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BBNK > SEC Filings for BBNK > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for BRIDGE CAPITAL HOLDINGS

Form 10-Q for BRIDGE CAPITAL HOLDINGS


6-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the historical information, this quarterly report contains certain forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and which are subject to the "Safe Harbor" created by those sections. The reader of this quarterly report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Such risks and uncertainties include, among others, (1) competitive pressure in the banking industry increases significantly; (2) changes in interest rate environment reduces margin; (3) unfavorable economic conditions, both nationally and regionally, continues or worsens for an unknown period, resulting in, among other things, continued or increased deterioration in credit quality;
(4) changes in the regulatory environment, including the Dodd-Frank legislation;
(5) changes in business conditions and inflation; (6) costs and expenses of complying with the internal control provisions of the Sarbanes-Oxley Act and our degree of success in achieving compliance; (7) changes in securities markets;
(8) future credit loss experience; (9) civil disturbances of terrorist threats or acts, or apprehension about possible future occurrences of acts of this type;
(10) the involvement of the United States in war or other hostilities; and (11) governmental action or inaction in response to economic and political conditions could have unpredictable consequences for the economy and the banking industry. Therefore, the information in this quarterly report should be carefully considered when evaluating the business prospects of the Company.

Critical Accounting Policies

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements. Our most complex accounting policies require management's judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure that valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting policies involving significant management valuation judgments.


Table of Contents

Allowance for Loan Losses: The allowance for loan losses represents management's best estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The provision for loan losses is determined based on management's assessment of several factors:
reviews and evaluation of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experiences, the level of classified and nonperforming loans and the results of regulatory examinations.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows using a discount rate appropriate to the loan's level of risk, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions and methodologies consistent with those that would be utilized by unrelated third parties.

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses and the associated provision for loan losses.

The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when, in the opinion of management, there is significant doubt as to the collectability of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection.

Sale of SBA Loans: The Company has the ability and the intent to sell all or a portion of certain SBA loans in the loan portfolio and, as such, carries the saleable portion of these loans at the lower of aggregate cost or fair value. At September 30, 2012 and December 31, 2011, the fair value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried at aggregate cost.

In calculating gain on the sale of SBA loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company's assumptions are validated by reference to external market information.

Investment securities: Our securities are classified as either available-for-sale or held-to-maturity. The fair value of most securities classified as available-for-sale is based on quoted market prices. If quoted market prices are not available, fair values are extrapolated from the quoted prices of similar instruments. Held-to maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

Supplemental Employee Retirement Plan: The Company has entered into supplemental employee retirement agreements with certain executive and senior officers. The measurement of the liability under these agreements includes estimates involving life expectancy, length of time before retirement, and expected benefit levels. Should these estimates prove materially wrong, we could incur additional or reduced expense to provide the benefits.


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Selected Financial Data



The following table reflects selected financial data and ratios as of and for
the quarters ended September 30, 2012 and 2011 (dollars in thousands, except per
share data).



                                        Three months ended            Nine months ended
                                          September 30,                 September 30,
                                       2012           2011           2012           2011
Statement of Operations Data:
Interest income                     $    15,970    $    13,180    $    46,385    $    37,191
Interest expense                            573            529          1,601          1,716
Net interest income                      15,397         12,651         44,784         35,475
Provision for credit losses                 200          1,250          2,450          2,000
Net interest income after
provision for credit losses              15,197         11,401         42,334         33,475
Other income                              3,785          3,257          9,300          7,314
Other expenses                           11,584         10,923         34,020         31,365
Income before income taxes                7,398          3,735         17,614          9,424
Income taxes                              3,034          1,532          7,234          3,865
Net income                          $     4,364    $     2,203    $    10,380    $     5,559
Preferred dividends                           -              -              -            200
Net income available to common
shareholders                        $     4,364    $     2,203    $    10,380    $     5,359

Per Share Data:
Basic earnings per share            $      0.30    $      0.15    $      0.72    $      0.38
Diluted earnings per share                 0.29           0.15           0.70           0.37
Shareholders' equity per share             9.02           8.33           9.02           8.33

Balance Sheet Data:
Balance sheet totals:
Assets                              $ 1,247,554    $ 1,093,983
Loans, net                              858,032        699,045
Deposits                              1,071,207        935,992
Shareholders' equity                    142,051        126,045

Average balance sheet amounts:
Assets                              $ 1,217,074    $ 1,075,319    $ 1,178,455    $ 1,029,197
Loans, net                              815,042        654,792        789,207        625,113
Deposits                              1,041,394        918,346        994,400        866,106
Shareholders' equity                    140,255        125,850        136,204        128,159

Selected Ratios:
Return on average assets                   1.43 %         0.81 %         1.18 %         0.72 %
Return on average equity                  12.38 %         6.94 %        10.18 %         5.80 %
Efficiency ratio                          60.39 %        68.66 %        62.90 %        73.30 %
Risk based capital ratio                  15.70 %        16.55 %
Net chargeoffs (recoveries) to
average gross loans                       -0.01 %        -0.03 %         0.15 %        -0.12 %
Allowance for loan losses to
total loans                                2.25 %         2.54 %
Average equity to average assets          11.52 %        11.70 %        11.56 %        12.45 %


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Summary of Financial Results - Quarter ended September 30, 2012

The Company reported net operating income of $4.4 million for the three months ended September 30, 2012 representing an increase of $2.2 million, or 98.1%, compared to net operating income of $2.2 million for the same period one year ago. The Company reported earnings per diluted share of $0.29 for the current quarter compared to $0.15 per diluted share for the same quarter in 2011.

The increase in earnings during the period ended September 30, 2012 compared to the same period in 2011 resulted primarily from an increase in interest income related to loans and investment securities, an increase in non-interest income and a decrease in provision for credit losses, offset slightly by an increase in non-interest expense related to supporting growth and investments in new initiatives. See the specific sections below for details regarding these changes.

The table below highlights the changes in the nature and sources of income and expense.

                                                   Three months ended
                                                      September 30,            Increase
(dollars in thousands)                             2012           2011        (Decrease)

Interest income                                 $    15,970    $   13,180    $      2,790
Interest expense                                        573           529              44

Net interest income                                  15,397        12,651           2,746
Provision for credit losses                             200         1,250          (1,050 )
Net interest income after provision for
credit losses                                        15,197        11,401           3,796

Other income                                          3,785         3,257             528
Other expenses                                       11,584        10,923             661
Income before income taxes                            7,398         3,735           3,663

Income taxes                                          3,034         1,532           1,502
Net income                                      $     4,364    $    2,203    $      2,161
Net income available to common shareholders     $     4,364    $    2,203    $      2,161

Net Interest Income and Margin

Net interest income, the difference between interest earned on loans and investments and interest paid on deposits is the principal component of the Company's earnings. Net interest income is affected by changes in the nature and volume of earning assets held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities.

Net interest income for the quarter ended September 30, 2012 was $15.4 million, which was comprised of $16.0 million in interest income and $573,000 in interest expense. Net interest income for the quarter ended September 30, 2011 was $12.7 million, which was comprised of $13.2 million in interest income and $529,000 in interest expense. Net interest income for the quarter ended September 30, 2012 represented an increase of $2.7 million or 21.7% from the same period one year earlier. The increase in net interest income from the same period one year ago was primarily attributable to an increase in average earning assets as a result of loan growth, combined with a decrease in average nonperforming loans.

The composition of the average balance sheet impacts growth in net interest income. For the quarter ended September 30, 2012 average earning assets of $1.16 billion represented an increase of $149.3 million, or 14.7%, compared to $1.01 billion for the same period in 2011. The Company's loan-to-deposit ratio, a measure of leverage, averaged 80.43% during the quarter ended September 30, 2012, which represented an increase compared to an average of 73.33% for the same quarter of 2011 as a result of higher loan growth relative to deposit funding.


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The Company's net interest margin (net interest income divided by average earning assets) for the quarter ended September 30, 2012 was 5.26% compared to 4.95% in the same period one year earlier. The increase in net interest margin was primarily due to increased balance sheet leverage, a more favorable mix in average earning assets and increased recurring loan fees related to overall growth of the loan portfolio. The positive impact on the net interest margin from increased loan fees for the three months ended September 30, 2012 compared to the same period last year was 34 basis points.

The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters ended September 30, 2012 and 2011.

                                              Three months ended September 30,
                                         2012                                   2011
                                         Yields     Interest                    Yields     Interest
                           Average         or        Income/      Average         or        Income/
(dollars in thousands)     Balance       Rates       Expense      Balance       Rates       Expense
ASSETS
Interest earning
assets (2):
Loans (1)                $    837,574        6.9 %  $  14,467   $    673,464        6.8 %  $  11,615
Federal funds sold             99,726        0.2 %         59        107,063        0.2 %         64
Investment securities         225,775        2.5 %      1,444        233,202        2.6 %      1,501
Other                             335        0.0 %          -            335        0.0 %          -
Total interest earning
assets                      1,163,410        5.5 %     15,970      1,014,064        5.2 %     13,180

Noninterest-earning
assets:
Cash and due from
banks                          23,232                                 25,066
All other assets (3)           30,432                                 36,189
TOTAL                    $  1,217,074                           $  1,075,319

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand                   $      5,475        0.0 %          -   $      7,115        0.1 %  $       1
Savings                       295,646        0.3 %        237        324,282        0.3 %        220
Time                           45,370        0.6 %         63         32,948        0.5 %         38
Other                          19,592        5.5 %        273         17,527        6.1 %        270
Total interest bearing
liabilities                   366,083        0.6 %        573        381,872        0.5 %        529

Noninterest-bearing
liabilities:
Demand deposits               694,903                                554,001
Accrued expenses and
other liabilities              15,833                                 13,596
Shareholders' equity          140,255                                125,850
TOTAL                    $  1,217,074                           $  1,075,319

Net interest income
and margin                                   5.3 %  $  15,397                       4.9 %  $  12,651



(1) Loan fee amortization of $2.7 million and $1.5 million, respectively, is included in interest income. Nonperforming loans have been included in average loan balances.
(2) Interest income is reflected on an actual basis, not a fully taxable equivalent basis. Yields are based on amortized cost.
(3) Net of average allowance for credit losses of $19.6 million and $16.9 million, respectively.


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The following table shows the effect of the interest differential of volume and rate changes for the quarters ended September 30, 2012 and 2011. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.

                                     Three months ended September 30,
                                              2012 vs. 2011
                                           Increase (decrease)
                                             due to change in
                                   Average       Average         Total
(dollars in thousands)             Volume          Rate         Change
Interest income:
Loans                           $       2,803    $     49    $       2,852
Federal funds sold                         (4 )        (0 )             (4 )
Investment securities                     (52 )        (5 )            (57 )
Total interest income                   2,747          43            2,790

Interest expense:
Demand                                      -          (1 )             (1 )
Savings                                   (23 )        41               17
Time                                       17           8               25
Other                                      28         (25 )              3
Total interest expense                     22          22               44

Change in net interest income   $       2,725    $     21    $       2,746

Significant factors affecting net interest income are: rates, volumes and mix of the loan, investment and deposit portfolios. Due to the nature of the Company's lending markets, in which the majority of loans are generally tied to prime rate, it is believed that an increase in interest rates should positively affect the Company's future earnings, while a decline should have a negative impact. However, it is not feasible to provide an accurate measure of such a change because of the many factors (many of them uncontrollable) influencing the result.

Interest Income

Interest income of $16.0 million in the quarter ended September 30, 2012 represented an increase of $2.8 million, or 21.2%, from $13.2 million in the same quarter one year earlier. The average yield on earning assets was 5.46% for the quarter ended September 30, 2012 compared to 5.16% for the quarter ended September 30, 2011. The increase in interest income was primarily due to an increase in earning assets and a decrease in non-performing loans.

Average gross loans were $837.6 million for three months ended September 30, 2012, an increase of $164.1 million or 24.4% from $673.5 million for the same period one year earlier. Average loans comprised 72.0% of average earning assets in the three months ended September 30, 2012 compared to 66.4% in the third quarter of 2011.

Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $325.8 million for the quarter ended September 30, 2012, a decrease of $14.8 million or 4.3% from $340.6 million for the three months ended September 30, 2011.

Interest Expense

Interest expense was $573,000 for the quarter ended September 30, 2012, which represented an increase of $44,000, or 8.3% from $529,000 for the comparable period of 2011. The increase in interest expense was primarily due to an increase in average time accounts and other interest bearing liabilities combined with an increase in yield on savings and time accounts to 35 basis points in the third quarter of 2012 compared to 29 basis points in the same period in 2011. Average interest-bearing liabilities were $366.1 million for the three months ended September 30, 2012, a decrease of $15.8 million, or 4.1%, from $381.9 million for the same period one year earlier.


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Average interest bearing deposits were $346.5 million for the quarter ended September 30, 2012, which represented 33.3% of total average deposits and was a decrease of $17.9 million, or 4.9%, from $364.3 million representing 39.7% of total average deposits in the third quarter of 2011.

Other (non-deposit) interest bearing liabilities are primarily comprised of junior subordinated debt securities issued by the Company and other borrowings. The junior subordinated debt is intended to supplement capital requirements of the Company at a rate of interest that is fixed for five years. Other interest bearing liabilities averaged $19.6 million in the three months ended September 30, 2012 and $17.5 million for the comparable period of 2011.

The average rate paid on interest-bearing liabilities was 0.62% and 0.55% in the quarters ended September 30, 2012 and 2011, respectively.

Credit Risk and Provision for Credit Losses

The Company maintains an allowance for credit losses which is based, in part, on the Company's loss experience, the impact of economic conditions within the Company's market area and, as applicable, the State of California and/or national macroeconomic conditions, the value of underlying collateral, loan performance, and inherent risks in the loan portfolio. The allowance is reduced by charge-offs and increased by provisions for credit losses charged to operating expense and recoveries of previously charged-off loans.

The Company charged-off $17,000 during the three months ended September 30, 2012 compared to $280,000 during the three months ended September 30, 2011. Loan recoveries of $67,000 were recognized during the third quarter of 2012 compared to $450,000 for the three months ended September 30, 2011.

The Company recorded a provision for credit losses of $200,000 for the three months ended September 30, 2012 due to the significant amount of new credit funding in the quarter. This compares to $1.3 million recorded for the quarter ending September 30, 2011.

The following schedule provides an analysis of the allowance for credit losses for the quarters ended September 30, 2012 and 2011, respectively:

Analysis of the allowance for credit losses:

                                 Three months ended
                                   September 30,
(dollars in thousands)            2012         2011

Balance, beginning of period   $    19,541   $ 16,872
Provision for credit losses            200      1,250
Charge-offs                            (17 )     (280 )
Recoveries                              67        450
Balance, end of period         $    19,791   $ 18,292

The allowance for loan losses was $19.8 million, or 2.25% of total loans, at September 30, 2012, compared to $18.3 million, or 2.54% of total loans, at September 30, 2011. The increase in the allowance for loan losses from September 30, 2011 to September 30, 2012 is primarily attributable to the growth of the loan portfolio.


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Based on an evaluation of individual credits, historical credit loss experience by loan type, economic conditions, and the Company's reassessment of risks noted above, management has allocated the allowance for loan losses as follows for the periods ending September 30, 2012 and December 31, 2011:

                              September 30, 2012         December 31, 2011
                                        Percent of                Percent of
                                       ALLL in each              ALLL in each
                                       category to               category to
(dollars in thousands)       Amount    gross loans     Amount    gross loans

Commercial                  $  6,003            0.7 % $  5,545            0.7 %
Real estate construction         765            0.1 %    1,220            0.2 %
Land loans                       362            0.0 %      613            0.1 %
Real estate other              6,232            0.7 %    6,111            0.8 %
Factoring and asset based      3,567            0.4 %    2,381            0.3 %
SBA                            2,758            0.3 %    2,567            0.3 %
Other                            104            0.0 %      103            0.0 %
                            $ 19,791            2.2 % $ 18,540            2.4 %

Beginning in the second quarter of 2008, deterioration in economic conditions within the Company's market area and, as applicable, the State of California and/or national macroeconomic conditions resulted in increased stress to the loan portfolio, specifically construction and land development loans outside of the Company's primary market of Santa Clara County and contiguous portions of San Mateo and Alameda counties.

In response to the deteriorating market conditions, the Company undertook steps to aggressively reduce the exposure to construction and land development loans with particular emphasis on loans outside of its primary market. Management curtailed new loan origination, thoroughly reviewed collateral values of projects approaching maturity and conservatively evaluated the market prospects of collateral for indications of impairments.

By September 30, 2012, the Company's land development portfolio was reduced to $5.3 million with just $1.4 million remaining exposure outside of the primary market area. Further, over 70% of the remaining loans in this category are underwritten to amortizing term structures supported by cash flow from liquidity of the borrowers.

Construction loans at September 30, 2012 were $39.0 million with $4.9 million remaining on projects outside of the primary market area. In addition, at that date $18.5 million, or 47.0%, were loans to finance commercial projects while none were to finance residential projects of five or more units.

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