NEWBRIDGE BANCORP - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:

June 30, 2015

Commission File Number: 000-11448

NewBridge Bancorp

(Exact name of Registrant as specified in its Charter)

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

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

(336) 369-0900

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

Smaller reporting company ¨

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

At August 6, 2015, the registrant had 35,890,135 shares of Class A Common Stock
outstanding and 3,186,748 shares of Class B Common Stock outstanding.

NEWBRIDGE BANCORP

FORM 10-Q

TABLE OF CONTENTS

		Page

	PART I
	Financial Information

Item 1	Financial Statements	3
	Consolidated Balance Sheets June 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income Three Months and Six Months Ended June 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income Three Months and Six Months Ended June 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows Six Months Ended June 30, 2015 and 2014	7
	Notes to Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3	Quantitative and Qualitative Disclosures About Market Risk	58
Item 4	Controls and Procedures	59

	PART II
	Other Information
Item 6	Exhibits	60

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

NewBridge Bancorp and Subsidiary

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	June 30,			December 31,
	2015			2014
	(Unaudited)
Assets
Cash and due from banks	$	36,507		$	32,870
Interest-bearing bank balances		743			1,499
Investment certificates of deposit		17,285			15,632
Loans held for sale		15,100			6,181
Available for sale investment securities		392,388			366,097
Held to maturity investment securities (market value of $140,020 and $131,915 at June 30, 2015 and December 31, 2014, respectively)		138,633			130,701
Loans		2,004,203			1,804,406
Less allowance for credit losses		(21,314	)		(22,112	)
Net loans		1,982,889			1,782,294
Premises and equipment		44,546			44,822
Goodwill		24,716			22,063
Core deposit intangible		4,677			4,616
Real estate acquired in settlement of loans		2,142			3,057
Bank-owned life insurance		61,201			52,891
Deferred tax assets		29,351			33,133
Other assets		28,507			24,376
Total assets	$	2,778,685		$	2,520,232

Liabilities
Noninterest-bearing deposits	$	363,036		$	319,327
NOW deposits		548,109			509,450
Savings and money market deposits		539,550			454,372
Time deposits		544,115			549,415
Total deposits		1,994,810			1,832,564
Federal Home Loan Bank borrowings		404,800			346,700
Other borrowings		104,274			91,774
Accrued expenses and other liabilities		19,184			17,839
Total liabilities		2,523,068			2,288,877

Shareholders’ Equity
Preferred stock – Authorized 30,000,000 shares; issued and outstanding – none at 6/30/15 and 12/31/2014		-			-
Common stock		291,307			275,615
Class A, no par value – Authorized 90,000,000 shares; issued and outstanding – 35,890,135 at 6/30/2015 and 34,008,795 at 12/31/2014
Class B, no par value – Authorized 10,000,000 shares; issued and outstanding – 3,186,748 at 6/30/2015 and 12/31/2014
Directors’ deferred compensation plan		(324	)		(324	)
Accumulated deficit		(34,641	)		(43,241	)
Accumulated other comprehensive loss		(725	)		(695	)
Total shareholders’ equity		255,617			231,355
Total liabilities and shareholders’ equity	$	2,778,685		$	2,520,232

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Income

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

	Three Months Ended					Six Months Ended
	June 30					June 30
	2015		2014			2015		2014
Interest Income
Interest and fees on loans	$	20,553	$	18,506		$	40,016	$	33,617
Interest on investment securities
Taxable		4,189		3,297			8,148		6,093
Tax exempt		316		280			592		436
Interest-bearing bank balances and investment certificates of deposit		41		40			78		41
Total interest income		25,099		22,123			48,834		40,187

Interest Expense
Deposits		1,324		1,050			2,464		1,907
Federal Home Loan Bank borrowings		275		180			538		366
Other borrowings		670		638			1,315		1,023
Total interest expense		2,269		1,868			4,317		3,296
Net interest income		22,830		20,255			44,517		36,891
Provision for credit losses		16		600			120		744
Net interest income after provision for credit losses		22,814		19,655			44,397		36,147

Noninterest Income
Retail banking		2,291		2,673			4,399		5,252
Mortgage banking services		511		241			867		370
Wealth management services		749		713			1,501		1,429
Gain on sales of investment securities		-		-			-		-
Bank-owned life insurance		922		329			1,229		777
Other		364		250			1,226		704
Total noninterest income		4,837		4,206			9,222		8,532

Noninterest Expense
Personnel		9,725		9,645			19,794		17,986
Occupancy		1,360		1,241			2,739		2,427
Furniture and equipment		1,020		948			1,981		1,855
Technology and data processing		1,298		1,173			2,511		2,290
Legal and professional		1,274		925			2,014		1,463
FDIC insurance		453		416			864		813
Real estate acquired in settlement of loans		219		(62	)		396		336
Acquisition-related		171		4,812			2,428		4,900
Other		2,890		2,945			5,810		5,440
Total noninterest expense		18,410		22,043			38,537		37,510
Income before income taxes		9,241		1,818			15,082		7,169
Income tax expense		3,240		657			5,311		2,557
Net Income		6,001		1,161			9,771		4,612
Dividends on preferred stock		-		-			-		(337	)
Net Income available to common shareholders	$	6,001	$	1,161		$	9,771	$	4,275

Earnings per share
Basic	$	0.15	$	0.03		$	0.25	$	0.13
Diluted	$	0.15	$	0.03		$	0.25	$	0.13

Cash dividends declared per share	$	0.015	$	-		$	0.03	$	-

Weighted average shares outstanding
Basic		39,046,498		36,808,785			38,448,707		32,671,233
Diluted		39,496,122		37,382,568			38,920,185		33,266,976

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income

(Unaudited; dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2015			2014			2015			2014
Net Income	$	6,001		$	1,161		$	9,771		$	4,612
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period, net of tax of $(1,014), $1,203, $(279), and $2,334, respectively		(1,637	)		1,889			(450	)		3,664
Unrealized gains (losses) on cash flow hedges:
Unrealized holding gains (losses) arising during period, net of tax of $56, $0, $345, and $0, respectively		90			-			557			-
Reclassification adjustment for (gains) losses included in net income, net of tax of $(75), $0, $(150), and $0, respectively		(120	)		-			(241	)		-
Defined benefit pension plans:
Amortization of net loss, net of tax of $64, $(6), $64 and $(12), Respectively		104			(9	)		104			(19	)
Total other comprehensive income (loss)		(1,563	)		1,880			(30	)		3,645
Comprehensive Income	$	4,438		$	3,041		$	9,741		$	8,257

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2015 and 2014

(Unaudited; dollars in thousands)

											Directors’						Accumulated
	Preferred			Common Stock							Deferred						Other			Total
	Stock			Class A		Class B					Compensation			Accumulated			Comprehensive			Shareholders’
	Series A			Shares		Shares		Amount			Plan			Deficit			Income (Loss)			Equity
Balances at December 31, 2013	$	15,000			25,291,568		3,186,748	$	210,297		$	(468	)	$	(56,880	)	$	(1,157	)	$	166,792
Net Income		-			-		-		-			-			4,612			-			4,612
Change in accumulated other comprehensive income (loss) net of deferred income taxes		-			-		-		-			-			-			3,645			3,645
Redemption of preferred stock		(15,000	)		-		-		-			-			-			-			(15,000	)
Dividends on preferred stock		-			-		-		-			-			(337	)		-			(337	)
Acquisition of CapStone Bank		-			8,075,228		-		62,264			-			-			-			62,264
Expense of stock issuance		-			-		-		(367	)		-			-			-			(367	)
Exercise of stock options		-			570,395		-		2,309			-			-			-			2,309
Stock issuance pursuant to restricted stock units		-			12,252		-		(49	)		-			-			-			(49	)
Excess tax benefits from stock-based awards		-			-		-		249			-			-			-			249
Stock-based compensation		-			-		-		389			-			-			-			389
Distributions		-			-		-		-			144			-			-			144
Balances at June 30, 2014	$	-			33,949,443		3,186,748	$	275,092		$	(324	)	$	(52,605	)	$	2,488		$	224,651

Balances at December 31, 2014	$	-			34,008,795		3,186,748	$	275,615		$	(324	)	$	(43,241	)	$	(695	)	$	231,355
Net Income		-			-		-		-			-			9,771			-			9,771
Change in accumulated other comprehensive income (loss) net of deferred income taxes		-			-		-		-			-			-			(30	)		(30	)
Acquisition of Premier Commercial Bank		-			1,735,465		-		15,037			-			-			-			15,037
Expense of stock issuance		-			-		-		(103	)		-			-			-			(103	)
Dividends on common stock		-			-		-		-			-			(1,171	)		-			(1,171	)
Exercise of stock options		-			95,000		-		428			-			-			-			428
Stock issuance pursuant to restricted stock units		-			50,875		-		(240	)		-			-			-			(240	)
Excess tax benefits from stock-based awards		-			-		-		157			-			-			-			157
Stock-based compensation		-			-		-		413			-			-			-			413
Balances at June 30, 2015	$	-			35,890,135		3,186,748	$	291,307		$	(324	)	$	(34,641	)	$	(725	)	$	255,617

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited; dollars in thousands)

	Six Months Ended
	June 30
	2015			2014

Cash Flow from operating activities
Net Income	$	9,771		$	4,612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,173			2,865
Securities premium amortization and discount accretion, net		190			384
Increase in cash surrender value of bank-owned life insurance		(796	)		(777	)
Mortgage banking services		(867	)		(370	)
Originations of loans held for sale		(79,327	)		(39,879	)
Proceeds from sales of loans held for sale		73,594			38,046
Accretion on acquired loans		(3,091	)		(2,535	)
Excess tax benefits from stock-based awards		(157	)		(249	)
Deferred income tax expense (benefit)		5,095			2,571
Writedowns and (gains) losses on sales of real estate acquired in settlement of loans, net		274			117
Provision for credit losses		120			744
Stock-based compensation		413			389
(Increase) decrease in income taxes receivable		(425	)		103
(Increase) decrease in interest earned but not received		(87	)		(140	)
Increase (decrease) in interest accrued but not paid		(2	)		(58	)
Net (increase) decrease in other assets		(1,784	)		(1,355	)
Net increase (decrease) in other liabilities		652			(74	)
Net cash provided by (used in) operating activities		5,746			4,394

Cash Flow from investing activities
Net cash received from acquisition		3,215			6,198
Proceeds from maturities of investment certificates of deposit		2,740			-
Purchases of securities available for sale		(19,972	)		(19,696	)
Purchases of securities held to maturity		(20,195	)		(50,871	)
Proceeds from sales of securities available for sale		25,891			9,045
Proceeds from maturities, prepayments and calls of securities available for sale		13,876			13,637
Proceeds from maturities, prepayments and calls of securities held to maturity		12,344			2,460
Net (increase) decrease in loans		(102,068	)		(18,336	)
Purchase of bank-owned life insurance		(8,299	)		-
Maturity of bank-owned life insurance		805			-
Purchases of premises and equipment		(1,372	)		(1,154	)
Proceeds from sales of premises and equipment		1			352
Proceeds from sales of real estate acquired in settlement of loans		1,285			4,988
Net cash provided by (used in) investing activities		(91,749	)		(53,377	)

Cash Flow from financing activities
Net increase (decrease) in demand deposits and NOW accounts		59,262			15,360
Net increase (decrease) in savings and money market accounts		14,095			(27,971	)
Net increase (decrease) in time deposits		(34,961	)		41,117
Net increase (decrease) in Federal Home Loan Bank borrowings		38,331			(2,000	)
Net increase (decrease) in other borrowings		12,500			43,500
Dividends paid		(585	)		(337	)
Redemption of preferred stock		-			(15,000	)
Exercise of stock options		428			2,309
Cash paid in lieu of issuing shares pursuant to restricted stock units		(240	)		(49	)
Excess tax benefits from stock-based awards		157			249
Expense of stock issuance		(103	)		(367	)
Net cash provided by (used in) financing activities		88,884			56,811
Increase (decrease) in cash and cash equivalents		2,881			7,828
Cash and cash equivalents at the beginning of the period		34,369			33,513
Cash and cash equivalents at the end of the period	$	37,250		$	41,341

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Consolidated Statements of Cash Flows (continued)

(Unaudited; dollars in thousands)

	Six Months Ended
	June 30
	2015			2014

Supplemental disclosures of cash flow information
Cash paid during the periods for:
Interest	$	4,304		$	3,219
Income taxes		450			-

Supplemental disclosures of noncash transactions
Transfer of loans to real estate acquired in settlement of loans	$	643		$	914
Dividends declared but not paid		586			-
Unrealized gains (losses) on securities available for sale:
Change in securities available for sale		(728	)		5,998
Change in deferred income taxes		278			(2,334	)
Change in shareholders’ equity		(450	)		3,664
Unrealized gains (losses) on cash flow hedges:
Change in fair value of cash flow hedges		511			-
Change in deferred income taxes		(195	)		-
Change in shareholders’ equity		316			-
Acquisition:
Fair value of assets acquired		161,687			381,594
Fair value of liabilities assumed		144,490			336,730

See notes to consolidated financial statements

NewBridge Bancorp and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 — Basis of Presentation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and provisions for credit losses considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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

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

The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2015 (SEC File No. 000-11448) (the “Annual Report”). This Quarterly Report should be read in conjunction with the Annual Report.

Recent accounting pronouncements

In January 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” This Update provides guidance on when an in-substance repossession or foreclosure is deemed to occur, which requires the mortgage loan to be derecognized and the related real estate be recognized. The Update clarifies that an in-substance repossession or foreclosure is deemed to occur upon either (i) a creditor obtaining legal title to the residential real estate or (ii) the borrower conveying all interest in the residential real estate through a deed in lieu of foreclosure (or a similar legal agreement). Creditors must disclose the amount of foreclosed residential real estate held as well as the amount of collateralized loans for which foreclosure is in process. The Update became effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Update could be adopted on either a modified retrospective or a prospective method, and early adoption was permitted. The Company adopted this Update prospectively January 1, 2015, which requires additional disclosure by the Company but does not otherwise materially affect our financial statements. (See Note 5 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.)

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This Update sets new guidance to clarify principles for recognizing revenue and develops a common revenue standard with the International Accounting Standards Board. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. On July 9, 2015 the FASB voted to delay the effective date of ASU 2014-09 for one year for most entities, or fiscal years beginning after December 15, 2017 for public companies. Early adoption will be allowed, but no earlier than the original effective date of ASU 2014-09. The Company is currently evaluating the effect of adopting ASU 2014-09 on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (Topic 860).” The amendments in this Update require two accounting changes. First, the amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. Also, the amendments in this Update require disclosure for certain transactions accounted for as a sale and for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings. The accounting changes and the disclosure for certain transactions accounted for as a sale in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014 and for interim periods beginning after March 15, 2015. Early adoption for a public business entity was prohibited. This Update requires additional disclosure by the Company but does not otherwise materially affect our financial statements. (See Note 7 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q.)

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

In February 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” This Update eliminates from GAAP the concept of extraordinary items, which are items that are unusual in nature and infrequent. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Subtopic 810): Amendments to the Consolidation Analysis.” This Update provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity and also amends the criteria for consolidating such an entity. In addition, the Update amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a variable interest entity primary beneficiary determination. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2015-02 will have a material effect on its consolidated financial statements as the Company does not have any material investments in limited partnerships with voting rights.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This Update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued. An entity should apply the new guidance on a retrospective basis. The adoption of ASU 2015-03 is not expected to have a material effect on the Company’s consolidated financial statements.

Reclassification

Certain items for 2014 have been reclassified to conform to the 2015 presentation. Such reclassifications had no effect on net income, total assets or shareholders’ equity as previously reported.

Note 2 — Business Combinations and Acquisitions

Acquisition of Premier Commercial Bank

On February 27, 2015, the acquisition of Premier Commercial Bank (“Premier”) was completed. Premier, a commercial bank headquartered in Greensboro, NC, operated one full-service banking office centrally located in Greensboro and residential mortgage origination offices in Greensboro, Charlotte, Raleigh, High Point, Kernersville and Burlington, NC. Per the terms of the Agreement and Plan of Combination and Reorganization, 75% of the 1,925,247 shares of Premier common stock outstanding at acquisition were exchanged for 1,735,465 shares of the Company’s Class A common stock at an exchange ratio of 1.2019, and the remaining 25% were exchanged for cash of $4.8 million. The shares were issued at a price of $8.30 per share, the closing stock price of the Class A common stock on February 27, 2015. The total purchase price was $19.8 million, including the conversion of 294,400 Premier stock options having a fair value of $632,000. The acquisition was a tax-free transaction.

The transaction was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of Premier, as of February 27, 2015, were recorded at their respective fair values, and the excess of the acquisition consideration over the fair value of Premier’s net assets was allocated to goodwill. For the acquisition of Premier, estimated fair values of assets acquired and liabilities assumed are based on the information available, and the Company believes this information provides a reasonable basis for determining fair values. Management continues to evaluate these fair values, which are subject to revision as more detailed analyses are completed and additional information becomes available. Any changes resulting from the evaluation of these or other estimates as of the acquisition date may change the amount of the fair values recorded.

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

Fair value of assets acquired
Cash and cash equivalents	$	8,028
Investment certificates of deposit		4,478
Loans held for sale		2,319
Available for sale investment securities		47,085
Loans		95,984
Premises and equipment		114
Core deposit intangible		970
Deferred tax assets		1,355
Other assets		1,354
Total assets acquired		161,687
Fair value of liabilities assumed
Deposits		124,182
Federal Home Loan Bank borrowings		19,810
Accrued expenses and other liabilities		498
Total liabilities assumed		144,490
Net assets acquired	$	17,197
Purchase price
Shares of Class A common stock issued		1,735,465
Purchase price per share of Class A common stock	$	8.30
Class A common stock issued and cash exchanged for fractional shares		14,405
Fair value of converted stock options		632
Cash paid		4,813
Total purchase price	$	19,850
Goodwill	$	2,653

During the second quarter of 2015, immaterial adjustments were made to other assets and to accrued expenses and other liabilities.

Purchased Credit Impaired (“PCI”) loans acquired totaled $16.1 million at estimated fair value, and acquired performing loans totaled $79.9 million at estimated fair value. The gross contractual amount receivable for PCI loans and acquired performing loans was $20.0 million and $100.1 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected was $1.4 million.

Goodwill recorded for Premier represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes.

Pro Forma

The following tables reflect the pro forma total net interest income, noninterest income and net income for the three months and six months ended June 30, 2015 and 2014 as though the acquisition of Premier had taken place on January 1, 2014. The pro forma results are not adjusted for acquisition-related expense, and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2014, nor of future results of operations.

	Three Months Ended June 30
(Dollars in thousands)	2015		2014

Net interest income	$	22,641	$	21,496
Noninterest income		4,837		4,908
Net income		5,821		1,226

	Six Months Ended June 30
	2015		2014

Net interest income	$	45,002	$	39,548
Noninterest income		9,528		9,812
Net income		9,282		4,935

It is not practicable to present the revenue and earnings of Premier since acquisition because Premier has not been maintained as a separate accounting entity.

Acquisition of CapStone Bank

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

The transaction was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of CapStone, as of April 1, 2014, were recorded at their respective estimated fair values, and the excess of the acquisition consideration over the fair value of CapStone’s net assets was allocated to goodwill. The estimated fair values of assets acquired and liabilities assumed are based on the information available, and the Company believes this information provides a reasonable basis for determining fair values.

Fair value of assets acquired
Cash and cash equivalents	$	6,198
Investment certificates of deposit		18,250
Federal funds sold		1,000
Available for sale investment securities		49,357
Loans		292,848
Premises and equipment		3,185
Core deposit intangible		2,490
Real estate acquired in settlement of loans		169
Deferred tax assets		3,740
Other assets		4,357
Total assets acquired		381,594
Fair value of liabilities assumed
Deposits		273,665
Federal Home Loan Bank borrowings		61,268
Accrued expenses and other liabilities		1,797
Total liabilities assumed		336,730
Net assets acquired	$	44,864
Purchase price
Shares of Class A common stock issued		8,075,228
Purchase price per share of Class A common stock	$	7.14
Class A common stock issued and cash exchanged for fractional shares		57,658
Fair value of converted stock options		4,606
Total purchase price	$	62,264
Goodwill	$	17,400

During the third quarter of 2014, adjustments of $509,000 were made to deferred tax assets acquired and goodwill. During the fourth quarter of 2014, there was an adjustment of $5,000 made to real estate acquired in settlement of loans and goodwill.

PCI loans acquired totaled $65.8 million at estimated fair value, and acquired performing loans totaled $227.0 million at estimated fair value. The gross contractual amount receivable for PCI loans and acquired performing loans was $84.9 million and $274.8 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected was $2.5 million.

Goodwill recorded for CapStone represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes.

Acquisition-related expense during the first six months of 2015 totaled $2.4 million and was predominately related to the acquisition of Premier. These costs are recorded as noninterest expense as incurred. Acquisition-related expense during the first six months of 2014 was $4.9 million and was related to the acquisitions of Security Savings Bank, SSB (“Security Savings”) on October 1, 2013 and CapStone. The components of acquisition-related expense for the first six months of 2015 and 2014 are as follows (dollars in thousands):

	2015		2014

Personnel	$	1,358	$	1,584
Furniture and equipment		372		13
Technology and data processing		470		2,674
Legal and professional		190		488
Other		38		141
Total acquisition-related expense	$	2,428	$	4,900

Note 3 — Net Income Per Share

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

	For the Three Months Ended June 30				For the Six Months Ended June 30
	2015		2014		2015		2014
Basic:
Net income available to common shareholders	$	6,001	$	1,161	$	9,771	$	4,275
Weighted average shares outstanding		39,046,498		36,808,785		38,448,707		32,671,233
Net income per share, basic	$	0.15	$	0.03	$	0.25	$	0.13

Diluted:
Net income available to common shareholders	$	6,001	$	1,161	$	9,771	$	4,275
Weighted average shares outstanding		39,046,498		36,808,785		38,448,707		32,671,233
Effect of dilutive securities:
Stock options		281,854		450,711		299,509		479,566
Restricted stock units and performance units		167,770		123,072		171,969		116,177
Weighted average shares outstanding and dilutive potential shares outstanding		39,496,122		37,382,568		38,920,185		33,266,976
Net income per share, diluted	$	0.15	$	0.03	$	0.25	$	0.13

Note 4 — Investment Securities

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

			Available for Sale – June 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾
U.S. government-sponsored agency securities	$	49,098	$	-	$	(1,279	)	$	47,819		2.07	%		6.44
SBA securities		7,338		11		(17	)		7,332		2.52			5.37
Agency mortgage backed securities		28,164		1,035		(42	)		29,157		2.92			2.98
Collateralized mortgage obligations		8,452		184		-			8,636		3.67			3.21
Commercial mortgage backed securities		32,817		1,131		-			33,948		3.37			2.22
Corporate bonds		141,751		3,485		(337	)		144,899		3.69			3.18
Covered bonds		49,995		1,608		(44	)		51,559		3.48			1.51
State and municipal obligations		32,812		786		(4	)		33,594		5.43	⁽²⁾		3.78
Total debt securities		350,427		8,240		(1,723	)		356,944		3.48	⁽²⁾		3.39
Federal Home Loan Bank stock		19,665		-		-			19,665
Federal Reserve Bank stock		6,097		-		-			6,097
Other equity securities		9,336		497		(151	)		9,682
Total	$	385,525	$	8,737	$	(1,874	)	$	392,388

			Available for Sale – December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾
U.S. government-sponsored agency securities	$	49,599	$	-	$	(1,485	)	$	48,114		2.05	%		6.80
Agency mortgage backed securities		19,314		1,255		-			20,569		3.78			3.46
Collateralized mortgage obligations		10,492		217		-			10,709		3.81			3.72
Commercial mortgage backed securities		33,646		1,179		-			34,825		3.40			2.62
Corporate bonds		128,798		3,612		(535	)		131,875		3.78			3.50
Covered bonds		49,976		2,017		(73	)		51,920		3.49			1.98
State and municipal obligations		33,930		1,204		(4	)		35,130		5.17	⁽²⁾		3.75
Total debt securities		325,755		9,484		(2,097	)		333,142		3.58	⁽²⁾		3.71
Federal Home Loan Bank stock		17,712		-		-			17,712
Federal Reserve Bank stock		5,702		-		-			5,702
Other equity securities		9,336		361		(156	)		9,541
Total	$	358,505	$	9,845	$	(2,253	)	$	366,097

			Held to Maturity – June 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾
U.S. government-sponsored agency securities	$	24,826	$	83	$	(282	)	$	24,627		2.12	%		5.68
Agency mortgage backed securities		50,013		1,123		-			51,136		2.58			4.26
Corporate bonds		30,657		132		(64	)		30,725		2.85			3.72
Covered bonds		4,986		52		-			5,038		2.08			3.46
Subordinated debt issues		27,000		353		(33	)		27,320		5.88			9.22
State and municipal obligations		1,151		23		-			1,174		4.25	⁽²⁾		9.46
Total	$	138,633	$	1,766	$	(379	)	$	140,020		3.19	⁽²⁾		5.37

			Held to Maturity – December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Average Yield			Average Duration⁽¹⁾
U.S. government-sponsored agency securities	$	32,772	$	95	$	(416	)	$	32,451		2.16	%		4.75
Agency mortgage backed securities		54,339		1,352		-			55,691		2.58			4.43
Corporate bonds		23,455		123		(64	)		23,514		2.72			4.19
Covered bonds		4,984		25		-			5,009		2.08			3.92
Subordinated debt issues		14,000		50		(17	)		14,033		6.26			9.35
State and municipal obligations		1,151		66		-			1,217		4.28	⁽²⁾		7.60
Total	$	130,701	$	1,711	$	(497	)	$	131,915		2.89	⁽²⁾		5.00

⁽¹⁾Average remaining duration to maturity, in years

⁽²⁾ Fully taxable-equivalent basis

The following table shows the Company’s investments with gross unrealized losses and their fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, as of June 30, 2015 (dollars in thousands):

	Less Than 1 Year					1 Year or More					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Loss			Value		Loss			Value		Loss
U.S. government-sponsored agency securities	$	27,470	$	(457	)	$	40,001	$	(1,104	)	$	67,471	$	(1,561	)
SBA securities		5,063		(17	)		-		-			5,063		(17	)
Agency mortgage backed securities		11,157		(42	)		-		-			11,157		(42	)
Corporate bonds		51,011		(194	)		3,840		(207	)		54,851		(401	)
Covered bonds		4,940		(44	)		-		-			4,940		(44	)
Subordinated debt issues		4,968		(33	)		-		-			4,968		(33	)
State and municipal obligations		1,215		(4	)		-		-			1,215		(4	)
Equity securities		-		-			1,746		(151	)		1,746		(151	)
Total securities	$	105,824	$	(791	)	$	45,587	$	(1,462	)	$	151,411	$	(2,253	)

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

There were 52 available for sale debt securities and 14 held to maturity securities in an unrealized loss position at June 30, 2015. Management does not intend to sell any of these securities that have unrealized losses and believes that it is not likely that sales of these securities will be necessary before a recovery of cost. The unrealized losses in all of these securities are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover as the bonds approach their maturity dates or repricing dates or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality.

There were two available for sale equity securities in an unrealized loss position at June 30, 2015. Although those two securities have been in a loss position one year or more, they remain investment grade by all rating agencies and show no indication that dividend payments or credit of the issuer are at risk. Management does not intend to sell these securities, believes that it is not likely that sales of these securities will be necessary before a recovery of cost and does not consider these securities other-than-temporarily impaired.

Investment securities with an amortized cost of $150.6 million and $170.0 million, as of June 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes. The Company has $35.0 million in letters of credit issued by the Federal Home Loan Bank of Atlanta, which are used in lieu of securities to pledge against public deposits.

Investment securities of Premier having a book value of $25.9 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the six months ended June 30, 2015. In 2014, CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the six months ended June 30, 2014.

Note 5 — Loans and Allowance for Credit Losses

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered PCI loans; which include $86.8 million at June 30, 2015 resulting from the acquisition of Security Savings on October 1, 2013, the acquisition of CapStone on April 1, 2014, and the acquisition of Premier on February 27, 2015, and $81.1 million at December 31, 2014 resulting from the acquisitions of Security Savings and Capstone. Loans held for investment are summarized in the following table (dollars in thousands):

	June 30, 2015						December 31, 2014
	Loans –						Loans –
	Excluding		PCI		Total		Excluding		PCI		Total
	PCI		Loans		Loans		PCI		Loans		Loans
Secured by owner-occupied nonfarm nonresidential properties	$	315,654	$	20,349	$	336,003	$	292,013	$	17,969	$	309,982
Secured by other nonfarm nonresidential properties		459,702		17,967		477,669		411,107		15,768		426,875
Other commercial and industrial		221,525		4,343		225,868		189,085		2,819		191,904
Total Commercial		996,881		42,659		1,039,540		892,205		36,556		928,761

Construction loans – 1 to 4 family residential		33,028		751		33,779		42,969		712		43,681
Other construction and land development		154,750		3,613		158,363		120,612		3,816		124,428
Total Real estate – construction		187,778		4,364		192,142		163,581		4,528		168,109

Closed-end loans secured by 1 to 4 family residential properties		395,437		24,926		420,363		379,646		26,626		406,272
Lines of credit secured by 1 to 4 family residential properties		227,479		6,277		233,756		222,329		6,375		228,704
Loans secured by 5 or more family residential properties		70,607		6,687		77,294		32,611		4,987		37,598
Total Real estate – mortgage		693,523		37,890		731,413		634,586		37,988		672,574

Credit cards		7,480		-		7,480		7,656		-		7,656
Other revolving credit plans		8,955		23		8,978		9,085		27		9,112
Other consumer loans		6,311		1,868		8,179		7,414		1,982		9,396
Total Consumer		22,746		1,891		24,637		24,155		2,009		26,164

All other loans		16,471		-		16,471		8,798		-		8,798
Total Other		16,471		-		16,471		8,798		-		8,798

Total loans held for investment	$	1,917,399	$	86,804	$	2,004,203	$	1,723,325	$	81,081	$	1,804,406

Unamortized deferred loan origination fees and costs were a net cost of $2.3 million at June 30, 2015 and $1.3 million at December 31, 2014.

Loans totaling $15.1 million and $6.2 million, as of June 30, 2015 and December 31, 2014, respectively, were held for sale, and stated at the lower of cost or market value as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.

As of June 30, 2015 and December 31, 2014, qualifying loans totaling approximately $659.1 million and $768.9 million, respectively, were pledged under a blanket lien to secure the lines of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond.

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

	June 30,			December 31,
	2015			2014
Commercial nonaccrual loans, not restructured	$	672		$	1,620
Commercial nonaccrual loans, restructured		77			-
Non-commercial nonaccrual loans, not restructured		2,393			3,471
Non-commercial nonaccrual loans, restructured		61			5
Total nonaccrual loans		3,203			5,096
Troubled debt restructured, accruing		2,480			2,116
Total nonperforming loans		5,683			7,212
Real estate acquired in settlement of loans		2,142			3,057
Total nonperforming assets	$	7,825		$	10,269

Restructured loans, performing⁽¹⁾	$	1,030		$	1,151
Loans past due 90 days or more and still accruing⁽²⁾	$	1,732		$	1,534

Nonperforming loans to loans held for investment		0.28	%		0.40	%
Nonperforming assets to total assets at end of period		0.28	%		0.41	%
Allowance for credit losses to nonperforming loans		375.05	%		306.60	%

⁽¹⁾

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

⁽²⁾

Loans past due 90 days or more and still accruing includes $1,721 and $1,463 of PCI loans as of June 30, 2015 and December 31, 2014, respectively.

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

Commitments to lend additional funds to borrowers whose loans have been restructured were not material at June 30, 2015.

Included in real estate acquired in settlement of loans at June 30, 2015 is $958,000 of one to four family residential properties. The amount of loans secured by one to four family residential properties in process of foreclosure at June 30, 2015, was $1.5 million. As of June 30, 2015, there had been no foreclosures on mortgage loans with a government guarantee.

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

Loans – Excluding PCI
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
June 30, 2015	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	-	$	-	$	640	$	640	$	315,014	$	315,654
Secured by other nonfarm nonresidential properties		16		-		-		16		459,686		459,702
Other commercial and industrial		574		-		109		683		220,842		221,525
Total Commercial		590		-		749		1,339		995,542		996,881

Construction loans – 1 to 4 family residential		-		-		-		-		33,028		33,028
Other construction and land development		-		-		107		107		154,643		154,750
Total Real estate – construction		-		-		107		107		187,671		187,778

Closed-end loans secured by 1 to 4 family residential properties		1,442		-		1,239		2,681		392,756		395,437
Lines of credit secured by 1 to 4 family residential properties		1,882		-		947		2,829		224,650		227,479
Loans secured by 5 or more family residential properties		-		-		145		145		70,462		70,607
Total Real estate – mortgage		3,324		-		2,331		5,655		687,868		693,523

Credit cards		73		11		-		84		7,396		7,480
Other revolving credit plans		22		-		1		23		8,932		8,955
Other consumer loans		27		-		15		42		6,269		6,311
Total Consumer		122		11		16		149		22,597		22,746

All other loans		-		-		-		-		16,471		16,471
Total Other		-		-		-		-		16,471		16,471

Total loans	$	4,036	$	11	$	3,203	$	7,250	$	1,910,149	$	1,917,399

PCI Loans
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
June 30, 2015	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	483	$	-	$	-	$	483	$	19,866	$	20,349
Secured by other nonfarm nonresidential properties		128		-		-		128		17,839		17,967
Other commercial and industrial		-		6		-		6		4,337		4,343
Total Commercial		611		6		-		617		42,042		42,659

Construction loans – 1 to 4 family residential		-		-		-		-		751		751
Other construction and land development		12		-		-		12		3,601		3,613
Total Real estate – construction		12		-		-		12		4,352		4,364

Closed-end loans secured by 1 to 4 family residential properties		543		1,420		-		1,963		22,963		24,926
Lines of credit secured by 1 to 4 family residential properties		236		274		-		510		5,767		6,277
Loans secured by 5 or more family residential properties		-		-		-		-		6,687		6,687
Total Real estate – mortgage		779		1,694		-		2,473		35,417		37,890

Credit cards		-		-		-		-		-		-
Other revolving credit plans		-		-		-		-		23		23
Other consumer loans		38		21		-		59		1,809		1,868
Total Consumer		38		21		-		59		1,832		1,891

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

Total loans	$	1,440	$	1,721	$	-	$	3,161	$	83,643	$	86,804

Total Loans
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
June 30, 2015	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	483	$	-	$	640	$	1,123	$	334,880	$	336,003
Secured by other nonfarm nonresidential properties		144		-		-		144		477,525		477,669
Other commercial and industrial		574		6		109		689		225,179		225,868
Total Commercial		1,201		6		749		1,956		1,037,584		1,039,540

Construction loans – 1 to 4 family residential		-		-		-		-		33,779		33,779
Other construction and land development		12		-		107		119		158,244		158,363
Total Real estate – construction		12		-		107		119		192,023		192,142

Closed-end loans secured by 1 to 4 family residential properties		1,985		1,420		1,239		4,644		415,719		420,363
Lines of credit secured by 1 to 4 family residential properties		2,118		274		947		3,339		230,417		233,756
Loans secured by 5 or more family residential properties		-		-		145		145		77,149		77,294
Total Real estate – mortgage		4,103		1,694		2,331		8,128		723,285		731,413

Credit cards		73		11		-		84		7,396		7,480
Other revolving credit plans		22		-		1		23		8,955		8,978
Other consumer loans		65		21		15		101		8,078		8,179
Total Consumer		160		32		16		208		24,429		24,637

All other loans		-		-		-		-		16,471		16,471
Total Other		-		-		-		-		16,471		16,471

Total loans	$	5,476	$	1,732	$	3,203	$	10,411	$	1,993,792	$	2,004,203

Loans – Excluding PCI
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
December 31, 2014	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	1,366	$	-	$	1,353	$	2,719	$	289,294	$	292,013
Secured by other nonfarm nonresidential properties		-		-		237		237		410,870		411,107
Other commercial and industrial		1,451		-		30		1,481		187,604		189,085
Total Commercial		2,817		-		1,620		4,437		887,768		892,205

Construction loans – 1 to 4 family residential		-		-		-		-		42,969		42,969
Other construction and land development		66		-		159		225		120,387		120,612
Total Real estate – construction		66		-		159		225		163,356		163,581

Closed-end loans secured by 1 to 4 family residential properties		3,529		35		1,871		5,435		374,211		379,646
Lines of credit secured by 1 to 4 family residential properties		2,578		-		1,301		3,879		218,450		222,329
Loans secured by 5 or more family residential properties		-		-		-		-		32,611		32,611
Total Real estate – mortgage		6,107		35		3,172		9,314		625,272		634,586

Credit cards		93		35		-		128		7,528		7,656
Other revolving credit plans		121		1		102		224		8,861		9,085
Other consumer loans		131		-		43		174		7,240		7,414
Total Consumer		345		36		145		526		23,629		24,155

All other loans		-		-		-		-		8,798		8,798
Total Other		-		-		-		-		8,798		8,798

Total loans	$	9,335	$	71	$	5,096	$	14,502	$	1,708,823	$	1,723,325

PCI Loans
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
December 31, 2014	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	285	$	-	$	-	$	285	$	17,684	$	17,969
Secured by other nonfarm nonresidential properties		-		-		-		-		15,768		15,768
Other commercial and industrial		-		13		-		13		2,806		2,819
Total Commercial		285		13		-		298		36,258		36,556

Construction loans – 1 to 4 family residential		-		-		-		-		712		712
Other construction and land development		-		-		-		-		3,816		3,816
Total Real estate – construction		-		-		-		-		4,528		4,528

Closed-end loans secured by 1 to 4 family residential properties		2,394		1,396		-		3,790		22,836		26,626
Lines of credit secured by 1 to 4 family residential properties		380		33		-		413		5,962		6,375
Loans secured by 5 or more family residential properties		-		-		-		-		4,987		4,987
Total Real estate – mortgage		2,774		1,429		-		4,203		33,785		37,988

Credit cards		-		-		-		-		-		-
Other revolving credit plans		-		-		-		-		27		27
Other consumer loans		46		21		-		67		1,915		1,982
Total Consumer		46		21		-		67		1,942		2,009

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

Total loans	$	3,105	$	1,463	$	-	$	4,568	$	76,513	$	81,081

Total Loans
	30-89 Days		90+ Days		Nonaccrual		Total Past Due				Total Loans
December 31, 2014	Past Due		Past Due		Loans		+ Nonaccrual		Current		Receivable
Secured by owner-occupied nonfarm nonresidential properties	$	1,651	$	-	$	1,353	$	3,004	$	306,978	$	309,982
Secured by other nonfarm nonresidential properties		-		-		237		237		426,638		426,875
Other commercial and industrial		1,451		13		30		1,494		190,410		191,904
Total Commercial		3,102		13		1,620		4,735		924,026		928,761

Construction loans – 1 to 4 family residential		-		-		-		-		43,681		43,681
Other construction and land development		66		-		159		225		124,203		124,428
Total Real estate – construction		66		-		159		225		167,884		168,109

Closed-end loans secured by 1 to 4 family residential properties		5,923		1,431		1,871		9,225		397,047		406,272
Lines of credit secured by 1 to 4 family residential properties		2,958		33		1,301		4,292		224,412		228,704
Loans secured by 5 or more family residential properties		-		-		-		-		37,598		37,598
Total Real estate – mortgage		8,881		1,464		3,172		13,517		659,057		672,574

Credit cards		93		35		-		128		7,528		7,656
Other revolving credit plans		121		1		102		224		8,888		9,112
Other consumer loans		177		21		43		241		9,155		9,396
Total Consumer		391		57		145		593		25,571		26,164

All other loans		-		-		-		-		8,798		8,798
Total Other		-		-		-		-		8,798		8,798

Total loans	$	12,440	$	1,534	$	5,096	$	19,070	$	1,785,336	$	1,804,406

At June 30, 2015 and December 31, 2014 there were $3.6 million and $3.3 million, respectively, of loans classified as TDRs. A restructured loan is classified as a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. The Company monitors the performance of restructured loans on an ongoing basis. For loans classified as TDRs, the Company further evaluates the loans as performing or nonperforming. Loans retain their accrual status at the time of their restructuring. As a result, if a loan is on nonaccrual at the time it is restructured, it stays as nonaccrual; and if a loan is on accrual at the time of the restructuring, it generally stays on accrual. A restructured loan will be reclassified to nonaccrual if the loan becomes 90 days delinquent or other weaknesses are observed which make collection of principal and interest unlikely. Nonperforming TDRs originally classified as nonaccrual may be reclassified as accruing if, subsequent to restructuring, they experience six consecutive months of payment performance according to the restructured terms. Further, a TDR may be considered performing and subsequently removed from nonperforming status in years subsequent to the restructuring if it meets the following criteria:

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

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

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

Restructurings of loans and their classification as TDRs are based on individual facts and circumstances. Loan restructurings that are classified as TDRs may involve an increase or reduction of the interest rate, extension of the term of the loan, or deferral or forgiveness of principal or interest payments, which the Company considers are concessions. All loans classified as TDRs were restructured due to financial difficulties experienced by the borrower. The Company had $1.0 million and $1.2 million of performing TDRs at June 30, 2015 and December 31, 2014, respectively, which were restructured in a prior year without an interest rate concession and were performing in accordance with their restructured terms.

The following tables provide information about TDRs restructured during the current and prior year periods (dollars in thousands):

	Restructurings During the Three Months Ended June 30, 2015						Restructurings During the Three Months Ended June 30, 2014
	Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment
TDRs:
Commercial		2	$	657	$	663		-	$	-	$	-
Real estate – mortgage		-		-		-		1		132		125
Total		2	$	657	$	663		1	$	132	$	125

	Restructurings During the Six Months Ended June 30, 2015						Restructurings During the Six Months Ended June 30, 2014
	Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment		Number of Contracts		Pre-Restructuring Outstanding Recorded Investment		Post- Restructuring Outstanding Recorded Investment
TDRs:
Commercial		2	$	657	$	663		-	$	-	$	-
Real estate – mortgage		-		-		-		3		183		176
Total		2	$	657	$	663		3	$	183	$	176

Two loans were restructured and classified as TDR loans during the first half of 2015. One of the commercial loans restructured in 2015 involved an extension of the term of the loan, and the other involved a deferral of principal. Three loans were restructured and classified as TDR loans during the first half of 2014. The real estate – mortgage loan restructured in the second quarter of 2014 involved forgiveness of principal, and the two real estate – mortgage loans restructured in the first quarter of 2014 involved deferral of interest payments.

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

No TDRs were restructured in the prior 12 months that subsequently defaulted during the three months or six months ended June 30, 2015, or the three months or six months ended June 30, 2014.

Interest is not typically accrued on nonperforming loans, as they are normally in nonaccrual status. However, interest may be accrued in certain circumstances on nonperforming TDRs, such as those that have an interest rate concession but are otherwise performing. Interest income on performing or nonperforming accruing TDRs is recognized consistent with any other accruing loan. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on a loan is discontinued when, in management’s opinion, the borrower is not likely to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Loans are placed on nonaccrual status when (i) management has concerns relating to the ability to collect the loan principal and interest, and (ii) generally when loans are 90 days or more past due. Interest income is subsequently recognized on a cash basis only to the extent payments are received and only if the loan is well secured. Commercial loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower in accordance with the contractual terms. Residential mortgage and consumer loans are typically returned to accrual status once they are no longer past due. There were $2.5 million in TDRs at June 30, 2015 and $2.2 million in TDRs at June 30, 2014 that were considered nonperforming and were accruing interest. The following table shows interest income recognized and received on these TDRs for the three months and six months ended June 30, 2015 and 2014 (dollars in thousands):

	Three Months Ended June 30, 2015				Three Months Ended June 30, 2014
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	-	$	-	$	3	$	3
Real estate – construction		-		-		2		2
Real estate – mortgage		19		20		17		17
Total	$	19	$	20	$	22	$	22

	Six Months Ended June 30, 2015				Six Months Ended June 30, 2014
	Recognized		Received		Recognized		Received
Interest Income:
Commercial	$	-	$	-	$	6	$	6
Real estate – construction		-		-		4		4
Real estate – mortgage		39		41		33		33
Total	$	39	$	41	$	43	$	43

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

Loans specifically identified and evaluated for levels of impairment totaled $3.6 million and $4.2 million at June 30, 2015 and December 31, 2014, respectively, as detailed in the following tables (dollars in thousands).

	Impaired Loans
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Recorded		Income
	Balance		Balance		Allowance		Investment		Recognized
At June 30, 2015
Loans without a specific valuation allowance
Commercial	$	874	$	981	$	-	$	877	$	13
Real estate – construction		440		440		-		460		15
Real estate – mortgage		472		472		-		542		16
Consumer		4		4		-		5		-
Total		1,790		1,897		-		1,884		44

Loans with a specific valuation allowance
Commercial		77		77		-		86		3
Real estate – construction		143		143		44		183		6
Real estate – mortgage		1,628		1,648		183		1,659		29
Consumer		10		10		1		10		-
Total		1,858		1,878		228		1,938		38

Total impaired loans
Commercial		951		1,058		-		963		16
Real estate – construction		583		583		44		643		21
Real estate – mortgage		2,100		2,120		183		2,201		45
Consumer		14		14		1		15		-
Total	$	3,648	$	3,775	$	228	$	3,822	$	82

	Impaired Loans
			Unpaid				Average		Interest
	Recorded		Principal		Specific		Recorded		Income
	Balance		Balance		Allowance		Investment		Recognized
At December 31, 2014
Loans without a specific valuation allowance
Commercial	$	283	$	283	$	-	$	342	$	22
Real estate – construction		453		453		-		480		32
Real estate – mortgage		361		381		-		454		36
Consumer		17		17		-		18		1
Total		1,114		1,134		-		1,294		91

Loans with a specific valuation allowance
Commercial		1,087		1,194		588		1,409		78
Real estate – construction		148		148		53		186		11
Real estate – mortgage		1,878		1,878		264		1,913		71
Consumer		-		-		-		-		-
Total		3,113		3,220		905		3,508		160

Total impaired loans
Commercial		1,370		1,477		588		1,751		100
Real estate – construction		601		601		53		666		43
Real estate – mortgage		2,239		2,259		264		2,367		107
Consumer		17		17		-		18		1
Total	$	4,227	$	4,354	$	905	$	4,802	$	251

The balance in the allowance for credit losses and the recorded investment in loans by portfolio segment and based on the reserving method for the six months ended June 30, 2015, the year ended December 31, 2014 and the six months ended June 30, 2014 were as follows:

				Real Estate -			Real Estate -									Total
Allowance for credit losses:	Commercial			Construction			Mortgage			Consumer			Other			Allowance
June 30, 2015
Individually evaluated for impairment	$	-		$	44		$	183		$	1		$	-		$	228
Collectively evaluated for impairment		10,622			1,942			7,974			356			159			21,053
PCI		-			-			30			3			-			33
Total ending allowance	$	10,622		$	1,986		$	8,187		$	360		$	159		$	21,314
Allowance for credit losses as a percentage of recorded investment		1.02	%		1.03	%		1.12	%		1.46	%		0.97	%		1.06	%
December 31, 2014
Individually evaluated for impairment	$	588		$	53		$	264		$	-		$	-		$	905
Collectively evaluated for impairment		10,567			1,931			8,195			421			93			21,207
PCI		-			-			-			-			-			-
Total ending allowance	$	11,155		$	1,984		$	8,459		$	421		$	93		$	22,112
Allowance for credit losses as a percentage of recorded investment		1.20	%		1.18	%		1.26	%		1.61	%		1.06	%		1.23	%
June 30, 2014
Individually evaluated for impairment	$	19		$	8		$	1,041		$	-		$	-		$	1,068
Collectively evaluated for impairment		10,245			1,763			9,313			469			86			21,876
PCI		-			-			-			-			-			-
Total ending allowance	$	10,264		$	1,771		$	10,354		$	469		$	86		$	22,944
Allowance for credit losses as a percentage of recorded investment		1.23	%		1.17	%		1.47	%		1.63	%		1.07	%		1.33	%

			Real Estate -		Real Estate -						Total
Recorded investment in loans:	Commercial		Construction		Mortgage		Consumer		Other		Loans
June 30, 2015
Individually evaluated for impairment	$	951	$	583	$	2,100	$	14	$	-	$	3,648
Collectively evaluated for impairment		995,930		187,195		691,423		22,732		16,471		1,913,751
PCI		42,659		4,364		37,890		1,891		-		86,804
Total recorded investment in loans	$	1,039,540	$	192,142	$	731,413	$	24,637	$	16,471	$	2,004,203
December 31, 2014
Individually evaluated for impairment	$	1,370	$	601	$	2,239	$	17	$	-	$	4,227
Collectively evaluated for impairment		890,835		162,980		632,347		24,138		8,798		1,719,098
PCI		36,556		4,528		37,988		2,009		-		81,081
Total recorded investment in loans	$	928,761	$	168,109	$	672,574	$	26,164	$	8,798	$	1,804,406
June 30, 2014
Individually evaluated for impairment	$	1,991	$	813	$	5,221	$	-	$	-	$	8,025
Collectively evaluated for impairment		778,059		144,344		653,119		26,605		8,064		1,610,191
PCI		55,198		5,921		45,050		2,165		-		108,334
Total recorded investment in loans	$	835,248	$	151,078	$	703,390	$	28,770	$	8,064	$	1,726,550

The allowance for credit losses as a percentage of the recorded investment in loans shown in the table above reflects the improvement in asset quality in the past year. There is a greater proportion of low risk, high quality loans in the loan portfolio at June 30, 2015 compared to June 30, 2014. As a result, the allowance for credit losses as a percentage of the total recorded investment in loans at June 30, 2015 is significantly lower than at June 30, 2014. Also impacting the allowance for credit losses as a percentage of the total recorded investment in loans is the acquired non-PCI portfolio, which was recorded at fair value on the acquisition date and had an allowance for credit losses of $735,000 as of June 30, 2015.

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

	June 30,										December 31,
	2015										2014
			Special		Sub-								Special		Sub-
Loans – excluding PCI	Pass		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total
Commercial	$	960,979	$	16,005	$	18,662	$	15	$	995,661	$	858,218	$	18,578	$	12,717	$	969	$	890,482
Real estate – construction		172,037		739		919		57		173,752		148,226		1,144		88		60		149,518
Real estate – mortgage		143,837		3,845		1,131		-		148,813		99,200		4,794		1,987		-		105,981
Consumer		1,147		-		-		-		1,147		928		-		-		-		928
Other		15,692		-		255		-		15,947		7,646		1,152		-		-		8,798
Total	$	1,293,692	$	20,589	$	20,967	$	72	$	1,335,320	$	1,114,218	$	25,668	$	14,792	$	1, 029	$	1,155,707

	June 30,										December 31,
	2015										2014
			Special		Sub-								Special		Sub-
PCI loans	Pass⁽¹⁾		Mention		standard		Doubtful		Total		Pass⁽¹⁾		Mention		standard		Doubtful		Total
Commercial	$	32,701	$	5,777	$	4,027	$	-	$	42,505	$	27,766	$	5,345	$	3,205	$	-	$	36,316
Real estate – construction		2,632		1,110		526		-		4,268		2,838		1,248		339		-		4,425
Real estate – mortgage		13,012		3,899		1,830		-		18,741		11,246		3,811		1,627		-		16,684
Consumer		-		-		-		-		-		-		-		-		-		-
Other		-		-		-		-		-		-		-		-		-		-
Total	$	48,345	$	10,786	$	6,383	$	-	$	65,514	$	41,850	$	10,404	$	5,171	$	-	$	57,425

	June 30,										December 31,
	2015										2014
			Special		Sub-								Special		Sub-
Total loans	Pass		Mention		standard		Doubtful		Total		Pass		Mention		standard		Doubtful		Total
Commercial	$	993,680	$	21,782	$	22,689	$	15	$	1,038,166	$	885,984	$	23,923	$	15,922	$	969	$	926,798
Real estate – construction		174,669		1,849		1,445		57		178,020		151,064		2,392		427		60		153,943
Real estate – mortgage		156,849		7,744		2,961		-		167,554		110,446		8,605		3,614		-		122,665
Consumer		1,147		-		-		-		1,147		928		-		-		-		928
Other		15,692		-		255		-		15,947		7,646		1,152		-		-		8,798
Total	$	1,342,037	$	31,375	$	27,350	$	72	$	1,400,834	$	1,156,068	$	36,072	$	19,963	$	1, 029	$	1,213,132

⁽¹⁾

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

An analysis of the changes in the allowance for credit losses for the three months and six months ended June 30, 2015 and 2014 follows (dollars in thousands):

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Three Months Ended June 30, 2015
Loans – excluding PCI
Commercial	$	10,474	$	396	$	119	$	425		$	10,622
Real estate – construction		2,005		4		39		(54	)		1,986
Real estate – mortgage		8,871		429		123		(408	)		8,157
Consumer		382		104		61		18			357
Other		102		-		13		44			159
Total	$	21,834	$	933	$	355	$	25		$	21,281

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		41		2		-		(9	)		30
Consumer		3		-		-		-			3
Other		-		-		-		-			-
Total	$	44	$	2	$	-	$	(9	)	$	33

Total loans
Commercial	$	10,474	$	396	$	119	$	425		$	10,622
Real estate – construction		2,005		4		39		(54	)		1,986
Real estate – mortgage		8,912		431		123		(417	)		8,187
Consumer		385		104		61		18			360
Other		102		-		13		44			159
Total	$	21,878	$	935	$	355	$	16		$	21,314

Three Months Ended June 30, 2014
Loans – excluding PCI
Commercial	$	11,347	$	304	$	152	$	(931	)	$	10,264
Real estate – construction		1,853		400		444		(126	)		1,771
Real estate – mortgage		10,683		2,160		253		1,578			10,354
Consumer		462		138		80		65			469
Other		90		-		3		(7	)		86
Total	$	24,435	$	3,002	$	932	$	579		$	22,944

PCI loans
Commercial	$	-	$	10	$	-	$	10		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		11		-		11			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	21	$	-	$	21		$	-

Total loans
Commercial	$	11,347	$	314	$	152	$	(921	)	$	10,264
Real estate – construction		1,853		400		444		(126	)		1,771
Real estate – mortgage		10,683		2,171		253		1,589			10,354
Consumer		462		138		80		65			469
Other		90		-		3		(7	)		86
Total	$	24,435	$	3,023	$	932	$	600		$	22,944

	Beginning									Ending
	Balance		Chargeoffs		Recoveries		Provision			Balance
Six Months Ended June 30, 2015
Loans – excluding PCI
Commercial	$	11,155	$	1,032	$	379	$	120		$	10,622
Real estate – construction		1,984		7		339		(330	)		1,986
Real estate – mortgage		8,459		836		268		266			8,157
Consumer		421		242		199		(21	)		357
Other		93		-		17		49			159
Total	$	22,112	$	2,117	$	1,202	$	84		$	21,281

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		2		-		32			30
Consumer		-		1		-		4			3
Other		-		-		-		-			-
Total	$	-	$	3	$	-	$	36		$	33

Total loans
Commercial	$	11,155	$	1,032	$	379	$	120		$	10,622
Real estate – construction		1,984		7		339		(330	)		1,986
Real estate – mortgage		8,459		838		268		298			8,187
Consumer		421		243		199		(17	)		360
Other		93		-		17		49			159
Total	$	22,112	$	2,120	$	1,202	$	120		$	21,314

Six Months Ended June 30, 2014
Loans – excluding PCI
Commercial	$	11,480	$	437	$	525	$	(1,304	)	$	10,264
Real estate – construction		2,027		404		514		(366	)		1,771
Real estate – mortgage		10,479		2,683		450		2,108			10,354
Consumer		469		362		136		226			469
Other		95		-		6		(15	)		86
Total	$	24,550	$	3,886	$	1,631	$	649		$	22,944

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

Total loans
Commercial	$	11,480	$	499	$	525	$	(1,242	)	$	10,264
Real estate – construction		2,027		404		514		(366	)		1,771
Real estate – mortgage		10,479		2,716		450		2,141			10,354
Consumer		469		362		136		226			469
Other		95		-		6		(15	)		86
Total	$	24,550	$	3,981	$	1,631	$	744		$	22,944

Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired companies.

In conjunction with the acquisition of Premier on February 27, 2015, the PCI loan portfolio was accounted for at fair value as follows (dollars in thousands):

	February 27, 2015

Contractual principal and interest at acquisition	$	19,999
Nonaccretable difference		(821	)
Expected cash flows at acquisition		19,178
Accretable yield		(3,040	)
Basis in PCI loans at acquisition – estimated fair value	$	16,138

A summary of changes in the recorded investment of PCI loans for the three months and six months ended June 30, 2015 and 2014 follows (dollars in thousands):

	Three Months Ended June 30
	2015			2014

Recorded investment, beginning of period	$	93,075		$	52,568
Fair value of loans acquired during the period		-			65,816
Accretion		1,314			1,358
Reductions for payments, sales and foreclosures		(7,585	)		(11,408	)
Recorded investment, end of period	$	86,804		$	108,334
Outstanding principal balance, end of period	$	95,149		$	118,656

	Six Months Ended June 30
	2015			2014

Recorded investment, beginning of period	$	81,081		$	56,015
Fair value of loans acquired during the period		16,138			65,816
Accretion		2,500			1,985
Reductions for payments, sales and foreclosures		(12,915	)		(15,482	)
Recorded investment, end of period	$	86,804		$	108,334
Outstanding principal balance, end of period	$	95,149		$	118,656

A summary of changes in the accretable yield for PCI loans for the three months and six months ended June 30, 2015 and 2014 follows (dollars in thousands):

	Three Months Ended June 30
	2015			2014

Accretable yield, beginning of period	$	23,885		$	13,473
Addition from acquisition		-			13,969
Accretion		(1,314	)		(1,358	)
Reclassification from nonaccretable difference		232			400
Other changes, net		239			(882	)
Accretable yield, end of period	$	23,042		$	25,602

	Six Months Ended June 30
	2015			2014

Accretable yield, beginning of period	$	22,447		$	14,462
Addition from acquisition		3,040			13,969
Accretion		(2,500	)		(1,985	)
Reclassification from nonaccretable difference		1,282			503
Other changes, net		(1,227	)		(1,347	)
Accretable yield, end of period	$	23,042		$	25,602

Note 6 — Deferred Tax Assets

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

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

The significant components of the Company’s deferred tax assets at June 30, 2015 and December 31, 2014 were as follows (dollars in thousands):

	2015			2014
Deferred tax assets:
Allowance for credit losses	$	8,153		$	8,458
Net operating losses		17,585			21,554
Other		13,452			13,420
Valuation allowance		(328	)		(328	)
Total		38,862			43,104

Deferred tax liabilities:
Net unrealized gain on available for sale securities		2,625			2,904
Other		6,886			7,067
Total		9,511			9,971
Net deferred tax assets	$	29,351		$	33,133

Note 7 — Repurchase Agreements

In previous periods, the Company occasionally secured long-term funding utilizing securities sold under repurchase agreements. Repurchase agreements are transactions whereby the Company sells to a counterparty securities at an agreed upon purchase price, and which obligates the Company to repurchase the securities on an agreed upon date at an agreed upon repurchase price with interest at an agreed upon rate payable at a predetermined frequency. Securities sold under agreements to repurchase are recorded at the amount of cash received in connection with the transaction and are included in other borrowings in the consolidated balance sheets.

The Company monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable securities and the counterparty’s interest in those securities and segregates the securities from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the securities collateralizing the transactions, as the Company may be required to provide additional collateral based on fair value changes of the underlying securities.

At June 30, 2015, the Company had one repurchase agreement, which it entered into on December 8, 2006 for $21.0 million with a repurchase date of December 8, 2016. The transaction is subject to quarterly calls with quarterly interest payments at a fixed rate of 4.03%. Securities pledged as collateral under the repurchase agreement are maintained with the counterparty. Securities acceptable as collateral are U.S. Treasury securities, U.S. government agency securities, U.S. government-sponsored agency securities, and agency mortgage backed securities. The Company may substitute collateral among the acceptable categories. The remaining contractual maturity of repurchase agreements by class of collateral pledged included in other borrowings in the consolidated balance sheets as of June 30, 2015 and December 31, 2014 is presented in the following tables (dollars in thousands).

	June 30, 2015
	Remaining Contractual Maturity of the Agreements
	Less than 1 Year		1 – 3 Years		3 – 5 Years		Greater than 5 Years		Total		Market Value of Collateral
Repurchase agreements
U.S. government-sponsored agency securities	$	-	$	17,411	$	-	$	-	$	17,411	$	20,334
Agency mortgage backed securities		-		3,589		-		-		3,589		4,617
Total borrowings	$	-	$	21,000	$	-	$	-	$	21,000	$	24,951
Gross amount of recognized liabilities for repurchase agreements									$	21,000

	December 31, 2014
	Remaining Contractual Maturity of the Agreements
	Less than 1 Year		1 – 3 Years		3 – 5 Years		Greater than 5 Years		Total		Market Value of Collateral
Repurchase agreements
U.S. government-sponsored agency securities	$	-	$	16,699	$	-	$	-	$	16,699	$	19,396
Agency mortgage backed securities		-		4,301		-		-		4,301		5,573
Total borrowings	$	-	$	21,000	$	-	$	-	$	21,000	$	24,969
Gross amount of recognized liabilities for repurchase agreements									$	21,000

Note 8 — Stock Compensation Plans

The Company recorded $413,000 and $389,000 of stock-based compensation expense for the six-month periods ended June 30, 2015 and 2014, respectively. The stock-based compensation expense is calculated on a ratable basis over the vesting periods of the related stock options or grants of restricted stock units or performance units and is reported within personnel expense. This expense had no impact on the Company’s reported cash flows. As of June 30, 2015, there was $1.7 million of unrecognized stock-based compensation expense. This expense will be fully recognized by December 31, 2017.

To determine the amounts recorded in the financial statements, the fair value of each stock option is estimated on the date of the grant using the Black-Scholes-Merton option-pricing model, and for restricted stock units and performance units, the fair value of the Company’s stock on date of grant is used. During the first six months of 2015, no stock options were granted.

As of June 30, 2015, there were 437,209 restricted stock units and performance units outstanding. The fair value of each restricted stock unit or performance unit is the closing price of the Company’s Class A common stock on the grant date. The date of grant and the fair value of these are as follows:

June 30, 2015
			Grant	Fair Value
Type	Units		Date	Per Unit
Restricted stock units		10	02/09/11	$	5.15
Restricted stock units		41,198	01/11/12		3.89
Restricted stock units		3,790	07/25/12		4.10
Restricted stock units		88,010	01/16/13		5.00
Restricted stock units		2,390	03/06/13		5.91
Restricted stock units		1,460	04/24/13		5.99
Restricted stock units		22,204	07/24/13		8.80
Restricted stock units		1,701	10/09/13		6.61
Restricted stock units		82,196	01/15/14		7.19
Performance units		36,301	07/29/14		7.64
Performance units		22,835	10/29/14		8.41
Performance units		130,904	01/28/15		8.10
Performance units		4,210	05/20/15		8.12
		437,209

On February 27, 2015, there were 294,400 Premier stock options that converted to 353,831 Company stock options. The estimated fair value of the converted options was $632,000 using the Black-Scholes-Merton option-pricing model. At June 30, 2015, there were 217,418 of these converted options outstanding and exercisable with a weighted average remaining contractual life of 4.69 years and no intrinsic value as the exercise price exceeds the current market price. The following is a summary of stock option activity and related information for the first six months of 2015.

	Options			Weighted Average Exercise Price

Outstanding – beginning of period		985,071		$	7.51
Converted		353,831			9.16
Exercised		(95,000	)		4.51
Forfeited		(221,991	)		12.15
Outstanding – end of period		1,021,911		$	7.35

Exercisable – end of period		1,021,911		$	7.35

Note 9 — Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of the Company’s financial instruments.

Cash and cash equivalents. The carrying amounts for cash and due from banks approximate fair value because of the short maturities of those instruments and are categorized as Level 1 (quoted prices in active markets for identical assets).

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

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

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

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

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

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

Interest rate swaps. Under the terms of cash flow hedges, which the Bank entered into in August and November, 2014, for the duration of the hedges the Bank and the counterparty pay one another the difference between the variable amount payable by the Bank based on the 30-day LIBOR rate and the fixed payment payable by the counterparty. In addition, the Bank has several other interest rate swap contracts that were classified as non-designated hedges that allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with a derivatives dealer to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest. The fair values of the interest rate swaps designated as cash flow hedges and the non-designated interest rate swaps are based on projected LIBOR rates for the duration of the hedges, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. The fair values of the interest rate swaps are categorized as Level 2.

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

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

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

During the first quarter of 2015, the Company revised its methodology for estimating the fair value of the junior subordinated notes to discounting the projected future cash flows using the LIBOR interest rate swap curve. Previously, the Company projected cash flows assuming the current payment rate remained unchanged for the remaining term. Prior period amounts have not been revised.

The following tables present the estimated fair values of financial instruments as of June 30, 2015 and December 31, 2014 (dollars in thousands):

June 30, 2015	Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	37,250	$	37,250
Investment certificates of deposit		17,285		17,332
Investment securities		531,021		532,408
Loans		1,982,889		1,982,043
Loans held for sale		15,100		15,100
Investments held in trust		8,194		8,194
Interest rate swaps		514		514
Financial liabilities:
Deposits		1,994,810		1,996,370
Federal funds purchased		42,000		42,000
Wholesale repurchase agreements		21,000		22,324
Subordinated debt		15,500		15,918
Junior subordinated notes		25,774		19,390
Federal Home Loan Bank borrowings		404,800		404,832
Non-qualified defined contribution plan liability		8,194		8,194
Interest rate swaps		269		269

December 31, 2014	Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	34,369	$	34,369
Investment certificates of deposit		15,632		15,705
Investment securities		496,798		498,012
Loans		1,782,294		1,784,477
Loans held for sale		6,181		6,181
Investments held in trust		7,342		7,342
Interest rate swaps		224		224
Financial liabilities:
Deposits		1,832,564		1,834,333
Federal funds purchased		29,500		29,500
Wholesale repurchase agreements		21,000		22,252
Subordinated debt		15,500		15,978
Junior subordinated notes		25,774		12,515
Federal Home Loan Bank borrowings		346,700		346,712
Non-qualified defined contribution plan liability		7,342		7,342
Interest rate swaps		492		492

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

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

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets measured at fair value
Available for sale securities:
at June 30, 2015	$	4,625	$	362,001	$	25,762
at December 31, 2014		4,465		338,218		23,414
Investments held in trust:
at June 30, 2015		8,194		-		-
at December 31, 2014		7,342		-		-
Interest rate swaps:
at June 30, 2015		-		514		-
at December 31, 2014		-		224		-
Liabilities measured at fair value
Non-qualified defined contribution plan liability:
at June 30, 2015		8,194		-		-
at December 31, 2014		7,342		-		-
Interest rate swaps:
at June 30, 2015		-		269		-
at December 31, 2014		-		492		-

The table below presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2015 and the year ended December 31, 2014 (dollars in thousands):

	Six Months			Twelve Months
	Ended			Ended
	June 30,			December 31,
	2015			2014

Available for sale securities
Beginning balance	$	23,414		$	9,988
Purchases		4,022			16,947
Acquisitions		1,147			3,089
Redemptions		(2,821	)		(6,610	)
Ending balance	$	25,762		$	23,414

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

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Loans held for sale:
at June 30, 2015	$	-	$	15,100	$	-
at December 31, 2014		-		6,181		-
Real estate acquired in settlement of loans:
at June 30, 2015		-		-		1,961
at December 31, 2014		-		-		2,485
Impaired loans, net of allowance:
at June 30, 2015		-		-		3,420
at December 31, 2014		-		-		3,322

The fair value of collateral dependent loans is determined by appraisals or by alternative evaluations, such as tax evaluations. The fair value of loans may also be determined by sales contracts in hand or settlement agreements.

The following table presents the valuation and unobservable inputs for Level 3 assets measured at fair value at June 30, 2015 (dollars in thousands):

Description	Fair Value		Valuation Methodology	Unobservable Inputs	Range of Inputs

Federal Home Loan Bank stock and Federal Reserve Bank stock	$	25,762	Cost	Redemption provisions	N/A

Real estate acquired in settlement of loans		1,961	Appraised value	Discount to reflect current market conditions	0.00% - 52.00%

Impaired loans, net of allowance		3,420	Appraised value	Discount to reflect current market conditions	0.00% - 52.00%
			Discounted cash flows	Discount rates	3.13% - 8.20%

Note 10 — Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, at June 30, 2015 and December 31, 2014 are as follows (dollars in thousands):

	2015			2014

Unrealized gains on available for sale securities	$	4,238		$	4,688
Funded status of pension plans		(5,116	)		(5,220	)
Unrecognized gains (losses) on cash flow hedges		153			(163	)
Total accumulated other comprehensive income (loss)	$	(725	)	$	(695	)

Reclassifications from accumulated other comprehensive income (loss) for the three-month and six-month periods ended June 30, 2015 and 2014 are as follows (dollars in thousands):

Details about accumulated other	Amount reclassified from accumulated other			Affected line item in the Consolidated
comprehensive income (loss)	comprehensive income (loss)			Statements of Income

Three months ended June 30, 2015
Unrealized gains (losses) on cash flow hedges	$	195		Interest and fees on loans
		(75	)	Income tax expense (benefit)
	$	120		Net of tax

Amortization of net actuarial loss	$	(168	)	Personnel expense
		64		Income tax expense (benefit)
	$	(104	)	Net of tax

Total reclassifications for the period	$	16

Three months ended June 30, 2014
Amortization of net actuarial loss	$	15		Personnel expense
		(6	)	Income tax expense (benefit)
	$	9		Net of tax

Total reclassifications for the period	$	9

Six months ended June 30, 2015
Unrealized gains (losses) on cash flow hedges	$	391		Interest and fees on loans
		(150	)	Income tax expense (benefit)
	$	241		Net of tax

Amortization of net actuarial loss	$	(168	)	Personnel expense
		64		Income tax expense (benefit)
	$	(104	)	Net of tax

Total reclassifications for the period	$	137

Six months ended June 30, 2014
Amortization of net actuarial loss	$	31		Personnel expense
		(12	)	Income tax expense (benefit)
	$	19		Net of tax

Total reclassifications for the period	$	19

Note 11 — Capital Transactions

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

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

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

Quarterly cash dividends resumed in the first quarter of 2015. On February 18, 2015, the Board of Directors declared a $0.015 per share quarterly cash dividend on its common stock, payable April 15, 2015 to shareholders of record as of the close of business on March 16, 2015. On May 20, 2015, the Board of Directors declared a $0.015 per share quarterly cash dividend on its common stock, payable July 15, 2015 to shareholders of record as of the close of business on June 16, 2015.

On February 27, 2015, the Company completed its acquisition of Premier. (See Note 2 of the Notes to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q for details of the transaction.)

Note 12 — Derivatives

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

In order to mitigate its exposure in the event the interest rate curve flattens, on August 8, 2014 and on November 13, 2014, the Bank entered into three-year interest rate swaps with a notional amount of $50.0 million each that qualify as cash flow hedges under GAAP with the risk management objective of reducing the Bank’s interest rate risk exposure to the variability of the cash flows upon changes to its forecasted interest receipts as the 30-day LIBOR, the benchmark interest rate used by the Bank, changes. These are designated as cash flow hedges of the interest rate risk associated with the benchmark rate of the 30-day LIBOR attributable to the forecasted interest payments received from the 30-day LIBOR loan portfolio and investment securities (the hedged forecasted transaction). For the interest rate swap entered into on August 8, 2014, the Bank will receive interest at a fixed rate of 0.925% and pay interest at a rate based on the 30-day LIBOR. This interest rate swap hedges interest receipts through August 8, 2017. For the interest rate swap entered into on November 13, 2014, the Bank will receive interest at a fixed rate of 0.98% and pay interest at a rate based on the 30-day LIBOR. This interest rate swap hedges interest receipts through November 13, 2017. Settlement of the swaps occurs monthly. As of June 30, 2015, collateral of $450,000 was pledged and on deposit with the counterparty to secure the existing obligations under these interest rate swaps. The fair value of the swaps is included in other assets in the consolidated balance sheets, and the net change in fair value is included in other comprehensive income and in the consolidated statements of cash flows under the caption net (increase) decrease in other assets. At June 30, 2015, the estimated fair value of the asset is $247,000.

For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income. The Bank’s interest rate swaps have been effective since inception. Changes in the fair value of the interest rate swaps, therefore, have had no impact on net income. For the first six months of 2015, the Bank recognized interest income of $391,000 resulting from incremental interest received from the counterparty, none of which related to ineffectiveness. The Bank regularly monitors the credit risk of the interest rate swaps counterparty.

In addition, the Bank has three other interest rate swap contracts that were classified as non-designated hedges. These derivatives are interest rate swaps executed with commercial borrowers to allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with derivatives dealers to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest.

The interest rate swap contracts with the commercial borrowers require the borrowers to pay to or receive from the Bank an amount equal to and offsetting the value of the interest rate swaps. If the commercial borrower fails to perform and the market value for the interest rate swap with the derivatives dealer is negative (i.e. in a net liability position), the Bank would have to continue to pay the settlement amount for the financial derivative to the dealer or pay a termination fee. If the market value for the interest rate swap with the derivatives dealer is positive (i.e. in a net asset position), the Bank would continue to receive a payment for the settlement amount for the financial derivative with the dealer. The settlement amount is impacted by the fluctuation of interest rates.

The fair values of interest rate swap derivatives that are classified as non-designated hedges are recorded in other assets and other liabilities on the balance sheet. As these interest rate swaps do not meet hedge accounting requirements, changes in the fair value of these interest rate swaps are recognized directly in earnings. These changes are recorded in other noninterest expense. As of June 30, 2015, the customer interest rate swaps and the offsetting swaps each had an aggregate notional amount of approximately $11.8 million, and the fair value of these three interest rate swap derivatives are recorded in other assets for $267,000 and in other liabilities for $269,000 on the balance sheet. The net effect of recording the derivatives at fair value through earnings was immaterial to the Company’s financial condition and results of operations during the first six months of 2015.

As of June 30, 2015, the Bank provided $350,000 of collateral for two of these interest rate swaps, which is included in cash on the balance sheet as interest-bearing deposits with banks. Collateral for the third interest rate swap is an agency mortgage backed security with a collateral value of $537,000 at June 30, 2015. If the Bank had breached any of these provisions at June 30, 2015, it would have been required to settle its obligations under the agreements by paying termination values totaling $290,000.

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

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

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

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

•

Revenues are lower than expected;

•

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

•

Competitive pressure among depository institutions increases significantly;

•

Changes in consumer spending, borrowings and savings habits;

•

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

•

The cost of additional capital is more than expected;

•

The interest rate environment could reduce interest margins;

•

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

•

Counterparty risk;

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

More stringent capital requirements effective January 1, 2015;

•

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

•

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

The Company cautions that the foregoing list of important factors is not exhaustive. See also those risk factors identified in the section headed “Risk Factors,” beginning on page 15 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on March 12, 2015 (the “Annual Report”). The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of the Company.

Introduction

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

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

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

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

Application of Critical Accounting Policies

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

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Net Interest Income

Net interest income for the second quarter of 2015, on a taxable equivalent basis, was $23.0 million, an increase of $2.6 million, or 12.7%, from $20.4 million for the second quarter of 2014. Average earning assets in the second quarter of 2015 increased $321.9 million, or 14.6%, to $2.53 billion, compared to $2.21 billion in the second quarter of 2014. Average interest-bearing liabilities in the second quarter of 2015 increased $228.2 million, or 12.2%, to $2.10 billion, compared to $1.87 billion in the second quarter of 2014. The increases in average earning assets and average interest-bearing liabilities and the resulting increase in net interest income are primarily due to organic growth and the acquisition of Premier Commercial Bank (“Premier”), which contributed approximately $96.0 million of loans, $35.0 million of investments and other interest-earning assets after repositioning the acquired balance sheet, and $105.0 million of interest-bearing deposits at the February 27, 2015 acquisition date.

Taxable-equivalent net interest margin decreased to 3.64% for the second quarter of 2015, compared to 3.70% for the second quarter of 2014, a decrease of six basis points. The interest rate spread decreased to 3.57% in the second quarter of 2015, compared to 3.64% in the second quarter of 2014, a decrease of seven basis points. The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on the loan portfolio and a higher cost of funds rate. For the three months ended June 30, 2015, the annualized average yield on loans decreased to 4.18% from 4.29% for the three months ended June 30, 2014. The average yield on earning assets during the second quarter of 2015 decreased four basis points to 4.00% from 4.04% during the comparable period in 2014, while the average rate on interest-bearing liabilities increased three basis point to 0.43% from 0.40%. The following table provides an analysis of average volumes, yields and rates and net interest income on a tax-equivalent basis for the three months ended June 30, 2015 and 2014.

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

	Three Months Ended								Three Months Ended
	June 30, 2015								June 30, 2014
				Interest		Annualized						Interest		Annualized
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate
Earning assets:
Loans receivable⁽²⁾	$	1,972,979		$	20,553		4.18	%	$	1,731,815		$	18,506		4.29	%
Taxable securities		479,689			3,894		3.25			409,913			3,182		3.11
Tax exempt securities⁽¹⁾		32,639			473		5.80			33,991			420		4.94
Federal Home Loan Bank stock		18,144			202		4.45			12,387			115		3.71
Federal Reserve Bank stock		6,097			93		6.10			-			-		-
Interest-bearing bank balances		20,673			41		0.80			20,193			40		0.79

Total earning assets		2,530,221			25,256		4.00			2,208,299			22,263		4.04

Non-earning assets:
Cash and due from banks		32,921								32,069
Premises and equipment		44,596								46,541
Other assets		150,708								155,173
Allowance for credit losses		(21,867	)							(24,459	)

Total assets	$	2,736,579		$	25,256				$	2,417,623		$	22,263

Interest-bearing liabilities:
Savings deposits	$	69,409		$	9		0.05	%	$	67,630		$	12		0.07	%
NOW deposits		546,954			368		0.27			484,906			207		0.17
Money market deposits		452,173			364		0.32			405,893			199		0.20
Time deposits		568,214			583		0.41			607,822			632		0.42
Other borrowings		91,988			670		2.92			76,216			638		3.36
Federal Home Loan Bank borrowings		369,938			275		0.30			228,049			180		0.32

Total interest-bearing liabilities		2,098,676			2,269		0.43			1,870,516			1,868		0.40

Other liabilities and shareholders’ equity:
Demand deposits		365,425								302,397
Other liabilities		19,629								15,139
Shareholders’ equity		252,849								229,571
Total liabilities and shareholders’ equity	$	2,736,579			2,269				$	2,417,623			1,868

Net interest income and net interest margin⁽³⁾				$	22,987		3.64	%				$	20,395		3.70	%

Interest rate spread⁽⁴⁾							3.57	%							3.64	%

⁽¹⁾

Income related to securities exempt from federal income taxes is stated on a fully taxable-equivalent basis, assuming a federal income tax rate of 35%, and is then reduced by the non-deductible portion of interest expense. The adjustments made to convert to a fully taxable-equivalent basis were $157 for 2015 and $140 for 2014.

⁽²⁾

The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(259) and $(61) for the three months ended June 30, 2015 and 2014, respectively, are included in interest income. Also included in interest income for the three months ended June 30, 2015 is $195 from interest rate cash flow hedges.

⁽³⁾

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

⁽⁴⁾

Earning assets yield minus interest-bearing liability rate.

Noninterest Income and Expense

In the second quarter of 2015, noninterest income increased 15.0% to $4.8 million, from $4.2 million during the same period in 2014. Retail banking income decreased 14.3% to $2.3 million in the second quarter of 2015 from $2.7 million in the second quarter of 2014, principally due to reduced insufficient funds fees. Mortgage banking revenue increased $270,000, or 112.0%, to $511,000 from $241,000 during the same period last year, driven by higher purchase and refinance demand as well as additional originators following the Premier acquisition. Wealth management revenue increased 5.0% to $749,000 in the second quarter of 2015 from $713,000 in the second quarter of 2014. Bank-owned life insurance income increased 180.2% to $922,000 in the second quarter of 2015 from $329,000 in the second quarter of 2014 as the Company recognized $433,000 in proceeds due to a policy maturity. The Company also had a net gain of $100,000 from investments in small business investment companies, which is reflected within other noninterest income, during the second quarter of 2015, compared to $74,000 during the same period in 2014. No investment securities were sold during the three months ended June 30, 2015. In 2014, investment securities of CapStone Bank (“CapStone”) having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the three months ended June 30, 2014.

In the second quarter of 2015, noninterest expense decreased 16.5% to $18.4 million, from $22.0 million in the second quarter of 2014. The decrease was primarily due to acquisition-related expense in the second quarter of 2015 of $171,000, compared to $4.8 million during the same period last year. Personnel expense increased 0.8% to $9.7 million, from $9.6 million in the prior year second quarter due primarily to the additional personnel resulting from the acquisition of Premier in February, 2015, and the addition of middle market and treasury management personnel. In the second quarter of 2014, the Company recorded accruals of $533,000 for severance expenses, primarily due to a retail banking realignment. Occupancy expense increased $119,000, or 9.6%, to $1.4 million, and furniture and equipment expense increased $72,000, or 7.6%, to $1.0 million in the second quarter of 2015 from $1.2 million and $948,000, respectively, during the same period in 2014 due primarily to the acquisition of Premier. Legal and professional expense increased 37.7% to $1.3 million, from $0.9 million in the prior year second quarter due to various internal projects which are now completed. FDIC insurance expense increased $37,000, or 8.9%, to $453,000 in the second quarter of 2015, from $416,000 in the second quarter of 2014, reflecting the increase in net assets due to organic growth and the Premier acquisition. Real estate acquired in settlement of loans expense (benefit) increased to $219,000 in the second quarter of 2015, from $(62,000) in the same period last year. Other noninterest expense was stable at $2.9 million as detailed in the following table (dollars in thousands):

	Three Months Ended
	June 30				Percentage
	2015		2014		Variance

Other noninterest expense:
Advertising	$	449	$	429		4.7	%
Bankcard expense		143		173		(17.3	)
Postage		227		212		7.1
Telephone		141		124		13.7
Amortization of core deposit intangible		471		456		3.3
Stationery, printing and supplies		171		146		17.1
Other expense		1,288		1,405		(8.3	)
Total	$	2,890	$	2,945		(1.9	)

Income Taxes

The Company recorded income tax expense of $3.2 million for the second quarter of 2015, compared to $657,000 for the second quarter of 2014. The Company’s effective tax rate was 35.1% for the three-month period ended June 30, 2015. For the three-month period ended June 30, 2014, the Company’s effective tax rate was 36.1%.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Net Interest Income

Net interest income for the first half of 2015, on a taxable equivalent basis, was $44.8 million, an increase of $7.7 million, or 20.8%, from $37.1 million for the first half of 2014. Average earning assets in the first half of 2015 increased $454.0 million, or 22.6%, to $2.46 billion, compared to $2.01 billion in the first half of 2014. Average interest-bearing liabilities in the first half of 2015 increased $343.3 million, or 20.1%, to $2.05 billion, compared to $1.71 billion in the first half of 2014. The increases in average earning assets and average interest-bearing liabilities and the resulting increase in net interest income are primarily due to the acquisition of CapStone on April 1, 2014, the acquisition of Premier on February 27, 2015, and organic growth.

Taxable equivalent net interest margin decreased to 3.67% for the first half of 2015, compared to 3.72% for the first half of 2014, a decrease of five basis points. The interest rate spread decreased to 3.60% in the first half of 2015, compared to 3.67% in the first half of 2014, a decrease of seven basis points. The decrease in net interest margin and interest rate spread was driven primarily by a lower yield on the loan portfolio and a higher cost of funds rate. For the six months ended June 30, 2015, the annualized average yield on loans decreased to 4.21% from 4.29% for the six months ended June 30, 2014. The average yield on earning assets during the first half of 2015 decreased four basis points to 4.02% from 4.06% during the comparable period in 2014, while the average rate on interest-bearing liabilities increased three basis points to 0.42% from 0.39%. The following table provides an analysis of average volumes, yields and rates and net interest income on a taxable equivalent basis for the six months ended June 30, 2015 and 2014.

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

	Six Months Ended								Six Months Ended
	June 30, 2015								June 30, 2014
				Interest		Annualized						Interest		Annualized
	Average			Income/		Average			Average			Income/		Average
	Balance			Expense		Yield/Rate			Balance			Expense		Yield/Rate
Earning assets:
Loans receivable⁽²⁾	$	1,915,751		$	40,016		4.21	%	$	1,581,176		$	33,617		4.29	%
Taxable securities		469,007			7,578		3.23			382,551			5,895		3.08
Tax exempt securities⁽¹⁾		33,292			886		5.32			23,897			654		5.47
Federal Home Loan Bank stock		18,316			391		4.27			10,759			198		3.68
Federal Reserve Bank stock		5,966			179		6.00			-			-		-
Interest-bearing bank balances		20,844			78		0.75			10,761			41		0.77

Total earning assets		2,463,176			49,128		4.02			2,009,144			40,405		4.06

Non-earning assets:
Cash and due from banks		33,121								31,437
Premises and equipment		44,599								45,189
Other assets		146,833								137,257
Allowance for credit losses		(22,024	)							(24,581	)

Total assets	$	2,665,705		$	49,128				$	2,198,446		$	40,405

Interest-bearing liabilities:
Savings deposits	$	68,974		$	18		0.05	%	$	65,691		$	20		0.06	%
NOW deposits		534,336			683		0.26			462,885			372		0.16
Money market deposits		436,008			626		0.29			379,684			348		0.18
Time deposits		558,790			1,137		0.41			544,949			1,167		0.43
Other borrowings		87,362			1,315		3.04			66,235			1,023		3.11
Federal Home Loan Bank borrowings		367,337			538		0.30			190,063			366		0.39

Total interest-bearing liabilities		2,052,807			4,317		0.42			1,709,507			3,296		0.39

Other liabilities and shareholders’ equity:
Demand deposits		348,301								273,841
Other liabilities		19,927								15,489
Shareholders’ equity		244,670								199,609
Total liabilities and shareholders’ equity	$	2,665,705			4,317				$	2,198,446			3,296

Net interest income and net interest margin⁽³⁾				$	44,811		3.67	%				$	37,109		3.72	%

Interest rate spread⁽⁴⁾							3.60	%							3.67	%

⁽¹⁾

⁽²⁾

The average loans receivable balances include nonaccruing loans. Amortization of loan fees, net of deferred costs, and other loan-related fees of $(424) and $(63) for the six months ended June 30, 2015 and 2014, respectively, are included in interest income. Also included in interest income for the six months ended June 30, 2015 is $391 from interest rate cash flow hedges.

⁽³⁾

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

⁽⁴⁾

Earning assets yield minus interest-bearing liability rate.

Noninterest Income and Expense

In the first half of 2015, noninterest income increased $690,000, or 8.1%, to $9.2 million, from $8.5 million during the same period in 2014. Retail banking income decreased 16.2% to $4.4 million in the first half of 2015 from $5.3 million in the first half of 2014, principally due to reduced insufficient funds fees. Mortgage banking revenue increased $497,000, or 134.3%, to $867,000 from $370,000 during the same period last year, driven by higher purchase and refinance demand as well as additional originators following the Premier acquisition. Wealth management revenue increased 5.0% to $1.5 million in the first six months of 2015, from $1.4 million in the same period last year. Bank-owned life insurance income increased 58.2% to $1.2 million in the first half of 2015 from $777,000 in the first half of 2014 as the Company recognized $433,000 in proceeds due to a policy maturity. The Company also had a net gain of $570,000 from investments in small business investment companies, which is reflected within other noninterest income, during the first half of 2015, compared to $388,000 during the same period in 2014. Premier investment securities having a book value of $25.9 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the six months ended June 30, 2015. In 2014, CapStone investment securities having a book value of $9.2 million were sold immediately following the acquisition to reposition the portfolio at no recorded gain or loss. No other investment securities were sold during the six months ended June 30, 2014.

In the first half of 2015, noninterest expense increased 2.7% to $38.5 million from $37.5 million in the first half of 2014. Excluding acquisition-related expense, which declined to $2.4 million in the first half of 2015 from $4.9 million during the same period last year, noninterest expense increased $3.5 million, or 10.7%. Personnel expense increased 10.1% to $19.8 million, from $18.0 million in the first half of 2014 due primarily to the additional personnel resulting from the acquisitions of CapStone in April 2014, and Premier in February 2015, and the addition of middle market and treasury management personnel. In the first half of 2014, the Company recorded accruals of $533,000 for severance expenses, primarily due to a retail banking realignment. Occupancy expense increased $312,000, or 12.9%, to $2.7 million, and furniture and equipment expense increased $126,000, or 6.8%, to $2.0 million in the first six months of 2015 from $2.4 million and $1.9 million, respectively, during the same period in 2014 due primarily to the acquisitions of CapStone and Premier. In the first half of 2015, legal and professional expense increased 37.7% to $2.0 million, from $1.5 million in the prior year period due to various internal projects which are now completed. FDIC insurance expense increased $51,000, or 6.3%, to $864,000 in the first half of 2015, from $813,000 in the first half of 2014, reflecting the increase in net assets due to organic growth and the Premier and CapStone acquisitions. Real estate acquired in settlement of loans expense increased to $396,000 in the first six months of 2015, from $336,000 in the same period last year. Other noninterest expense increased $370,000, or 6.8%, to $5.8 million for the first six months of 2015, compared to $5.4 million for the first six months of 2014 as detailed in the following table (dollars in thousands):

	Six Months Ended
	June 30				Percentage
	2015		2014		Variance

Other noninterest expense:
Advertising	$	783	$	696		12.5	%
Bankcard expense		236		335		(29.6	)
Postage		449		422		6.4
Telephone		282		229		23.1
Amortization of core deposit intangible		909		726		25.2
Stationery, printing and supplies		328		261		25.7
Other expense		2,823		2,771		1.9
Total	$	5,810	$	5,440		6.8

Income Taxes

The Company recorded income tax expense of $5.3 million for the first half of 2015, compared to $2.6 million for the first half of 2014. The Company’s effective tax rate was 35.2% for the six-month period ended June 30, 2015. For the six-month period ended June 30, 2014, the Company’s effective tax rate was 35.7%.

Asset Quality and Allowance for Credit Losses

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

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

At June 30, 2015, the allowance for credit losses was $21.3 million, or 1.06% of loans held for investment, compared to $22.1 million, or 1.23% of loans held for investment at December 31, 2014, and $22.9 million, or 1.33% of loans held for investment at June 30, 2014. The allowance for credit losses was 375.05% of nonperforming loans at June 30, 2015, 306.60% at December 31, 2014 and 203.17% at June 30, 2014. There is a greater proportion of low risk, high quality loans in the loan portfolio at June 30, 2015 compared to June 30, 2014. As a result, the allowance for credit losses as a percentage of loans held for investment at June 30, 2015 is significantly lower than at June 30, 2014. Also impacting the allowance for credit losses as a percentage of loans held for investment is the acquired non-PCI portfolio, which is recorded at fair value on the acquisition date and has an allowance for credit losses of $735,000 as of June 30, 2015. Excluding acquired loans and their associated allowance, the allowance for credit losses to loans held for investment was 1.23% at June 30, 2015, 1.43% at December 31, 2014 and 1.68% at June 30, 2014. Based on analysis of the current loan portfolio and levels of problem assets and potential problem loans, management believes the allowance for credit losses is adequate. Additional information regarding the allowance for credit losses is presented in the table headed “Asset Quality Analysis” on page 50.

Nonperforming loans totaled $5.7 million at June 30, 2015, compared to $7.2 million at December 31, 2014 and $11.3 million at June 30, 2014. Real estate acquired in settlement of loans was $2.1 million at June 30, 2015, $3.1 million at December 31, 2014, and $3.6 million at June 30, 2014. During the first six months of 2015, approximately $643,000 was transferred from loans into real estate acquired in settlement of loans, and approximately $1.3 million of real estate acquired in settlement of loans was disposed of. A net loss of $274,000 has been recorded on the disposition and writedowns of real estate acquired in settlement of loans in the current year, through June 30, 2015, compared to a net loss of $117,000 in the first half of 2014. The Company recorded $122,000 of expenses on real estate acquired in settlement of loans during the first six months of 2015, compared to $219,000 in the first half of 2014. Nonperforming assets (comprised of nonaccrual loans, restructured loans and real estate acquired in settlement of loans) totaled $7.8 million, or 0.28% of total assets, at June 30, 2015, compared to $10.3 million, or 0.41% of total assets, at December 31, 2014 and $14.9 million, or 0.61% of total assets, a year ago.

The Bank is within the regulatory commercial real estate high concentration guidelines in land acquisition, development and construction (“AD&C portfolio”) loans, as well as total commercial real estate loans. At June 30, 2015, the Bank’s concentration levels were 65.01% and 270.17%, respectively, of total regulatory capital, which compares favorably to the interagency regulatory guidance maximum concentrations of 100% and 300%, respectively. The Bank’s AD&C portfolio totaled $192.1 million at June 30, 2015, including $41.2 million of speculative residential construction and residential acquisition and development.

The provision for credit losses charged to operations for the three months ended June 30, 2015 totaled $16,000, compared to $600,000 for the three months ended June 30, 2014. Net chargeoffs for the three months ended June 30, 2015 were $580,000, or 0.12% of average loans held for investment on an annualized basis, compared to net chargeoffs of $2.1 million, or 0.48% of average loans held for investment on an annualized basis, for the three months ended June 30, 2014. The provision for credit losses charged to operations for the six months ended June 30, 2015 totaled $120,000, compared to $744,000 for the six months ended June 30, 2014. Net chargeoffs for the six months ended June 30, 2015 were $918,000, or 0.10% of average loans held for investment on an annualized basis, compared to net chargeoffs of $2.4 million, or 0.30% of average loans held for investment on an annualized basis, for the six months ended June 30, 2014. The provision for credit losses charged to operations for the year ended December 31, 2014 totaled $883,000. Net chargeoffs for the year ended December 31, 2014 were $3.3 million, or 0.20% of average loans held for investment.

Asset Quality Analysis

(Dollars in thousands)

	Beginning		Charge							Ending
	Balance		Offs		Recoveries		Provision			Balance
At or for the Three Months Ended June 30, 2015
Loans – excluding PCI
Commercial	$	10,474	$	396	$	119	$	425		$	10,622
Real estate – construction		2,005		4		39		(54	)		1,986
Real estate – mortgage		8,871		429		123		(408	)		8,157
Consumer		382		104		61		18			357
Other		102		-		13		44			159
Total	$	21,834	$	933	$	355	$	25		$	21,281

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		41		2		-		(9	)		30
Consumer		3		-		-		-			3
Other		-		-		-		-			-
Total	$	44	$	2	$	-	$	(9	)	$	33

Total loans
Commercial	$	10,474	$	396	$	119	$	425		$	10,622
Real estate – construction		2,005		4		39		(54	)		1,986
Real estate – mortgage		8,912		431		123		(417	)		8,187
Consumer		385		104		61		18			360
Other		102		-		13		44			159
Total	$	21,878	$	935	$	355	$	16		$	21,314

	Beginning		Charge							Ending
	Balance		Offs		Recoveries		Provision			Balance
At or for the Six Months Ended June 30, 2015
Loans – excluding PCI
Commercial	$	11,155	$	1,032	$	379	$	120		$	10,622
Real estate – construction		1,984		7		339		(330	)		1,986
Real estate – mortgage		8,459		836		268		266			8,157
Consumer		421		242		199		(21	)		357
Other		93		-		17		49			159
Total	$	22,112	$	2,117	$	1,202	$	84		$	21,281

PCI loans
Commercial	$	-	$	-	$	-	$	-		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		2		-		32			30
Consumer		-		1		-		4			3
Other		-		-		-		-			-
Total	$	-	$	3	$	-	$	36		$	33

Total loans
Commercial	$	11,155	$	1,032	$	379	$	120		$	10,622
Real estate – construction		1,984		7		339		(330	)		1,986
Real estate – mortgage		8,459		838		268		298			8,187
Consumer		421		243		199		(17	)		360
Other		93		-		17		49			159
Total	$	22,112	$	2,120	$	1,202	$	120		$	21,314

	Beginning		Charge							Ending
	Balance		Offs		Recoveries		Provision			Balance
At or for the Year Ended December 31, 2014
Loans – excluding PCI
Commercial	$	11,480	$	1,411	$	1,368	$	(282	)	$	11,155
Real estate – construction		2,027		427		894		(510	)		1,984
Real estate – mortgage		10,479		4,607		1,433		1,154			8,459
Consumer		469		868		356		464			421
Other		95		-		36		(38	)		93
Total	$	24,550	$	7,313	$	4,087	$	788		$	22,112

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

Total loans
Commercial	$	11,480	$	1,473	$	1,368	$	(220	)	$	11,155
Real estate – construction		2,027		427		894		(510	)		1,984
Real estate – mortgage		10,479		4,640		1,433		1,187			8,459
Consumer		469		868		356		464			421
Other		95		-		36		(38	)		93
Total	$	24,550	$	7,408	$	4,087	$	883		$	22,112

	Beginning		Charge							Ending
	Balance		Offs		Recoveries		Provision			Balance
At or for the Three Months Ended June 30, 2014
Loans – excluding PCI
Commercial	$	11,347	$	304	$	152	$	(931	)	$	10,264
Real estate – construction		1,853		400		444		(126	)		1,771
Real estate – mortgage		10,683		2,160		253		1,578			10,354
Consumer		462		138		80		65			469
Other		90		-		3		(7	)		86
Total	$	24,435	$	3,002	$	932	$	579		$	22,944

PCI loans
Commercial	$	-	$	10	$	-	$	10		$	-
Real estate – construction		-		-		-		-			-
Real estate – mortgage		-		11		-		11			-
Consumer		-		-		-		-			-
Other		-		-		-		-			-
Total	$	-	$	21	$	-	$	21		$	-

Total loans
Commercial	$	11,347	$	314	$	152	$	(921	)	$	10,264
Real estate – construction		1,853		400		444		(126	)		1,771
Real estate – mortgage		10,683		2,171		253		1,589			10,354
Consumer		462		138		80		65			469
Other		90		-		3		(7	)		86
Total	$	24,435	$	3,023	$	932	$	600		$	22,944

	Beginning		Charge							Ending
	Balance		Offs		Recoveries		Provision			Balance
At or for the Six Months Ended June 30, 2014
Loans – excluding PCI
Commercial	$	11,480	$	437	$	525	$	(1,304	)	$	10,264
Real estate – construction		2,027		404		514		(366	)		1,771
Real estate – mortgage		10,479		2,683		450		2,108			10,354
Consumer		469		362		136		226			469
Other		95		-		6		(15	)		86
Total	$	24,550	$	3,886	$	1,631	$	649		$	22,944

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

Total loans
Commercial	$	11,480	$	499	$	525	$	(1,242	)	$	10,264
Real estate – construction		2,027		404		514		(366	)		1,771
Real estate – mortgage		10,479		2,716		450		2,141			10,354
Consumer		469		362		136		226			469
Other		95		-		6		(15	)		86
Total	$	24,550	$	3,981	$	1,631	$	744		$	22,944

	As of June 30, 2015			As of December 31, 2014			As of June 30, 2014
Nonperforming Assets:
Commercial nonaccrual loans, not restructured	$	672		$	1,620		$	2,602
Commercial nonaccrual loans, restructured		77			-			144
Non-commercial nonaccrual loans, not restructured		2,393			3,471			5,954
Non-commercial nonaccrual loans, restructured		61			5			431
Total nonaccrual loans		3,203			5,096			9,131
Troubled debt restructured, accruing		2,480			2,116			2,162
Total nonperforming loans		5,683			7,212			11,293
Real estate acquired in settlement of loans		2,142			3,057			3,585
Total nonperforming assets	$	7,825		$	10,269		$	14,878

Asset Quality Percentages:
Nonperforming loans to loans held for investment at end of period		0.28	%		0.40	%		0.65	%
Nonperforming assets to total assets at end of period		0.28	%		0.41	%		0.61	%
Allowance for credit losses as a percentage of loans held for investment at end of period		1.06	%		1.23	%		1.33	%
Allowance for credit losses as a percentage of loans held for investment excluding acquired loans at end of period		1.23	%		1.43	%		1.68	%
Allowance for credit losses to nonperforming loans		375.05	%		306.60	%		203.17	%

Liquidity Management

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

During the first six months of 2015, the Company had net cash provided by operating activities of $5.7 million, compared to $4.4 million of net cash provided by operating activities in the first six months of 2014. The increase was primarily the result of an increase in net income of $5.2 million. Acquisition-related expense in the first six months of 2015 was $2.4 million, compared to $4.9 million in the first six months of 2014. Depreciation and amortization were $2.2 million for the first six months of 2015, compared to $2.9 million for the first six months of 2014. Originations of loans held for sale in excess of proceeds from sales of loans held for sale were $5.7 million in the first half of 2015, compared to $1.8 million in the first half of 2014. Accretion on acquired loans for the first six months of 2015 was $3.1 million compared to $2.5 million during the same period last year. Provision for credit losses was $120,000 for the first half of 2015, compared to $744,000 in the first half of 2014. For the first six months of 2015, there was a net loss of $274,000 related to real estate acquired in settlement of loans, compared to a net loss of $117,000 for the first six months of 2014.

Net cash used in investing activities for the first six months of 2015 was $91.7 million, compared to net cash used in investing activities for the first six months of 2014 of $53.4 million. Cash outflows for the first half of 2015 included $40.2 million in purchases of securities, compared to $70.6 million in the first half of 2014. For the six months ended June 30, 2015, cash inflows included $52.1 million in proceeds from sales, maturities, prepayments and calls of investment securities, compared to $25.1 million during the six months ended June 30, 2014. During the first six months of 2015, there was an increase in loans held for investment of $102.1 million, compared to an increase of $18.3 million during the same period last year. Cash inflows for the first half of 2015 included $1.3 million in proceeds from sales of real estate acquired in settlement of loans, compared to $5.0 million in the first half of 2014. For the first half of 2015, cash outflows included $8.3 million for the purchase of bank-owned life insurance, while cash inflows included $805,000 from a maturity of bank-owned life insurance. For the six months ended June 30, 2015, cash inflows included $2.7 million in proceeds from maturities of investment certificates of deposit with no comparable proceeds in the prior year period. In the 2015 six-month period, net cash received from the acquisition of Premier totaled $3.2 million, while cash received from the CapStone acquisition totaled $6.2 million in the 2014 six-month period.

During the six months ended June 30, 2015, net cash provided by financing activities was $88.9 million, compared to net cash provided by financing activities of $56.8 million during the same period of 2014. Cash inflows for the first half of 2015 included a net increase of $38.4 million in deposits, compared to a net increase in deposits of $28.5 million in the first half of 2014. During the first half of 2015, the Company had net cash inflows of $50.8 million related to increased borrowings, compared to an increase of $41.5 million in the first half of 2014. Dividends paid in the first half of 2015 were $585,000, compared to $337,000 in the first half of 2014. During the first six months of 2015, cash inflows from stock option exercises were $428,000, compared to $2.3 million in the first six months of 2014. In the first six months of 2014, the Company had cash outflows of $15.0 million for redemption of its remaining 15,000 outstanding shares of Series A preferred stock.

Cash and cash equivalents totaled $37.3 million at June 30, 2015, compared to $34.4 million at December 31, 2014 and $41.3 million at June 30, 2014.

The Company had borrowing capacity of approximately $513.7 million with the Federal Home Loan Bank of Atlanta, of which approximately $72.9 million was available at June 30, 2015. Borrowings consist of $404.8 million in advances, $35.0 million in letters of credit used in lieu of securities to pledge against public deposits, and a $1.0 million financial standby letter of credit issued by the Federal Home Loan Bank of Atlanta on behalf of one of the Company’s clients. These borrowings are collateralized by Federal Home Loan Bank of Atlanta stock, investment securities, qualifying residential one to four family first mortgage loans, qualifying multifamily first mortgage loans, qualifying commercial real estate loans, and qualifying home equity lines of credit and second mortgage loans. The Company provides various reports to the Federal Home Loan Bank of Atlanta on a regular basis to maintain the availability of the credit line. Each borrowing request is initiated through an advance application that is subject to their approval before funds are advanced under the line of credit. The Company also had $4.3 million of borrowing capacity through the Federal Reserve Bank System, of which none was used as of June 30, 2015. The line with the Federal Reserve Bank of Richmond is collateralized by qualified consumer and commercial/agricultural loans. In addition, the Company has $89.8 million in unsecured, overnight federal funds lines with correspondent banks, of which $42.0 million was used as of June 30, 2015.

Interest Rate Risk Management

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

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

The Company uses several interest rate risk measurement tools provided by a national asset/liability management consultant to help manage this risk. The Company’s Asset/Liability Policy provides guidance for acceptable levels of interest rate risk and potential remediations. Management provides the consultant with key assumptions, which are used as inputs into the measurement tools. There follows a summary of two different tools management uses on a quarterly basis to monitor and manage interest rate risk. The Company has not experienced any material changes in interest rate risk since the end of the fiscal year ended December 31, 2014.

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

The following tables summarize the results of the Company’s income simulation model as of March 31, 2015, the most currently available review date.

	“Rate Ramp”
	Change in Net Interest Income
	Year 1			Year 2
Change in Market Interest Rates:
200 basis point “ramped" increase		0.45	%		1.14	%
Base case – no change		-			(1.37	)%
100 basis point “ramped” decrease		(0.98	)%		(7.02	)%

	“Rate Shock”
	Change in Net Interest Income
	Year 1			Year 2
Change in Market Interest Rates:
200 basis point “shocked” increase		0.18	%		2.93	%
Base case – no change		-			(1.37	)%
100 basis point “shocked” decrease		(3.39	)%		(9.40	)%

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

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

The following is a summary of the results of the report compiled by the Company’s outside consultant using data and assumptions management provided as of March 31, 2015, the most currently available review date.

	Estimated Change in Net Portfolio Value
	Amount in 000s			Percent
Change in Market Interest Rates:
200 basis point increase	$	(8,587	)		(3.40	)%
Base case – no change		-			-
100 basis point decrease	$	(22,572	)		(8.93	)%

Over the past several years, the Company’s balance sheet consistently has been slightly “asset sensitive,” i.e. should interest rates decline, the Company’s assets will reprice faster than its liabilities, resulting in a declining net interest margin and less net interest income. In order to mitigate its exposure in the event the interest rate curve flattens, in August and November, 2014, the Bank entered into interest rate swaps totaling $100 million notional amount that qualify as cash flow hedges under GAAP. These are designated as cash flow hedges of the interest rate risk associated with the benchmark rate of the 30-day LIBOR attributable to the forecasted interest payments received from the 30-day LIBOR loan portfolio and investment securities (the hedged forecasted transaction). For cash flow hedges, the effective portion of the gain or loss due to changes in the fair value of the derivative hedging instrument is included in other comprehensive income, while the ineffective portion, representing the excess of the cumulative change in the fair value of the derivative over the cumulative change in expected future discounted cash flows on the hedged transaction, is recorded in the consolidated statements of income. The Bank’s interest rate swaps have been effective since inception. Changes in the fair value of the interest rate swaps, therefore, have had no impact on net income. In addition, the Bank has three other interest rate swap contracts that were classified as non-designated hedges executed with commercial borrowers to allow the customers to pay a fixed rate of interest to the Bank. These interest rate swaps were simultaneously hedged by executing offsetting interest rate swaps with derivatives dealers to mitigate the net risk exposure to the Bank resulting from the transactions and allow the Bank to receive a variable rate of interest. (See Note 12 of the Notes to Consolidated Financial Statements.)

Capital Resources and Shareholders’ Equity

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

On February 27, 2015, the acquisition of Premier was completed. Premier, a commercial bank headquartered in Greensboro, NC, operated one full-service banking office centrally located in Greensboro and residential mortgage origination offices in Greensboro, Charlotte, Raleigh, High Point, Kernersville and Burlington, NC. Per the terms of the Agreement and Plan of Combination and Reorganization, 75% of the 1,925,247 shares of Premier common stock outstanding at acquisition were exchanged for 1,735,465 shares of the Company’s Class A common stock at an exchange ratio of 1.2019, and the remaining 25% were exchanged for cash of $4.8 million. The shares were issued at a price of $8.30 per share, the closing stock price of the Class A common stock on February 27, 2015. The total purchase price was $19.8 million, including the conversion of 294,400 Premier stock options having a fair value of $632,000.

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

In July 2013, the Federal Reserve approved a final rule implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rule revised minimum capital requirements and adjusted prompt corrective action thresholds. The final rule revised the regulatory capital elements, added a new common equity Tier 1 capital ratio, and increased the minimum Tier 1 capital ratio requirement. The rule also permitted certain banking organizations to retain, through a one-time election, which the Company and the Bank made, the existing treatment for accumulated other comprehensive income and implemented a new capital conservation buffer. The final rule was effective for community banks on January 1, 2015, subject to a transition period for certain parts of the rule.

As shown in the accompanying table, the Company and the Bank have capital levels exceeding the minimum levels for “well capitalized” banks and bank holding companies as of June 30, 2015.

	Regulatory Capital
	Well Capitalized			Adequately Capitalized			Company			Bank

Total Capital		10.0	%		8.0	%		12.00	%		11.84	%
Tier 1 Capital		8.0			6.0			10.50			10.96
Common Equity Tier 1 Capital		6.5			4.5			9.79			10.96
Leverage Capital		5.0			4.0			8.92			9.31

The final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act are complex and subject to interpretation. While management can give no assurance that a regulatory entity will not interpret the rules differently, management does not believe that any differences in interpretation will result in a material impact on capital ratios.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Company considers interest rate risk to be its most significant market risk, which is discussed under the heading “Interest Rate Risk Management” on page 55.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s management, including its CEO, CFO and Chief Accounting Officer (“CAO”) evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2015. Based upon that evaluation, the Company’s CEO, CFO and CAO each concluded that as of June 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in internal control over financial reporting

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit No.		Description

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

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

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

3.3		Amended and Restated Bylaws adopted by the Board of Directors on April 13, 2015, incorporated herein by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed with the SEC on April 15, 2015 (SEC File No. 000-11448).

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

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

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

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

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

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

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

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

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

4.7		Form of Subordinated Note, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on March 14, 2014 (SEC File No. 000-11448).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.41		NewBridge Bank Supplemental Executive Retirement Plan, executed November 6, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 10.43 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 7, 2014 (SEC File No. 000-11448).*

10.42		NewBridge Bank Supplemental Executive Retirement Plan Participation Agreement by and between NewBridge Bank and Pressley A. Ridgill, executed November 6, 2014, and effective September 1, 2014, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 7, 2014 (SEC File No. 000-11448).*

10.43		Employment and Change of Control Agreement among NewBridge Bancorp, NewBridge Bank and Ramsey K. Hamadi, effective March 30, 2015, incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on February 6, 2015 (SEC File No. 000-11448).*

10.44		Premier Commercial Bank 2008 Employee Stock Option Plan, incorporated herein by reference to Exhibit 10.44 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2015 (SEC File No. 000-11448).*

10.45		Premier Commercial Bank 2008 Director Stock Option Plan, incorporated herein by reference to Exhibit 10.45 of the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2015 (SEC File No. 000-11448).*

10.46		NewBridge Bancorp 2015 Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on May 13, 2015 (SEC File No. 000-11448).*

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

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

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

101.1		Financial Statements filed in XBRL format.

* Management contract and compensatory arrangements.

SIGNATURES

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

Date: August 7, 2015	NEWBRIDGE BANCORP
	(Registrant)


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

EXHIBIT INDEX

Exhibit No.	Description

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

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

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

101.1	Financial Statements submitted in XBRL format.

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