and management’s intent and ability to hold the security to recovery. Declines in the value of available for sale equity securities that are considered to be other-than-temporary are reflected in earnings as realized losses.

There were 28 available for sale debt securities and 14 held to maturity securities in an unrealized loss position at September 30, 2014. Management does not intend to sell any of these securities that have unrealized losses and believes that it is not likely that we will have to sell any such securities before a recovery of cost. The unrealized losses in all of these securities are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality.

There were three available for sale equity securities in an unrealized loss position at September 30, 2014. Although two of those three securities have been in a loss position one year or more, they remain investment grade by all rating agencies and show no indication that dividend payments or credit of the issuer are at risk. Management does not intend to sell these securities, believes that it is not likely that sales of these securities will be necessary before a recovery of cost and does not consider these securities other-than-temporarily impaired.

Investment securities with an amortized cost of $167.8 million and $106.2 million, as of September 30, 2014 and December 31, 2013, respectively, were pledged to secure public deposits and for other purposes. The Company has $30.0 million in letters of credit issued by the Federal Home Loan Bank of Atlanta, which are used in lieu of securities to pledge against public deposits.

CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the nine months ended September 30, 2014. Investment securities with a book value of $65.0 million were sold during the nine months ended September 30, 2013. The Company recognized a net gain of $736,000 on the sales of those securities in 2013.

Note 5 — Loans and Allowance for Credit Losses

Loans are summarized in the following table (dollars in thousands) which reflects $97.0 million at September 30, 2014 of PCI loans resulting from the acquisition of Security Savings on October 1, 2013 and the acquisition of CapStone on April 1, 2014, and $56.0 million at December 31, 2013 of PCI loans resulting from the acquisition of Security Savings; loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered PCI loans:

	September 30, 2014						December 31, 2013
	Loans –						Loans –
	Excluding		PCI		Total		Excluding		PCI		Total
	PCI		Loans		Loans		PCI		Loans		Loans
Secured by owner-occupied nonfarm nonresidential properties	$	316,768	$	21,418	$	338,186	$	290,953	$	12,023	$	302,976
Secured by other nonfarm nonresidential properties		345,632		18,903		364,535		234,355		4,707		239,062
Other commercial and industrial		128,334		8,641		136,975		113,620		782		114,402
Total Commercial		790,734		48,962		839,696		638,928		17,512		656,440

Construction loans – 1 to 4 family residential		47,838		1,315		49,153		20,582		-		20,582
Other construction and land development		104,384		4,304		108,688		90,575		4,239		94,814
Total Real estate – construction		152,222		5,619		157,841		111,157		4,239		115,396

Closed-end loans secured by 1 to 4 family residential properties		381,818		28,676		410,494		334,127		24,205		358,332
Lines of credit secured by 1 to 4 family residential
properties		226,187		6,596		232,783		205,524		7,588		213,112
Loans secured by 5 or more family residential properties		41,040		5,039		46,079		38,735		-		38,735
Total Real estate – mortgage		649,045		40,311		689,356		578,386		31,793		610,179

Credit cards		7,515		-		7,515		7,659		-		7,659
Other revolving credit plans		9,350		28		9,378		8,520		9		8,529
Other consumer loans		7,831		2,070		9,901		7,787		2,462		10,249
Total Consumer		24,696		2,098		26,794		23,966		2,471		26,437

All other loans		7,277		-		7,277		8,251		-		8,251
Total Other		7,277		-		7,277		8,251		-		8,251

Total loans	$	1,623,974	$	96,990	$	1,720,964	$	1,360,688	$	56,015	$	1,416,703

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

	September 30,			December 31,
	2014			2013
Commercial nonaccrual loans, not restructured	$	1,576		$	2,542
Commercial nonaccrual loans, restructured		106			294
Non-commercial nonaccrual loans, not restructured		3,914			3,680
Non-commercial nonaccrual loans, restructured		403			391
Total nonaccrual loans		5,999			6,907
Troubled debt restructured, accruing		1,830			2,491
Total nonperforming loans		7,829			9,398
Real estate acquired in settlement of loans		3,580			7,620
Total nonperforming assets	$	11,409		$	17,018

Restructured loans, performing⁽¹⁾	$	1,473		$	2,166
Loans past due 90 days or more and still accruing⁽²⁾	$	1,982		$	2,887

Nonperforming loans to loans held for investment		0.45	%		0.66	%
Nonperforming assets to total assets at end of period		0.47	%		0.87	%
Allowance for credit losses to nonperforming loans		287.41	%		261.23	%

⁽¹⁾ Loans restructured in a prior year without an interest rate concession or forgiveness of debt that are performing in accordance with their restructured terms.

⁽²⁾ Loans past due 90 days or more and still accruing includes $1,976 and $2,834 of PCI loans as of September 30, 2014 and December 31, 2013, respectively.

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

Commitments to lend additional funds to borrowers whose loans have been restructured were not material at September 30, 2014.

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

Loans – Excluding PCI
September 30, 2014	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	188	$	-	$	769	$	957	$	315,811	$	316,768
Secured by other nonfarm nonresidential properties		200		-		493		693		344,939		345,632
Other commercial and industrial		841		-		420		1,261		127,073		128,334
Total Commercial		1,229		-		1,682		2,911		787,823		790,734

Construction loans – 1 to 4 family residential		-		-		-		-		47,838		47,838
Other construction and land development		24		-		259		283		104,101		104,384
Total Real estate – construction		24		-		259		283		151,939		152,222

Closed-end loans secured by 1 to 4 family residential properties		1,932		-		2,530		4,462		377,356		381,818
Lines of credit secured by 1 to 4 family residential properties		2,344		-		1,360		3,704		222,483		226,187
Loans secured by 5 or more family residential properties		-		-		-		-		41,040		41,040
Total Real estate – mortgage		4,276		-		3,890		8,166		640,879		649,045

Credit cards		67		6		-		73		7,442		7,515
Other revolving credit plans		30		-		102		132		9,218		9,350
Other consumer loans		43		-		66		109		7,722		7,831
Total Consumer		140		6		168		314		24,382		24,696

All other loans		-		-		-		-		7,277		7,277
Total Other		-		-		-		-		7,277		7,277

Total loans	$	5,669	$	6	$	5,999	$	11,674	$	1,612,300	$	1,623,974

PCI Loans
September 30, 2014	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	289	$	-	$	-	$	289	$	21,129	$	21,418
Secured by other nonfarm nonresidential properties		-		-		-		-		18,903		18,903
Other commercial and industrial		-		13		-		13		8,628		8,641
Total Commercial		289		13		-		302		48,660		48,962

Construction loans – 1 to 4 family residential		-		-		-		-		1,315		1,315
Other construction and land development		-		-		-		-		4,304		4,304
Total Real estate – construction		-		-		-		-		5,619		5,619

Closed-end loans secured by 1 to 4 family residential properties		587		1,831		-		2,418		26,258		28,676
Lines of credit secured by 1 to 4 family residential properties		276		109		-		385		6,211		6,596
Loans secured by 5 or more family residential properties		-		-		-		-		5,039		5,039
Total Real estate – mortgage		863		1,940		-		2,803		37,508		40,311

Credit cards		-		-		-		-		-		-
Other revolving credit plans		-		-		-		-		28		28
Other consumer loans		-		23		-		23		2,047		2,070
Total Consumer		-		23		-		23		2,075		2,098

All other loans		-		-		-		-		-		-
Total Other		-		-		-		-		-		-

Total loans	$	1,152	$	1,976	$	-	$	3,128	$	93,862	$	96,990

Total Loans
September 30, 2014	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	477	$	-	$	769	$	1,246	$	336,940	$	338,186
Secured by other nonfarm nonresidential properties		200		-		493		693		363,842		364,535
Other commercial and industrial		841		13		420		1,274		135,701		136,975
Total Commercial		1,518		13		1,682		3,213		836,483		839,696

Construction loans – 1 to 4 family residential		-		-		-		-		49,153		49,153
Other construction and land development		24		-		259		283		108,405		108,688
Total Real estate – construction		24		-		259		283		157,558		157,841

Closed-end loans secured by 1 to 4 family residential properties		2,519		1,831		2,530		6,880		403,614		410,494
Lines of credit secured by 1 to 4 family residential properties		2,620		109		1,360		4,089		228,694		232,783
Loans secured by 5 or more family residential properties		-		-		-		-		46,079		46,079
Total Real estate – mortgage		5,139		1,940		3,890		10,969		678,387		689,356

Credit cards		67		6		-		73		7,442		7,515
Other revolving credit plans		30		-		102		132		9,246		9,378
Other consumer loans		43		23		66		132		9,769		9,901
Total Consumer		140		29		168		337		26,457		26,794

All other loans		-		-		-		-		7,277		7,277
Total Other		-		-		-		-		7,277		7,277

Total loans	$	6,821	$	1,982	$	5,999	$	14,802	$	1,706,162	$	1,720,964

Loans – Excluding PCI
December 31, 2013	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	1,170	$	-	$	1,948	$	3,118	$	287,835	$	290,953
Secured by other nonfarm nonresidential properties		256		-		745		1,001		233,354		234,355
Other commercial and industrial		22		-		143		165		113,455		113,620
Total Commercial		1,448		-		2,836		4,284		634,644		638,928

Construction loans – 1 to 4 family residential		231		-		-		231		20,351		20,582
Other construction and land development		368		-		719		1,087		89,488		90,575
Total Real estate – construction		599		-		719		1,318		109,839		111,157

Closed-end loans secured by 1 to 4 family residential properties		4,691		41		2,326		7,058		327,069		334,127
Lines of credit secured by 1 to 4 family residential properties		1,825		-		899		2,724		202,800		205,524
Loans secured by 5 or more family residential properties		951		-		-		951		37,784		38,735
Total Real estate – mortgage		7,467		41		3,225		10,733		567,653		578,386

Credit cards		92		12		-		104		7,555		7,659
Other revolving credit plans		37		-		102		139		8,381		8,520
Other consumer loans		229		-		25		254		7,533		7,787
Total Consumer		358		12		127		497		23,469		23,966

All other loans		-		-		-		-		8,251		8,251
Total Other		-		-		-		-		8,251		8,251

Total loans	$	9,872	$	53	$	6,907	$	16,832	$	1,343,856	$	1,360,688

PCI Loans
December 31, 2013	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	95	$	-	$	-	$	95	$	11,928	$	12,023
Secured by other nonfarm nonresidential properties		-		222		-		222		4,485		4,707
Other commercial and industrial		15		13		-		28		754		782
Total Commercial		110		235		-		345		17,167		17,512

Construction loans – 1 to 4 family residential		-		-		-		-		-		-
Other construction and land development		181		79		-		260		3,979		4,239
Total Real estate – construction		181		79		-		260		3,979		4,239

Closed-end loans secured by 1 to 4 family residential properties		2,484		1,634		-		4,118		20,087		24,205
Lines of credit secured by 1 to 4 family residential properties		132		795		-		927		6,661		7,588
Loans secured by 5 or more family residential properties		-		-		-		-		-		-
Total Real estate – mortgage		2,616		2,429		-		5,045		26,748		31,793

Credit cards		-		-		-		-		-		-
Other revolving credit plans		-		1		-		1		8		9
Other consumer loans		95		90		-		185		2,277		2,462
Total Consumer		95		91		-		186		2,285		2,471

All other loans		-		-		-		-		-		-
Total Other		-		-		-		-		-		-

Total loans	$	3,002	$	2,834	$	-	$	5,836	$	50,179	$	56,015

Total Loans
December 31, 2013	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	1,265	$	-	$	1,948	$	3,213	$	299,763	$	302,976
Secured by other nonfarm nonresidential properties		256		222		745		1,223		237,839		239,062
Other commercial and industrial		37		13		143		193		114,209		114,402
Total Commercial		1,558		235		2,836		4,629		651,811		656,440

Construction loans – 1 to 4 family residential		231		-		-		231		20,351		20,582
Other construction and land development		549		79		719		1,347		93,467		94,814
Total Real estate – construction		780		79		719		1,578		113,818		115,396

Closed-end loans secured by 1 to 4 family residential properties		7,175		1,675		2,326		11,176		347,156		358,332
Lines of credit secured by 1 to 4 family residential properties		1,957		795		899		3,651		209,461		213,112
Loans secured by 5 or more family residential properties		951		-		-		951		37,784		38,735
Total Real estate – mortgage		10,083		2,470		3,225		15,778		594,401		610,179

Credit cards		92		12		-		104		7,555		7,659
Other revolving credit plans		37		1		102		140		8,389		8,529
Other consumer loans		324		90		25		439		9,810		10,249
Total Consumer		453		103		127		683		25,754		26,437

All other loans		-		-		-		-		8,251		8,251
Total Other		-		-		-		-		8,251		8,251

Total loans	$	12,874	$	2,887	$	6,907	$	22,668	$	1,394,035	$	1,416,703

At September 30, 2014 and December 31, 2013 there were $3.8 million and $5.3 million, respectively, of loans classified as TDRs. A restructured loan is classified as a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. The Company monitors the performance of restructured loans on an ongoing basis. For loans classified as TDRs, the Company further evaluates the loans as performing or nonperforming. Loans retain their accrual status at the time of their restructuring. As a result, if a loan is on nonaccrual at the time it is restructured, it stays as nonaccrual; and if a loan is on accrual at the time of the restructuring, it generally stays on accrual. A restructured loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. Nonperforming TDRs originally classified as nonaccrual may be reclassified as accruing if, subsequent to restructuring, they experience six consecutive months of payment performance according to the restructured terms. Further, a TDR may be considered performing and subsequently removed from nonperforming status in years subsequent to the restructuring if it meets the following criteria:

At the time of restructuring, the loan was made at a market rate of interest for comparable risk;

The loan has shown at least six consecutive months of payment performance in accordance with the restructured terms; and

The loan has been included in the TDR disclosures for at least one Annual Report on Form 10-K

Restructurings of loans and their classification as TDRs are based on individual facts and circumstances. Loan restructurings that are classified as TDRs may involve an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments, which the Company considers are concessions. All loans classified as TDRs were restructured due to financial difficulties experienced by the borrower. The Company had $1.5 million and $2.2 million of performing TDRs at September 30, 2014 and December 31, 2013, respectively, which were restructured in a prior year without an interest rate concession and were performing in accordance with their restructured terms.

The following table provides information about loans first classified as TDRs during the current and prior year three-month and nine-month periods (dollars in thousands):

	Restructurings for the Three Months Ended September 30, 2014						Restructurings for the Three Months Ended September 30, 2013
	Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment
TDRs:
Commercial		1	$	124	$	124		1	$	142	$	142
Real estate – mortgage		-		-		-		2		226		226
Consumer		2		19		19		-		-		-
Total		3	$	143	$	143		3	$	368	$	368

	Restructurings for the Nine Months Ended September 30, 2014						Restructurings for the Nine Months Ended September 30, 2013
	Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment
TDRs:
Commercial		1	$	124	$	124		2	$	874	$	407
Real estate – construction		-		-		-		1		460		460
Real estate – mortgage		3		183		176		3		323		323
Consumer		2		19		19		-		-		-
Total		6	$	326	$	319		6	$	1,657	$	1,190

Newly restructured TDRs in the third quarter of 2014 each had an extension of the term of the loan, and the two consumer loans identified above also had an interest rate reduction. Newly restructured TDRs in the second quarter of 2014 consisted of one loan involving a forgiveness of principal, and the two newly restructured TDRs in the first quarter of 2014 involved deferral of interest payments. There were three newly restructured TDRs during the third quarter of 2013, of which, the newly restructured commercial loan involved an interest rate concession, and the two newly restructured real estate - mortgage loans involved deferrals of principal payments. The newly restructured TDRs in the first and second quarter of 2013 each involved an extension of the term of the loan.

A TDR is considered to be in default if it is 90 days or more past due at the end of any month during the reporting period.

No TDRs were restructured in the prior 12 months that subsequently defaulted during the three months or nine months ended September 30, 2014, or the three months or nine months ended September 30, 2013.

Interest is not typically accrued on nonperforming loans, as they are normally in nonaccrual status. However, interest may be accrued in certain circumstances on nonperforming TDRs, such as those that have an interest rate concession but are otherwise performing. Interest income on performing or nonperforming accruing TDRs is recognized consistent with any other accruing loan. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on a loan is discontinued when, in management’s opinion, the borrower is not likely 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 loans are 90 days or more past due. Interest income is subsequently recognized on a cash basis only to the extent payments are received and only if the loan is well secured. Commercial loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower in accordance with the contractual terms. Residential mortgage and consumer loans are typically returned to accrual status once they are no longer past due. There were $1.8 million in TDRs at September 30, 2014 and $2.2 million in TDRs at September 30, 2013 that were considered nonperforming and were accruing interest. The following table shows interest income recognized and received on these TDRs for the three months and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30, 2014				Three Months Ended September 30, 2013
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	-	$	-	$	3	$	4
Real estate – construction		-		-		-		-
Real estate – mortgage		15		12		22		19
Consumer		-		1		-		-
Total	$	15	$	13	$	25	$	23

	Nine Months Ended September 30, 2014				Nine Months Ended September 30, 2013
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	6	$	6	$	20	$	21
Real estate – construction		4		4		1		1
Real estate – mortgage		48		45		69		62
Consumer		-		1		-		-
Total	$	58	$	56	$	90	$	84

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

Loans specifically identified and evaluated for levels of impairment totaled $3.9 million and $5.9 million at September 30, 2014 and December 31, 2013, respectively, as detailed in the following tables (dollars in thousands).

	Impaired Loans
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Recorded		Recognized
	Balance		Balance		Allowance		Investment		Year to Date
September 30, 2014
Loans without a specific valuation allowance
Commercial	$	301	$	301	$	-	$	356	$	9
Real estate – construction		595		971		-		673		24
Real estate – mortgage		414		452		-		483		4
Consumer		17		18		-		18		1
Total		1,327		1,742		-		1,530		38

Loans with a specific valuation allowance
Commercial		439		546		11		443		24
Real estate – construction		150		150		8		187		9
Real estate – mortgage		2,031		2,031		383		2,093		53
Total		2,620		2,727		402		2,723		86

Total impaired loans
Commercial		740		847		11		799		33
Real estate – construction		745		1,121		8		860		33
Real estate – mortgage		2,445		2,483		383		2,576		57
Consumer		17		18		-		18		1
Total	$	3,947	$	4,469	$	402	$	4,253	$	124

	Impaired Loans
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Recorded		Recognized
	Balance		Balance		Allowance		Investment		Year to Date
December 31, 2013
Loans without a specific valuation allowance
Commercial	$	1,210	$	1,246	$	-	$	1,261	$	30
Real estate – construction		480		480		-		514		34
Real estate – mortgage		338		369		-		358		7
Total		2,028		2,095		-		2,133		71

Loans with a specific valuation allowance
Commercial		738		846		68		747		42
Real estate – construction		152		152		8		189		12
Real estate – mortgage		2,961		2,961		696		3,025		107
Total		3,851		3,959		772		3,961		161

Total impaired loans
Commercial		1,948		2,092		68		2,008		72
Real estate – construction		632		632		8		703		46
Real estate – mortgage		3,299		3,330		696		3,383		114
Total	$	5,879	$	6,054	$	772	$	6,094	$	232

In the first quarter of 2014, the Company changed its methodology for allocating the allowance for credit losses by portfolio segment. Prior period allocations were revised to conform to the new methodology. The change in methodology did not change the total allowance for credit losses. The balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method as of September 30, 2014, December 31, 2013 and September 30, 2013 were as follows:

			Real Estate –		Real Estate –						Total
Allowance for credit losses:	Commercial		Construction		Mortgage		Consumer		Other		Allowance
September 30, 2014
Individually evaluated for impairment	$	11	$	8	$	383	$	-	$	-	$	402
Collectively evaluated for impairment		10,564		1,860		9,132		451		92		22,099
PCI		-		-		-		-		-		-
Total ending allowance	$	10,575	$	1,868	$	9,515	$	451	$	92	$	22,501
December 31, 2013
Individually evaluated for impairment	$	68	$	8	$	696	$	-	$	-	$	772
Collectively evaluated for impairment		11,412		2,019		9,783		469		95		23,778
PCI		-		-		-		-		-		-
Total ending allowance	$	11,480	$	2,027	$	10,479	$	469	$	95	$	24,550
September 30, 2013
Individually evaluated for impairment	$	25	$	10	$	690	$	10	$	-	$	735
Collectively evaluated for impairment		12,008		2,078		10,105		369		90		24,650
Total ending allowance	$	12,033	$	2,088	$	10,795	$	379	$	90	$	25,385

			Real Estate –		Real Estate –						Total
Recorded investment in loans:	Commercial		Construction		Mortgage		Consumer		Other		Loans
September 30, 2014
Individually evaluated for impairment	$	740	$	745	$	2,445	$	17	$	-	$	3,947
Collectively evaluated for impairment		789,994		151,477		646,600		24,679		7,277		1,620,027
PCI		48,962		5,619		40,311		2,098		-		96,990
Total recorded investment in loans	$	839,696	$	157,841	$	689,356	$	26,794	$	7,277	$	1,720,964
December 31, 2013
Individually evaluated for impairment	$	1,948	$	632	$	3,299	$	-	$	-	$	5,879
Collectively evaluated for impairment		636,980		110,525		575,087		23,966		8,251		1,354,809
PCI		17,512		4,239		31,793		2,471		-		56,015
Total recorded investment in loans	$	656,440	$	115,396	$	610,179	$	26,437	$	8,251	$	1,416,703
September 30, 2013
Individually evaluated for impairment	$	4,236	$	587	$	4,774	$	10	$	-	$	9,607
Collectively evaluated for impairment		616,209		92,669		519,484		22,047		6,345		1,256,754
Total recorded investment in loans	$	620,445	$	93,256	$	524,258	$	22,057	$	6,345	$	1,266,361

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

	September 30, 2014										December 31, 2013
			Special		Sub-								Special		Sub-
Loans – excluding PCI	Pass		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total
Commercial	$	753,928	$	18,332	$	15,972	$	705	$	788,937	$	592,221	$	30,962	$	15,044	$	302	$	638,529
Real estate – construction		136,950		1,192		423		135		138,700		82,483		8,628		2,288		-		93,399
Real estate – mortgage		109,789		1,796		2,560		101		114,246		84,999		4,243		5,168		-		94,410
Consumer		525		-		-		-		525		-		-		-		-		-
Other		5,788		882		-		-		6,670		7,373		-		-		-		7,373
Total	$	1,006,980	$	22,202	$	18,955	$	941	$	1,049,078	$	767,076	$	43,833	$	22,500	$	302	$	833,711

	September 30, 2014										December 31, 2013
			Special		Sub-								Special		Sub-
PCI loans	Pass⁽¹⁾		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total
Commercial	$	32,326	$	12,502	$	3,847	$	15	$	48,690	$	5,451	$	4,831	$	7,031	$	135	$	17,448
Real estate – construction		3,882		1,518		111		-		5,511		1,568		1,743		731		198		4,240
Real estate – mortgage		11,552		4,218		2,241		-		18,011		2,811		2,361		5,739		499		11,410
Consumer		-		-		-		-		-		2		1		-		-		3
Other		-		-		-		-		-		-		-		-		-		-
Total	$	47,760	$	18,238	$	6,199	$	15	$	72,212	$	9,832	$	8,936	$	13,501	$	832	$	33,101

	September 30, 2014										December 31, 2013
			Special		Sub-								Special		Sub-
Total loans	Pass		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total
Commercial	$	786,254	$	30,834	$	19,819	$	720	$	837,627	$	597,672	$	35,793	$	22,075	$	437	$	655,977
Real estate – construction		140,832		2,710		534		135		144,211		84,051		10,371		3,019		198		97,639
Real estate – mortgage		121,341		6,014		4,801		101		132,257		87,810		6,604		10,907		499		105,820
Consumer		525		-		-		-		525		2		1		-		-		3
Other		5,788		882		-		-		6,670		7,373		-		-		-		7,373
Total	$	1,054,740	$	40,440	$	25,154	$	956	$	1,121,290	$	776,908	$	52,769	$	36,001		$ 1, 134	$	866,812

⁽¹⁾ PCI loans in the Pass category are in the pre-watch risk grade, which is the lowest risk grade in the Pass category.

An analysis of the changes in the allowance for credit losses for the three months and nine months ended September 30, 2014 and 2013 follows (dollars in thousands):

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Three Months Ended September 30, 2014
Loans – excluding PCI
Commercial	$	10,264	$	399	$	775	$	(65	)	$	10,575
Real estate – construction		1,771		60		49		108			1,868
Real estate – mortgage		10,354		1,423		648		(64	)		9,515
Consumer		469		201		77		106			451
Other		86		-		2		4			92
Total	$	22,944	$	2,083	$	1,551	$	89		$	22,501

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		-		-		-			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	-	$	-	$	-		$	-

Total loans
Commercial	$	10,264	$	399	$	775	$	(65	)	$	10,575
Real estate – construction		1,771		60		49		108			1,868
Real estate – mortgage		10,354		1,423		648		(64	)		9,515
Consumer		469		201		77		106			451
Other		86		-		2		4			92
Total	$	22,944	$	2,083	$	1,551	$	89		$	22,501

Three Months Ended September 30, 2013
Commercial	$	12,287	$	324	$	796	$	(726	)	$	12,033
Real estate – construction		2,077		372		59		324			2,088
Real estate – mortgage		11,482		1,136		366		83			10,795
Consumer		408		176		69		78			379
Other		141		338		13		274			90
Total	$	26,395	$	2,346	$	1,303	$	33		$	25,385

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Nine Months Ended September 30, 2014
Loans – excluding PCI
Commercial	$	11,480	$	836	$	1,300	$	(1,369	)	$	10,575
Real estate – construction		2,027		464		563		(258	)		1,868
Real estate – mortgage		10,479		4,106		1,098		2,044			9,515
Consumer		469		563		213		332			451
Other		95		-		8		(11	)		92
Total	$	24,550	$	5,969	$	3,182	$	738		$	22,501

PCI loans
Commercial	$	-	$	62	$	-	$	62		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		33		-		33			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	95	$	-	$	95		$	-

Total loans
Commercial	$	11,480	$	898	$	1,300	$	(1,307	)	$	10,575
Real estate – construction		2,027		464		563		(258	)		1,868
Real estate – mortgage		10,479		4,139		1,098		2,077			9,515
Consumer		469		563		213		332			451
Other		95		-		8		(11	)		92
Total	$	24,550	$	6,064	$	3,182	$	833		$	22,501

Nine Months Ended September 30, 2013
Commercial	$	12,314	$	859	$	1,020	$	(442	)	$	12,033
Real estate – construction		2,058		1,125		392		763			2,088
Real estate – mortgage		11,673		2,777		922		977			10,795
Consumer		466		806		214		505			379
Other		119		338		63		246			90
Total	$	26,630	$	5,905	$	2,611	$	2,049		$	25,385

Loans totaling $3.3 million and $3.5 million, as of September 30, 2014 and December 31, 2013, respectively, were held for sale and stated at the lower of cost or market value on an individual basis.

Loans totaling $771.8 million and $517.1 million, as of September 30, 2014 and December 31, 2013, respectively, were pledged to secure lines of credit with the Federal Home Loan Bank of Atlanta and Federal Reserve Bank of Richmond.

In conjunction with the acquisition of CapStone on April 1, 2014, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):

	April 1, 2014

Contractual principal and interest at acquisition	$	84,855
Nonaccretable difference		(5,070	)
Expected cash flows at acquisition		79,785
Accretable yield		(13,969	)
Basis in PCI loans at acquisition – estimated fair value	$	65,816

A summary of changes in the recorded investment of PCI loans for the three months and nine months ended September 30, 2014 follows (dollars in thousands):

	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014

Recorded investment, beginning of period	$	108,334		$	56,015
Fair value of CapStone acquired loans		-			65,816
Accretion		1,330			3,315
Reductions for payments, sales and foreclosures		(12,674	)		(28,156	)
Recorded investment, end of period	$	96,990		$	96,990
Outstanding principal balance, end of period	$	104,666		$	104,666

In the third quarter of 2014, the Company sold a small group of nonperforming loans with a total recorded investment of $5.4 million for net proceeds of $6.0 million. Included in this sale were PCI loans with a total outstanding principal balance of $4.8 million and a total recorded investment of $2.6 million for net proceeds of $2.7 million. The $100,000 excess proceeds on the PCI loan sales was recorded as an adjustment to the recorded investment of the remaining PCI portfolio. The remaining excess proceeds from the loan sale of $500,000 was recorded as recoveries of previously charged off loans.

A summary of changes in the accretable yield for PCI loans for the three months and nine months ended September 30, 2014 follows (dollars in thousands):

	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014

Accretable yield, beginning of period	$	25,602		$	14,462
Addition from CapStone acquisition		-			13,969
Accretion		(1,330	)		(3,315	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		(957	)		(454	)
Other changes, net		737			(610	)
Accretable yield, end of period	$	24,052		$	24,052

Note 6 — Deferred Tax Assets

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

Management has concluded that only a portion of the deferred tax assets associated with certain state net economic loss and contribution carryforwards should be impaired. Management has also concluded that the utilization of the remaining deferred tax assets is more likely than not.

Income tax expense for each of the quarters and nine-month periods of 2014 and 2013 were determined as follows (dollars in thousands):

	First			Second			Third		Nine Months
	Quarter			Quarter			Quarter		Year to Date
2014
Income tax expense (benefit) calculated	$	1,900		$	657		$	2,804	$	5,361
Deferred tax asset valuation adjustment		-			-			-		-
Income tax expense (benefit)	$	1,900		$	657		$	2,804	$	5,361

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

The significant components of the Company’s deferred tax assets at September 30, 2014 and December 31, 2013 were as follows (dollars in thousands):

	2014			2013
Deferred tax assets:
Allowance for credit losses	$	8,641		$	9,428
Net operating losses		25,609			28,201
Other		10,985			8,431
Valuation allowance		(571	)		(571	)
Total		44,664			45,489

Deferred tax liabilities:
Net unrealized gain on available for sale securities		3,239			1,577
Other		7,282			7,133
Total		10,521			8,710
Net deferred tax assets	$	34,143		$	36,779

Note 7 — Stock Compensation Plans

The Company recorded $561,000 and $295,000 of stock-based compensation expense for the nine-month periods ended September 30, 2014 and 2013, respectively. The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related stock options or restricted stock grants and is reported within personnel expense. This expense had no impact on the Company’s reported cash flows. As of September 30, 2014, there was $1.2 million of unrecognized stock-based compensation expense. This expense will be fully recognized by December 31, 2016.

To determine the amounts recorded in the financial statements, the fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model. During the first nine months of 2014, no stock options were granted.

As of September 30, 2014, 392,554 restricted stock units were outstanding. The fair value of each restricted stock unit is the closing price of the Company’s Class A common stock on the grant date. The date of grant and the fair value of each restricted stock unit are as follows:

September 30, 2014
		Grant	Fair Value
Units		Date	Per Unit
	17,470	02/09/11	$	5.15
	95,569	01/11/12		3.89
	7,393	07/25/12		4.10
	100,190	01/16/13		5.00
	2,390	03/06/13		5.91
	1,460	04/24/13		5.99
	35,359	07/24/13		8.80
	3,403	10/09/13		6.61
	93,019	01/15/14		7.19
	22,301	07/29/14		7.64
	14,000	07/29/14		7.64
	392,554

On April 1, 2014, 617,270 CapStone stock options were converted to 1,388,849 Company stock options. The estimated fair value of the converted options was $4.6 million using the Black-Scholes option-pricing model. At September 30, 2014, 744,004 of these converted options were outstanding and exercisable with an average weighted remaining contractual life of approximately two years and an aggregate intrinsic value of $2.0 million. The following is a summary of stock option activity and related information for the converted stock options during the period from acquisition on April 1, 2014 through September 30, 2014 (dollars in thousands, except per share data).

	Options			Weighted Average Exercise Price

Converted		1,388,849		$	4.54
Exercised		(625,045	)		4.13
Forfeited		(19,800	)		6.12
Outstanding – end of period		744,004		$	4.84

Exercisable – end of period		744,004		$	4.84

The Company recorded excess tax benefits of $64,000 on the exercise of 136,687 nonqualified stock options and the disqualifying disposition of 33,018 incentive stock options exercised during the second and third quarters of 2014.

Note 8 — 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 and are categorized as Level 1 (quoted prices in active markets for identical assets).

Investment certificates of deposit. Investment certificates of deposit are certificates of deposit of $250,000 or less placed in multiple financial institutions. The fair value is estimated using the difference between the coupon rate on each certificate of deposit and the current required rate and is categorized as Level 2 (“significant other observable inputs”).

Investment securities. The fair value of investment securities is based on quoted prices in active markets for identical assets (Level 1), if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities, corresponding to the “significant other observable inputs” definition of GAAP (Level 2). If a quoted market price for a similar security is not available, fair value is estimated using “significant unobservable inputs” as defined by GAAP (Level 3). The fair value of equity investments in the restricted stock of the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank equals the carrying value based on the redemption provisions and is categorized as Level 3.

Loans held for sale. Substantially all residential mortgage loans held for sale are pre-sold; therefore, their carrying value approximates fair value and is categorized as Level 2.

Loans. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value. The fair value of loans is categorized as Level 3.

Impaired loans. The fair value of each impaired loan is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral, less selling and other handling costs, for certain collateral dependent loans less specific reserves. The fair value of impaired loans is categorized as Level 3.

Investments held in trust. Investments held in trust consist primarily of cash and cash equivalents, equity securities, and mutual fund investments, and are recorded at fair value and included in other assets. The purpose of these investments is to fund certain director and executive officer non-qualified retirement benefits and deferred compensation. For cash and cash equivalents, which have maturities of 90 days or less, their carrying amounts reported in the consolidated balance sheets approximate fair value and are categorized as Level 1. The fair value of other equity securities and mutual funds are valued based on quoted prices from the market and are categorized as Level 1.

Interest rate swap. Under the terms of a cash flow hedge, which the Company entered into on August 8, 2014, for the duration of the hedge the Company and the counterparty pay one another the difference between the variable amount payable by the Company based on the 30-day LIBOR rate and the fixed payment payable by the counterparty. The fair value of the cash flow hedge is based on projected LIBOR rates for the duration of the hedge, a value that, while observable in the market, is subject to adjustment due to pricing considerations for the specific instrument. The fair value of the interest rate swap is categorized as Level 2.

Deposits. The fair value of noninterest-bearing demand deposits and Negotiable Order of Withdrawal (“NOW”), savings, and money market deposits are the amounts payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of deposits is categorized as Level 2.

Federal funds purchased and retail repurchase agreements. The carrying values of federal funds purchased and retail repurchase agreements are considered to be a reasonable estimate of fair value and are categorized as Level 1.

Wholesale repurchase agreements, subordinated debt, junior subordinated notes and Federal Home Loan Bank of Atlanta borrowings. The fair values of these liabilities are estimated using the discounted values of the contractual cash flows and are categorized as Level 2. The discount rate is estimated using the rates currently in effect for similar borrowings.

The tables below present the estimated fair values of financial instruments as of September 30, 2014 and December 31, 2013 (dollars in thousands):

September 30, 2014	Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	39,757	$	39,757
Investment certificates of deposit		16,669		16,739
Investment securities		496,914		497,298
Loans		1,698,463		1,703,305
Loans held for sale		3,303		3,303
Investments held in trust		6,696		6,696
Financial liabilities:
Deposits		1,825,134		1,827,096
Federal funds purchased		37,700		37,700
Wholesale repurchase agreements		21,000		22,831
Subordinated debt		15,500		15,706
Junior subordinated notes		25,774		11,830
Federal Home Loan Bank borrowings		274,000		274,038
Interest rate swap		259		259

December 31, 2013	Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	33,513	$	33,513
Investment securities		368,866		366,988
Loans		1,392,153		1,414,109
Loans held for sale		3,530		3,530
Investments held in trust		6,184		6,184
Financial liabilities:
Deposits		1,553,996		1,555,221
Federal funds purchased		13,000		13,000
Wholesale repurchase agreements		21,000		22,915
Junior subordinated notes		25,774		11,279
Federal Home Loan Bank borrowings		170,000		170,253

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 and liabilities measured at fair value on a recurring basis categorized by the level of inputs used in the valuation of each asset or liability (dollars in thousands):

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)

Assets measured at fair value
Available for sale securities at September 30, 2014	$	4,610	$	340,907	$	18,314
Available for sale securities at December 31, 2013		2,845		288,716		9,988
Investments held in trust at September 30, 2014		6,696		-		-
Investments held in trust at December 31, 2013		6,184		-		-
Liabilities measured at fair value
Interest rate swap at September 30, 2014		-		-		259
Interest rate swap at December 31, 2013		-		-		-

The table below presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2014 and the year ended December 31, 2013 (dollars in thousands):

	Nine Months			Twelve Months
	Ended			Ended
	September 30,			December 31,
	2014			2013

Available for sale securities
Beginning balance	$	9,988		$	7,685
Purchases		11,172			17,464
Acquisitions		3,089			2,090
Redemptions		(5,935	)		(17,251	)
Ending balance	$	18,314		$	9,988

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 (dollars in thousands):

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Loans held for sale at September 30, 2014	$	-	$	3,303	$	-
Loans held for sale at December 31, 2013		-		3,530		-
Real estate acquired in settlement of loans at September 30, 2014		-		-		3,580
Real estate acquired in settlement of loans at December 31, 2013		-		-		7,620
Impaired loans, net of allowance at September 30, 2014		-		-		3,545
Impaired loans, net of allowance at December 31, 2013		-		-		5,107

Note 9 — Accumulated Other Comprehensive Income (Loss)

The balance of accumulated other comprehensive income, net of tax, at September 30, 2014 is comprised of $4.7 million of unrealized gains on securities available for sale, $(3.6) million for the funded status of pension plans, and $(0.2) million of unrecognized loss on cash flow hedges. At December 31, 2013, the balance of accumulated other comprehensive income, net of tax, was comprised of $2.5 million of unrealized gains on securities available for sale and $(3.6) million for the funded status of pension plans.

Reclassifications from accumulated other comprehensive income (loss) for the three-month and nine-month periods ended September 30, 2014 and 2013 are as follows (dollars in thousands):

Details about accumulated other	Amount reclassified from accumulated other			Affected line item in the Consolidated
comprehensive income (loss)	comprehensive income (loss)			Statements of Income
Three months ended September 30, 2014
Amortization of post retirement benefit	$	16		Personnel expense
		(6	)	Income tax expense (benefit)
	$	10		Net of tax

Total reclassifications for the period	$	10

Three months ended September 30, 2013

Unrealized gains (losses) on available for sale securities	$	458		Gain on sales of investment securities
		(181	)	Income tax expense (benefit)
	$	277		Net of tax

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

Total reclassifications for the period	$	286

Nine months ended September 30, 2014
Amortization of post retirement benefit	$	47		Personnel expense
		(18	)	Income tax expense (benefit)
	$	29		Net of tax

Total reclassifications for the period	$	29

Nine months ended September 30, 2013

Unrealized gains (losses) on available for sale securities	$	736		Gain on sales of investment securities
		(291	)	Income tax expense (benefit)
	$	445		Net of tax

Amortization of post retirement benefit	$	46		Personnel expense
		(18	)	Income tax expense (benefit)
	$	28		Net of tax

Total reclassifications for the period	$	473

Note 10 — Capital Transactions

On March 14, 2014, the Company entered into a Subordinated Note Purchase Agreement with 14 accredited investors under which the Company issued an aggregate of $15.5 million of subordinated notes (the “Notes”) to the accredited investors, including members of the Company’s Board of Directors. The Notes have a maturity date of March 14, 2024. The Notes bear interest, payable on the 1st of January and July of each year, commencing July 1, 2014, at a fixed interest rate of 7.25% per year. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

On March 31, 2014, the Company redeemed of all of its remaining 15,000 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $15.0 million plus $172,500 of accrued and unpaid dividends.

On April 1, 2014, the Company completed its acquisition of CapStone. (See Note 2 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for details of the transaction.)

Note 11 — Derivative

Interest rate risk management is a part of the Company’s overall asset/liability management process. The primary oversight of asset/liability management rests with the Asset and Liability Committee, which is comprised of the Company’s Chief Executive Officer, Chief Financial Officer, and other senior executives. Over the past several years, the Company’s balance sheet has been consistently slightly “asset sensitive,” i.e. should interest rates decline, the Company’s assets will reprice faster than its liabilities, resulting in a declining net interest margin and less net interest income.

In order to partially mitigate its exposure in the event the interest rate curve flattens over the next three years, on August 8, 2014, the Company entered into an interest rate swap that qualifies as a cash flow hedge under GAAP. The fair value of the swap is included in other liabilities in the consolidated balance sheets, and the net change in fair value is included in other comprehensive income and in the consolidated statements of cash flows under the caption net (increase) decrease in other liabilities. At September 30, 2014, the estimated fair value of the liability is $259,000.

The risk management objective is to reduce the Company’s interest rate risk exposure to the variability of the cash flows upon changes to its forecasted interest receipts as 30-day London Interbank Offered Rate (“LIBOR”), the benchmark interest rate used by the Company, changes. The Company’s position is improved by entry into an interest rate swap with a notional amount of $50.0 million to receive interest at a fixed rate of 0.925 percent and pay interest at a rate based on 30-day LIBOR. This is designated as a cash flow hedge of the interest rate risk associated with the benchmark rate of 30-day LIBOR attributable to the forecasted interest payments received from the 30-day LIBOR loan portfolio and investment securities (the hedged forecasted transaction). The interest rate swap hedges interest receipts through August 8, 2017. Settlement of the swap occurs monthly. As of September 30, 2014, $250,000 collateral was pledged and on deposit with the counterparty to secure the existing obligation under the interest rate swap.

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income. The Company’s interest rate swap has been fully effective since inception. Changes in the fair value of the interest rate swap, therefore, have had no impact on net income. For the three months and nine months ended September 30, 2014, the Company recognized interest income of $58,000 resulting from incremental interest received from the counterparty, none of which related to ineffectiveness. The Company monitors the credit risk of the interest rate swap counterparty.

Note 12 — Subsequent Events

Pending acquisition of Premier Commercial Bank

On October 8, 2014, the Company announced the signing of a definitive merger agreement with Premier Commercial Bank (“Premier”), a commercial bank headquartered in Greensboro, North Carolina, with approximately $172 million in assets as of September 30, 2014. Premier operates one full-service banking office centrally located in Greensboro and residential mortgage origination offices in Greensboro, Charlotte, Raleigh, High Point, Kernersville and Burlington, North Carolina.

The acquisition, which is subject to customary closing conditions, including regulatory approval and approval by Premier shareholders, is expected to close in the first quarter of 2015. Under the terms of the definitive merger agreement, Premier’s outstanding shares of common stock will be converted, at the election of the holder of such shares, into the right to receive cash in the amount of $10.00 per share, shares of the Company’s Class A common stock, or a combination of cash and shares, subject to allocation and pro rata procedures to ensure that 75% of the shares of Premier’s common stock will be exchanged for shares of the Company’s common stock and the remaining 25% will be exchanged for cash. The number of shares of the Company’s common stock to be exchanged for each share of Premier common stock will be determined by dividing $10.00 by the 20-day volume weighted average price per share of the Company’s common stock ending on the fifth trading day prior to closing, but in no event more than 1.5152 shares of the Company’s common stock or less than 1.1186 shares of the Company’s common stock for each share of Premier common stock. The agreement also provides for the conversion of unexercised, vested and unvested Premier stock options into Company stock options.

There are presently 1,925,247 shares of Premier common stock and 294,400 Premier stock options outstanding. The transaction is valued at approximately $19.8 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of the Company including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects,” “anticipates,” “should,” “estimates,” “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation:

•

Revenues are lower than expected;

•

Credit quality deterioration, which could cause an increase in the provision for credit losses;

•

Competitive pressure among depository institutions increases significantly;

•

Changes in consumer spending, borrowings and savings habits;

•

Technological changes and security and operations risks associated with the use of technology;

•

The cost of additional capital is more than expected;

•

The interest rate environment could reduce interest margins;

•

Asset/liability repricing risks, ineffective hedging and liquidity risks;

•

Counterparty risk;

•

General economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business, are less favorable than expected;

•

The effects of the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments;

•

The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System;

•

Volatility in the credit or equity markets and its effect on the general economy;

•

Demand for the products or services of the Company, as well as its ability to attract and retain qualified people;

•

The costs and effects of legal, accounting and regulatory developments and compliance;

•

Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule;

•

The effects of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and related regulations, and the enactment of further regulations related to this Act;

•

More stringent capital requirements effective January 1, 2015;

•

Risks associated with the Company’s growth strategy, including acquisitions; and

•

The effects of any intangible or deferred tax asset impairments that may be required in the future.

The Company cautions that the foregoing list of important factors is not exhaustive. See also those risk factors identified in the section headed “Risk Factors,” beginning on page 14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2014 (the “Annual Report”). The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of the Company.

Introduction

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

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

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

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

Application of Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiary comply with accounting principles generally accepted in the United States and conform to standards within the banking industry. The preparation of the financial information contained in this Quarterly Report on Form 10-Q requires the Company’s management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s management evaluates these estimates on an ongoing basis. Business combination and the acquisition method of accounting are discussed in Note 2 of the Notes to Consolidated Financial Statements. A summary of the allowance for credit losses, the most complex and subjective accounting policy of the Company, is discussed under the heading “Asset Quality and Allowance for Credit Losses” as well as in Note 5 of the Notes to Consolidated Financial Statements. Income taxes and the valuation allowance against deferred tax assets are discussed in Note 6 of the Notes to Consolidated Financial Statements.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net Interest Income

Net interest income for the third quarter of 2014, on a taxable equivalent basis, was $20.6 million, an increase of $4.7 million, or 29.7%, from $15.9 million for the third quarter of 2013. Average earning assets in the third quarter of 2014 increased $617.1 million, or 38.2%, to $2.23 billion, compared to $1.62 billion in the third quarter of 2013. Average interest-bearing liabilities in the third quarter of 2014 increased $532.0 million, or 39.5%, to $1.88 billion, compared to $1.35 billion in the third quarter of 2013. The increases in average earning assets and average interest-bearing liabilities and the resulting increase in net interest income are primarily due to the acquisition of Security Savings Bank, SSB (“Security Savings”) on October 1, 2013, the acquisition of CapStone Bank (“CapStone”) on April 1, 2014 and organic growth in the loan and deposit portfolios.

Taxable-equivalent net interest margin decreased to 3.66% for the third quarter of 2014, compared to 3.90% for the third quarter of 2013, a decrease of 24 basis points. The interest rate spread decreased to 3.60% in the third quarter of 2014, compared to 3.83% in the third quarter of 2013, a decrease of 23 basis points. The decreases in net interest margin and interest rate spread were driven primarily by a lower yield on the loan portfolio. For the three months ended September 30, 2014, the annualized average yield on loans decreased to 4.24% from 4.52% for the three months ended September 30, 2013. The average yield on earning assets during the third quarter of 2014 decreased 23 basis points to 4.00% from 4.23% during the comparable period in 2013, while the average rate on interest-bearing liabilities remained stable at 0.40%. The following table provides an analysis of average volumes, yields and rates and net interest income on a tax-equivalent basis for the three months ended September 30, 2014 and 2013.

(Fully taxable equivalent basis¹, dollars in thousands)

	Three Months Ended								Three Months Ended
	September 30, 2014								September 30, 2013
				Interest		Annualized						Interest		Annualized
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate

Earning assets:
Loans receivable²	$	1,728,789		$	18,456		4.24	%	$	1,226,469		$	13,969		4.52	%
Taxable securities		436,756			3,470		3.18			365,035			2,935		3.22
Tax exempt securities		34,128			421		4.93			14,796			294		7.95
Federal Home Loan Bank stock		14,051			115		3.27			8,277			40		1.93
Federal Reserve Bank stock		1,207			19		6.30			-			-		-
Interest-bearing bank balances		18,970			39		0.82			2,213			2		0.36

Total earning assets		2,233,901			22,520		4.00			1,616,790			17,240		4.23

Non-earning assets:
Cash and due from banks		31,195								23,658
Premises and equipment		46,191								34,671
Other assets		141,888								109,994
Allowance for credit losses		(23,052	)							(26,176	)

Total assets	$	2,430,123		$	22,520				$	1,758,937		$	17,240

Interest-bearing liabilities:
Savings deposits	$	66,870		$	8		0.05	%	$	48,834		$	6		0.05	%
NOW deposits		482,772			235		0.19			418,106			169		0.16
Money market deposits		404,395			215		0.21			337,777			141		0.17
Time deposits		573,108			575		0.40			355,766			421		0.47
Other borrowings		88,104			665		2.99			49,757			338		2.70
Borrowings from Federal
Home Loan Bank		265,098			205		0.31			138,080			271		0.78

Total interest-bearing liabilities		1,880,347			1,903		0.40			1,348,320			1,346		0.40

Other liabilities and shareholders’ equity:
Demand deposits		308,329								229,972
Other liabilities		15,331								19,644
Shareholders’ equity		226,116								161,001
Total liabilities and shareholders’ equity	$	2,430,123			1,903				$	1,758,937			1,346

Net interest income and net interest margin³				$	20,617		3.66	%				$	15,894		3.90	%

Interest rate spread⁴							3.60	%							3.83	%

Income related to securities exempt from federal income taxes is stated on a fully taxable equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable equivalent basis were $141 for 2014 and $98 for 2013.

The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(200) and $7 for the three months ended September 30, 2014 and 2013, respectively, are included in interest income.

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

⁴

Earning assets yield minus interest-bearing liability rate.

Noninterest Income and Expense

In the third quarter of 2014, noninterest income decreased 8.7% to $4.1 million, from $4.5 million during the same period in 2013. No investment securities were sold during the three months ended September 30, 2014, whereas the Company recognized gains on the sales of investment securities of $458,000 during the third quarter of 2013. Retail banking income increased 1.6% to $2.7 million in the third quarter of 2014 from $2.6 million in the third quarter of 2013. Mortgage banking revenue decreased $19,000, or 6.3%, to $283,000 from $302,000 during the same period last year due to a slightly lower level of mortgage loan production as mortgage interest rates were similar in both time periods. Wealth management revenue increased 5.4% to $719,000 in the third quarter of 2014 from $682,000 in the third quarter of 2013. The Company also had a net gain of $8,000 on other equity investments, which is reflected within other noninterest income, during the third quarter of 2014, compared to $21,000 during the same period in 2013.

In the third quarter of 2014, noninterest expense increased 15.1% to $16.6 million, from $14.4 million in the third quarter of 2013. Personnel expense increased 7.9% to $8.7 million, from $8.1 million in the prior year third quarter. The increase in personnel expense is due primarily to hiring related to the new middle-market banking group and new commercial banking groups, to the expansion of the commercial banking team in Winston-Salem, North Carolina, and to additional personnel resulting from the acquisition of Security Savings in October, 2013 and the acquisition of CapStone in April, 2014, partially offset by the workforce reduction resulting from the retail banking realignment announced in the second quarter of 2014. Occupancy expense increased $231,000, or 22.3%, to $1.3 million, and furniture and equipment expense increased $108,000, or 12.9%, to $948,000 in the third quarter of 2014 from $1.0 million and $840,000, respectively, during the same period in 2013 due primarily to the acquisitions of Security Savings and CapStone. FDIC insurance expense declined $37,000, or 8.3%, to $407,000 in the third quarter of 2014, from $444,000 in the third quarter of 2013 despite a significant increase in the assessment base due to the acquisitions of Security Savings and CapStone; in the fourth quarter of 2013, the Bank received a new risk rating, which reduced the Bank’s FDIC insurance assessments. Real estate acquired in settlement of loans expense increased to $158,000 in the third quarter of 2014, from $152,000 in the same period last year.

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

	Three Months Ended
	September 30				Percentage
	2014		2013		Variance

Other noninterest expense:
Advertising	$	463	$	324		42.9	%
Bankcard expense		135		130		3.8
Postage		282		177		59.3
Telephone		131		121		8.3
Amortization of core deposit intangible		449		176		155.1
Stationery, printing and supplies		181		105		72.4
Other expense		1,550		1,152		34.5
Total noninterest expense	$	3,191	$	2,185		46.0

Income Taxes

The Company recorded income tax expense of $2.8 million for the third quarter of 2014, compared to $2.9 million for the third quarter of 2013. The Company’s effective tax rate was 35.5% for the three-month period ended September 30, 2014. For the three-month period ended September 30, 2013, the Company’s effective tax rate was 48.9%; the effective tax rate was 36.3% before recording the estimated effect of a reduction in North Carolina corporate income tax rates. (See Note 6 of the Notes to Consolidated Financial Statements.)

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net Interest Income

Net interest income for the first nine months of 2014, on a taxable equivalent basis, was $57.7 million, an increase of $11.2 million, or 24.0%, from $46.6 million for the first nine months of 2013. Average earning assets in the first nine months of 2014 increased $500.2 million, or 31.6%, to $2.08 billion, compared to $1.58 billion in the first nine months of 2013. Average interest-bearing liabilities in the first nine months of 2014 increased $466.7 million, or 35.9%, to $1.77 billion, compared to $1.30 billion in the first nine months of 2013. The increases in average earning assets and average interest-bearing liabilities and the resulting increase in net interest income are primarily due to the acquisition of Security Savings on October 1, 2013, the acquisition of CapStone on April 1, 2014 and organic growth in the loan and deposit portfolios.

Taxable equivalent net interest margin decreased to 3.70% for the first nine months of 2014, compared to 3.93% for the first nine months of 2013, a decrease of 23 basis points. The interest rate spread decreased to 3.65% in the first nine months of 2014, compared to 3.86% in the first nine months of 2013, a decrease of 21 basis points. The decreases in net interest margin and interest rate spread were driven primarily by a lower yield on the loan portfolio. For the nine months ended September 30, 2014, the annualized average yield on loans decreased to 4.27% from 4.61% for the nine months ended September 30, 2013. The average yield on earning assets during the first nine months of 2014 decreased 23 basis points to 4.04% from 4.27% during the comparable period in 2013, while the average rate on interest-bearing liabilities decreased two basis points to 0.39% from 0.41%. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the nine months ended September 30, 2014 and 2013.

(Fully taxable equivalent basis¹, dollars in thousands)

	Nine Months Ended								Nine Months Ended
	September 30, 2014								September 30, 2013
				Interest		Annualized						Interest		Annualized
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate
Earning assets:
Loans receivable²	$	1,630,921		$	52,073		4.27	%	$	1,192,263		$	41,135		4.61	%
Taxable securities		400,813			9,364		3.12			362,548			8,423		3.10
Tax exempt securities		27,345			1,075		5.24			15,810			863		7.28
Federal Home Loan Bank stock		11,868			313		3.52			7,228			123		2.27
Federal Reserve Bank stock		407			19		6.22			-			-		-
Interest-bearing bank balances		13,527			80		0.79			6,807			15		0.29

Total earning assets		2,084,881			62,924		4.04			1,584,656			50,559		4.27

Non-earning assets:
Cash and due from banks		31,355								24,416
Premises and equipment		45,527								35,036
Other assets		138,823								103,872
Allowance for credit losses		(24,066	)							(26,504	)

Total assets	$	2,276,520		$	62,924				$	1,721,476		$	50,559

Interest-bearing liabilities:
Savings deposits	$	66,089		$	28		0.06	%	$	47,397		$	18		0.05	%
NOW deposits		469,587			607		0.17			420,434			540		0.17
Money market deposits		388,011			563		0.19			332,014			441		0.18
Time deposits		554,438			1,742		0.42			341,301			1,248		0.49
Other borrowings		73,604			1,688		3.07			48,021			994		2.77
Borrowings from Federal Home Loan Bank		215,350			571		0.35			111,209			768		0.92

Total interest-bearing liabilities		1,767,079			5,199		0.39			1,300,376			4,009		0.41

Other liabilities and shareholders’ equity:
Demand deposits		285,464								220,654
Other liabilities		15,436								19,420
Shareholders’ equity		208,541								181,026
Total liabilities and shareholders’ equity	$	2,276,520			5,199				$	1,721,476			4,009

Net interest income and net interest margin³				$	57,725		3.70	%				$	46,550		3.93	%

Interest rate spread⁴							3.65	%							3.86	%

The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(263) and $119 for the nine months ended September 30, 2014 and 2013, respectively, are included in interest income.

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

⁴

Earning assets yield minus interest-bearing liability rate.

Noninterest Income and Expense

In the first nine months of 2014, noninterest income decreased $749,000, or 5.6%, to $12.6 million, from $13.4 million during the same period in 2013. CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the nine months ended September 30, 2014, whereas the Company recognized gains on the sale of investment securities of $736,000 during the first nine months of 2013. Retail banking income increased 4.2% to $7.9 million in the first nine months of 2014 from $7.6 million in the first nine months of 2013. Mortgage banking revenue decreased $694,000, or 51.5%, to $653,000 from $1.3 million during the same period last year due to a significantly lower level of mortgage loan production resulting from increases in mortgage interest rates. Wealth management revenue increased 11.2% to $2.1 million in the first nine months of 2014, from $1.9 million in the same period last year. The Company also had a net gain of $396,000 on other equity investments, which is reflected within other noninterest income, during the first nine months of 2014, compared to $308,000 during the same period in 2013.

In the first nine months of 2014, noninterest expense increased 28.8% to $54.1 million from $42.0 million in the first nine months of 2013. The increase was primarily due to acquisition-related expense in the first nine months of 2014 of $4.9 million, compared to $69,000 in the comparable period last year. Personnel expense increased 14.0% to $26.7 million, from $23.4 million in the first nine months of 2013. The increase in personnel expense is due primarily to hiring related to the new middle-market banking group and new commercial banking groups, to the expansion of the commercial banking team in Winston-Salem, North Carolina, and to additional personnel resulting from the acquisition of Security Savings in October, 2013 and the acquisition of CapStone in April, 2014, partially offset by the workforce reduction resulting from the retail banking realignment announced in the second quarter of 2014. In addition, the Company recorded accruals of $533,000 in the first nine months of 2014 for severance expenses, primarily due to the retail banking realignment. Occupancy expense increased $619,000, or 20.1%, to $3.7 million, and furniture and equipment expense increased $293,000, or 11.7%, to $2.8 million in the first nine months of 2014 from $3.0 million and $2.5 million, respectively, during the same period in 2013 due primarily to the acquisitions of Security Savings and CapStone. FDIC insurance expense declined $109,000, or 8.2%, to $1.2 million in the first nine months of 2014, from $1.3 million in the first nine months of 2013 despite a significant increase in the assessment base due to the acquisitions of Security Savings and CapStone; in the fourth quarter of 2013, the Bank received a new risk rating, which reduced the Bank’s FDIC insurance assessments. Real estate acquired in settlement of loans expense (benefit) increased to $494,000 in the first nine months of 2014, from $(285,000) in the same period last year.

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

	Nine Months Ended
	September 30				Percentage
	2014		2013		Variance

Other noninterest expense:
Advertising	$	1,159	$	1,128		2.7	%
Bankcard expense		393		364		8.0
Postage		704		530		32.8
Telephone		360		528		(31.8	)
Amortization of core deposit intangible		1,175		539		118.0
Stationery, printing and supplies		442		347		27.4
Other expense		4,398		3,373		30.4
Total noninterest expense	$	8,631	$	6,809		26.8

Income Taxes

The Company recorded income tax expense of $5.4 million for the nine months of 2014 at an effective tax rate of 35.6%, compared to an income tax benefit of $3.7 million for the comparable period in 2013. The effective tax rate for the first nine months of 2013 was (24.0)%, as the Company recorded the reversal of a substantial portion of the valuation allowance against its deferred tax asset in the second quarter and the estimated effect of a reduction in North Carolina corporate income tax rates during the third quarter. (See Note 6 of the Notes to Consolidated Financial Statements.)

Asset Quality and Allowance for Credit Losses

The Company’s allowance for credit losses, which is utilized to absorb actual losses in its loan portfolio, is analyzed monthly by management. This analysis includes a methodology that segments the loan portfolio into risk graded loans and homogeneous loan classifications and considers the current status of the portfolio, historical chargeoff experience, current levels of delinquent, impaired and nonperforming loans and their underlying collateral values, as well as economic and other risk factors. It is also subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as the methodology employed and other analytical measures in comparison to a group of peer banks. Due to the concentration of our loan portfolio in real estate secured loans, the value of collateral is heavily dependent on real estate values in North Carolina. No assurances can be given that future economic conditions will not adversely affect borrowers, and/or real estate values in North Carolina, and result in increases in credit losses and nonperforming asset levels.

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

At September 30, 2014, the allowance for credit losses was $22.5 million, or 1.31% of loans held for investment, compared to $24.6 million, or 1.73% of loans held for investment at December 31, 2013, and $25.4 million, or 2.00% of loans held for investment at September 30, 2013. The allowance for credit losses was 287.41% of nonperforming loans at September 30, 2014, 261.23% at December 31, 2013 and 220.68% at September 30, 2013. Based on analysis of the current loan portfolio and levels of problem assets and potential problem loans, management believes the allowance for credit losses is adequate. In the first quarter of 2014, the Company changed its methodology for allocating the allowance for credit losses by portfolio segment for financial reporting. Prior period allocations were revised to conform to the new methodology. The change in methodology did not change the total allowance for credit losses. Additional information regarding the allowance for credit losses is presented in the table headed “Asset Quality Analysis” on page 47.

Nonperforming loans totaled $7.8 million at September 30, 2014, compared to $9.4 million at December 31, 2013 and $11.5 million at September 30, 2013. Real estate acquired in settlement of loans was $3.6 million at September 30, 2014, $7.6 million at December 31, 2013, and $2.7 million at September 30, 2013. Approximately $1.6 million was transferred from loans into real estate acquired in settlement of loans, and approximately $5.4 million of real estate acquired in settlement of loans was disposed of during the first nine months of 2014. A net loss of $115,000 has been recorded on the disposition and writedowns of real estate acquired in settlement of loans in the current year, through September 30, 2014, compared to a net gain of $742,000 in the first nine months of 2013. The Company recorded $379,000 of expenses on real estate acquired in settlement of loans during the first nine months of 2014, compared to $457,000 in the first nine months of 2013. Nonperforming assets (comprised of nonaccrual loans, restructured loans and real estate acquired in settlement of loans) totaled $11.4 million, or 0.47% of total assets, at September 30, 2014, compared to $17.0 million, or 0.87% of total assets, at December 31, 2013 and $14.2 million, or 0.79% of total assets, a year ago.

The Bank is within the regulatory commercial real estate high concentration guidelines in land acquisition, development and construction (“AD&C portfolio”) loans, as well as total commercial real estate loans. At September 30, 2014, the Bank’s concentration levels were 61.37% and 235.48%, respectively, of total regulatory capital, which compares favorably to the interagency regulatory guidance maximum concentrations of 100% and 300%, respectively. The Bank’s AD&C portfolio totaled $157.8 million at September 30, 2014, including $49.6 million of speculative residential construction and residential acquisition and development.

The provision for credit losses charged to operations for the three months ended September 30, 2014 totaled $89,000, compared to $33,000 for the three months ended September 30, 2013. Net chargeoffs for the three months ended September 30, 2014 were $532,000, or 0.12% of average loans held for investment on an annualized basis, compared to net chargeoffs of $1.0 million, or 0.34% of average loans held for investment on an annualized basis, for the three months ended September 30, 2013.

The provision for credit losses charged to operations for the nine months ended September 30, 2014 totaled $833,000, compared to $2.0 million for the nine months ended September 30, 2013. Net chargeoffs for the nine months ended September 30, 2014 were $2.9 million, or 0.24% of average loans held for investment on an annualized basis, compared to net chargeoffs of $3.3 million, or 0.37% of average loans held for investment on an annualized basis, for the nine months ended September 30, 2013.

Asset Quality Analysis

(Dollars in thousands)

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Three Months Ended September 30, 2014
Loans – excluding PCI
Commercial	$	10,264	$	399	$	775	$	(65	)	$	10,575
Real estate – construction		1,771		60		49		108			1,868
Real estate – mortgage		10,354		1,423		648		(64	)		9,515
Consumer		469		201		77		106			451
Other		86		-		2		4			92
Total	$	22,944	$	2,083	$	1,551	$	89		$	22,501

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		-		-		-			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	-	$	-	$	-		$	-

Total loans
Commercial	$	10,264	$	399	$	775	$	(65	)	$	10,575
Real estate – construction		1,771		60		49		108			1,868
Real estate – mortgage		10,354		1,423		648		(64	)		9,515
Consumer		469		201		77		106			451
Other		86		-		2		4			92
Total	$	22,944	$	2,083	$	1,551	$	89		$	22,501

Three Months Ended September 30, 2013
Commercial	$	12,287	$	324	$	796	$	(726	)	$	12,033
Real estate – construction		2,077		372		59		324			2,088
Real estate – mortgage		11,482		1,136		366		83			10,795
Consumer		408		176		69		78			379
Other		141		338		13		274			90
Total	$	26,395	$	2,346	$	1,303	$	33		$	25,385

	Three Months Ended September 30, 2014			Year Ended December 31, 2013
Nonperforming Assets:
Commercial nonaccrual loans, not restructured	$	1,576		$	2,542
Commercial nonaccrual loans, restructured		106			294
Non-commercial nonaccrual loans, not restructured		3,914			3,680
Non-commercial nonaccrual loans, restructured		403			391
Total nonaccrual loans		5,999			6,907
Troubled debt restructured, accruing		1,830			2,491
Total nonperforming loans		7,829			9,398
Real estate acquired in settlement of loans		3,580			7,620
Total nonperforming assets	$	11,409		$	17,018

Asset Quality Percentages:
Nonperforming loans to loans held for investment at end of period		0.45	%		0.66	%
Nonperforming assets to total assets at end of period		0.47	%		0.87	%
Allowance for credit losses as a percentage of loans held for investment at end of period		1.31	%		1.73	%
Allowance for credit losses to nonperforming loans		287.41	%		261.23	%
Net chargeoffs as a percentage of average loans outstanding during the period (annualized for interim periods)		0.12	%		0.38	%

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Nine Months Ended September 30, 2014
Loans – excluding PCI
Commercial	$	11,480	$	836	$	1,300	$	(1,369	)	$	10,575
Real estate – construction		2,027		464		563		(258	)		1,868
Real estate – mortgage		10,479		4,106		1,098		2,044			9,515
Consumer		469		563		213		332			451
Other		95		-		8		(11	)		92
Total	$	24,550	$	5,969	$	3,182	$	738		$	22,501

PCI loans
Commercial	$	-	$	62	$	-	$	62		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		33		-		33			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	95	$	-	$	95		$	-

Total loans
Commercial	$	11,480	$	898	$	1,300	$	(1,307	)	$	10,575
Real estate – construction		2,027		464		563		(258	)		1,868
Real estate – mortgage		10,479		4,139		1,098		2,077			9,515
Consumer		469		563		213		332			451
Other		95		-		8		(11	)		92
Total	$	24,550	$	6,064	$	3,182	$	833		$	22,501

Nine Months Ended September 30, 2013
Commercial	$	12,314	$	859	$	1,020	$	(442	)	$	12,033
Real estate – construction		2,058		1,125		392		763			2,088
Real estate – mortgage		11,673		2,777		922		977			10,795
Consumer		466		806		214		505			379
Other		119		338		63		246			90
Total	$	26,630	$	5,905	$	2,611	$	2,049		$	25,385

	Nine Months Ended September 30, 2014			Year Ended December 31, 2013
Nonperforming Assets:
Commercial nonaccrual loans, not restructured	$	1,576		$	2,542
Commercial nonaccrual loans, restructured		106			294
Non-commercial nonaccrual loans, not restructured		3,914			3,680
Non-commercial nonaccrual loans, restructured		403			391
Total nonaccrual loans		5,999			6,907
Troubled debt restructured, accruing		1,830			2,491
Total nonperforming loans		7,829			9,398
Real estate acquired in settlement of loans		3,580			7,620
Total nonperforming assets	$	11,409		$	17,018

Asset Quality Percentages:
Nonperforming loans to loans held for investment at end of period		0.45	%		0.66	%
Nonperforming assets to total assets at end of period		0.47	%		0.87	%
Allowance for credit losses as a percentage of loans held for investment at end of period		1.31	%		1.73	%
Allowance for credit losses to nonperforming loans		287.41	%		261.23	%
Net chargeoffs as a percentage of average loans outstanding during the period (annualized for interim periods)		0.24	%		0.38	%

Liquidity Management

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

During the first nine months of 2014, the Company had net cash provided by operating activities of $13.0 million, compared to $19.6 million in the first nine months of 2013. The decrease was primarily the result of a decrease in net income of $9.6 million. The reduction in net income was primarily the result of income tax expense of $5.4 million for the first nine months of 2014 compared to an income tax benefit of $3.7 million for the first nine months of 2013 as the Company recaptured an impairment valuation allowance against its deferred tax asset. In addition, acquisition-related expense in the first nine months of 2014 was $4.9 million, compared to $69,000 in the comparable period last year. Depreciation and amortization increased $1.4 million for the first nine months of 2014 to $4.1 million compared to $2.7 million for the first nine months of 2013. Proceeds from sales of loans held for sale exceeded originations of loans held for sale by $881,000 in the first nine months of 2014, while proceeds from sales of loans held for sale exceeded originations of loans held for sale by $7.1 million in the first nine months of 2013. Accretion on acquired loans was $4.1 million in the first nine months of 2014, whereas there was no accretion on acquired loans in the comparable prior year period. Provision for credit losses was $833,000 for the first nine months of 2014 compared to $2.0 million in the first nine months of 2013. For the first nine months of 2014, there was a net loss of $115,000 related to real estate acquired in settlement of loans, compared to a net gain of $742,000 for the first nine months of 2013. In addition, there were gains on sales of investment securities of $736,000 during the first nine months of 2013, while no gains were recorded during the first nine months of 2014.

Net cash used in investing activities for the first nine months of 2014 was $75.3 million, compared to $84.9 million for the first nine months of 2013. Cash outflows for the first nine months of 2014 included $105.7 million in purchases of securities, compared to $148.2 million in the first nine months of 2013. For the nine months ended September 30, 2014, cash inflows included $30.1 million in proceeds from sales, maturities, prepayments and calls of investment securities, compared to $175.1 million during the nine months ended September 30, 2013. Cash inflows for the first nine months of 2014 also included $1.5 million in proceeds from maturities of investment certificates of deposit and $6.0 million in proceeds from sales of loans with no comparable cash inflows in the prior year period. During the first nine months of 2014, there was an increase in loans held for investment of $18.4 million, compared to an increase of $117.6 million during the same period last year. Cash received from the CapStone acquisition totaled $6.2 million in the 2014 nine-month period.

During the nine months ended September 30, 2014, net cash provided by financing activities was $68.5 million, compared to net cash provided by financing activities of $82.4 million during the same period of 2013. During the first nine months of 2014, the Company had cash inflows of $83.2 million related to increased borrowing, compared to cash inflows of $49.7 million in the first nine months of 2013. Excluding deposits assumed in the acquisitions of Security Savings and CapStone, cash outflows for the first nine months of 2014 included a net decrease of $1.8 million in deposits, compared to an increase in deposits of $79.5 million in the first nine months of 2013. In the first nine months of 2014, the Company had cash outflows of $15.0 million as it redeemed the remaining 15,000 shares of Series A preferred stock, compared to $37.5 million for the redemption of Series A preferred stock and $7.8 million for the repurchase of the stock warrant in the first nine months of 2013. Dividends paid in the first nine months of 2014 were $337,000, compared to $1.4 million in the first nine months of 2013. During the first nine months of 2014, cash inflows from stock option exercises were $2.6 million, whereas there were no stock option exercises in the first nine months of 2013.

Cash and cash equivalents totaled $39.8 million at September 30, 2014, compared to $33.5 million at December 31, 2013 and $56.9 million at September 30, 2013.

The Company had borrowing capacity of approximately $521.1 million with the Federal Home Loan Bank of Atlanta, of which approximately $216.1 million was available at September 30, 2014. Borrowings consist of $274.0 million in advances, $30.0 million in letters of credit used in lieu of securities to pledge against public deposits, and a $1.0 million financial standby letter of credit issued by the Federal Home Loan Bank of Atlanta on behalf of one of the Company’s clients. These borrowings are collateralized by Federal Home Loan Bank of Atlanta stock, investment securities, qualifying residential 1 to 4 family first mortgage loans, qualifying multifamily first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. The Company provides various reports to the Federal Home Loan Bank of Atlanta on a regular basis to maintain the availability of the credit line. Each borrowing request is initiated through an advance application that is subject to their approval before funds are advanced under the line of credit. The Company also had $4.6 million of borrowing capacity through the Federal Reserve Bank System, of which none was used as of September 30, 2014. The line with the Federal Reserve Bank of Richmond is collateralized using qualified loans. In addition, the Company has $85.0 million in unsecured, overnight federal funds lines with correspondent banks, of which $37.7 million was used as of September 30, 2014.

Interest Rate Risk Management

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

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

The Company uses several interest rate risk measurement tools provided by a national asset/liability management consultant to help manage this risk. The Company’s Asset/Liability Policy provides guidance for acceptable levels of interest rate risk and potential remediations. Management provides the consultant with key assumptions, which are used as inputs into the measurement tools. There follows a summary of two different tools management uses on a quarterly basis to monitor and manage interest rate risk. The Company has not experienced any material changes in interest rate risk since the end of the fiscal year ended December 31, 2013.

Earnings simulation modeling. Net income is affected by changes in the level of interest rates, the shape of the yield curve and the general market pressures affecting current market interest rates at the time of simulation. Many interest rate indices do not move uniformly, creating certain disunities between them. For example, the spread between a 30 day prime-based asset and a 30 day Federal Home Loan Bank of Atlanta advance may not be uniform over time. The earnings simulation model projects changes in net interest income caused by the effect of changes in interest rates on interest-earning assets and interest-bearing liabilities. Simulation results are measured as a percentage change in net interest income compared to the static-rate or “base case” scenario. The model uses the Company’s current balance sheet, but considers decreases in asset and liability volumes based on prepayment assumptions as well as rate changes. Rate changes are modeled gradually over a 12 month period, referred to as a “rate ramp,” and instantaneously, referred to as a “rate shock.” The model projects only changes in interest income and expense and does not project changes in noninterest income, noninterest expense, provision for credit losses or the impact of changing tax rates.

The following tables summarize the results of the Company’s income simulation model as of June 30, 2014, the most currently available review date.

	“Rate Ramp”
	Change in Net Interest Income
	Year 1			Year 2
Change in Market Interest Rates:
200 basis point “ramped" increase		1.07	%		2.67	%
Base case – no change		-			(1.28	)%
100 basis point “ramped” decrease		(0.56	)%		(6.63	)%

	“Rate Shock”
	Change in Net Interest Income
	Year 1			Year 2
Change in Market Interest Rates:
200 basis point “shocked” increase		2.26	%		4.66	%
Base case – no change		-			(1.28	)%
100 basis point “shocked” decrease		(2.95	)%		(9.03	)%

The projected changes in net interest income are within the Board of Directors’ guidelines in a 200 basis point increasing or 100 basis point decreasing interest rate environment. However, management continually monitors signs of elevated risks and takes certain actions to limit these risks.

Net portfolio value analysis. Net portfolio value (“NPV”) represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates with no effect given to any actions management might take to counter the effect of that interest rate movement.

The following is a summary of the results of the report compiled by the Company’s outside consultant using data and assumptions management provided as of June 30, 2014, the most currently available review date.

	Estimated Change in Net Portfolio Value
	Amount in 000s			Percent
Change in Market Interest Rates:
200 basis point increase	$	(6,991	)		(2.77	)%
Base case – no change		-			-
100 basis point decrease	$	(14,598	)		(5.78	)%

Over the past several years, the Company’s balance sheet has been consistently slightly “asset sensitive,” i.e. should interest rates decline, the Company’s assets will reprice faster than its liabilities, resulting in a declining net interest margin and less net interest income. In order to mitigate its exposure in the event interest rates over the next three years decline, on August 8, 2014, the Company entered into an interest rate swap that qualifies as a cash flow hedge under GAAP. (See Note 11 of the Notes to Consolidated Financial Statements.)

Capital Resources and Shareholders’ Equity

On March 31, 2014, the Company redeemed all of its remaining 15,000 outstanding shares of Series A preferred stock at the liquidation price of $1,000 per share for a total of $15.0 million, plus $172,500 of accrued and unpaid dividends.

On April 1, 2014, the Company completed its acquisition of CapStone. Under the terms of the Agreement and Plan of Combination and Reorganization, CapStone’s shareholders received 2.25 shares of the Company’s Class A common stock for each share of CapStone common stock. The Company issued 8,075,228 shares of Class A common stock (based on 3,589,028 shares of CapStone common stock issued and outstanding as of the closing date) at a price of $7.14 per common share, the closing stock price of the Class A common stock on March 31, 2014. The implied value of the consideration received by CapStone shareholders was $16.065 per share of CapStone common stock. The total purchase price was $62.3 million, including the conversion of 617,270 CapStone stock options having a fair value of $4.6 million. No cash was issued in the transaction other than an immaterial amount of cash paid in lieu of fractional shares.

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

As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies as of September 30, 2014.

	Regulatory Capital
	Well Capitalized			Adequately Capitalized			Company			Bank

Total Capital		10.0	%		8.0	%		12.63	%		12.31	%
Tier 1 Capital		6.0			4.0			10.64			11.12
Leverage Capital		5.0			4.0			8.59			8.98

In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, and increase the minimum Tier I capital ratio requirement. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income and implement a new capital conservation buffer. The final rules will take effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules. The Company is currently evaluating the impact of the final rules on its capital levels and anticipates that the Company and the Bank have will continue to have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Company considers interest rate risk to be its most significant market risk, which is discussed under the heading “Interest Rate Risk Management” on page 50.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s management, including its CEO, CFO and Chief Accounting Officer (“CAO”) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2014. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of September 30, 2014, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in internal control over financial reporting

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit No.		Description

2.1		Agreement and Plan of Combination and Reorganization dated as of November 1, 2013, by and among CapStone Bank, NewBridge Bancorp and NewBridge Bank, incorporated herein by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on November 1, 2013 (SEC File No. 000-11448).

2.2		Agreement and Plan of Combination and Reorganization dated as of October 8, 2014, by and among Premier Commercial Bank, NewBridge Bancorp and NewBridge Bank, incorporated herein by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on October 8, 2014 (SEC File No. 000-11448).

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

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

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

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

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

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

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

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

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

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

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

4.6		Specimen Certificate of Class A Common Stock, no par value, incorporated herein by reference to Exhibit 4.6 of the Annual Report on Form 10-K filed with the SEC on March 12, 2014 (SEC File No. 000-11448).

4.7		Form of Subordinated Note, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2014 (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		1996 Omnibus Stock Incentive Plan, incorporated herein by reference to Exhibit 10.2 of the Annual Report on Form 10-K for the year ended December 31, 1995, filed with the SEC on March 28, 1996 (SEC File No. 000-11448).*

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

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

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

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

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

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

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

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

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

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

10.13		FNB Amended and Restated Directors Retirement Policy, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on August 3, 2007 (SEC File No. 000-11448).*

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

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

10.16		Second Amendment to the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy Trust Agreement among Regions Bank d/b/a/ Regions Morgan Keegan Trust, NewBridge Bancorp and NewBridge Bank, which is incorporated 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).*

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

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

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

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

10.21		Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.45 of the Quarterly Report on Form 10-Q filed with the SEC on August 11, 2008 (SEC File No. 000-11448).*

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

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

10.24		Second Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 11, 2012, incorporated herein by reference to Exhibit 10.33 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

10.25		Third Amendment to the Trust Agreement for the Directors and Senior Management Deferred Compensation Plan and Directors Retirement Policy, effective March 5, 2012, incorporated herein by reference to Exhibit 10.34 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

10.26		Appointment of Successor Trustee under the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management dated March 5, 2012, incorporated herein by reference to Exhibit 10.35 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

10.27		Second Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.36 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

10.28		Third Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.37 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

10.29		Fourth Form of Restricted Stock Award Agreement adopted under the Amended and Restated Comprehensive Equity Compensation Plan for Directors and Employees, incorporated herein by reference to Exhibit 10.38 of the Annual Report on Form 10-K filed with the SEC on March 22, 2012 (SEC File No. 000-11448).*

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

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

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

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

10.34		Third Amendment to the NewBridge Bancorp Non-Qualified Deferred Compensation Plan for Directors and Senior Management, effective January 23, 2013, incorporated herein by reference to Exhibit 10.35 of the Annual Report on Form 10-K filed with the SEC on March 12, 2014 (SEC File No. 000-11448).*

10.35		Form of Subordinated Note Purchase Agreement, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2014 (SEC File No. 000-11448).

10.36		CapStone Bank 2006 Incentive Stock Option Plan, incorporated herein by reference to Exhibit 99.1 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).*

10.37		CapStone Bank 2006 Nonstatutory Stock Option Plan, incorporated herein by reference to Exhibit 99.2 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).*

10.38		Patriot State Bank 2007 Incentive Stock Option Plan, incorporated herein by reference to Exhibit 99.3 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).*

10.39		Patriot State Bank 2007 Nonstatutory Stock Option Plan, incorporated herein by reference to Exhibit 99.4 of the Registration Statement on Form S-8, filed with the SEC on April 24, 2014 (SEC File No. 333-195472).*

10.40		Form of Settlement and Release Agreement between NewBridge Bank and Michael S. Patterson, incorporated herein by reference to Exhibit 10.37 of the Registration Statement on Form S-4, filed with the SEC on December 23, 2013 (SEC File No. 333-193045).*

10.41		Form of Continuing Services Agreement between NewBridge Bank and Michael S. Patterson, incorporated herein by reference to Exhibit 10.36 of the Registration Statement on Form S-4, filed with the SEC on December 23, 2013 (SEC File No. 333-193045).*

10.42		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Pressley A. Ridgill, executed August 21, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on August 21, 2014 (SEC File No. 000-11448).*

10.43		NewBridge Bank Supplemental Executive Retirement Plan, executed November 6, 2014, and effective September 1, 2014.*

10.44		NewBridge Bank Supplemental Executive Retirement Plan Participation Agreement by and between NewBridge Bank and Pressley A. Ridgill, executed November 6, 2014, and effective September 1, 2014.*

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

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

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

101.1		Financial Statements filed in XBRL format.

* Management contract and compensatory arrangements.

SIGNATURES

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

Date: November 7, 2014	NEWBRIDGE BANCORP
	(Registrant)

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

EXHIBIT INDEX

Exhibit No.		Description

10.43		NewBridge Bank Supplemental Executive Retirement Plan, executed November 6, 2014, and effective September 1, 2014.

10.44		NewBridge Bank Supplemental Executive Retirement Plan Participation Agreement by and between NewBridge Bank and Pressley A. Ridgill, executed November 6, 2014, and effective September 1, 2014.

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

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

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

101.1		Financial Statements submitted in XBRL format.