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BBNK > SEC Filings for BBNK > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for BRIDGE CAPITAL HOLDINGS

Form 10-Q for BRIDGE CAPITAL HOLDINGS


9-Aug-2013

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

The accompanying management's discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. Management evaluates estimates and assumptions on an ongoing basis. Management bases its estimates on historical experiences and various other factors and assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions.

There have been no significant changes during the three and six months ended June 30, 2013 to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Part II, Item 7 of our 2012 Form 10-K.


Table of Contents

Selected Financial Data



The following table reflects selected financial data and ratios as of and for
the quarters and six months ended June 30, 2013 and 2012 (dollars in thousands,
except per share data):



                                        Three months ended             Six months ended
                                             June 30,                      June 30,
                                       2013           2012           2013           2012
Statement of Operations Data:
Interest income                     $    17,216    $    15,090    $    33,364    $    30,415
Interest expense                            639            549          1,244          1,028
Net interest income                      16,577         14,541         32,120         29,387
Provision for credit losses               5,300            500          6,050          2,250
Net interest income after
provision for credit losses              11,277         14,041         26,070         27,137
Other income                              4,756          2,972          7,675          5,515
Other expenses                           12,888         11,358         24,746         22,436
Income before income taxes                3,145          5,655          8,998         10,216
Income taxes                              1,302          2,346          3,734          4,200
Net income                          $     1,843    $     3,309    $     5,264    $     6,016

Per Share Data:
Basic earnings per share            $      0.13    $      0.23    $      0.37    $      0.42
Diluted earnings per share                 0.12           0.22           0.35           0.40
Shareholders' equity per share             9.79           8.99

Balance Sheet Data:
Balance sheet totals:
Assets                              $ 1,463,322    $ 1,165,209
Loans, net                              975,050        828,240
Deposits                              1,276,614        985,554
Shareholders' equity                    153,963        137,110

Average balance sheet amounts:
Assets                              $ 1,428,971    $ 1,162,472    $ 1,370,395    $ 1,158,933
Loans, net                              960,675        765,604        916,199        776,147
Deposits                              1,238,810        961,857      1,182,373        970,645
Shareholders' equity                    154,254        135,677        151,836        134,156

Selected Ratios:
Return on average assets                   0.52 %         1.14 %         0.77 %         1.04 %
Return on average equity                   4.79 %         9.81 %         6.99 %         9.02 %
Efficiency ratio                          60.41 %        64.85 %        62.18 %        64.28 %
Risk based capital ratio                  14.80 %        15.80 %
Net chargeoffs (recoveries) to
average gross loans                        0.55 %         0.03 %         0.59 %         0.16 %
Allowance for loan losses to
total loans                                2.05 %         2.30 %
Average equity to average assets          10.79 %        11.67 %        11.08 %        11.58 %


Table of Contents

Summary of Financial Results - Quarter ended June 30, 2013

The Company reported net operating income of $1.8 million for the three months ended June 30, 2013 representing a decrease of $1.5 million, or 44.3%, compared to net operating income of $3.3 million for the same period one year ago. The Company reported earnings per diluted share of $0.12 for the current quarter compared to $0.22 per diluted share for the same quarter in 2012.

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

                                                   Three months ended
                                                        June 30,               Increase
(dollars in thousands)                             2013           2012        (Decrease)

Interest income                                 $    17,216    $   15,090    $      2,126
Interest expense                                        639           549              90

Net interest income                                  16,577        14,541           2,036
Provision for credit losses                           5,300           500           4,800
Net interest income after provision for
credit losses                                        11,277        14,041          (2,764 )

Other income                                          4,756         2,972           1,784
Other expenses                                       12,888        11,358           1,530
Income before income taxes                            3,145         5,655          (2,510 )

Income taxes                                          1,302         2,346          (1,044 )
Net income                                      $     1,843    $    3,309    $     (1,466 )

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 June 30, 2013 was $16.6 million, which was comprised of $17.2 million in interest income and $639,000 in interest expense. Net interest income for the quarter ended June 30, 2012 was $14.5 million, which was comprised of $15.1 million in interest income and $549,000 in interest expense. Net interest income for the quarter ended June 30, 2013 represented an increase of $2.0 million or 14.0% 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.

The composition of the average balance sheet impacts growth in net interest income. For the quarter ended June 30, 2013 average earning assets of $1.36 billion represented an increase of $257.9 million, or 23.3%, compared to $1.11 billion for the same period in 2012. The Company's loan-to-deposit ratio, a measure of leverage, averaged 79.43% during the quarter ended June 30, 2013, which represented a decrease compared to an average of 85.03% for the same quarter of 2012 as a result of higher deposit funding relative to loan growth.

The Company's net interest margin (net interest income divided by average earning assets) for the quarter ended June 30, 2013 was 4.87% compared to 5.28% in the same period one year earlier. The decrease in net interest margin was primarily due to a less favorable mix of earning assets and decreased leverage, partially offset by increased recurring loan fees. The impact on the net interest margin from increased loan fees for the three months ended June 30, 2013 compared to the same period last year was 18 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 June 30, 2013 and 2012.


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                                                Three months ended June 30,
                                        2013                                  2012
                                         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)                $    984,030       6.49 % $  15,926   $    817,834       6.57 % $  13,365
Federal funds sold            117,134       0.24 %        69         52,761       0.24 %        31
Investment securities         263,395       1.86 %     1,221        236,052       2.89 %     1,694
Other                             313       0.00 %         -            319       0.00 %         -
Total interest earning
assets                      1,364,872       5.06 %    17,216      1,106,966       5.48 %    15,090

Noninterest-earning
assets:
Cash and due from
banks                          25,831                                21,359
All other assets (3)           38,268                                34,147
TOTAL                    $  1,428,971                          $  1,162,472

LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Deposits:
Demand                   $     11,191       0.04 %         1   $      5,652       0.00 % $       -
Savings                       429,403       0.28 %       301        284,297       0.29 %       205
Time                           49,423       0.53 %        65         31,006       0.35 %        27
Other                          20,824       5.24 %       272         51,043       2.50 %       317
Total interest bearing
liabilities                   510,841       0.50 %       639        371,998       0.59 %       549

Noninterest-bearing
liabilities:
Demand deposits               748,794                               640,902
Accrued expenses and
other liabilities              15,082                                13,895
Shareholders' equity          154,254                               135,677
TOTAL                    $  1,428,971                          $  1,162,472

Net interest income
and margin                                  4.87 % $  16,577                      5.28 % $  14,541



(1) Loan fee amortization of $2.7 million and $1.7 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 loan losses of $19.3 million and $19.3 million, respectively.


Table of Contents

The following table shows the effect of the interest differential of volume and rate changes for the quarters ended June 30, 2013 and 2012. 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 June 30,
                                           2013 vs. 2012
                                        Increase (decrease)
                                         due to change in
                                 Average        Average      Total
(dollars in thousands)            Volume         Rate       Change
Interest income:
Loans                           $    2,727    $      (165 ) $ 2,561
Federal funds sold                      38             (0 )      38
Investment securities                  132           (604 )    (473 )
Total interest income                2,896           (770 )   2,126

Interest expense:
Demand                                   0              1         1
Savings                                103             (6 )      96
Time                                    24             14        38
Other                                 (394 )          349       (45 )
Total interest expense                (266 )          357        90

Change in net interest income   $    3,163    $    (1,127 ) $ 2,036

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 $17.2 million in the quarter ended June 30, 2013 represented an increase of $2.1 million, or 14.1%, from $15.1 million in the same quarter one year earlier. The average yield on earning assets was 5.06% for the quarter ended June 30, 2013 compared to 5.48% for the quarter ended June 30, 2012. The decrease in the average yield on interest earning assets was primarily due to a less favorable mix of earning assets and a lower yield on investments, partially offset by increased recurring loan fees.

Average gross loans were $984.0 million for three months ended June 30, 2013, an increase of $166.2 million or 20.3% from $817.8 million for the same period one year earlier. Average loans comprised 72.1% of average earning assets in the three months ended June 30, 2013 compared to 73.9% in the second quarter of 2012.

Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $380.8 million for the quarter ended June 30, 2013, an increase of $91.7 million or 31.7% from $289.1 million for the three months ended June 30, 2012.

Interest Expense

Interest expense was $639,000 for the quarter ended June 30, 2013, which represented an increase of $90,000, or 16.4% from $549,000 for the comparable period of 2012. The increase in interest expense was primarily due to an increase in average interest bearing deposit accounts. Average interest-bearing liabilities were $510.8 million for the three months ended June 30, 2013, an increase of $138.8 million, or 37.3%, from $372.0 million for the same period one year earlier.

Average interest bearing deposits were $490.0 million for the quarter ended June 30, 2013, which represented 39.6% of total average deposits and was an increase of $169.1 million, or 52.7%, from $321.0 million representing 33.4% of total average deposits in the second quarter of 2012.


Table of Contents

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 $20.8 million in the three months ended June 30, 2013 and $51.0 million for the comparable period of 2012.

The average rate paid on interest-bearing liabilities was 0.50% and 0.59% in the quarters ended June 30, 2013 and 2012, respectively.

Credit Risk and Provision for Credit Losses

The Company maintains an allowance for loan 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 $5.4 million during the three months ended June 30, 2013 compared to $553,000 during the three months ended June 30, 2012. Loan recoveries of $26,000 were recognized during the second quarter of 2013 compared to $290,000 for the three months ended June 30, 2012.

The following schedule provides an analysis of the allowance for loan losses for the quarters ended June 30, 2013 and 2012, respectively:

                                 Three months ended
                                      June 30,
(dollars in thousands)            2013         2012

Balance, beginning of period   $    20,543   $ 19,304
Provision for credit losses          5,300        500
Charge-offs                         (5,399 )     (553 )
Recoveries                              26        290
Balance, end of period         $    20,470   $ 19,541

The allowance for loan losses was $20.5 million, or 2.05% of total loans, at June 30, 2013, compared to $19.5 million, or 2.30% of total loans, at June 30, 2012. The increase in the allowance for loan losses from June 30, 2012 to June 30, 2013 was primarily attributable to the growth of the loan portfolio.

The Company recorded a provision for credit losses of $5.3 million for the three months ended June 30, 2013. This compares to $500,000 recorded for the quarter ending June 30, 2012. The increase in the provision for loan losses was primarily related to the charge-off of one asset-based commercial line of credit and the strong growth in the loan portfolio.

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 June 30, 2013 and December 31, 2012:


Table of Contents

                                 June 30, 2013           December 31, 2012
                                        Percent of                Percent of
                                       ALLL in each              ALLL in each
                                       category to               category to
(dollars in thousands)       Amount    gross loans     Amount    gross loans

Commercial                  $  8,094            0.8 % $  6,394            0.7 %
Real estate construction         683            0.1 %      673            0.1 %
Land loans                       330            0.0 %      333            0.0 %
Real estate other              3,565            0.4 %    5,178            0.6 %
Factoring and asset based      5,435            0.6 %    4,352            0.5 %
SBA                            2,247            0.2 %    2,905            0.3 %
Other                            116            0.0 %      113            0.0 %
                            $ 20,470            2.1 % $ 19,948            2.2 %

At June 30, 2013 nonperforming assets of $16.2 million, or 1.11% of total assets, compared to $10.1 million, or 0.75% of total assets, on December 31, 2012. The increase in nonperforming assets in the second quarter of 2013 was primarily due to the addition of one commercial real estate credit and one asset-based lending credit. Additionally, one real estate secured relationship was downgraded from a performing troubled debt restructuring to a nonperforming loan. The following summarizes nonperforming assets at June 30, 2013 and December 31, 2012.

                                                              June 30,      December 31,
(dollars in thousands)                                          2013            2012

Loans accounted for on a non-accrual basis                   $   16,160    $        9,967
Other loans with principal or interest contractually past
due 90 days or more and still accruing                                -                 -
Nonperforming loans                                              16,160             9,967
Other real estate owned                                              31               144
Nonperforming assets                                         $   16,191    $       10,111

Loans restructured and in compliance with modified terms          5,708             9,402

Nonperforming assets and restructured loans                  $   21,899    $       19,513

The nonperforming assets at June 30, 2013 consisted of loans on nonaccrual or 90 days or more past due and still accruing totaling $16.2 million, and other real estate owned valued at $31,000. Nonperforming loans at June 30, 2013 were comprised of loans with legal contractual balances totaling approximately $23.5 million reduced by $1.8 million received in nonaccrual interest and impairment charges of $5.5 million which have been charged against the allowance 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.


Table of Contents

The following table sets forth the components of nonperforming loans as of June 30, 2013 (dollars in thousands).

June 30, 2013

Classification                     Amount                   Collateral

Real estate other                              Special purpose facility in Santa
                                 $    5,361    Cruz County
Real estate other                              Single family residences in
                                      2,540    Sacramento County
Real estate other                     2,489    Retail center in Sacramento County
                                     10,390

Factoring/asset based lending         3,684    Business assets
                                      3,684

SBA                                            Special purpose facility in Alameda
                                        833    County
SBA                                            Special purpose facilities in San
                                        334    Diego County
SBA                                            Mixed used building in Santa Clara
                                        327    County
SBA                                            Special purpose facilities in Orange
                                        216    County
SBA                                            Single family residences in Orange
                                         83    and LA Counties
SBA                                            Lot for single family homes in
                                         56    Contra Costa County
SBA                                            Commercial building in San Diego
                                         23    County
SBA                                            Light industrial warehouse space in
                                          6    Stanislaus County
SBA                                            Single family residence in Santa
                                          6    Clara County
                                      1,884

Commercial                              195    Business assets
                                        195

Land                                           Lot for commercial development in
                                          7    Calaveras County
                                          7

Total nonperforming loans        $   16,160

Included in nonperforming loans at June 30, 2013 are loans totaling $8.1 million that have been modified in trouble debt restructurings, where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on a loan, payment extensions, forgiveness of principal, or other actions intended to maximize collection. In order for these loans to return to accrual status, the borrower must demonstrate a sustained period of timely payments. As of June 30, 2013, previously modified loans totaling $5.7 million were considered performing due to a sustained period of timely payments and therefore were accounted for on an accrual basis. During the current quarter, one previously modified credit relationship, representing $2.5 million in other real estate loans was downgraded from performing to non-performing.

Management undertakes significant processes in order to identify potential problem loans in a timely manner. In addition to regular interaction with the Company's borrowers, the relationship managers review the credit ratings for each loan on a monthly basis and identify any potential downgrades. For . . .

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