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BBNK > SEC Filings for BBNK > Form 10-K on 11-Mar-2014All Recent SEC Filings

Show all filings for BRIDGE CAPITAL HOLDINGS

Form 10-K for BRIDGE CAPITAL HOLDINGS


11-Mar-2014

Annual Report


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

In addition to the historical information, this annual 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 annual 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) general economic conditions, either nationally or regionally are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in the regulatory environment;
(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; and (10) the involvement of the United States in war or other hostilities. Therefore, the information in this annual 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 procedures that are intended to ensure 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.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

The allowance consists of specific and general reserves. Specific reserves primarily relate to loans that are individually classified as impaired, but may also relate to loans that in management's opinion exhibit negative credit characteristics or trends suggesting potential future loss exposure greater than historical loss experience would suggest. It is currently the Company's practice to immediately charge-off any identified financial loss pertaining to impaired loans when management believes the uncollectibility of the loan is confirmed, therefore specific reserves are uncommon. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are generally considered troubled debt restructurings and classified as impaired.

Commercial and real estate loans are individually evaluated for impairment. Generally Accepted Accounting Principles specify that if a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. However, it is currently the Company's practice to immediately charge-off any identified financial loss pertaining to impaired loans when management believes the uncollectibility of the loans has been confirmed.

Substandard loans are individually evaluated for impairment. Generally Accepted Accounting Principles specify that if a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using an appropriate discount rate or at the fair value of collateral if repayment is expected solely from the collateral. See Note 4 to the financial statements for additional information on substandard loans.


Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using an appropriate discount rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses. See Note 4 to the financial statements for additional information on troubled debt restructurings.

General reserves cover non-impaired loans and are based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

Portfolio segments identified by the Company include commercial, real estate construction, land, real estate other, factoring and asset-based lending, SBA, and consumer loans. Relevant risk characteristics for these portfolio segments generally include debt service coverage, loan-to-value ratios and financial performance on non-consumer loans and credit scores, debt-to income, collateral type and loan-to-value ratios for consumer loans.

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 December 31, 2013 and December 31, 2012, 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 Bank performs an allocation based on the relative fair values of the sold portion and retained portions of the loan. The Company assumptions are validated by reference to external market information.

Investment Securities

Our securities are classified as either available-for-sale, held-to-maturity or trading securities. The fair value of most securities classified as available-for-sale or trading securities, are 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.

Deferred Tax Assets

Our deferred tax assets are explained in Note 8 to the Consolidated Financial Statements. The Company has sufficient taxable income from current and prior periods to support our position that the benefit of our deferred tax assets will be realized. As such, we have provided no valuation allowance against our deferred tax assets.

Executive Summary

The Company reported net operating income of $14.7 million for the year ended December 31, 2013 representing an increase of $908,000, compared to net income of $13.8 million for the same period one year ago. For the year ended December 31, 2013, the Company reported earnings per diluted share of $0.97 compared to $0.92 for the year ended December 31, 2012. For the year ended December 31, 2011, the Company reported net operating income of $7.8 million. Net income available to common shareholders was reduced by preferred dividends of $200,000 resulting in earnings per diluted share of $0.52 for the year ended December 31, 2011. The Company retired the preferred stock issued under TARP in March of 2011 and, as a result, no longer has any preferred dividend payments.


For the year ended December 31, 2013, the Company's return on average assets and return on average equity were 1.03% and 9.47%, respectively, and compared to 1.14% and 9.98%, respectively, for the same period in 2012, and 0.75% and 6.12%, respectively, for the same period in 2011.

The increase in earnings during 2013 compared to 2012 resulted primarily from an increase in interest income related to loans, gains on sale of SBA loans and securities and depositor service charges, offset in part by a decrease in the gain on sale of other real estate owned and decreases in warrant income. The increase in earnings during 2012 compared to 2011 resulted primarily from an increase in interest income related to loans and investment securities, warrant income and other non-interest income, offset in part by an increase in non-interest expense related to supporting growth and investments in new initiatives.

Additionally, an overview of the financial results for 2013 discussed in the MD&A include the following:

Total assets grew to $1.60 billion at the end of 2013, with loans comprising 70.8% of the average earning asset mix, compared to 71.9% at prior year end. Total deposits were $1.41 billion at December 31, 2013, which included demand deposits of $965.8 million representing the highest level of demand deposit balances since the inception of the Company. At December 31, 2012, total assets and total deposits were $1.34 billion and $1.17 billion, respectively.

Gross loans were $1.08 billion at December 31, 2013, representing an increase of $169.1 million, or 18.6%, compared to gross loans of $908.6 million at December 31, 2012. Average loan balances increased by $143.4 million, or 17.3%, to $971.1 million for the year ended December 31, 2013, compared to $827.7 million for the year ended December 31, 2012.

Net interest income and non-interest income comprised total revenue of $82.6 million in 2013 compared to $73.6 million for 2012, representing an increase of $9.0 million, or 12.2%

Net interest margin decreased to 4.98% in 2013 compared to 5.27% in 2012.

Provision for credit losses for 2013 increased to $6.1 million from $4.0 million in 2012. Net charge-offs were $4.1 million for the current year compared to $2.5 million in 2012.

Allowance for credit losses represented 2.04% of total gross loans and 145.18% of nonperforming loans at December 31, 2013, compared to 2.20% of total gross loans and 200.14% of nonperforming loans at December 31, 2012.

As of December 31, 2013, nonperforming assets increased by $5.0 million to $15.1 million, or 0.94% of total assets, compared to $10.1 million or 0.75% of total assets at December 31, 2012.

Capital ratios remained significantly above the minimum required for the Company to be considered "well-capitalized" under the current Basel regulatory framework, and continued to support the Company's growth. Total Risk-Based Capital Ratio was 13.96%, Tier I Capital Ratio was 12.70%, and Tier I Leverage Ratio was 11.61% at December 31, 2013.


Results of Operations

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 source of the Company's operating earnings. Net interest income is affected by changes in the nature and volume of earning assets held during the year, the rates earned on such assets and the rates paid on interest-bearing liabilities. 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 three years ended December 31, 2013, 2012 and 2011.

                                                                   Year Ended December 31,
                                       2013                                 2012                                 2011
                                       Interest                             Interest                             Interest
                           Average      Income/    Yields/      Average      Income/    Yields/      Average      Income/    Yields/
(dollars in thousands)     Balance      Expense     Rates       Balance      Expense     Rates       Balance      Expense     Rates
Assets
Interest earning
assets (2):
Loans (1)                $   971,129   $  64,629      6.66 %  $   827,691   $  56,122      6.78 %  $   660,614   $  45,352      6.87 %
Investment securities        278,239       5,864      2.11 %      235,892       6,461      2.74 %      216,870       5,068      2.34 %
Federal funds sold           121,983         316      0.26 %       86,735         203      0.23 %      109,134         255      0.23 %
Interest bearing
deposits                         323           1      0.31 %          331           1      0.30 %          998          19      1.90 %
Total earning assets       1,371,674      70,810      5.16 %    1,150,649      62,787      5.46 %      987,616      50,694      5.13 %

Noninterest earning
assets:
Cash and due from
banks                         26,147                               22,946                               22,392
All other assets (3)          33,510                               33,096                               37,133
TOTAL                    $ 1,431,331                          $ 1,206,691                          $ 1,047,141

Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Deposits:
Demand                   $     9,849   $       3      0.03 %  $     5,834   $       2      0.03 %  $     6,205   $       4      0.06 %
Savings                      403,906       1,179      0.29 %      311,712         900      0.29 %      326,546         884      0.27 %
Time                          48,496         260      0.54 %       38,933         187      0.48 %       36,876         208      0.56 %
Other                         19,116       1,076      5.63 %       29,057       1,106      3.81 %       20,217       1,160      5.74 %
Total interest-bearing
Liabilities                  481,367       2,518      0.52 %      385,536       2,195      0.57 %      389,844       2,256      0.58 %

Noninterest-bearing
liabilities:
Demand deposits              778,219                              667,146                              515,056
Accrued expenses and
other liabilities             16,412                               15,643                               14,113
Shareholders' equity         155,333                              138,366                              128,128
TOTAL                    $ 1,431,331                          $ 1,206,691                          $ 1,047,141

Net interest income
and margin                             $  68,292      4.98 %                $  60,592      5.27 %                $  48,438      4.90 %



(1) Includes amortization of loan fees of $11.9 million for 2013, $9.4 million for 2012 and $5.7 million for 2011. Nonperforming loans have been included in average loan balances.

(2) Interest income is reflected on an actual basis, not on a fully taxable equivalent basis. Yields are based on amortized cost.

(3) Net of average allowance for loan losses of $20.6 million and average deferred loan fees of $4.3 million for 2013, average allowance for loan losses of $19.2 million and average deferred loan fees of $2.9 million for 2012, and average allowance for loan losses of $16.9 million and $1.8 million for 2011, respectively.

Interest differential is affected by changes in volume, changes in rates and a combination of changes in volume and rates. Volume changes are caused by changes in the levels of average earning assets and average interest bearing deposits and borrowings. Rate changes result from changes in yields earned on assets and rates paid on liabilities. Changes not solely attributable to volume or rates have been allocated to the rate component.


The following table shows the effect on the interest differential of volume and rate changes for the years ended December 31, 2013, 2012 and 2011:

                                                    Year Ended December 31,
                                        2013 vs. 2012                    2012 vs. 2011
                                     Increase (decrease)              Increase (decrease)
                                      due to change in                 due to change in
                                Average    Average     Total    Average     Average     Total
(dollars in thousands)           Volume      Rate     Change     Volume      Rate       Change
Interest income:
Loans                           $  9,546   $ (1,039 ) $ 8,507   $ 11,329   $    (559 ) $ 10,770
Investment securities                892     (1,489 )    (597 )      521         872      1,393
Federal funds sold                    91         22       113        (52 )         0        (52 )
Other                                 (0 )        0         0         (2 )       (16 )      (18 )
Total interest income             10,530     (2,507 )   8,023     11,796         297     12,093

Interest expense:
Demand                                 1         (0 )       1         (0 )        (2 )       (2 )
Savings                              269         10       279        (42 )        58         16
Time                                  51         22        73         10         (31 )      (21 )
Other                               (560 )      530       (30 )      337        (390 )      (54 )
Total interest expense              (238 )      561       323        304        (365 )      (61 )

Change in net interest income   $ 10,768   $ (3,068 ) $ 7,700   $ 11,491   $     662   $ 12,154

Net interest income was $68.3 million in 2013, comprised of $70.8 million in interest income and $2.5 million in interest expense. Net interest income was $60.6 million in 2012, comprised of $62.8 million in interest income and $2.2 million in interest expense. The increase of $7.7 million in net interest income in 2013, comprised of an increase in interest income of $8.0 million offset slightly by an increase of $323,000 in interest expense, was primarily attributable to an increase in average earning assets as a result of loan growth and excess liquidity generated from deposit growth.

Net interest income was $48.4 million in 2011, comprised of $50.7 million in interest income and $2.3 million in interest expense. The increase of $12.2 million in net interest income in 2012, comprised of an increase in interest income of $12.1 million combined with a decrease of $61,000 in interest expense, was primarily attributable to an increase in average earning assets as a result of loan growth.

The net interest margin (net interest income divided by average earning assets) was 4.98% for the year ended December 31, 2013, as compared to 5.27% for the year ended December 31, 2012 and 4.90% for 2011. The decrease in net interest margin in 2013 was primarily due to a less favorable mix in average earning assets, decreased leverage and increased nonperforming loans. The positive impact on the net interest margin from increased loan fees for the twelve months ended December 31, 2013 compared to the same period one year ago was 5 basis points. The Company's loan-to-deposit ratio, a measure of leverage, averaged 78.3% during the twelve months ended December 31, 2013, which represented a decrease compared to an average of 80.9% for the same period in 2012.

The increase in net interest margin in 2012 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 twelve months ended December 31, 2012 compared to the same period in 2011 was 24 basis points. The Company's loan-to-deposit ratio averaged 80.9% during the twelve months ended December 31, 2012 compared to 74.7% for the same period in 2011.

Interest Income

For the year ended December 31, 2013, the Company reported interest income of $70.8 million, an increase of $8.0 million or 12.8% over $62.8 million reported in 2012. The increase in interest income primarily reflects an increase in average earning assets. Average earning assets were $1.37 billion for the year ended December 31, 2013, an increase of $221.0 million, or 19.2%, over $1.15 billion for the year ended December 31, 2012. The increase in average earning assets reflects an increase in the average loan portfolio of $143.4 million over $827.7 million in 2012, and an increase in the average securities portfolio of $42.3 million from $235.9 million in 2012. The average yield on earning assets was 5.16% for the year ended December 31, 2013 compared to 5.46% for the year ended December 31, 2012 primarily due to a lower rate of interest earned on loans and investment securities during 2013.


For the year ended December 31, 2012, the Company reported interest income of $62.8 million, an increase of $12.1 million or 23.9% over $50.7 million reported in 2011. The increase in interest income primarily reflects an increase in average earning assets in addition to an increase in the average yield on investment securities. Average earning assets were $1.151 billion for the year ended December 31, 2012 an increase of $163.0 million, or 16.5%, over $987.6 million for the year ended December 31, 2011. The increase in average earning assets reflects an increase in the average loan portfolio of $167.1 million over $660.6 million in 2011, and an increase in the average securities portfolio of $19.0 million from $216.9 million in 2011. The average yield on earning assets was 5.46% for the year ended December 31, 2012 compared to 5.13% for the year ended December 31, 2011 due to a higher rate of interest earned on investment securities during 2012 and a more favorable mix of average earning assets. This was partially offset by lower rates of interest earned on all other earning assets.

Interest Expense

Interest expense was $2.5 million for the year ended December 31, 2013, which represented an increase of $323,000 or 14.7% compared to $2.2 million for the year ended December 31, 2012. The increase in interest expense primarily reflects a higher level of interest bearing liabilities in 2013 compared to 2012. The average yield on interest-bearing liabilities was 0.52% for the period ended December 31, 2013 compared to 0.57% for the period ended December 31, 2012. Average interest-bearing liabilities were $481.4 million for the year ended December 31, 2013, an increase of $95.8 million or 24.9% from $385.5 million for the year ended December 31, 2012.

Average interest bearing deposits were $462.3 million for the year ended December 31, 2013, which represented 37.3% of total average deposits and was an increase of $105.8 million, or 29.7%, from $356.5 million at December 31, 2012, representing 34.8% of total average deposits for the year.

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 borrowings during the year were comprised of short term borrowings. Other interest bearing liabilities averaged $19.1 million and $29.1 million in the years ended December 31, 2013 and 2012, respectively.

Interest expense was $2.2 million for the year ended December 31, 2012, which represented a decrease of $61,000 or 2.7% compared to $2.3 million for the year ended December 31, 2011. The decrease in interest expense primarily reflects a lower level of interest bearing liabilities combined with a lower interest rates paid on deposits in 2012 compared to 2011. The average yield on interest-bearing liabilities was 0.57% for the period ended December 31, 2012 compared to 0.58% for the period ended December 31, 2011. Average interest-bearing liabilities were $385.5 million for the year ended December 31, 2012, a decrease of $4.3 million or 1.1% from $389.8 million for the year ended December 31, 2011.

Average interest bearing deposits were $356.5 million for the year ended December 31, 2012, which represented 34.8% of total average deposits and was a decrease of $13.1 million, or 3.6%, from $369.6 million at December 31, 2011, representing 41.8% of total average deposits for the year.

Other borrowings during 2012 were comprised of short term borrowings. Other interest bearing liabilities averaged $29.1 million and $20.2 million in the years ended December 31, 2012 and 2011, respectively.

Credit Risk and Provision for Loan 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 loan losses charged to operating expense and recoveries of previously charged-off loans. Based on management's evaluation of such risks, the Company provided $6.1 million, $4.0 million, and $2.6 million to the allowance for loan losses in 2013, 2012 and 2011, respectively. During 2013, the Bank had $8.3 million in charge offs, and had . . .

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