UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended: December 31, 2010		Commission File Number: 000-11448

NewBridge Bancorp

(Exact name of Registrant as specified in its Charter)

North Carolina (State of Incorporation)		56-1348147 (I.R.S. Employer Identification No.)
1501 Highwoods Blvd., Suite 400
Greensboro, North Carolina		27410
(Address of principal executive offices)		(Zip Code)

(336) 369-0900
(Registrant’s telephone number, including area code)

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

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

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

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

Indicate by check mark 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 þ No o

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

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 o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a 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 o No þ

The aggregate market value of the Registrant’s voting and nonvoting common equity held by non-affiliates of the Registrant, based on the average bid and asked price of such common equity on the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $52.5 million. As of March 21, 2011 (the most recent practicable date), the Registrant had 15,655,868 shares of Common Stock outstanding.

Documents incorporated by reference — Portions of the Proxy Statement for the 2011 Annual Meeting of Shareholders of NewBridge Bancorp (the “Proxy Statement”) are incorporated by reference into Part III hereof.

The Exhibit Index begins on page 90.

 

 

NewBridge Bancorp
Annual Report on Form 10-K for the fiscal year ended December 31, 2010
Table of Contents

Index				Page
PART I
Item 1.		Business			4
Item 1A.		Risk Factors			14
Item 1B.		unresolved staff comments			24
Item 2.		Properties			25
Item 3.		Legal Proceedings			26
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			27
Item 6.		Selected Financial Data			30
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			54
Item 8.		Financial Statements and Supplementary Data			58
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			87
Item 9A.		Controls and Procedures			87
Item 9B.		Other Information			87
PART III
Item 10.		Directors, Executive Officers And Corporate Governance			88
Item 11.		Executive Compensation			88
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			88
Item 13.		Certain Relationships and Related Transactions, and director independence			88
Item 14.		Principal Accountant Fees and Services			88
PART IV
Item 15.		Exhibits and Financial Statement Schedules			89
		Signatures			94
EX-21.01
EX-23.01
EX-31.01
EX-31.02
EX-32.01
EX-99.01
EX-99.02

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•

revenues are lower than expected;

•

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

•

competitive pressure among depository institutions increases significantly;

•

changes in consumer spending, borrowings and savings habits;

•

regulatory approval for paying dividends cannot be obtained

•

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

•

the cost of additional capital is more than expected;

•

a change in the interest rate environment reduces interest margins;

•

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

•

counterparty risk;

•

general economic conditions, particularly those affecting real estate values, either nationally or in the market 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 Federal Reserve Board;

•

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

•

demand for the products or services of the Company, 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; and

•

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

Bancorp cautions that the foregoing list of important factors is not exhaustive. See also “Risk Factors” which begins on page 14. Bancorp undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time, by or on behalf of Bancorp.

PART I

Item 1.		Business

General

Bancorp is a bank holding company incorporated under the laws of the State of North Carolina (“NC”) and registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’s principal asset is stock of its banking subsidiary, NewBridge Bank (the “Bank”). Accordingly, throughout this Annual Report on Form 10-K, there are frequent references to the Bank. The principal executive offices of Bancorp and the Bank are located at 1501 Highwoods Boulevard, Suite 400, Greensboro, NC 27410. The telephone number is (336) 369-0900 and its website is www.newbridgebank.com. The Bank maintains operations facilities in Lexington and Reidsville, NC.

Bancorp is the successor entity to LSB Bancshares, Inc., which was incorporated on December 8, 1982 (“LSB”). On July 31, 2007, FNB Financial Services Corporation (“FNB”), a bank holding company, also incorporated in NC and registered under the BHCA, merged with and into LSB in a merger of equals (the “Merger”). LSB’s name was then changed to “NewBridge Bancorp”.

The Bank, a NC chartered non-member bank, is the successor entity to Lexington State Bank (“LSB Bank”), which was incorporated on July 5, 1949. As a result of the Merger, Bancorp acquired FNB Southeast, a NC chartered bank, the sole banking subsidiary of FNB. On November 12, 2007, FNB Southeast merged with and into LSB Bank (the “Bank Merger”) and the surviving bank changed its name to “NewBridge Bank”.

Business of Bank and Other Subsidiaries

Through its branch network, the Bank provides a wide range of banking products to small to medium-sized businesses and retail clients in its market areas, including interest bearing and noninterest bearing demand deposit accounts, certificates of deposits, individual retirement accounts, overdraft protection, personal and corporate trust services, safe deposit boxes, online banking, corporate cash management, brokerage, financial planning and asset management, and secured and unsecured loans. On December 31, 2009, the Bank expanded its mortgage production business through its acquisition of the assets of Bradford Mortgage Company, an established mortgage origination company operating principally in the Piedmont Triad Region of NC.

As of December 31, 2010, the Bank operated four active non-bank subsidiaries: Peoples Finance Company of Lexington, Inc. (“Peoples Finance”), LSB Properties, Inc. (“LSB Properties”), Henry Properties, LLC (“Henry Properties”) and Prince George Court Holdings, Inc. (“Prince George”). Peoples Finance, a NC licensed finance company, with approximately $0.9 million of loans outstanding as of December 31, 2010, is no longer actively soliciting loans. LSB Properties, Henry Properties and Prince George together own the real estate acquired in settlement of loans of the Bank.

Bancorp has one non-bank subsidiary, FNB Financial Services Capital Trust I (“FNB Trust”), a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. Prior to the Merger, FNB Trust was a subsidiary of FNB. FNB Trust is not consolidated in Bancorp’s financial statements.

As part of its operations, Bancorp regularly holds discussions and evaluates the potential acquisition of, or merger with, various financial institutions and other businesses. Bancorp also regularly considers the potential disposition of certain assets, branches, subsidiaries, or lines of business. As a general rule, Bancorp only publicly announces any material acquisitions or dispositions once a definitive agreement has been reached.

Bancorp operates one reportable segment, the Bank. Reference is made to Item 8 — “Financial Statements and Supplementary Data”. Management believes that Bancorp is not dependent upon any single customer, or a few customers, the loss of any one or more of which would have a material adverse effect on Bancorp’s operations.

Market Areas

The Bank’s primary market area is the Piedmont Triad Region of NC. On December 31, 2010, the Bank operated 31 branch offices, two commercial loan production offices and two mortgage loan production offices in its three markets: the Piedmont Triad Region and Coastal Region of NC and the Shenandoah Valley Region of Virginia (“VA”). The Bank also has one mortgage loan production office in Raleigh, NC and one in Charlotte, NC. The following table lists the Bank’s branch offices, categorized by region and city.

Piedmont Triad Region:		Piedmont Triad Region (continued):
Greensboro (five offices)		Midway
Lexington (three offices)		Thomasville
Reidsville (two offices)		Tyro
Winston-Salem (two offices)		Walkertown
Archdale		Wallburg
Clemmons		Welcome
Danbury
Eden		Coastal Region:
High Point		Wilmington (two offices)
Jamestown		Burgaw
Kernersville
King		Shenandoah Valley Region:
Madison		Harrisonburg 1

As of December 31, 2010, the Bank operated 27 branches and four loan production offices in the Piedmont Triad Region of North Carolina. The Piedmont Triad Region is a 12 county area, located in the rapidly growing interstate corridor between Charlotte, NC and the Research Triangle Park, and has a combined population of approximately 1.6 million people. The Piedmont Triad Region includes the cities of Greensboro, Winston-Salem and High Point, respectively the third, fourth and eighth largest cities in NC.

The Piedmont Triad Region economy, traditionally centered on the textile, furniture and tobacco industries, has transitioned to a more service-oriented economy; successfully diversifying into areas related to transportation, logistics, health care, education and technology. Benefiting the Piedmont Triad Region’s economy are decisions by FedEx to locate a national hub at Piedmont Triad International Airport (“PTIA”), and by Honda Aircraft Company to locate its world headquarters at PTIA.

In addition to its strategic proximity to key markets, the Piedmont Triad Region has a well defined transportation infrastructure, providing access to both global and national markets. Interstates I-40, I-85 and I-77 provide both North-South and East-West routes. In addition, local manufacturers and distribution hubs will have direct access to both Midwest markets and additional Southeast ports when Interstates I-73 and I-74, which will bisect the Piedmont Triad Region, are completed. Moreover, extensive rail services are offered by major carriers, Norfolk Southern, CSX and Amtrak as well as a number of short-line railroads.

The Piedmont Triad Region is home to numerous institutions of higher education, including Wake Forest University, Wake Forest University Medical Center, North Carolina School of the Arts, Salem College and Winston-Salem State University (Winston-Salem), High Point University (High Point), two members of the University of North Carolina system located in Greensboro; the University of North Carolina at Greensboro and a number of other well-respected private colleges, as well as many community colleges and technical schools. All are recognized for academic excellence and enhance the Piedmont Triad Region’s business development efforts, particularly in the field of biotechnology.

As of June 30, 2010, the Bank was the largest community bank in the Piedmont Triad Region, based on deposit market share.

As of December 31, 2010, the Bank operated three branches in the Coastal Region, which includes Pender County and New Hanover County, located on the Southeast coast of NC. Wilmington is the county seat and industrial center of New Hanover County. A historic seaport and a popular tourist destination, Wilmington has diversified and developed into a major resort area, a busy sea port (one of NC’s two deep water ports), a light manufacturing center, a chemical manufacturing center and the distribution hub of southeastern NC. During the past 20 years, the Wilmington area has experienced extensive industrial development and growth in the service and trade sectors. Industries in the Wilmington region produce fiber optic cables for the communications industry; aircraft engine parts; pharmaceuticals; nuclear fuel components; and various textile products. The motion picture industry has a significant presence in the Wilmington area. Wilmington also serves as a regional retail center, a regional medical center and the home of the University of North Carolina at Wilmington.

The total population of New Hanover County is approximately 190,000. The County is served by Interstate 40 and U.S. Highways 17 and 74, major rail connections and national and regional airlines through facilities at the New Hanover International Airport, located near Wilmington.

As of December 31, 2010, the Bank operated one branch in its Shenandoah Valley Region, serving Rockingham County, VA. On December 21, 2010, the Bank announced it had entered into an agreement to sell its Virginia operations.

Management believes that unemployment data is the most significant indicator of the economic health of its market areas and monitors this data on a regular basis. As reflected in the table below, the unemployment rates in each of the Company’s market areas has increased substantially since the end of 2007. In addition to the unemployment rate increases, Coastal Region property values were substantially impacted by speculative real estate development. The table also shows non-performing loans as a percentage of total loans in each market as of December 31, 2010.

				Unemployment Rate														As of December 31, 2010
																		Nonperforming										% of Total
				December 31														Loans					Total Loans					Loans
				2007			2008			2009			2010					(in thousands)
	Piedmont Triad:
	Guilford County			4.5%			8.3%			11.2%				10.1	%			$	6,473				$	275,978				2.35%
	Davidson County			5.3			9.7			13.4				11.1					12,448					367,112				3.39
	Rockingham County			5.7			10.1			12.6				12.1					2,577					90,239				2.86
	Forsyth County			4.3			7.4			9.9				9.1					5,617					217,959				2.58
	Coastal			3.9			7.5			9.7				8.9					17,340					187,730				9.24
	Shenandoah Valley			2.4			4.2			5.5				5.4					1,004					104,653				0.96

The following table reflects the Bank’s loans, deposits and branch locations by region at December 31, 2010, and the Bank’s rank, by deposit market share as of June 30, 2010 (dollars in thousands):

										Number of				Deposit Market
Region		Loans(1)				Deposits				Branches				Share Rank(2)
Piedmont Triad		$	1,033,887			$	1,293,431				27				1
Coastal			194,388				102,945				3				5
Shenandoah Valley			32,310				56,619				1				4

Deposits

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

		As of December 31,
		2010				2009				2008
Noninterest-bearing demand			11.1	%			10.4	%			9.0	%
Savings, NOW, MMA			54.8				44.6				36.9
Certificates of deposit			34.1				45.0				54.1
			100.0	%			100.0	%			100.0	%

The Bank accepts deposits at its banking offices, all of which have automated teller machines (“ATMs”). Its memberships in multiple ATM networks allow customers access to their depository accounts from ATM facilities throughout the United States. Competitive fees are charged for the use of its ATM facilities by customers not having an account with the Bank. Deposit flows are controlled primarily through the pricing of deposits.

At December 31, 2010, the Bank had $247.2 million in certificates of deposit of $100,000 or more, which includes $83.6 million in certificates of deposit of $250,000 or more. The Bank is a member of an electronic network that allows it to post interest rates and attract certificates of deposit nationally. It also utilizes brokered deposits and deposits obtained through the Promontory InterFinancial Network, also known as CDARS, to supplement in-market deposits. The accompanying table presents the scheduled maturities of time deposits of $100,000 or more and $250,000 or more at December 31, 2010.

Scheduled maturity of time deposits		$100,000 or more				$250,000 or more
(In thousands)
Less than three months		$	124,886			$	43,844
Three through six months			53,904				25,047
Seven through twelve months			38,602				7,512
Over twelve months			29,762				6,012
Total		$	247,154			$	82,415

See also Note 7 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Marketing

The Bank focuses its marketing efforts on small- to medium-sized businesses and retail clients, and on achieving certain strategic objectives, including increasing non-interest income and growing core deposits and loans. The Bank promotes its brand through its association with the Greensboro minor league baseball team and stadium (NewBridge Bank Park), traditional advertising and promotions, sponsorship of local events and other community-focused campaigns.

Competition

Commercial banking in North Carolina and Virginia is extremely competitive, due in large part to intrastate and interstate branching laws. Many of Bancorp’s competitors are significantly larger and have greater resources. Bancorp continues to encounter significant competition from a number of sources, including bank holding companies, financial holding companies, commercial banks, thrift institutions, credit unions and other financial institutions and financial intermediaries. Bancorp competes in its market areas with some of the largest banking organizations in the Southeast and nationally, almost all of which have numerous branches in NC and VA. Bancorp’s competition is not limited to financial institutions based in NC and VA. Many of its competitors have substantially higher lending limits due to their greater total capitalization, and many perform functions for their

customers that Bancorp generally does not offer. Bancorp primarily relies on providing quality products and services at a competitive price within its market areas. As a result of interstate banking legislation, Bancorp’s market is open to future penetration by banks located in other states, provided that the other states also permit de novo branching and acquisitions by NC and VA banking institutions, thereby increasing competition.

In the Piedmont Triad Region, as of June 30, 2010, Bancorp competed with 31 commercial banks and savings institutions, as well as numerous credit unions. As of that date, Bancorp competed with 20 commercial banks and savings institutions, and several credit unions, in the Coastal Region and 16 commercial banks and several credit unions in the Shenandoah Valley Region.

Employees

At December 31, 2010, the Company had a total of 497 employees, including 481 full time employees, all of whom were compensated by the Bank or its subsidiaries. None of the Company’s employees are represented by a collective bargaining unit, and the Company has not recently experienced any type of strike or labor dispute. The Company considers its relationship with its employees to be good.

Supervision and Regulation

Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect Bancorp, the Bank and the Bank’s subsidiaries. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below, and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of Bancorp and the Bank. Supervision, regulation and examination of Bancorp and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of Bancorp. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. Bancorp cannot predict whether, or in what form, any proposed statute or regulation will be adopted or the extent to which the business of Bancorp and the Bank may be affected by such statute or regulation.

General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the Federal Deposit Insurance Corporation (the “FDIC”) insurance fund in the event the depository institution becomes in danger of default or in default. For example, to avoid receivership of an insured depository institution subsidiary, a holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all acceptable capital standards as of the time the bank fails to comply with such capital restoration plan. Bancorp, as a registered bank holding company, is subject to the regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve”). Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to require a bank holding company to terminate any activity or to relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the holding company.

As a result of Bancorp’s ownership of the Bank, Bancorp is also registered under the bank holding company laws of North Carolina. Accordingly, Bancorp is also subject to supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”).

U.S. Treasury Capital Purchase Program. Pursuant to the U.S. Department of the Treasury (the “U.S. Treasury”) Capital Purchase Program (the “CPP”), on December 12, 2008, Bancorp issued and sold to the U.S.

Treasury (i) 52,372 shares of Bancorp’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 2,567,255 shares of Bancorp’s common stock, par value $5.00 per share, for an aggregate purchase price of $52,372,000 in cash. The Securities Purchase Agreement, dated December 12, 2008, pursuant to which the securities issued to the U.S. Treasury under the CPP were sold, currently restricts Bancorp, without the prior approval of the U.S. Treasury, from increasing dividends payable on its common stock from the last quarterly cash dividend per share ($0.05) declared on the common stock prior to October 14, 2008, limits Bancorp’s ability to repurchase shares of its common stock (with certain exceptions, including the repurchase of its common stock to offset share dilution from equity-based compensation awards), grants the holders of the Series A Preferred Stock, the Warrant and the common stock of Bancorp to be issued under the Warrant, certain registration rights, and subjects Bancorp to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (“EESA”), the American Recovery and Reinvestment Act of 2009 (“ARRA”) and subsequent regulations issued by the U.S. Treasury.

Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve System and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve’s capital adequacy guidelines are required to comply with the Federal Reserve’s risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets is 8%. At least half of the total capital is required to be “Tier I capital,” principally consisting of common stockholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock less certain goodwill items. The remainder (“Tier II capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum. Bancorp exceeded all applicable minimum capital adequacy guidelines as of December 31, 2010.

Capital Requirements for the Bank. The Bank, as a NC commercial bank, is required to maintain a surplus account equal to 50% or more of its paid-in capital stock. As a FDIC insured commercial bank that is not a member of the Federal Reserve, the Bank is also subject to capital requirements imposed by the FDIC. Under the FDIC’s regulations, state nonmember banks that (a) receive the highest rating during the examination process and (b) are not anticipating or experiencing any significant growth, are required to maintain a minimum leverage ratio of 3% of total consolidated assets; all other banks are required to maintain a minimum ratio of 1% or 2% above the stated minimum, with a minimum leverage ratio of not less than 4%. The Bank exceeded all applicable minimum capital requirements as of December 31, 2010.

Dividend and Repurchase Limitations. Bancorp’s participation in the CPP limits our ability to repurchase shares of our common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from equity-based compensation awards), except with the prior approval of the U.S. Treasury. See “Supervision and Regulation—U.S. Treasury Capital Purchase Program.” Federal regulations provide that Bancorp must obtain Federal Reserve approval prior to repurchasing common stock for consideration in excess of 10% of its net worth during any 12-month period unless Bancorp (i) both before and after the redemption satisfies capital requirements for a “well capitalized” bank holding company; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. Additionally, Bancorp’s Board of Directors has resolved not to redeem any of Bancorp’s stock without the prior approval of The Federal Reserve Bank of Richmond (the “Federal Reserve Bank”).

The ability of Bancorp to pay dividends or repurchase shares is dependent upon Bancorp’s receipt of dividends from the Bank. NC commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. NC commercial banks may only pay dividends from undivided profits,

which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by NC law. The Bank is currently restricted from paying dividends to Bancorp unless it receives advance approval from the FDIC and the Commissioner. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

During 2008, the Company first reduced its quarterly cash dividend, and later suspended the payment of cash dividends. As a result of the Company’s participation in the CPP, the Company currently requires prior approval of the U.S. Treasury to increase dividends payable on its common stock to more than the last quarterly cash dividend ($0.05 per share) declared prior to October 14, 2008. Additionally, Bancorp’s Board of Directors has resolved not to declare or pay any dividend, common or preferred, or make any payments on trust preferred securities without the prior approval of the Federal Reserve Bank.

Deposit Insurance Assessments. The Bank is subject to insurance assessments imposed by the FDIC. Under current law, the insurance assessment to be paid by members of the Deposit Insurance Fund, such as the Bank, is specified in a schedule required to be issued by the FDIC. In 2010, FDIC assessments for deposit insurance ranged from 12 to 50 basis points per $100 of insured deposits, depending on the institution’s capital position and other supervisory factors. During the first quarter of 2009, the FDIC instituted a one-time special assessment equal to 5 cents per $100 of domestic deposits on FDIC insured institutions, which resulted in an additional $970,000 in FDIC insurance expense for 2009. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of estimated deposit insurance premiums by December 31, 2009. The FDIC exempted the Bank from this rule, and the Bank continues to pay premiums on a quarterly basis. On February 7, 2011, the FDIC adopted a new assessment formula, effective with the second quarter of 2011. The Bank expects its assessments will decline as a result.

Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta. At December 31, 2010, the Bank was in compliance with these requirements.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination, which was completed during June 2008.

Prompt Corrective Action. The FDIC has broad powers to take corrective action to resolve the problems of insured depository institutions. The extent of these powers will depend upon whether the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized”. Under the regulations, an institution is considered “well capitalized” if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An “adequately capitalized” institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating). An institution is

considered (A) “undercapitalized” if it has (i) a total risk-based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4%, or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating); (B) “significantly undercapitalized” if the institution has (i) a total risk-based capital ratio of less than 6%, (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3%; and (C) “critically undercapitalized” if the institution has a ratio of tangible equity to total assets equal to or less than 2%. At December 31, 2010, the Bank had the requisite capital levels to qualify as “well capitalized”.

Changes in Control. The BHCA prohibits Bancorp from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank or financial holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of Bancorp. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of Bancorp or controls in any manner the election of a majority of the directors of Bancorp. Control is presumed to exist if a person acquires more than 10% of any class of voting stock, the stock is registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), and the acquiror will be the largest shareholder after the acquisition.

Federal Securities Law. Bancorp has registered its common stock with the SEC pursuant to Section 12(g) of the Exchange Act. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to Bancorp.

Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans to one borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.

Loans to One Borrower. The Bank is subject to the loans to one borrower limits imposed by the Commissioner, which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the Bank. At December 31, 2010, this limit was $31.6 million. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus, or $21.1 million.

Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”), dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. In doing so, it increased competition in the financial services industry, presenting greater opportunities for our larger competitors, which were more able to expand their service and products than smaller, community-oriented financial institutions, such as the Bank.

USA Patriot Act of 2001. The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act was intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The impact of the Act on financial institutions of all kinds has been significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act (“SOX”) was signed into law in 2002 and addresses accounting, corporate governance and disclosure issues. The impact of SOX is wide-ranging as it applies to all public companies and imposes significant requirements for public company governance and disclosure requirements.

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

The economic and operational effects of SOX on public companies, including the Company, have been and will continue to be significant in terms of the time, resources and costs associated with compliance with its requirements.

Dodd-Frank Wall Street Reform and Consumer Protection Act . On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act was intended primarily to overhaul the financial regulatory framework following the global financial crisis and will impact all financial institutions including Bancorp and the Bank. The Dodd-Frank Act contains provisions that will, among other things, establish a Bureau of Consumer Financial Protection, establish a systemic risk regulator, consolidate certain federal bank regulators and impose increased corporate governance and executive compensation requirements. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act are not yet known.

Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution’s normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction, “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates) and “undercapitalized” depository institutions may not accept, renew, or roll-over such deposits. Definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by the FDIC to implement the prompt corrective action provisions discussed above.

Taxation. Federal Income Taxation. Financial institutions such as the Company are subject to the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), in the same general manner as other corporations. The Bank computes its bad debt deduction under the specific charge-off method.

State Taxation. Under NC law, the Bancorp and its subsidiaries are each subject to corporate income taxes at a 6.90% rate and an annual franchise tax at a rate of 0.15% of equity.

Other. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state chartered institutions examined by state regulators, and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.

The Bank is subject to examination by the FDIC and the Commissioner. In addition, it is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit, equal credit and fair credit reporting laws and laws relating to branch banking. The Bank, as an insured NC commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the Deposit Insurance Fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.

Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions, are introduced regularly. Neither Bancorp nor the Bank can predict whether or what form any proposed statute or regulation will be adopted or the extent to which the business of Bancorp or the Bank may be affected by such statute or regulation.

Available Information

Bancorp makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on its internet website www.newbridgebank.com, as soon as reasonably practicable after the reports are electronically filed with the SEC. Any materials that Bancorp files with the SEC may be read and/or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SEC’s website at www.sec.gov.

Additionally, Bancorp’s corporate governance policies, including the charters of the Audit and Risk Management, Compensation, and Corporate Governance and Nominating Committees, the Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Code of Business Conduct and Ethics for CEO and Senior Financial Officers may also be found under the “Investor Relations” section of Bancorp’s website. A written copy of the foregoing corporate governance policies is available upon written request to Bancorp.

Item 1A.		Risk Factors

An investment in Bancorp’s common stock is subject to risks inherent in Bancorp’s business. The material risks and uncertainties that management believes affect Bancorp are described below. Before making an investment decision, you should carefully consider these risks and uncertainties, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. These risks and uncertainties are not the only ones facing Bancorp. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also impair Bancorp’s business operations. This report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, Bancorp’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of Bancorp’s common stock could decline significantly, and you could lose all or part of your investment.

Risks Related to Recent Economic Conditions and Governmental Response Efforts

Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally. The global, U.S. and North Carolina economies are continuing to experience significantly reduced business activity and consumer spending as a result of, among other factors, disruptions in the capital and credit markets that first occurred during 2008. Since 2008, dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:

	•		a decrease in the demand for loans or other products and services offered by us;
	•		a decrease in the value of our loans or other assets secured by consumer or commercial real estate;
	•		a decrease in deposit balances due to overall reductions in the accounts of customers;
	•		an impairment of certain intangible assets or investment securities;
	•		a decreased ability to raise additional capital on terms acceptable to us or at all; or
	•		an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.

Until conditions improve, we expect our business, financial condition and results of operations to continue to be adversely affected.

Financial reform legislation recently enacted by Congress will result in new laws and regulations that are expected to increase our costs of operations. Congress recently enacted the Dodd-Frank Act. This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act are expected to have a near term effect on us. For example, effective one year after the date of enactment, is a provision that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Increases in FDIC insurance premiums may adversely affect Bancorp’s net income and profitability. Since 2008, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In addition, the FDIC instituted two temporary programs, to further insure customer deposits at FDIC insured banks: deposit accounts are now insured up to $250,000 per customer (up from $100,000), which in 2010 was made permanent, and noninterest-bearing transactional accounts are currently fully insured (unlimited coverage). These programs have placed additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of estimated deposit insurance premiums by December 31, 2009. The FDIC exempted the Bank from this prepayment requirement, and the Bank continues to pay these premiums on a quarterly basis. Bancorp is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are additional bank or financial institution failures, or the cost of resolving prior failures exceeds expectations, the Bank may be required to pay higher FDIC premiums than those currently in force. Any future increases or required prepayments of FDIC insurance premiums may adversely impact Bancorp’s earnings and financial condition.

The capital and credit markets have experienced unprecedented levels of volatility. During the economic downturn, the capital and credit markets experienced extended volatility and disruption. In some cases, the markets produced downward pressure on financial institution stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. If these levels of market disruption and volatility continue, worsen or abate and then arise at a later date, Bancorp’s ability to access capital could be materially impaired. Bancorp’s inability to access the capital markets could constrain the Bank’s ability to make new loans, to meet the Bank’s existing lending commitments and, ultimately jeopardize the Bank’s overall liquidity and capitalization.

Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or other legislation or regulations intended to strengthen the U.S. financial system, could adversely affect us. Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA,

EESA, the TLGP and special assessments imposed by the FDIC, subject participants to additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, may have a material and adverse affect on our business, financial condition, and results of operations.

Our participation in the CPP imposes restrictions and obligations on us that limit our ability to increase dividends, repurchase shares of our common stock and access the capital markets. On December 12, 2008, we issued and sold (i) 52,372 shares of Series A Preferred Stock and (ii) a Warrant to purchase 2,567,255 shares of Bancorp’s common stock, par value $5.00 per share, to the U.S. Treasury as part of its CPP. Prior to December 12, 2011, unless we have redeemed all of the Series A Preferred Stock or the U.S. Treasury has transferred all of the Series A Preferred Stock to a third party, the Securities Purchase Agreement pursuant to which such securities were sold, among other things, limits the payment of dividends on our common stock to a maximum quarterly dividend of $0.05 per share without prior regulatory approval, limits our ability to repurchase shares of our common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution from equity-based compensation awards), and grants the holders of such securities certain registration rights which, in certain circumstances, impose lock-up periods during which we would be unable to issue equity securities. In addition, unless we are able to redeem the Series A Preferred Stock during the first five years, the dividends on this capital will increase substantially at that point, from 5% to 9%. Depending on market conditions at the time, this increase in dividends could significantly impact our liquidity.

The limitations on incentive compensation contained in the ARRA and subsequent regulations may adversely affect our ability to retain our highest performing employees. In the case of a company such as Bancorp that received CPP funds, the ARRA, and subsequent regulations issued by the U.S. Treasury, contain restrictions on bonus and other incentive compensation payable to the company’s senior executive officers. As a consequence, we may be unable to create a compensation structure that permits us to retain our highest performing employees and attract new employees of a high caliber. If this were to occur, our businesses and results of operations could be adversely affected.

The soundness of other financial institutions could adversely affect us. Since mid-2007, the financial services industry as a whole, as well as the securities markets generally, have been materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Financial institutions in particular have been subject to increased volatility and an overall loss in investor confidence.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and other institutional clients.

From time to time, we may utilize derivative financial instruments, primarily to hedge our exposure to changes in interest rates, but also to hedge cash flow. By entering into these transactions and derivative instrument contracts, we expose ourselves to counterparty credit risk in the event of default of our counterparty or client. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings, limiting our exposure to any single counterparty and regularly monitoring our market position with each counterparty. Nonetheless, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan due us. There is no assurance that any such losses would not materially and adversely affect our businesses, financial condition or results of operations.

Market developments may adversely affect our industry, business and results of operations. Significant declines in the housing market, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Bancorp has experienced significant challenges, its credit quality has deteriorated and its net income and results of operations have been adversely impacted. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. Although to date Bancorp and the Bank remain “well capitalized,” and have performed better than many of their peers, we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and/or reduced business activity could materially adversely affect our business, financial condition and results of operations.

Risks Associated with Our Business

We rely on dividends from the Bank for most of our revenue. Bancorp is a separate and distinct legal entity from the Bank. Bancorp receives substantially all of its revenue from dividends received from the Bank. These dividends are the principal source of funds to pay dividends on Bancorp’s common and preferred stock, and interest and principal on its outstanding debt securities. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to Bancorp. The Bank is currently restricted from paying dividends to Bancorp unless it receives advance approval from the FDIC and the Commissioner. In the event the Bank is unable to pay dividends to Bancorp, Bancorp may not be able to service debt, pay obligations, or pay dividends on Bancorp’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on Bancorp’s business, financial condition and results of operations. See Item 1 “Business — Supervision and Regulation” and Note 19 of the Notes to the Consolidated Financial Statements.

The Bank is exposed to risks in connection with the loans it makes. A significant source of risk for Bancorp and the Bank arises from the possibility that losses will be sustained by the Bank because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. Losses from such failures have materially impacted the Bank’s operating results during the past 3 years. The Bank has underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that it believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying its loan portfolio. Such policies and procedures, however, can not fully prevent unexpected losses that could adversely affect the Bank’s results of operations.

Our allowance for loan losses may be insufficient. All borrowers carry the potential to default and our remedies to recover (seizure and/or sale of collateral, legal actions, guarantees, etc.) may not fully satisfy money previously lent. We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge offs, based on judgments different than those of management. An increase in the allowance for loan losses results in a decrease in net income, and possibly risk-based capital, and may have a material adverse effect on our financial condition and results of operations.

If the value of real estate in the markets we serve were to further decline, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us. At December 31, 2010, our loans secured by real estate totaled $1.07 billion, or 84.8% of total loans (excluding loans held for sale). With these loans concentrated within our three markets, the Piedmont Triad Region, Coastal Region and Shenandoah Valley Region, a further decline in local economic conditions in these markets could adversely affect the value of the real estate collateral securing our loans. A further decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. See Allocation of Allowance for Credit Losses in the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion related to the Bank’s process for determining the appropriate level of the allowance for possible credit losses. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would negatively impact our profits. Also, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies, and natural disasters.

Our commercial real estate lending may expose us to risk of loss and hurt our earnings and profitability. We regularly make loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one-to-four family residential mortgage loans. Further, loans secured by commercial real estate properties are generally for larger amounts and involve a greater degree of risk than one to four family residential mortgage loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. Because of the current general economic slowdown, these loans represent higher risk, could result in an increase in our total net-charge offs and could require us to increase our allowance for loan losses, which could have a material adverse effect on our financial condition or results of operations. At December 31, 2010, our loans secured by commercial real estate totaled $382.0 million, which represented 30.3% of total loans (excluding loans held for sale). For the year ended December 31, 2010, we had net charge-offs of loans secured by commercial real estate of $2.5 million, a decrease of $4.7 million when compared to the same year-ago period. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

Our construction loans and land development loans involve a higher degree of risk than other segments of our loan portfolio. A portion of our loan portfolio is comprised of construction loans and land development loans. Construction financing typically involves a higher degree of credit risk than commercial real estate lending. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations. Construction and land development loans are dependent on the successful completion of the projects they finance, however, in many cases such construction and development projects in our primary market areas are not being completed in a timely manner, if at all. At December 31, 2010, we had loans of $139.1 million, or 11.0% of total loans (excluding loans held for sale), outstanding to finance construction and land development. For the year ended December 31, 2010 we had net charge-offs of construction and land development loans of $5.3 million, a decrease of $6.3 million when compared to the same year-ago period.

Our lending on unimproved land may expose us to a greater risk of loss and may have an adverse effect on results of operations. A portion of our construction and land development lending is secured by unimproved land. Loans secured by unimproved land are generally more risky than loans secured by improved property for

one to four family residential mortgage loans. Since unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business. These loans are susceptible to adverse conditions in the real estate market and local economy. At December 31, 2010, loans secured by unimproved property totaled $36.5 million, or 2.9% of our loan portfolio (excluding loans held for sale).

If our investment in the common stock of the FHLB of Atlanta is classified as other-than-temporarily impaired or as permanently impaired, our earnings and stockholders’ equity could decrease. We own common stock of the FHLB of Atlanta. We hold this stock to qualify for membership in the FHLB System and to be eligible to borrow funds under the FHLB of Atlanta’s advance program. The aggregate cost and fair value of our FHLB of Atlanta common stock as of December 31, 2010 was $10.4 million based on its par value. There is no market for our FHLB of Atlanta common stock.

Published reports indicate that certain member banks of the FHLB System may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capital of an FHLB, including the FHLB of Atlanta, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB of Atlanta common stock could be impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the after-tax amount of the impairment charge.

If the Bank loses key employees with significant business contacts in its market areas, its business may suffer. The Bank’s success is largely dependent on the personal contacts of our officers and employees in its market areas. If the Bank loses key employees temporarily or permanently, this could have a material adverse effect on the business. The Bank could be particularly affected if its key employees go to work for competitors. The Bank’s future success depends on the continued contributions of its existing senior management personnel, many of whom have significant local experience and contacts in its market areas. The Bank has employment agreements or non-competition agreements with several of its senior and executive officers in an attempt to partially mitigate this risk.

Bancorp’s growth strategy may not be successful. As a strategy, Bancorp seeks to increase the size of its franchise by pursuing business development opportunities. Bancorp can provide no assurance that it will be successful in increasing the volume of Bancorp’s loans and deposits at acceptable risk levels and upon acceptable terms, expanding its asset base while managing the costs and implementation risks associated with this growth strategy. There can be no assurance that any expansion will be profitable or that Bancorp will be able to sustain its growth, either through internal growth or through successful expansions of its banking markets, or that Bancorp will be able to maintain sufficient levels of capital to support its continued growth. If further deterioration of the Bank’s credit quality should occur, the need to preserve capital levels above the minimum to be deemed “well capitalized” could further restrict the Bank’s ability to pursue a growth strategy.

The Bank is subject to interest rate risk. The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and investment securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Bank’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Bank receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of the Bank’s financial assets and liabilities, and (iii) the average duration of certain of the Bank’s interest-rate sensitive assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Bank’s net interest income and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. In addition, there are costs associated with the Bank’s risk management techniques, and these costs could be material. Fluctuations in interest rates are not predictable or controllable and, therefore, there

can be no assurances of the Bank’s ability to continue to maintain a consistent, positive spread between the interest earned on the Bank’s earning assets and the interest paid on the Bank’s interest-bearing liabilities. See Item 7A Quantitative and Qualitative Disclosures about Market Risk for further discussion related to Bancorp’s management of interest rate risk.

We may face increasing deposit-pricing pressures, which may, among other things, reduce our profitability. Checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other non-depository investments, as providing superior expected returns or seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Additional increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs.

Bancorp’s operating results and financial condition would likely suffer if there is a further deterioration in the general economic condition of the areas in which the Bank does business. Unlike larger national or other regional banks that are more geographically diversified, the Bank primarily provides services to customers located in the Piedmont Triad Region and Coastal Region in NC and the Shenandoah Valley Region in VA. Because the Bank’s lending and deposit-gathering activities are concentrated in these markets, particularly the Piedmont Triad Region, the Bank will be affected by the business activity, population, income levels, deposits and real estate activity in these markets. Adverse developments in local industries have had and could continue to have a negative affect on the Bank’s financial condition and results of operations. Even though the Bank’s customers’ business and financial interest may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce the Bank’s growth rate, affect the ability of the Bank’s customers to repay their loans and generally affect Bancorp’s financial condition and results of operations. A further decline in general economic conditions in the Bank’s market areas, caused by inflation, recession, higher unemployment or other factors which are beyond the Bank’s control would also impact these local economic conditions and could have an adverse affect on Bancorp’s financial condition and results of operations.

Bancorp and the Bank compete with much larger companies for some of the same business. The banking and financial services business in our market areas continues to be a competitive field and it is becoming more competitive as a result of:

	•		Changes in regulations;
	•		Changes in technology and product delivery systems; and
	•		The accelerating pace of consolidation among financial services providers.

We may not be able to compete effectively in our markets, and our results of operations could be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and customers with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services.

Negative publicity could damage our reputation. Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.

The Bank is subject to environmental liability risk associated with lending activities. A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may

foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Bancorp’s financial condition and results of operations.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows. Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the sale of loans and other sources could have a substantial negative effect on our liquidity. We do not anticipate that our retail and commercial deposits will be sufficient to meet our funding needs in the foreseeable future. We therefore rely on deposits obtained through intermediaries, FHLB advances, securities sold under agreements to repurchase and other wholesale funding sources to obtain the funds necessary to manage our balance sheet.

Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general, including a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned which could have a material adverse effect on our financial condition, results of operations and cash flows.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition. Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

From time to time the Financial Accounting Standards Board (the “FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.

Impairment of investment securities, certain other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations. In assessing the impairment of investment securities, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuers, and the intent and ability of Bancorp to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. Under current accounting standards, certain other intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically or when impairment indicators are present. Assessment of certain other intangible assets could result in circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period during which such impairment is identified. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

Technological advances impact Bancorp’s business. The banking industry continues to undergo technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Bancorp’s future success will depend, in part, on our ability to address the needs of the Bank’s customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. The Bank may not be able to effectively implement new technology-driven products and services or successfully market such products and services to its customers.

We rely on other companies to provide key components of our business infrastructure. Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing these third party vendors could also entail significant delay and expense.

Our information systems may experience an interruption or breach in security. We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Government regulations may prevent or impair Bancorp’s ability to engage in mergers or operate in other ways. Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. The Bank is subject to supervision and periodic examination by the FDIC and the Commissioner. Bancorp is subject to regulation by the Federal Reserve and the Commissioner. The Bank is currently restricted from paying dividends to Bancorp, unless it receives advance approval from the FDIC and the Commissioner. Bancorp’s Board of Directors has resolved not to declare any dividend, common or preferred, make any payments on trust preferred stock or redeem any of its stock without advance approval of the Federal Reserve Bank. Banking regulations, designed primarily for the protection of depositors, and the withholding of necessary approvals by the bank regulatory agencies may limit the growth and the return to Bancorp’s stockholders by restricting certain activities, such as:

	•		The payment of dividends to our stockholders;
	•		The payment of dividends on trust preferred securities;
	•		Possible mergers with or acquisitions of or by other institutions;
	•		Our desired investments;
	•		Loans and interest rates on loans;
	•		Interest rates paid on our deposits;
	•		The possible expansion of our branch offices; and
	•		Our ability to provide securities or trust services.

The Bank also is subject to capitalization guidelines set forth in federal legislation, and could be subject to enforcement actions to the extent that it is found by regulatory examiners to be undercapitalized. Bancorp cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on Bancorp’s future business and earnings prospects. The cost of compliance with regulatory requirements may adversely affect our ability to operate profitably.

Unpredictable catastrophic events could have a material adverse effect on Bancorp. The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms and blizzards), fires and other catastrophes could adversely affect Bancorp’s consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on the Bank in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by the Bank. The incidence and severity of catastrophes are inherently unpredictable. Although the Bank carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce Bancorp’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on Bancorp’s financial condition and/or results of operations.

Risks Related to our Common Stock

Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

	•		Actual or anticipated variations in quarterly results of operations;
	•		Recommendations by securities analysts;
	•		Operating results and stock price performance of other companies that investors deem comparable to us;
	•		News reports relating to trends, concerns, and other issues in the financial services industry;
	•		Perceptions in the marketplace regarding us and/or our competitors;
	•		New technology used or services offered by competitors;
	•		Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and
	•		Changes in government regulations.

General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause our stock price to decrease regardless of operating results.

Bancorp’s trading volume is low compared with larger national and regional banks. Bancorp’s common stock is traded on the NASDAQ Global Select Market. However, the trading volume of Bancorp’s common stock is relatively low when compared with larger companies listed on the NASDAQ, the NYSE or other consolidated reporting systems or stock exchanges. Thus, the market in Bancorp’s common stock may be limited in scope relative to larger companies. In addition, Bancorp cannot say with any certainty that a more active and liquid trading market for its common stock will develop.

Bancorp has issued preferred stock and subordinated debentures, all of which rank senior to our common stock. Bancorp has issued 52,372 shares of Series A Preferred Stock. This series of preferred stock ranks senior to shares of our common stock. As a result, Bancorp must make dividend payments on the preferred stock before any dividends can be paid on the common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders the preferred stock must be satisfied before any distributions can be made on the common stock. If Bancorp does not remain current in the payment of dividends on the Series A Preferred Stock, no dividends may be paid on the common stock. In addition, Bancorp has issued $25.8 million in subordinated debentures in connection with its issuance of trust preferred securities. These debentures also rank senior to the common stock.

Our preferred stock reduces net income available to holders of our common stock and earnings per common share and the Warrant may be dilutive to holders of our common stock. The dividends payable on our preferred stock will reduce any net income available to holders of common stock and our earnings per common share. The preferred stock will also receive preferential treatment in the event of sale, merger, liquidation, dissolution or winding up of our company. Additionally, the ownership interest of holders of our common stock will be diluted to the extent the Warrant is exercised.

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock. We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.

There may be future issuances of additional subordinated debentures, which may adversely affect the market price of our common stock. We may issue additional subordinated debentures in connection with the issuance of additional trust preferred securities. Such additional debentures would rank senior to the common stock. The market value of our common stock could decline as a result of future issuances or the perception that such issuances could occur.

Our common stock is not FDIC insured. Bancorp’s common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.

Item 1B.		Unresolved Staff Comments

None

Item 2.		Properties

Bancorp and the Bank’s executive offices are located at 1501 Highwoods Boulevard in Greensboro, NC. The Bank’s principal support and operational functions are located at 38 West First Avenue, Lexington, NC and 202 South Main Street in Reidsville, NC. On December 31, 2010, the Bank operated 31 branch offices, two commercial loan production offices and two mortgage loan production offices in its three markets: the Piedmont Triad Region and Coastal Region of NC and the Shenandoah Valley Region of VA. In addition, the Bank operated two mortgage loan production offices outside its markets. The locations of the Bank’s executive and banking offices, their form of occupancy, deposits as of December 31, 2010, and year opened, are provided in the accompanying table:

Location		Owned or Leased				Deposits				Year
						(in thousands)
1501 Highwoods Boulevard, Greensboro, NC (1)		Leased				$	—				2004
38 West First Avenue, Lexington, NC (2)		Owned					223,037				1949
202 South Main Street, Reidsville, NC (3)		Owned					79,476				1910
10401 South Main Street, Archdale, NC		Owned					13,545				2003
301 East Fremont Street, Burgaw, NC		Leased					34,229				1999
2386 Lewisville-Clemmons Road, Clemmons, NC		Owned					24,430				2001
1101 North Main Street, Danbury, NC		Owned					24,808				1997
801 South Van Buren Road, Eden, NC		Owned					51,317				1996
2132 New Garden Road, Greensboro, NC		Owned					76,076				1997
4638 Hicone Road, Greensboro, NC		Owned					31,699				2000
3202 Randleman Road, Greensboro, NC		Owned					42,539				2000
1702 Battleground Avenue, Greensboro, NC		Owned					16,510				2008
201 North Elm Street, Greensboro, NC		Leased					6,415				2009
200 Westchester Drive, High Point, NC		Owned					38,069				2001
120 East Main Street, Jamestown, NC		Owned					26,652				2004
230 East Mountain Street, Kernersville, NC		Leased					19,502				1997
647 South Main Street, King, NC		Owned					53,888				1997
1926 Cotton Grove Road, Lexington, NC		Owned					33,120				1968
500 South Main Street, Lexington, NC (4)		Leased					—				2004
605 North Highway Street, Madison, NC		Owned					29,941				1997
11492 Old U.S. Highway 52, Midway, NC		Owned					32,109				1973
1646 Freeway Drive, Reidsville, NC		Owned					50,085				1972
941 Randolph Street, Thomasville, NC		Owned					46,972				1987
4481 Highway 150 South, Tyro, NC		Owned					25,797				2002
3000 Old Hollow Road, Walkertown, NC		Owned					24,838				1997
10335 North NC Highway 109, Wallburg, NC		Owned					30,852				1992
6123 Old U.S. Highway 52, Welcome, NC		Owned					53,606				1958
161 South Stratford Road, Winston-Salem, NC		Leased					70,680				1997
3500 Old Salisbury Road, Winston-Salem, NC		Owned					41,578				1978
704 South College Road, Wilmington, NC		Leased					36,247				1997
1001 Military Cutoff Road, Wilmington, NC		Leased					32,469				2006
440 South Main Street, Harrisonburg, VA (5)		Owned					56,619				1988

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

The Bank operates commercial loan production offices in leased premises in Burlington and Greensboro, NC. The Bank also operates mortgage loan production offices in leased premises in Charlotte, Lake Norman, Raleigh and Winston-Salem, NC.

In addition, as of December 31, 2010, the Bank also operated 14 offsite ATM machines in various locations throughout its markets.

Item 3.		Legal Proceedings

In the ordinary course of operations, Bancorp and its subsidiaries are often involved in legal proceedings. In the opinion of management, neither Bancorp nor its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the fourth quarter of Bancorp’s fiscal year ended December 31, 2010.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Prices and Dividend Policies

Bancorp’s common stock is traded on the Global Select Market of the NASDAQ Stock Market (“NASDAQ GSM”) under the symbol “NBBC”. The following table shows the high, low and closing sales prices of Bancorp’s common stock on the NASDAQ GSM, based on published financial sources, for each quarter within the last two fiscal years.

Quarter ended		High				Low				Close
December 31, 2010		$	5.00			$	3.40			$	4.70
September 30, 2010			4.00				2.94				3.57
June 30, 2010			5.28				3.46				3.51
March 31, 2010			4.34				2.08				3.56
December 31, 2009		$	2.78			$	1.89			$	2.22
September 30, 2009			3.11				1.82				2.74
June 30, 2009			2.70				1.39				2.07
March 31, 2009			3.04				0.94				2.11

As of March 15, 2011, there were approximately 6,900 beneficial owners, including 3,253 holders of record, of Bancorp’s common stock.

Holders of Bancorp’s common stock are entitled to receive ratably such dividends as may be declared by Bancorp’s Board of Directors out of legally available funds. No cash dividends have been declared for Bancorp’s common stock since 2008. The ability of Bancorp’s Board of Directors to declare and pay dividends on its common stock is subject to the terms of applicable North Carolina law and banking regulations. Further, except with the U.S. Treasury’s approval, until such time as Bancorp has redeemed all of the Series A Preferred Stock or the U.S. Treasury has transferred all of the Series A Preferred Stock to a third party, prior to December 12, 2011, the payment of dividends on its common stock is limited to a maximum quarterly dividend of $0.05 per share. Also, Bancorp may not pay dividends on its capital stock if it is in default or has elected to defer payments of interest under its junior subordinated debentures. The declaration and payment of future dividends to holders of Bancorp’s common stock will also depend upon Bancorp’s earnings and financial condition, the capital requirements of Bancorp’s subsidiaries, regulatory conditions and other factors as Bancorp’s Board of Directors may deem relevant. For a further discussion as to restrictions on Bancorp and the Bank’s ability to pay dividends, please refer to “Item 1 — Supervision and Regulation”.

The following table sets forth certain information regarding outstanding options and shares available for future issuance under equity compensation plans as of December 31, 2010. Individual equity compensation arrangements are aggregated and included within this table. This table excludes any plan, contract or arrangement that provides for the issuance of options, warrants or other rights that are given to Bancorp’s shareholders on a pro rata basis and any employee benefit plan that is intended to meet the qualification requirements of Section 401(a) of the Code.

Number of Shares

Remaining Available

for Future Issuance

under Equity

Number of Shares to be

Weighted-Average

Compensation Plans

Issued Upon Exercise of

Exercise Price of

(excluding shares

Outstanding Options,

Outstanding Options,

reflected in

Warrants and Rights

Warrants and Rights

column (a))

Plan Category

(a)

(b)

(c)

Equity Compensation Plans Approved by Shareholders (1)

821,767

$

14.23

1,439,942

Equity Compensation Plans Not Approved by Shareholders

—

—

—

Total

821,767

$

14.23

1,439,942

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Bancorp did not repurchase any of its equity securities during 2010.

Recent Sales of Unregistered Securities

Bancorp did not sell any of its equity securities in the last fiscal year which were not registered under the Securities Act of 1933, as amended.

FIVE-YEAR STOCK PERFORMANCE TABLE

     The following table illustrates the cumulative total shareholder return on Bancorp’s common stock over the five-year period ended December 31, 2010 and the cumulative total return over the same period of the S&P 500 Index (U.S.) and The Carson Medlin Company’s Independent Bank Index of 23 independent community banks located in eight southeastern states. The table assumes $100 originally invested on December 31, 2005 and that all subsequent dividends were reinvested in additional shares.

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

		2005				2006				2007				2008				2009				2010
NewBridge Bancorp			100				99				67				16				15				31
The Carson Medlin Company’s Independent Bank Index1			100				112				90				77				88				87
S&P 500 Index			100				116				122				77				97				112

Item 6.		Selected Financial Data

The following table should be read in conjunction with “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and “Item 8 — Financial Statements and Supplementary Data,” which begin on page 30 and page 57 below, respectively.

		Years Ended December 31
(In thousands, except per share data and performance
measures)		2010				2009				2008				2007				2006
SUMMARY OF OPERATIONS
Interest income		$	89,913			$	98,500			$	117,286			$	97,621			$	67,323
Interest expense			20,454				39,156				53,852				42,368				24,195
Net interest income			69,459				59,344				63,434				55,253				43,128
Provision for credit losses			21,252				35,749				25,262				18,952				5,510
Net interest income after provision for credit losses			48,207				23,595				38,172				36,301				37,618
Noninterest income			19,507				19,177				20,630				14,998				14,290
Goodwill impairment			—				—				50,437				—				—
Noninterest expense			64,581				69,546				72,191				62,356				43,324
Income (loss) before income taxes			3,133				(26,774	)			(63,826	)			(11,057	)			8,584
Income taxes			(247	)			(11,641	)			(6,924	)			(5,394	)			2,584
Net income (loss)			3,380				(15,133	)			(56,902	)			(5,663	)			6,000
Dividends and accretion on preferred stock			(2,919	)			(2,917	)			(170	)			—				—
Net income (loss) available to common shareholders		$	461			$	(18,050	)		$	(57,072	)		$	(5,663	)		$	6,000
Cash dividends declared		$	—			$	—			$	6,106			$	8,255			$	5,755
SELECTED YEAR END ASSETS AND LIABILITIES
Investment Securities		$	325,129			$	325,339			$	288,572			$	369,423			$	147,129
Loans held for investment, net of unearned income			1,260,585				1,456,526				1,603,588				1,490,084				759,978
Assets			1,807,161				1,946,526				2,078,627				2,057,358				987,746
Deposits			1,452,995				1,499,310				1,663,463				1,627,720				817,683
Shareholders’ equity			163,188				164,604				179,236				193,153				89,309
PERFORMANCE MEASURES
Net income (loss) to average total assets			0.02	%			(0.88	)%			(2.72	)%			(0.40	)%			0.61	%
Net income (loss) to average shareholders’ equity			0.28				(11.75	)			(29.38	)			(3.76	)			6.47
Dividend payout			—				—				N/M				N/M				95.92
Average shareholders’ equity to average total assets			8.68				8.30				9.25				9.18				9.44
Average tangible shareholders’ equity to average tangible total assets			8.45				8.05				6.73				7.51				9.40
PER SHARE DATA
Earnings (loss) per share:
Basic		$	0.03			$	(1.15	)		$	(3.64	)		$	(0.49	)		$	0.71
Diluted			0.03				(1.15	)			(3.64	)			(0.49	)			0.71
Cash dividends declared			—				—				0.39				0.68				0.68
Book value at end of year			7.08				7.17				8.10				12.30				10.60
Tangible book value at end of year			6.79				6.83				7.72				9.10				10.54

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Executive Overview

The Company is in its fourth year of operations following the merger of equals of FNB and LSB in July 2007 and the subsequent merger of the two $1 billion legacy banks, FNB Southeast and LSB Bank, in late 2007. Due primarily to the severe economic recession that followed, the Company lost $6.6 million (not including goodwill impairment) in 2008 and $15.1 million in 2009. The Company did not defer credit costs, but instead aggressively charged-off and wrote down credits in an effort to rapidly restore profitability. In 2010, earnings dramatically improved by $18.5 million. Today, we believe the Company is well positioned to take advantage of a disrupted market.

In July 2008, Pressley A. Ridgill was named CEO of the Company, having become President of the Company, and CEO and President of the Bank in 2007. One year earlier, Mr. Ridgill had been appointed CEO of FNB and FNB Southeast. Through the combination, the Bank became the largest community bank in the North Central region of North Carolina, known as the Piedmont Triad. While a number of challenges emerged during the recession, the newly appointed CEO began bringing together his executive management team. The management team members were selected for their talents, experience and commitment to the Company’s Guiding Principles, which are founded on the concept that “Financial Success Begins with Integrity”. By early 2009, the executive management team was in place, and the credit deterioration in the loan portfolio had peaked. Having implemented a re-defined community bank strategy, the Company focused on returning to profitability. Under Mr. Ridgill’s guidance, management’s implementation of the redefined community bank strategy has yielded dramatically improved operating results and positive trends, including:

	•		Five consecutive quarters of profit, including $3.4 million of full-year profit in 2010
	•		Pre-tax income increased $29.9 million from 2009 to 2010
	•		Net interest margin of 4.00% in 2010, an 82 basis point improvement over the prior year
	•		Core deposit growth of 16% in 2010
	•		Provision for credit losses declined $14.5 million from 2009 to 2010
	•		Nonperforming loans declined 47% from the June 2009 peak, excluding changes in troubled debt restructured loans
	•		Total noninterest expense declined by $5.0 million in 2010 and $53.1 million in 2009; recurring operating expense declined by $4.6 million in 2010 and $8.9 million in 2009 compared to the prior years
	•		Total and tier one leverage capital improved to 13.14% and 9.69%, respectively, at December 31, 2010 from their lows of 12.20% and 8.83%, respectively

As we evaluate our 2010 results, we are satisfied with robust improvements in lowering operating and credit-related costs, increasing net interest income and building a stable capital position well above the regulatory levels required to be “well capitalized”. From 2007 through 2010 the Company charged-off more than $115 million of loans and other real estate owned, or 7.1% of the highest/peak level of loan balances of June 2008. As we have previously discussed, our desire was to put this adverse credit cycle behind us as quickly as possible, through early recognition of credit losses. We believe we have been largely successful in doing so. Looking forward to 2011, we believe credit costs will remain high for many months to come, but core earnings should continue to exceed credit costs and preferred dividends, resulting in a rising level of capital generation. In the recovery period of this recession, we believe the Company has emerged more disciplined and efficient with a greater opportunity for long-term success than what would have otherwise been realized.

Our Community Bank Strategy and Operating Plan

As a community bank, we believe our opportunity to achieve exceptional returns for our shareholders is through consistent delivery of superior customer service to small- and mid-size business and consumer customers in a manner that the large national and super regional banks are unable or unwilling to emulate. The Piedmont Triad has approximately $40 billion of deposits and just 3% of those balances are held at our Bank. The market is dominated by large national and regional banks, with 80% of the market’s deposits residing in banks with more than $10 billion of assets. Consequently, even relatively small growth in our market share could potentially result in extraordinary gains for the Company. We believe the economic downturn affected many of the competing North Carolina banks later in the credit cycle, which is resulting in less effective competition for quality customers, enhancing our opportunity to grow our market share.

To ensure the achievement of our strategic plan, management rewrote our operating plans following the bank merger to include basic measurable items that communicate throughout the organization the steps needed to improve the financial results of the organization. The operating plan objectives include:

	•		Manage the net interest margin (NIM), including growing and expanding profitable customer relationships
	•		Improve asset quality
	•		Increase non-interest income
	•		Implement a disciplined cost management culture
	•		Position the Company to fulfill its Vision and Mission.

Manage Net Interest Margin

Net interest income is the difference between interest income and interest expense and is the Bank’s primary source of revenue. In order to manage our net interest income effectively, management must manage our net interest margin, which is the net yield on earning assets less the cost of interest bearing liabilities.

In the strategic and operating plans, management defined several steps to improve our control of the net interest margin, including:

	•		Identifying and growing profitable relationships, by focusing our efforts and incentives on growing these relationships. Our performance-based sales culture identifies specific methodologies and tools to use in cross-selling to existing clients and introducing the Bank to new prospects. The Bank looks to take advantage of the current turbulent financial environment to grow market share throughout our markets.
	•		Enhancing our interest rate risk management tools. Early in 2009, management engaged a prominent consulting firm to improve management’s interest rate risk management tools and practices. This firm works with more than 300 banks across the country and has been a leader in the asset liability management field since the 1980s.
	•		Reducing the Company’s dependence on high cost time deposits in favor of lower cost core accounts, including DDA, NOW checking, money market and savings accounts.
	•		Pricing loans consistently while considering relationship pricing for deposit and other relationships. Management is also seeking to develop more consistency on loan pricing relative to the various durations of fixed rate loans.
	•		Implementing a more disciplined and accountable budget process to include monitoring loan, investment and deposit yields, rates and balances so that variances are questioned and controllable items are controlled.

Management implemented many of these operating changes over the last three years, which had a pronounced impact on the Company’s operating results in 2009 and 2010.

Net interest income increased $10.1 million in 2010 to $69.5 million compared to $59.3 million in 2009. The increased net interest income was due primarily to a 82 basis point rise in the Company’s net interest margin to

4.00% for the twelve months ended December 31, 2010 compared to the same period a year ago. The margin improved due to growth in core deposits and lower dependence on high cost time deposits. The weighted average deposit costs fell 106 basis points to 1.10% for the year ending December 31, 2010 compared to 2.16% for the year ending December 31, 2009. In 2008, the Company faced irrational time deposit pricing pressure from financial institutions in-market. The impact caused intense margin compression during late 2008 and the first two quarters of 2009. As management shifted liability strategies, high cost time deposits left the Bank for higher rates elsewhere and were replaced with lower cost core deposit accounts. NOW checking accounts became the featured product in marketing ads and internal sales incentives, which resulted in a sizable shift in the deposit mix. At December 31, 2010, DDA, money market, NOW and savings accounts totaled 66%, or $957.4 million, of the Company’s $1.45 billion of deposits. The percentage of core deposits has increased significantly, from 55%, or $824.9 million, at December 31, 2009 and 46%, or $763.3 million at December 31, 2008.

Improve Asset Quality

Our primary objective is to put the adverse affects of the recession behind us as quickly as possible through early recognition of credit losses. We believe we have been largely successful in identifying and taking appropriate aggressive action with our problem credits. Since 2007, the Company has charged off more than $115 million of problem loans and other real estate owned. Asset quality has steadily improved since nonperforming loans peaked in June of 2009 at $64.0 million. At December 31, 2010, nonperforming loans totaled $50.6 million, or 4.01% of total loans, and nonperforming assets totaled $77.3 million, or 4.28% of total assets. The Company’s highest risk and most closely monitored nonperforming assets are nonaccruing loans excluding troubled debt restructured loans. These loans totaled $32.0 million at December 31, 2010, down $19.6 million, or 38% since December 31, 2009 and down $27.3 million, or 47%, since June 30, 2009. OREO balances continue to cycle through the balance sheet, helping control the level of nonperforming assets over time. At December 31, 2010, OREO balances totaled $26.7 million, down from $27.3 million at December 31, 2009. During 2010, $20.7 million of loans were transferred into OREO, $3.8 million of OREO was written down, and $17.5 million was sold.

At December 31, 2010, the allowance for credit losses totaled $28.8 million, or 2.28% of loans held for investment and 56.8% of nonperforming loans. Provision for credit losses declined $14.5 million for the year to $21.3 million compared to $35.7 million for the year ending December 31, 2009. The Company’s coverage percentage may not be comparable with other banking institutions due to its practice of charging off specific estimated losses on loans at the time they become measurable. Consequently, the Company’s allowance for credit losses consists primarily of general reserves, with 95% being general and 5% specific. Substantially all estimated losses from the Company’s $50.6 million of non-performing loans have been recognized through charge-offs.

Increase Non-interest Income

Non interest income increased $330,000 in 2010 to $19.5 million compared to $19.2 million for 2009. Gain on sale of investments boosted 2010 non-interest income by $3.2 million compared to the prior year. Excluding the gain on sale of investments, non-interest income declined due primarily to lower deposit fee income resulting from changes in banking regulation combined with industry wide trends in consumer behavior that we believe are favorable to consumers as the banking industry implements improved consumer protection processes and policies on consumer overdraft activates. The Company also took steps to expand mortgage banking fees in 2010 through the acquisition of Bradford Mortgage, a quality community mortgage origination company operating principally in the Piedmont Triad area. Mortgage revenue totaled $2.4 million in 2010 compared to $674,000 in 2009. Investment services income also contributed strong growth, increasing $403,000 to $1.6 million for the year. With our sights set on continued growth in fee income businesses outside of retail banking, we believe non-interest income sources will remain a favorable contributor to our future earnings.

Implement a Disciplined Cost Management Culture

Core to the execution of management’s operating plan is the implementation of a disciplined cost management culture where “that which is within our control is controlled.” While certain items such as FDIC insurance costs have proven to be outside our control, the vast majority of non-interest related expenses are controllable.

A key element to changing the culture was the implementation of a line-item accountable budget process. The budget was built around a philosophy we termed as the “CAST” philosophy, which is an acronym for:

	•		Conservative in forecasts and expectations
	•		Accountable on an account by account basis
	•		Specific to each individual in the organization so goals and budgets are understood
	•		Timely so that continued monitoring and adjustments can be made

Since the merger, the Bank has implemented several major cost reduction initiatives focused on eliminating excess costs and non-core or unprofitable activities. These initiatives include an ongoing franchise validation plan, which carefully reviews each of our branch locations and targets the elimination of waste, inefficiency and duplication throughout our franchise. Management developed a methodology that evaluates each location’s pre-tax contribution, age and state of the facility, ease of closure, market demographics and overall fit within our strategic vision. Execution of the franchise validation plan and other expense reduction initiatives has resulted in a net reduction of 12 bank locations and 199 full time equivalent employees since merger. In 2009 and 2010, the validation planning led to the closing of seven low performing locations, the addition of two locations and the planned sale of the last remaining Virginia location. Following the sale, the Company will have 30 full service bank locations and 481 full time equivalent employees. The reduction in the number of branch locations and other expense reductions resulted in an improvement in our core efficiency from a high of 90% to an average of 67% in 2010.

For the second consecutive year, the Company has experienced meaningful gains by lowering operating costs. In 2009, recurring operating expenses declined $8.9 million excluding $3.5 million in one-time items such as losses on disposal of branch locations. In 2010, recurring operating expenses fell an additional $4.6 million. The improved efficiency is due in large part to management’s ability to focus attention on eliminating excess costs and inefficient products, services and delivery channels from legacy operations. As we look into 2011, we anticipate that the improved cost management culture will continue to improve the organization’s financial performance. While noninterest expense has declined significantly in recent years, the goal remains to continue to improve efficiencies to a level that surpasses our peers. That objective has not yet been achieved, but remains a focus through continued discipline in a time that has the potential to generate meaningful growth in our Company.

Position the Company to fulfill its Vision and Mission

The Company is located primarily in the Piedmont Triad area which is the third largest metropolitan area in North Carolina. The Company is headquartered in proximity to the largest two markets in North Carolina; Charlotte and Raleigh/Durham, both within a 90 minute drive. Due to the weakened financial conditions among many North Carolina financial institutions, consolidation of institutions is beginning to occur. While the Company may consider an in-market acquisition of a troubled institution, it is more certain the Company will look to acquire valuable customer relationships, which is likely to occur through the addition of key bankers. The opportunity for growth is significant. The Company is carefully considering the growth and design of our franchise. Late in 2010, the Company decided to sell the last remaining Virginia banking location, further clarifying the strategic plan as a North Carolina bank. Consequently, growth will focus on expansion in the existing and adjacent market locations.

Finally capital planning has remained paramount in this environment. Despite several challenging years following the merger, the Company’s capital levels remain well above the “well capitalized levels” as defined by regulatory guidelines. At December 31, 2010 the Company’s total risk based capital was 13.13% compared to the minimum “well capitalized” level of 10.00%. The Company continues to have no near-term plans to raise capital for the purpose of repaying TARP funds; however, the Small Business Lending Fund capital program may be a viable alternative to replacing TARP funds. The Company is very attentive to the ramifications of near

and long term dilution caused by a capital raise. Therefore, while many opportunities seem to be emerging and will be evaluated, the decision to acquire another in market institution will be evaluated with a high regard to risk and dilution. Organic growth and talent acquisition may prove to be the more prudent growth strategy over time. The Company anticipates modest loan growth in 2011.

Financial Condition at December 31, 2010 and 2009

Bancorp’s consolidated assets of $1.81 billion at year end 2010 reflect a decrease of 7.2% from year end 2009, following a decrease of 6.4% during the previous year. The decreases in both years are primarily a result of a decline in Bancorp’s loan portfolio. Total average assets decreased 7.1% from $2.05 billion in 2009, to $1.91 billion in 2010, while average earning assets decreased 8.2%, from $1.93 billion in 2009, to $1.77 billion in 2010. The decreases in total average assets and average earning assets were also primarily the result of a decrease in loans outstanding.

Gross loans (including loans held for sale) decreased $125.5 million during 2010, or 8.6%, compared to a decrease of 8.8% in 2009. The decrease in loans is due primarily to principal repayment on existing loans, loan chargeoffs, and foreclosures, coupled with soft loan demand from qualified borrowers. Loans secured by real estate totaled $1.07 billion in 2010 and represented 84.8% of total loans (excluding loans held for sale), compared with 83.4% at year end 2009. Within this category, residential real estate loans decreased 9.0% to $544.4 million and construction loans decreased 21.5% to $139.1 million. Commercial loans totaled $516.0 million at year end 2010, a decrease of 13.0% from the end of 2009. Consumer loans decreased 30.0% during 2010, ending the year at $53.0 million. Management believes the Bank is not dependent on any single customer or group of customers concentrated in a particular industry, the loss of whose deposits or whose insolvency would have a material adverse effect on operations.

Investment securities (at amortized cost) totaled $321.3 million at year end 2010, a 1.1% increase from $317.9 million at year end 2009. U.S. Government agency securities totaled $109.3 million, or 34.0% of the portfolio at year end 2010, compared to $49.0 million, or 15.4% of the portfolio one year earlier. Management believes that the additional risk of owning agency securities over U.S. Treasury securities is negligible and has capitalized on the favorable spreads available on the former. Mortgage backed securities totaled $56.0 million, or 17.4% of the portfolio, at December 31, 2010, compared to $77.4 million, or 24.4% of the portfolio at the previous year end. State and municipal obligations amounted to $17.4 million at year end 2010, and comprised 5.4% of the portfolio, compared to $105.2 million, or 33.1% of the portfolio a year earlier. Investment securities with a book value of $82.1 million were sold during 2010 to reposition the investment portfolio and reduce the Company’s exposure to municipalities. A portion of the securities that were identified for sale had been classified as held to maturity and, accordingly, all held to maturity securities were designated as available for sale. During 2009, the Company began investing in corporate bonds and collateralized mortgage obligations (CMOs). Corporate bonds totaled $82.8 million, or 25.8% of the portfolio at December 31, 2010, of which $46.1 million were covered bonds, compared to total corporate bonds of $34.0 million, or 10.7% of the portfolio at December 31, 2009, of which $29.1 million were covered bonds. CMOs totaled $39.7 million, or 12.3% of the portfolio at year end 2010, compared to $35.1 million, or 11.0% of the portfolio at the end of the previous year. The Company’s investment strategy is to achieve acceptable total returns through investments in securities with varying maturity dates, cash flows and yield characteristics. U.S. Government agency securities are generally purchased for liquidity and collateral purposes, mortgage backed securities are purchased for yield and cash flow purposes, corporate bonds are purchased for yield and longer maturity municipal bonds are purchased for yield and income tax advantage. The table, “Investment Securities,” on page 52, presents the composition of the securities portfolio for the last three years, as well as information about cost, fair value and weighted average yield.

The competition for deposits within the Bank’s market areas increased significantly during the liquidity crisis of 2008 as larger national and regional banks increased their rates in an effort to attract deposits and maintain adequate liquidity. The Bank, which historically has relied on appropriate pricing and high quality customer service to retain and increase its retail deposit base, was forced to compete with higher rates offered by the larger national and regional banks in order to satisfy its deposit requirements. During 2009 and throughout 2010, the

Company shifted its liability strategy, reducing its dependence on high cost time deposits in favor of lower cost core accounts, including DDA, NOW checking, money market and savings accounts.

Total deposits decreased $46.3 million to $1.45 billion at December 31, 2010, a 3.1% decrease from a total of $1.50 billion one year earlier. This change was primarily the result of a $178.8 million reduction in time deposits, as the interest rates offered by the Bank declined substantially during the year. This decrease was partially offset by a $169.0 million increase in NOW account deposits, as the Bank’s new “FastForward Checking” product, introduced in the third quarter of 2009, grew to $212.0 million at December 31, 2010.

In order to attract additional deposits when necessary, the Bank uses several different sources such as membership in an electronic deposit gathering network that allows it to post interest rates and attract deposits from across the U.S. (bulletin board deposits), brokered certificates of deposit secured through broker/dealer partnerships and deposits obtained through the Promontory InterFinancial Network, also known as CDARS. The Bank’s reliance on these out-of-market deposits has continued to decrease during 2010. CDARS decreased $30.9 million, from $58.0 million at year end 2009 to $27.1 million at year end 2010, while brokered deposits increased $15.1 million, from $15.0 million at year end 2009 to $30.1 million at year end 2010.

The Bank also has a credit facility available with the FHLB of Atlanta. The Bank utilized a portion of the approximately $361.0 million credit line with the FHLB of Atlanta to fund earning assets. FHLB borrowings totaled $112.7 million at year end 2010. In addition to the credit line at the FHLB, the Bank has borrowing capacity at the Federal Reserve Bank totaling $30.0 million, of which there were no borrowings outstanding at December 31, 2010. Management believes these credit lines are a cost effective and prudent alternative to deposit balances, since particular amounts, terms and structures may be selected to meet changing needs.

Financial Condition at December 31, 2009 and 2008

Bancorp’s consolidated assets of $1.95 billion at year end 2009 reflect a decrease of 6.4% over year end 2008. The decrease from year end 2008 to year end 2009 is primarily a result of the decline in Bancorp’s loan portfolio. Total average assets decreased 1.8% from $2.09 billion in 2008, to $2.05 billion in 2009, while average earning assets increased 0.9%, from $1.91 billion in 2008, to $1.93 billion in 2009. The decrease in total average assets was also primarily the result of a decrease in loans outstanding, while the slight increase in average earning assets was driven by an increase in interest bearing bank balances.

Gross loans decreased $141.4 million during 2009, or 8.8%, compared to increases of 7.7% in 2008 and 96.1% in 2007. The decrease in loans was due primarily to principal repayment on existing loans, loan chargeoffs, and foreclosures, coupled with soft loan demand from qualified borrowers. Loans secured by real estate totaled $1.22 billion in 2009 and represented 83.4% of total loans, compared with 82.3% at year end 2008. Within this category, residential real estate loans decreased 4.4% to $605.0 million and construction loans decreased 19.0% to $177.3 million. Commercial loans totaled $593.4 million at year end 2009, a decrease of 3.9% from the end of 2008. Consumer loans decreased 38.3% during 2009, ending the year at $75.5 million.

Investment securities (at amortized cost) totaled $317.9 million at year end 2009, a 12.0% increase from $283.7 million at year end 2008. U.S. Government agency securities totaled $49.0 million, or 15.4% of the portfolio at year end 2009, compared to $56.6 million, or 20.0% of the portfolio one year earlier. Mortgage backed securities totaled $77.4 million, or 24.4% of the portfolio, at December 31, 2009, compared to $97.8 million, or 34.5% of the portfolio at the previous year end. State and municipal obligations amounted to $105.2 million at year end 2009, and comprised 33.1% of the portfolio, compared to $115.6 million, or 40.8% of the portfolio a year earlier. During 2009, the Company also began investing in corporate bonds and CMOs. Corporate bonds totaled $34.0 million, or 10.7% of the portfolio, of which $29.1 million were covered bonds, while CMOs totaled $35.1 million, or 11.0% of the portfolio.

Total deposits decreased $164.2 million to $1.50 billion at December 31, 2009, a 9.9% decrease from a total of $1.66 billion one year earlier. This change was primarily the result of a $225.8 million reduction in time deposits, as the interest rates offered by the Bank declined substantially during the year. This decrease was

partially offset by increases in NOW and money market deposits, as the Bank’s new “FastForward Checking” product, introduced in the third quarter of 2009, grew to $79.7 million at December 31, 2009.

Net Interest Income

Like most financial institutions, the primary component of the Company’s earnings is net interest income. Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume and changes in interest rates earned and paid. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Spread and margin are influenced by the levels and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of noninterest-bearing liabilities.

     Average Balances and Net Interest Income Analysis. The accompanying table sets forth, for the years 2008 through 2010, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or rates, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Average loans include nonaccruing loans, the effect of which is to lower the average yield.

Average Balances and Net Interest Income Analysis

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

						2010												2009												2008
						Interest												Interest												Interest
		Average				Income/				Average				Average				Income/				Average				Average				Income/				Average
		Balance				Expense				Yield/Rate				Balance				Expense				Yield/Rate				Balance				Expense				Yield/Rate
Earning assets:
Loans receivable(2)		$	1,406,624			$	74,795				5.32	%		$	1,538,777			$	84,089				5.46	%		$	1,575,064			$	101,550				6.49	%
Taxable securities			253,585				11,659				4.60				197,132				9,425				4.78				191,766				10,229				5.33
Tax exempt securities			65,807				4,821				7.33				109,622				6,754				6.16				113,480				6,539				5.76
FHLB stock			11,241				39				0.35				11,177				4				0.04				10,281				368				3.58
Interest-bearing bank balances			34,496				96				0.28				54,667				186				0.34				10,189				267				2.62
Federal funds sold			—				—				—				18,751				46				0.25				11,187				114				1.02
Total earning assets			1,771,753				91,410				5.16				1,930,126				100,504				5.21				1,911,967				119,067				6.23
Non-earning assets:
Cash and due from banks			27,525												24,120												41,829
Premises and equipment			39,815												42,889												45,415
Other assets			105,160												97,936												124,075
Allowance for credit losses			(35,630	)											(40,584	)											(31,020	)
Total assets		$	1,908,623											$	2,054,487											$	2,092,266
Interest-bearing liabilities:
Savings deposits		$	40,222			$	40				0.10	%		$	40,703			$	41				0.10	%		$	41,430			$	65				0.16	%
NOW deposits			368,702				3,201				0.87				195,626				778				0.40				170,221				802				0.47
Money market deposits			344,033				2,838				0.82				390,042				4,327				1.11				429,322				10,145				2.36
Time deposits			606,636				8,881				1.46				853,100				26,746				3.14				838,205				33,660				4.02
Other Borrowings			76,415				2,407				3.15				75,462				2,559				3.39				92,296				3,697				4.01
Borrowings from Federal
Home Loan Bank			123,015				3,087				2.51				149,559				4,706				3.15				148,206				5,483				3.70
Total interest-bearing liabilities			1,559,023				20,454				1.31				1,704,492				39,157				2.30				1,719,680				53,852				3.13
Other liabilities and shareholders’ equity:
Demand deposits			164,958												158,436												164,712
Other liabilities			18,921												20,988												14,223
Shareholders’ equity			165,721												170,571												193,651
Total liabilities and shareholders’ equity		$	1,908,623											$	2,054,487											$	2,092,266
Net interest income and net interest margin(3)						$	70,956				4.00	%						$	61,347				3.18	%						$	65,215				3.41	%
Interest rate spread(4)											3.85	%											2.91	%											3.10	%

Volume and Rate Variance Analysis

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table identifies (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) have been allocated, based on the absolute value, between changes attributable to volume and changes attributable to rate.

Volume and Rate Variance Analysis

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

						2010												2009
		Volume				Rate				Total				Volume				Rate				Total
		Variance(2)				Variance(2)				Variance				Variance(2)				Variance(2)				Variance
Interest income:
Loans receivable		$	(7,157	)		$	(2,137	)		$	(9,294	)		$	(2,214	)		$	(15,247	)		$	(17,461	)
Taxable investment securities			2,602				(368	)			2,234				278				(1,082	)			(804	)
Tax exempt investment securities			(3,049	)			1,116				(1,933	)			(228	)			443				215
FHLB stock			0				36				36				29				(393	)			(364	)
Interest-bearing bank balances			(62	)			(29	)			(91	)			320				(401	)			(81	)
Federal funds sold			(46	)			0				(46	)			49				(117	)			(68	)
Total interest income			(7,712	)			(1,382	)			(9,094	)			(1,766	)			(16,797	)			(18,563	)
Interest expense:
Savings deposits			(1	)			0				(1	)			(1	)			(23	)			(24	)
NOW deposits			1,041				1,382				2,423				107				(131	)			(24	)
Money market deposits			(463	)			(1,026	)			(1,489	)			(857	)			(4,961	)			(5,818	)
Time deposits			(6,264	)			(11,601	)			(17,865	)			589				(7,503	)			(6,914	)
Other borrowings			31				(183	)			(152	)			(616	)			(522	)			(1,138	)
Borrowings from FHLB			(755	)			(864	)			(1,619	)			49				(826	)			(777	)
Total interest expense			(6,411	)			(12,292	)			(18,703	)			(729	)			(13,966	)			(14,695	)
Increase (decrease) in net interest income		$	(1,301	)		$	10,910			$	9,609			$	(1,035	)		$	(2,833	)		$	(3,868	)