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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
000-50914
---------
(Commission File Number)
BRIDGE CAPITAL HOLDINGS
-----------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 80-0123855
----------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
55 ALMADEN BOULEVARD, SAN JOSE, CA 95113
----------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 423-8500
--------------
Bridge Bank, N.A. (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
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No . Indicate by checkmark whether registrant is an accelerated filer (as
defined by in Rule 12b-2 of the Exchange Act). Yes / / No /X/
The number of shares of Common Stock outstanding as of April 28, 2005: 6,146,447
FORWARD-LOOKING STATEMENTS
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 THE INTEREST RATE ENVIRONMENT
REDUCES MARGINS; (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 OR TERRORIST THREATS
OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF THIS TYPE;
AND (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER HOSTILITIES.
THEREFORE, THE INFORMATION IN THIS QUARTERLY REPORT SHOULD BE CAREFULLY
CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY.
FORWARD-LOOKING STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE USE OF TERMS SUCH
AS "BELIEVE", "EXPECT", "INTEND", "ANTICIPATE", "ESTIMATE", "PROJECT", "ASSUME,"
"PLAN," "PREDICT," "FORECAST," "IN MANAGEMENT'S OPINION," "MANAGEMENT CONSIDERS"
OR SIMILAR EXPRESSIONS. WHEREVER SUCH PHRASES ARE USED, SUCH STATEMENTS ARE AS
OF AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT
TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH
STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH
RESPECT TO FORWARD-LOOKING STATEMENTS.
ALL OF THE COMPANY'S OPERATIONS AND MOST OF ITS CUSTOMERS ARE LOCATED IN
CALIFORNIA. OTHER EVENTS, INCLUDING THOSE OF SEPTEMBER 11, 2001, HAVE INCREASED
THE UNCERTAINTY RELATED TO THE NATIONAL AND CALIFORNIA ECONOMIC OUTLOOK AND
COULD HAVE AN EFFECT ON THE FUTURE OPERATIONS OF THE COMPANY OR ITS CUSTOMERS,
INCLUDING BORROWERS. THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS
ANY OBLIGATION, TO UPDATE ANY FORWARD-LOOKING STATEMENTS TO REFLECT OCCURRENCES
OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.
THE READER SHOULD REFER TO THE MORE COMPLETE DISCUSSION OF SUCH RISKS IN THE
COMPANY'S ANNUAL REPORTS ON FORM 10-K.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Balance Sheet (unaudited)
(dollars in thousands)
March 31, December 31,
ASSETS 2005 2004
--------------------------
CASH AND DUE FROM BANKS $ 17,025 $ 6,535
FEDERAL FUNDS SOLD 75,485 62,675
--------------------------
Total cash and equivalents 92,510 69,210
--------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE 20,279 26,298
LOANS, net of allowance for credit losses of
$4,482 at March 31, 2005 and $4,146 at
December 31, 2004 318,145 289,467
PREMISES AND EQUIPMENT, net 2,346 2,215
ACCRUED INTEREST RECEIVABLE 1,529 1,366
OTHER ASSETS 13,631 13,481
--------------------------
TOTAL $ 448,440 $ 402,037
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand noninterest-bearing $ 158,596 $ 126,895
Demand interest-bearing 2,452 3,946
Savings 181,087 169,801
Time 55,612 51,814
--------------------------
Total deposits 397,747 352,456
--------------------------
OTHER BORROWINGS 12,000 12,000
ACCRUED INTEREST PAYABLE 109 69
OTHER LIABILITIES 4,309 4,390
--------------------------
Total liabilities 414,165 368,915
--------------------------
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000
shares authorized; none issued
Common stock, no par value; 30,000,000 shares
authorized;
6,146,447 shares issued and outstanding at
March 31, 2005.
6,097,697 shares issued and outstanding at
December 31, 2033,307 33,057
Retained earnings 1,141 184
Accumulated other comprehensive (loss) (173) (119)
---------------------------
Total shareholders' equity 34,275 33,122
---------------------------
TOTAL $ 448,440 $ 402,037
===========================
The accompanying notes are an integral part of the financial statements.
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Statement of Operations (unaudited)
(dollars in thousands)
Three months ended
March 31,
2005 2004
----------------------------
INTEREST INCOME:
Loans $ 6,270 $ 3,653
Federal funds sold 221 124
Investment securities available for sale 124 96
------------ ------------
Total interest income 6,615 3,873
------------ ------------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 5 8
Money market and savings 661 413
Certificates of deposit 314 261
Other 208 -
------------ ------------
Total interest expense 1,188 682
------------ ------------
Net interest income 5,427 3,191
Provision for credit losses 333 405
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 5,094 2,786
------------ ------------
OTHER INCOME:
Service charges on deposit accounts 68 72
Gain on sale of SBA loans 420 885
Other non interest income 296 165
------------ ------------
Total other income 784 1,122
------------ ------------
OTHER EXPENSES:
Salaries and benefits 2,552 1,774
Premises and fixed assets 550 560
Other 1,213 781
------------ ------------
Total other expenses 4,315 3,115
------------ ------------
INCOME BEFORE INCOME TAXES 1,563 793
------------ ------------
Income taxes 606 327
------------ ------------
NET INCOME $ 957 $ 466
============ ============
Basic earnings per share $ 0.16 $ 0.08
============ ============
Diluted earnings per share $ 0.14 $ 0.07
============ ============
Average common shares outstanding 6,127,474 6,051,739
============ ============
Average common and equivalent shares
outstanding 6,687,860 6,552,954
============ ============
The accompanying notes are an integral part of the financial statements.
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Statements of Cash Flows (unaudited)
(dollars in thousands)
Three months ended March 31,
2005 2004
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 957 $ 466
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 333 405
Depreciation and amortization 219 217
Increase in accrued interest receivable
and other assets (253) (271)
Increase in accrued interest payable and
other liabilities 2 95
------------- --------------
Net cash provided by operating activities 1,258 912
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of securities available
for sale 6,100 2,100
Purchase of securities available for sale (197) (7,426)
Net increase in loans (29,011) (11,812)
Purchase of life insurance (60) -
Purchase of fixed assets (331) (772)
------------- --------------
Net cash used in investing activities (23,499) (17,910)
------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 45,291 68,304
Common stock issued 250 2
------------- --------------
Net cash provided by financing activities 45,541 68,306
------------- --------------
NET INCREASE IN CASH AND EQUIVALENTS: 23,300 51,308
Cash and equivalents at beginning of period 69,210 57,547
------------- --------------
Cash and equivalents at end of period $ 92,510 $ 108,855
============= ==============
OTHER CASH FLOW INFORMATION:
Cash paid for interest $ 964 $ 681
============= ==============
Cash paid for income taxes $ 430 $ 245
============= ==============
The accompanying notes are an integral part of the financial statements.
BRIDGE CAPITAL HOLDINGS
NOTES TO FINANCIAL
STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.
The accompanying unaudited financial statements of Bridge Capital Holdings and
Bridge Bank, N.A. have been prepared in accordance with generally accepted
accounting principles and pursuant to the rules and regulations of the SEC. The
interim financial data as of March 31, 2005 and for the three months ended March
31, 2005 and March 31, 2004 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. Certain information and note disclosures normally included in
annual financial statements have been omitted pursuant to SEC rules and
regulations; however, the Company believes the disclosures made are adequate to
ensure that the information presented is not misleading. Results of operations
for the quarter ended March 31, 2005, are not necessarily indicative of full
year results.
The comparative balance sheet information as of December 31, 2004 is derived
from the audited financial statements.
USE OF ESTIMATES.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent assets and liabilities as of the dates and for the
periods presented. A significant estimate included in the accompanying financial
statements is the allowance for loan losses. Actual results could differ from
those estimates.
EARNINGS PER SHARE.
Basic net income per share is computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is determined using the weighted
average number of common shares outstanding during the period, adjusted for the
dilutive effect of common stock equivalents, consisting of shares that might be
issued upon exercise of common stock options. Common stock equivalents are
included in the diluted net income per share calculation to the extent these
shares are dilutive.
Earnings per share calculation
Quarter ended March 31,
2004 2003
---------------------------
Net income $ 957,000 $ 466,000
---------------------------
Weighted average shares used in computing:
Basic earnings per share 6,127,474 6,051,739
Dilutive potential common shares related
to stock options, using the treasury
stock method 560,386 501,215
------------- -----------
Total average shares and equivalents 6,687,860 6,552,954
Basic earnings per share $ 0.16 $ 0.08
===========================
Diluted earnings per share $ 0.14 $ 0.07
===========================
All options are dilutive.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation" as amended by SFAS No. 148 "Accounting
for Stock -Based Compensation. Under the provisions of SFAS No. 123, the Company
is encouraged, but not required, to measure compensation costs related to its
employee stock compensation plan under the fair value method. If the Company
elects not to recognize compensation expense under this method, it is required
to disclose the pro forma net income and net income per share effects based on
SFAS No. 123 fair value methodology. The Company has elected to adopt the
disclosure provisions of this statement.
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in its
accounting for stock options. All stock options are granted at fair value at the
date of the grant. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation for The Company's stock option plan been
determined consistent with SFAS No. 123, the Company's net income per share
would have changed to the pro forma amounts indicated below.
Under SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing model, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
WEIGHTED AVERAGE ASSUMPTIONS FOR OPTIONS GRANTED
DURING THE PERIOD ENDED:
March 31, March 31,
2005 2004
------------------------
Expected life 60 months 60 months
Stock Volatility 38.35% 12.00%
Risk free interest rate 3.82% 2.99%
Dividend yield 0.00% 0.00%
The Company's stock options generally vest annually over a period of 3 to 4
years. If the computed fair value of the 2005 and 2004 awards had been amortized
to expense over the vesting period of the awards, pro forma net income would
have been as follows:
Quarter ended
March 31,
2005 2004
-----------------------
Net income as reported $ 957,000 $ 466,000
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method of all awards, net of
related tax effects $ (116,000) $ (67,000)
Pro forma net income $ 841,000 $ 399,000
Earnings per share:
Basic-as reported $ 0.16 $ 0.08
Basic-pro forma $ 0.14 $ 0.07
Diluted-as reported $ 0.14 $ 0.07
Diluted-pro forma $ 0.13 $ 0.06
SFAS 123(R) will be effective for the Company January 1, 2006.
COMPREHENSIVE INCOME.
SFAS No. 130, "Reporting Comprehensive Income" requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement. Other comprehensive earnings include unrealized
gains and losses, net of tax, on marketable securities classified as
available-for-sale. The Company had cumulative other comprehensive income (loss)
totaling $(173,000), net of tax, for the period ended March 31, 2005 and
$33,000, net of tax, for the period ended March 31, 2004.
(dollars in thousands) Quarter ended March 31,
2005 2004
----------- ------------
Net income $ 957 $ 466
Other comprehensive earnings-
Net unrealized (losses) gains
on securities available for sale (173) 33
----------- ------------
Total comprehensive income $ 784 $ 499
=========== ============
SEGMENT INFORMATION.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information, requires certain information about the operating segments of the
Company. The objective of requiring disclosures about segments of an enterprise
and related information is to provide information about the different types of
business activities in which an enterprise engages and the different economic
environment in which it operates to help users of financial statements better
understand its performance, better assess its prospects for future cash flows
and make more informed judgments about the enterprise as a whole. The Company
has determined that it has one segment, general commercial banking, and
therefore, it is appropriate to aggregate the Company's operations into a single
operating segment.
2. SECURITIES
The amortized cost and approximate fair values of securities at March 31, 2005
and December 31, 2004 are as follows:
(dollars in thousands) as of March 31, 2005
-------------------------------
Gross Unrealized
-------------- Fair
Cost Gains Losses Value
-------------------------------
U. S. Government Treasuries $ 198 $ - $ - $ 198
U. S. Government Agencies 20,379 - (298) 20,081
-------------------------------
Total available for sale 20,577 - (298) 20,279
-------------------------------
Total investment securities
portfolio $20,577 $ - $(298) $20,279
===============================
as of December 31, 2004
-------------------------------
Gross Unrealized
-------------- Fair
Cost Gains Losses Value
-------------------------------
U. S. Government Treasuries $ 100 $ - $ - $ 100
U. S. Government Agencies 26,400 - (202) 26,198
-------------------------------
Total available for sale 26,500 - (202) 26,298
-------------------------------
Total investment securities
portfolio $26,500 $ - $(202) $26,298
===============================
The scheduled maturities of securities available for sale at March 31, 2005 were
as follows:
(dollars in thousands) March 31, 2005
-------------------
Amortized Fair
Securities available for sale Cost Value
- ----------------------------------- -------------------
Due in one year or less $11,279 $11,196
Due after one year through five years 9,298 9,083
Due after five years through ten years - -
Due after ten years - -
-------------------
Total securities available for sale 20,577 20,279
-------------------
Total Investment securities $20,577 $20,279
===================
December 31, 2004
-------------------
Amortized Fair
Securities available for sale Cost Value
- ----------------------------------- -------------------
Due in one year or less $14,116 $14,074
Due after one year through five years 12,384 12,224
Due after five years through ten years - -
Due after ten years - -
-------------------
Total securities available for sale 26,500 26,298
-------------------
Total Investment securities $26,500 $26,298
===================
As of March 31, 2005, investment securities with carrying values of
approximately $198,000 were pledged as collateral. As of March 31, 2005 no
unrealized losses were attributable to securities invested for a period greater
than 12 months.
3. LOANS
The balances in the various loan categories are as follows as of March 31, 2005
and December 31, 2004.
March 31, December 31,
2005 2004
------------------------
Commercial $ 108,106 $ 100,681
SBA 47,790 45,251
Real estate construction 48,934 42,323
Real estate other 88,150 80,044
Factoring and asset based lending 25,924 22,342
Other 4,686 3,945
------------------------
Loans, gross 323,590 294,586
Unearned fee income (963) (973)
------------------------
Total loan portfolio 322,627 293,613
Less allowance for credit losses (4,482) (4,146)
------------------------
Loans, net $ 318,145 $ 289,467
========================
4. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the shorter of the lease term, generally three to fifteen years, or
the estimated useful lives of the assets, generally three to five years.
Premises and equipment at March 31, 2005 and December 31, 2004 are comprised of
the following:
(dollars in thousands)
March 31, 2005
- ---------------------------- Accumulated Net Book
Cost Depreciation Value
--------- -----------------------
Leasehold improvements $ 1,840 $ (513) $1,327
Furniture and fixtures 634 (308) 326
Capitalized Software 1,124 (657) 467
Equipment 876 (650) 226
--------- ------------ ---------
Totals $ 4,474 $ (2,128) $2,346
========= ============ =========
December 31, 2004
- ---------------------------- Accumulated Net book
Cost Depreciation Value
--------- -----------------------
Leasehold improvements $ 1,590 $ (459) $1,131
Furniture and fixtures 634 (276) 358
Capitalized Software 1,066 (587) 479
Equipment 854 (607) 247
--------- ------------ ---------
Totals $ 4,144 $ (1,929) $2,215
========= ============ =========
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Changes to such risks and uncertainties, which could
impact future financial performance, include, among others, (1) competitive
pressures in the Banking industry; (2) changes in interest rate environment; (3)
general economic conditions, nationally, regionally and in operating market
areas; (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 and (7) changes in securities markets. Therefore, the
information in this quarterly report should be carefully considered when
evaluating business prospects of the Company.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are integral to understanding the results
reported. 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 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 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 discounted at the historical effective
interest rate stipulated in the loan agreement, 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 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 March
31, 2005 and December 31, 2004, 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.
Available-for-sale securities: 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.
Deferred tax assets: We use an estimate of future earnings to support
our position that the benefit of our deferred tax assets will be realized. If
future income should prove non-existent or less than the amount of the deferred
tax assets within the tax years to which they may be applied, the asset will not
be realized and our net income will be reduced.
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.
SELECTED FINANCIAL DATA
The following presents selected financial data and ratios as of and for
the quarter ended March 31, 2005 and 2004.
Statement of Operations Data:
(dollars in thousands, except per share data) Quarter ended March 31,
2005 2004
------------- --------------
Interest income $ 6,615 $ 3,873
Interest expense 1,188 682
------------- --------------
Net interest income 5,427 3,191
Provision for credit losses 333 405
------------- --------------
Net interest income after provision
for credit losses 5,094 2,786
------------- --------------
Other income 784 1,122
Other expenses 4,315 3,115
------------- --------------
Income before income taxes 1,563 793
Income taxes 606 327
------------- --------------
Net income $ 957 $ 466
============= ==============
Per share Data:
Basic earnings per share $ 0.16 $ 0.08
Diluted earnings per share 0.14 0.07
Shareholders' equity per share 5.58 5.03
Cash dividend per common share - -
March 31,
Balance Sheet Data: 2005 2004
------------- --------------
Balance sheet totals:
Assets $ 448,440 $ 347,503
Loans, net 318,145 202,460
Deposits 397,747 314,698
Shareholders' equity 34,275 30,455
Average balance sheet amounts:
Assets $ 397,375 $ 295,119
Loans, net 299,625 199,328
Deposits 342,187 264,576
Shareholders' equity 33,810 28,592
Selected Ratios:
Return on average assets 0.96% 0.63%
Return on average equity 11.32% 6.52%
Efficiency ratio 69.47% 72.22%
Risk based capital ratio 13.75% 10.32%
Net chargeoffs to average loans 0.00% 0.09%
Allowance for loan losses to total loans 1.39% 1.41%
Average equity to average assets 8.51% 9.69%
SUMMARY OF FINANCIAL RESULTS - QUARTER ENDED MARCH 31, 2005
The Company reported net income of $957,000 ($0.16 basic and $0.14
diluted earnings per share) for the quarter ended March 31, 2005 as compared to
$466,000 ($0.08 basic and $0.07 diluted earnings per share) for the quarter
ended March 31, 2004. The increase in net income resulted primarily from
increases in net interest income offset, in part, by lower non-interest income
and an increase in operating expenses.
The table below highlights the changes in the nature and sources of
income and expense.
Quarter ended March 31, Increase
Operations 2005 2004 (Decrease)
------------ ------------ -------------
(dollars in thousands, except per share data)
Interest income $ 6,615 $ 3,873 $ 2,742
Interest expense 1,188 682 506
------------ ------------ -------------
Net interest income 5,427 3,191 2,236
Provision for credit losses (333) (405) 72
------------ ------------ -------------
Net interest income after provision
for credit losses 5,094 2,786 2,308
------------ ------------ -------------
Other income 784 1,122 (338)
Other expenses (4,315) (3,115) (1,200)
------------ ------------ -------------
Income before income taxes 1,563 793 770
Income taxes (606) (327) (279)
------------ ------------ -------------
Net income $ 957 $ 466 $ 491
============ ============ =============
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 March 31, 2005 was $5,427,000
comprised of $6,615,000 in interest income and $1,188,000 in interest expense.
Net interest income for the three months ended March 31, 2004 was $3,191,000
comprised of $3,873,000 in interest income and $682,000 in interest expense. Net
interest income for the quarter ended March 31, 2005 represented an increase of
$2.2 million or 70% over the same period one year earlier. The average balance
sheet and the general interest rate environment drive net interest income.
The net interest margin (net interest income divided by average earning
assets) was 6.0% for the quarter ended March 31, 2005 and compared to 4.6% for
the same quarter in 2004. The improvement in the net interest margin was the
result of improved balance sheet leverage together with the impact of higher
short-term market interest rates.
The following table details the average balances, interest income and
expense and the effective yields/rates for earning assets and interest-bearing
liabilities for the quarters ended March 31, 2005 and 2004.
March 31, March 31,
2005 2004
------------------------------------- --------------------------------------
(dollars in thousands)
YIELDS INTEREST YIELDS INTEREST
AVERAGE OR INCOME/ AVERAGE OR INCOME/
BALANCE RATES EXPENSE BALANCE RATES EXPENSE
------------------------------------- --------------------------------------
ASSETS
Interest earning assets:
Loans (1) $ 304,831 8.2% $ 6,270 $ 202,787 7.2% $ 3,653
Federal funds sold 36,282 2.4% 221 50,504 1.0% 124
Investment securities (2) 22,719 2.2% 124 26,460 1.5% 96
------------------------------------- --------------------------------------
Total interest earning assets 363,832 7.3% 6,615 279,751 5.5% 3,873
---------------------- ----------------------
Noninterest-earning assets:
Cash and due from banks 21,631 14,674
All other assets (3) 11,917 694
--------------- ----------------
TOTAL $ 397,380 $ 295,119
=============== ================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 3,266 0.6% $ 5 $ 4,414 0.7% $ 8
Savings 153,496 1.7% 654 120,601 1.4% 413
Time 52,431 2.4% 321 46,036 2.3% 261
Other 17,444 4.8% 208 - - -
------------------------------------- --------------------------------------
Total interest bearing liabilities 226,637 2.1% 1,188 171,051 1.6% 682
---------------------- ----------------------
Noninterest-bearing liabilities:
Demand deposits 132,994 93,525
Accrued expenses and
other liabilities 3,939 1,951
Shareholders' equity 33,810 28,592
--------------- ----------------
TOTAL $ 397,380 $ 295,119
=============== ================
------------ ------------
Net interest income 6.0% $ 5,427 4.6% $ 3,191
====================== ======================
(1) Loan fee amortization of $721,000 and $404,000, 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 $4,270,000 and
$2,742,000, respectively.
The following table shows the effect of the interest differential of
volume and rate changes for the quarters ended March 31, 2005 and 2004. 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.
(dollars in thousands)
2005 vs. 2004
------------------------------------
Increase (decrease)
due to change in
------------------------------------
Average Average Total
Volume Rate Change
------------------------------------
Interest income:
Loans $ 2,099 $ 518 $ 2,617
Federal funds sold (87) 184 97
Investment securities (20) 48 28
------------------------------------
Total interest income 1,992 750 2,742
------------------------------------
Interest expense:
Demand (2) (1) (3)
Savings 140 101 241
Time 39 21 60
Other 208 - 208
------------------------------------
Total interest expense 386 120 506
------------------------------------
Change in net interest income $ 1,606 $ 630 $ 2,236
====================================
INTEREST INCOME
Interest income of $6.6 million in the quarter ended March 31, 2005
represented an increase of $2.7 million, or 71%, over $3.9 million in the same
quarter one year earlier. The increase in interest income was primarily due to
growth in earning assets, particularly growth in average loan balances. Average
earning assets for the quarter ended March 31, 2005 were $363.8 million and
represented growth of $84.0 million or 30% over $279.8 million for the same
period in 2004.
Average gross loans were $304.8 million for three months ended March
31, 2005, an increase of $102.0 million or 50% over $202.8 million for the same
period one year earlier. The average yield on loans was 8.2% for the quarter
ended March 31, 2005 and 7.2% for the quarter ended March 31, 2004. The majority
of the Company's loans are priced to adjust with movement in short-term interest
rates, particularly the prime rate, and the increase in yield was primarily due
to increases in the prime rate in the second half of 2004 and continuing into
the first quarter of 2005.
During the quarter ended March 31, 2005, the ratio of average gross
loans to average deposits (one measure of leverage) increased to 89.1%, up from
76.7% in the comparable period of 2004. In addition, average loans comprised
83.8% of average earning assets in the three months ended March 31, 2005
compared to 72.5% in the first quarter of 2004.
Other earning assets, consisting of investment securities, federal
funds sold and interest bearing deposits in other banks, averaged $59.0 million
for the quarter ended March 31, 2005, a decrease of $18.0 million or 23.3% from
$77.0 million for the three months ended March 31, 2004.
Taken together, the impact of higher short-term interest rates and
increased balance sheet leverage resulted in an increase in the yield on average
earning assets to 7.3% in the three months ended March 31, 2005 from 5.5% in
2004.
INTEREST EXPENSE
Interest expense was $1,188,000 for the quarter ended March 31, 2005,
which represented an increase of $506,000 or 74.2% over $682,000 for the
comparable period of 2004. The increase in interest expense reflects growth in
average interest-bearing liabilities and higher interest rates on liabilities in
2005 compared to 2004. Average interest-bearing liabilities were $226.6 million
for the three months ended March 31, 2005, an increase of $56.6 million, or
32.5%, over $171.1 million for the same period one year earlier. In addition,
the average rate paid on interest-bearing liabilities was 2.1% in the quarter
ended March 31, 2005 compared to 1.6% in the first quarter of 2004 as a result
of increases in short-term market interest rates.
Net interest income is the principal source of the Company's operating
earnings. 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.
PROVISION FOR CREDIT LOSSES
The Company maintains an allowance for credit losses which is based, in
part, on the Company's and industry loss experience, the impact of economic
conditions within the Company's market area, and, as applicable, the State of
California, 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 provided $333,000 to the
allowance for credit losses for the three months ended March 31, 2005, as
compared to $405,000 for the same period in 2004. There were no loans charged
off and $3,000 in recoveries during the three months ended March 31, 2005 as
compared to $190,000 in charge-offs and $5,000 in recoveries during the three
month period ended March 31, 2004. At March 31, 2005, the allowance for credit
losses was $4.48 million, representing 1.39% of total loans, as compared to
$2.90 million, representing 1.41% of total loans, at March 31, 2004.
The following schedule provides an analysis of the allowance for credit
losses
Analysis of the allowance for credit losses:
(dollars in thousands) March 31,
2005 2004
-------------------------
Balance, beginning of period $ 4,146 $ 2,683
Provision for credit losses 333 405
Charge-offs - (190)
Recoveries 3 5
-------------------------
Balance, end of period $ 4,482 $ 2,903
=========================
The accrual of interest on loans would be discontinued and any accrued
and unpaid interest is reversed when, in the opinion of management, there is
significant doubt as to the collectibility 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. There was one non-accrual loan
totaling $57,000 at March 31, 2005 and $1,026,000 at December 31, 2004. In
addition, at March 31, 2005 and December 31, 2004, there were no loans past due
90 days or more as to principal or interest and still accruing interest.
At March 31, 2005 and December 31, 2004 there were no properties owned
by the Company acquired through the foreclosure process and there were no
restructured loans.
The following summarizes nonperforming loans at March 31, 2005 and December 31,
2004.
Nonperforming Loans March 31, December 31,
(dollars in thousands) 2005 2004
--------------------------
Loans accounted for on a non-accrual basis $ 263 $ 1,026
Loans restructured and in compliance with modified terms - -
Other loans with principal or interest contracturally past due
90 days or more - -
--------------------------
$ 263 $ 1,026
==========================
Based on an evaluation of the individual credits, historical credit
loss experienced by loan type and economic conditions, management has allocated
the allowance for loan losses as follows for the period ended March 31, 2005 and
December 31, 2004:
March 31, 2005 December 31, 2004
------------------------------ ------------------------------
Percent of Percent of
loans in each loans in each
category to category to
(dollars in thousands) Amount total loans Amount total loans
------------------------------ ------------------------------
Commercial and other 1,222 33.4% 998 34.2%
SBA 566 14.8% 1,231 15.4%
Real estate construction 874 15.1% 444 14.3%
Real estate term 1,399 27.2% 1,132 27.2%
Factoring/ABL 379 8.0% 312 7.6%
Other 42 1.5% 29 1.3%
------------------------------ ------------------------------
$ 4,482 100.0% $ 4,146 100.0%
============================== ==============================
Management is of the opinion that the allowance for credit losses is
maintained at a level adequate for known and unidentified losses inherent in the
loan portfolio. However, the Company's loan portfolio, which includes
approximately $137,000,000 in real estate and construction loans, representing
approximately 42% of the portfolio, could be adversely affected if California
economic conditions and the real estate market in the Company's market area were
to weaken. The effect of such events, although uncertain at this time, could
result in an increase in the level of non-performing loans and OREO and the
level of the allowance for loan losses, which could adversely affect the
Company's future growth and profitability.
NON-INTEREST INCOME
The following table sets forth the components of other income and the
percentage distribution of such income for the three months ended March 31, 2005
and 2004.
Non-interest Income
(dollars in thousands) 2005 2004
------------------------ ------------------------
Amount Percent Amount Percent
------------------------ ------------------------
Gain on sale of SBA loans $ 420 53.6% $ 885 78.9%
SBA loan servicing income 65 8.3% 63 5.6%
Depositor service charges 68 8.7% 72 6.4%
Other operating income 231 29.5% 102 9.1%
------------------------ ------------------------
$ 784 100.0% $ 1,122 100.0%
======================== ========================
Non-interest income totaled $784,000 in the first quarter of 2005, a
decrease of $338,000 or 30.1% from $1,122,000 in 2004. Non-interest income
consists primarily of gains recognized on sales of SBA loans, SBA loan packaging
fees and service charge income on deposit accounts. The decrease in non-interest
income for the first quarter of 2005 was primarily a result of lower premium
income realized on sales of SBA loans during the quarter.
Revenue from sales of SBA loans is dependant on consistent origination
and funding of new loan volumes, the timing of which may be impacted, from time
to time, by (1) increased competition from other lenders; (2) the relative
attractiveness of SBA borrowing to other financing options; (3) adjustment of
programs by the SBA; (4) changes in activities of secondary market participants
and; (5) other factors. Gains recognized on sales of SBA loans were $420,000 in
the quarter ended March 31, 2005 which represented a decrease of $465,000 or 52%
compared to $885,000 the same period one year earlier. The decrease was
attributed to a lower volume of loans originated and available for sale and
timing of loan sales. During the first three months of 2005 the Company's SBA
group funded $12.9 million in new loans and sold $10.6 million which compared to
$14.3 million funded and $17.8 million sold in the same period one year earlier.
NON-INTEREST EXPENSE
The components of other expense are set forth in the following table
for the three months ended March 31, 2005 and 2004.
Other Expense as a Percent of Average Earning Assets
(dollars in thousands) 2005 2004
------------------------- ------------------------
Amount Percent Amount Percent
------------------------- ------------------------
Salaries and benefits $ 2,552 2.8% $ 1,774 2.5%
Occupancy 403 0.4% 397 0.6%
Data processing 251 0.3% 161 0.2%
Legal and professional 180 0.2% 126 0.2%
Furniture and equipment 147 0.2% 163 0.2%
Other 782 0.9% 494 0.7%
------------------------- ------------------------
$ 4,315 4.6% $ 3,115 4.4%
============ ============
Operating expenses were $4,315,000 for the three months ended March 31,
2005, an increase of $1,200,000 or 38.5% from $3,115,000 at March 31, 2004. As a
percentage of average earning assets, other expenses for the three months ended
March 31, 2005 and 2004 were 4.6% and 4.4%, respectively, on an annualized
basis. In 2005, operating expenses were comprised primarily of salaries and
benefits of $2,552,000, which compared to $1,774,000 in 2004, occupancy expense
of $403,000 which compared to $397,000 in 2004, and data processing expense of
$251,000 which compared to $161,000 in 2004. The increase in salaries and
benefits was primarily due to the additional headcount related to expansion of
the business. At March 31, 2005, the Company employed 81 FTE compared to 64 FTE
on the same date one year earlier. The increase in occupancy expense is
primarily due to expense related to the facility at 55 Almaden Blvd, San Jose,
California and the new facility at 2010 Crow Canyon Place, Suite 100 San Ramon,
California. Data processing expense increased primarily as a result of increased
volumes and locations.
BALANCE SHEET
Total assets of Bridge Bank at March 31, 2005 were $448.4 million, an
increase of $46.6 million (11.6%) as compared to $401.8 million at December 31,
2004. Growth in total assets was principally due to an increase in deposit
balances.
The following table shows the Company's loans by type and their
percentage distribution for the periods ended March 31, 2005 and December 31,
2004.
LOAN PORTFOLIO
(dollars in thousands) March 31, December 31,
2005 2004
--------------------------------
Commercial and other $ 108,106 $ 100,681
SBA 47,790 45,251
Real estate construction 48,934 42,323
Real estate other 88,150 80,044
Factoring and Asset based 25,924 22,342
Other 4,686 3,945
--------------------------------
Total gross loans 323,590 294,586
Unearned fee income (963) (973)
Total loan portfolio 322,627 293,613
--------------------------------
Less allowance for credit losses (4,482) (4,146)
--------------------------------
Loans, net $ 318,145 $ 289,467
================================
Commercial and other 33.4% 34.2%
SBA 14.8% 15.4%
Real estate construction 15.1% 14.3%
Real estate term 27.2% 27.2%
Factoring and Asset based 8.0% 7.6%
Other 1.5% 1.3%
--------------------------------
Total gross loans 100.0% 100.0%
================================
Net loan balances increased to $318.1 million at March 31, 2005, which
represented an increase of $28.7 million (10.0%) as compared to $289.5 million
at December 31, 2004. The increase in loans was primarily in real estate
construction and real estate other (including home equity lines) without a
concentration in any one specific category of loans, although overall real
estate secured loans comprise over 42% of loan balances at March 31, 2005. The
increase was a result of general marketing efforts.
The Company's commercial loan portfolio represents loans to small and
middle-market businesses in the Santa Clara county region. Commercial loans were
$108.1 million at March 31, 2005, which represented an increase of $7.4 million
or 7.4% over $100.7 million at December 31, 2004. At March 31, 2005, commercial
loans comprised 33.4% of total loans outstanding compared to 34.2% at December
31, 2004.
In March of 2002, the Company established an SBA lending group in Santa
Clara with a loan production office in Sacramento county. In October 2004, the
Company established a loan production office in San Diego county. The Company,
as a Preferred Lender, originates SBA loans and participates in the SBA 7A and
504 SBA lending programs. Under the 7A program, a loan is made for commercial or
real estate purposes. The SBA guarantees these loans and the guarantee may range
from 70% to 90% of the total loan. In addition, the loan could be collateralized
by a deed of trust on real estate. Under the 504 program, The Company lends
directly to the borrower and takes a first deed of trust to the subject
property. In addition the SBA, through a Community Development Corporation,
makes an additional loan to the borrower and takes a deed of trust subject to
the Company's position. The Company's position in relation to the real estate
"piggyback" loans can range from 50% to 70% loan to value. At March 31, 2005,
SBA loans comprised $47.8 million, or 14.8%, of total loans, an increase of $2.5
million, or 5.6%, from $45.2 million at December 31, 2004. The Company has the
ability and the intent to sell all or a portion of the SBA loans and, as such,
carries the saleable portion of SBA loans at the lower of aggregate cost or fair
value. At March 31, 2005, $At March 31, 2005 and December 31, 2004, the fair
value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried
at aggregate cost.
The Company's construction loan portfolio primarily consists of loans
to finance individual single-family residential homes, approximately half of
which are owner-occupied projects. Construction loans increased $6.6 million, or
15.6%, to $48.9 million at March 31, 2005 over $42.3 million at December 31,
2004. Construction loan balances at March 31, 2005 comprised 15.1% of total
loans compared to 14.3% at December 31, 2004.
Other real estate loans increased $8.1 million or 10.1% to $88.1
million at March 31, 2005 over $80.0 million at December 31, 2004. The increase
in other real estate loans was approximately equally split between home equity
lines of credit and other real estate term loans. Other real estate loans
represented 27.2% of total loans at March 31, 2005 and December 31, 2004.
Average total assets of the Company for the three months ended March
31, 2005 were $397.4 million. Average earning assets reached $363.8 million,
representing 91.6% of total assets, in the three months ended March 31, 2005
with an average yield of 7.3%. The increase in yield reflects the increase in
the volume and yield of average earning assets. At March 31, 2005, average loan
balances comprised $304.8 million, representing 83.8% of average earning assets
and 89.1% of average deposits as compared to $202.8 million at March 31, 2004
representing 94.8% of average earning assets and 76.7% of average deposits.
Deposits represent Bridge Bank's principal source of funds. Most of the
Bank's deposits are obtained from professionals, small- to medium sized
businesses and individuals within the Bank's market area. The Bank's deposit
base consists of non-interest and interest-bearing demand deposits, savings and
money market accounts and certificates of deposit. The following table
summarizes the composition of deposits as of March 31, 2005 and December 31,
2004.
DEPOSIT CATEGORIES
(dollars in thousands) March 31, December 31,
2005 2004
------------------------ ------------------------
Percent Percent
Total of total Total of total
Amount deposits Amount deposits
------------------------ ------------------------
Noninterest-bearing demand $ 158,596 39.87% $ 126,895 36.00%
Interest-bearing demand 2,452 0.62% 3,946 1.12%
Money market and savings 181,087 45.53% 169,801 48.18%
Certificates of deposit:
Less than $100 21,100 5.30% 16,182 4.59%
$100 and more 34,512 8.68% 35,632 10.11%
------------------------ ------------------------
Total $ 397,747 100.00% $ 352,456 100.00%
======================== ========================
Deposits increased $45.2 million or 12.9% from $352.5 million at
December 31, 2004 to $397.7 million at March 31, 2005. The increase in deposits
was primarily in non-interest bearing demand and money market accounts. The
increase can be attributed to marketing efforts to attract new account
relationships and the increased level of title and escrow company and 1031 real
estate exchange funds on deposit at March 31, 2005. Deposit totals at March 31,
2005 included $78.7 million, or 19.8%, in title and escrow company account
balances compared to $55.3 million, or 15.6%, at December 31, 2004. Excluding
title company account balances, deposits increased $21.8 million or 7.3%
compared to December 31, 2004.
At March 31, 2005, the total number of deposit accounts reached 2,203
with an average balance per account (excluding title) of approximately $151,210.
Average deposits for the three months ended March 31, 2005 were $342.2
million comprised of average interest-bearing deposits of $209.2 million and
average non-interest bearing demand deposits of $133.0 million. The average rate
paid on interest-bearing deposits was 2.1% and the Company's overall net
interest margin was 6.0%.
LEVERAGE
Total gross loan balances at March 31, 2005 were $323.6 million. The
resulting loan to deposit ratio was 81.4%. Other earning assets at March 31,
2005 were primarily comprised of Fed Funds sold of $75.5 million. To date, the
Company has deployed earning assets primarily in Fed funds to address the
potential volatility of the title company deposit balances and to accommodate
projected loan funding.
CAPITAL RESOURCES
The Company and the Bank are subject to the capital guidelines and
regulations governing capital adequacy for bank holding companies and national
banks. Additional capital requirements may be imposed on banks based on market
risk. The FDIC requires a Tier 1 CAPITAL1/ ratio to total assets ratio of 8% for
new banks during the first three years of operation.
- --------
1/ Tier 1 capital is generally defined as the sum of the core capital elements
less goodwill and certain intangibles. The following items are defined as core
capital elements: (i) common stockholders' equity; (ii) qualifying noncumulative
perpetual preferred stock and related surplus; and (iii) minority interests in
the equity accounts of consolidated subsidiaries.
After the first three years of operations, the Comptroller requires a
minimum leverage ratio of 3% of Tier 1 capital to total assets for national
banks that have received the highest composite regulatory rating (a regulatory
measurement of capital, assets, management, earnings and liquidity) and that are
not anticipating or experiencing any significant growth. All other institutions
are required to maintain a leverage ratio of at least 100 to 200 basis points
above the 3% minimum.
The Comptroller's regulations also require national banks to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of 8.00%.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Comptroller to those assets. At least
one-half of the qualifying capital must be in the form of Tier 1 capital.
The risk-based capital ratio focuses principally on broad categories of
credit risk, and might not take into account many other factors that can affect
a bank's financial condition. These factors include overall interest rate risk
exposure; liquidity, funding and market risks; the quality and level of
earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The
Comptroller has addressed many of these areas in related rule-making proposals.
In addition to evaluating capital ratios, an overall assessment of capital
adequacy must take account of each of these other factors including, in
particular, the level and severity of problem and adversely classified assets.
For this reason, the final supervisory judgment on a bank's capital adequacy may
differ significantly from the conclusions that might be drawn solely from the
absolute level of the Company's risk-based capital ratio. The Comptroller has
stated that banks generally are expected to operate above the minimum risk-based
capital ratio. Banks contemplating significant expansion plans, as well as those
institutions with high or inordinate levels of risk, should hold capital
consistent with the level and nature of the risks to which they are exposed.
Further, The Banking agencies have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a bank's role as financial intermediary, it
introduces volatility to bank earnings and to the economic value of The Company.
The Banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's exposure to declines in the economic value
of its capital due to changes in interest rates as a factor that The Banking
agencies consider in evaluating an institution's capital adequacy. Bank
examiners consider a bank's historical financial performance and its earnings
exposure to interest rate movements as well as qualitative factors such as the
adequacy of a bank's internal interest rate risk management.
Finally, institutions with significant trading activities must measure
and hold capital for exposure to general market risk arising from fluctuations
in interest rates, equity prices, foreign exchange rates and commodity prices
and exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. The federal banking agencies may apply the
market risk regulations on a case-by-case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and
interest rate risk, the federal banking agencies will evaluate an institution in
its periodic examination on the degree to which changes in interest rates,
foreign exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
Under certain circumstances, the Comptroller may determine that the
capital ratios for a national bank shall be maintained at levels, which are
higher than the minimum levels required by the guidelines. A national bank which
does not achieve and maintain adequate capital levels as required may be subject
to supervisory action by the Comptroller through the issuance of a capital
directive to ensure the maintenance of required capital levels. In addition, the
Company is required to meet certain guidelines of the Comptroller concerning the
maintenance of an adequate allowance for loan and lease losses.
The Company's Tier 1 capital at March 31, 2005 was $45.9 million
comprised of $33.4 million of capital stock and surplus, $1.1 million in
retained earnings and trust preferred securities up to the allowable limit of
$11.4.
The following table shows the Company's capital ratios at March 31,
2005 and December 31, 2004 as well as the minimum capital ratios required to be
deemed "well capitalized" under the regulatory framework.
As of March 31, As of December 31,
(in thousands) 2005 2004
------------------------ -------------------------
Amount Ratio Amount Ratio
------------------------ -------------------------
Company Capital Ratios
- -----------------------------------------
Tier 1 Capital $45,873 12.38% $44,172 12.34%
(to Risk Weighted Assets)
Tier 1 capital minimum requirement $14,821 4.00% $14,313 4.00%
Total Capital $50,930 13.75% $49,268 13.77%
(to Risk Weighted Assets)
Total capital minimum requirement $29,642 8.00% $28,625 8.00%
Company leverage
Tier 1 Capital $45,873 11.54% $ 44,172 12.94%
(to Average Assets)
Total capital minimum requirement $15,895 4.00% $ 13,659 4.00%
Bank Risk Based Capital Ratios
- -----------------------------------------
Tier 1 Capital $44,510 12.01% $43,058 12.03%
(to Risk Weighted Assets)
Tier 1 capital minimum requirement $14,820 4.00% $14,313 4.00%
Total Capital $48,992 13.22% $47,204 13.19%
(to Risk Weighted Assets)
Total capital minimum requirement $29,641 8.00% $28,625 8.00%
Bank leverage
Tier 1 Capital $44,510 11.20% $43,058 12.61%
(to Average Assets)
Total capital minimum requirement $15,895 4.00% $13,659 4.00%
However, de novo banks are generally required to hold capital in excess
of the amounts depicted in the table above. FDIC policies generally preclude
dividend payments during the first three years of operation, allow cash
dividends to be paid only from net operating income, and do not permit dividends
to be paid until an appropriate allowance for loans and lease losses has been
established and overall capital is adequate. The FDIC requires that a depository
institution maintain a Tier 1 capital to assets ratio of not less than 8% during
the first three years of operation.
The Company and the Bank were considered well capitalized at March 31, 2005.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
LIQUIDITY/INTEREST RATE SENSITIVITY
The Company manages its liquidity to provide adequate funds at an
acceptable cost to support borrowing requirements and deposit flows of its
customers. At March 31, 2005 and December 31, 2004, liquid assets as a
percentage of deposits were 28.4% and 27.1%, respectively. In addition to cash
and due from banks, liquid assets include interest-bearing deposits in other
banks, Federal funds sold and securities available for sale. The Company has $14
million in Federal funds lines of credit available with correspondent banks to
meet liquidity needs and additionally has approximately $14 million in borrowing
capacity at the Federal Home Loan Bank of San Francisco. The Company's balance
sheet position is asset-sensitive (based upon the significant amount of variable
rate loans and the repricing characteristics of its deposit accounts). This
balance sheet position generally provides a hedge against rising interest rates,
but has a detrimental effect during times of interest rate decreases. Net
interest income is generally negatively impacted in the short term by a decline
in interest rates. Conversely, an increase in interest rates should have a
short-term positive impact on net interest income.
The following table sets forth the distribution of repricing
opportunities, based on contractual terms of The Company's earning assets and
interest-bearing liabilities at March 31, 2005, the interest rate sensitivity
gap (i.e. interest rate sensitive assets less interest rate sensitive
liabilities), the cumulative interest rate sensitivity gap, the interest rate
sensitivity gap ratio (i.e. interest rate sensitive assets divided by interest
rate sensitive liabilities) and the cumulative interest rate sensitivity gap
ratio.
DISTRIBUTION OF REPRICING OPPORTUNITIES
March 31, 2005
(dollars in thousands)
After three After six After one
Within months but months but year but After
three within six within one within five
months months year five years years Total
--------------------------------------------------------------------
Federal funds sold $75,485 $ - $ - $ - $ - $ 75,485
U.S. Treasury securities - 198 - - - 198
Agency securities 1,996 1,988 7,014 9,083 - 20,081
Loans 186,969 18,615 30,494 55,314 32,198 323,590
--------------------------------------------------------------------
Total earning assets 264,450 20,801 37,508 64,397 32,198 419,354
--------------------------------------------------------------------
Interest checking, money market
and savings 183,539 ----- ----- ----- ----- 183,539
Certificates of deposit:
Less than $100,000 1,746 4,311 10,765 4,278 ----- 21,100
$100,000 or more 13,594 10,547 7,037 3,334 ----- 34,512
--------------------------------------------------------------------
Total interest-bearing liabilities 198,879 14,858 17,802 7,612 0 239,151
--------------------------------------------------------------------
-----------
Interest rate gap $65,571 $5,943 $19,706 $56,785 $32,198 $180,203
===========
=========================================================
Cumulative interest rate gap $65,571 $71,514 $91,220 $148,005 $180,203
=========================================================
Interest rate gap ratio 0.25 0.29 0.53 0.88 1.00
=========================================================
Cumulative interest rate gap ratio 0.25 0.25 0.28 0.38 0.43
=========================================================
Based on the contractual terms of its assets and liabilities, The
Company's balance sheet as March 31, 2005 was asset sensitive in terms of its
short-term exposure to interest rates. That is, at March 31, 2005 the volume of
assets that might reprice within the next year exceeded the volume of
liabilities that might reprice. This position provides a hedge against rising
interest rates, but has a detrimental effect during times of rate decreases. Net
interest income is negatively impacted by a decline in interest rates and
positively impacted by an increase in interest rates. To partially mitigate the
adverse impact of declining rates, the majority of variable rate loans made by
the Company have been written with a minimum "floor" rate.
The following table shows maturity and interest rate sensitivity of the
loan portfolio at March 31, 2005 and December 31, 2004. At March 31, 2005,
approximately 69% of the loan portfolio is priced with floating interest rates
which limit the exposure to interest rate risk on long-term loans.
Balances at Due after one
March 31, Due one year year through Due after
(dollars in thousands) 2005 or less five years five years
- --------------------------------------------------------------------------------
Commercial and other $ 108,106 $38,559 $55,021 $14,526
SBA 47,790 18,850 17 28,923
Real estate construction 48,934 39,701 9,233 -
Real estate-other 88,150 35,703 14,346 38,101
Factoring/ABL 25,924 23,229 2,695 -
Other 4,686 3,466 1,220 -
-----------------------------------------------------
TOTAL $ 323,590 $159,508 $82,532 $81,550
=====================================================
Balances at Due after one
December 31, Due one year year through Due after
(dollars in thousands) 2004 or less five years five years
- --------------------------------------------------------------------------------
Commercial and other $100,681 $40,649 $46,138 $13,894
SBA 45,251 9,411 - 35,840
Real estate construction 42,323 37,623 4,700 -
Real estate-other 80,044 38,014 12,585 29,445
Factoring/ABL 22,342 19,638 2,704 -
Other 3,945 3,715 230 -
-----------------------------------------------------
TOTAL $294,586 $149,050 $66,357 $79,179
=====================================================
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The definition of "off-balance sheet arrangements" includes any
transaction, agreement or other contractual arrangement to which an entity is a
party under which we have:
o Any obligation under a guarantee contract that has the characteristics
as defined in paragraph 3 of FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantee including Indirect
Guarantees of Indebtedness to Others" ("FIN 45");
o A retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets, such
as a subordinated retained interest in a pool of receivables
transferred to an unconsolidated entity;
o Any obligation, including a contingent obligation, under a contract
that would be accounted for as a derivative instrument, except that it
is both indexed to the registrant's own stock and classified in
stockholders' equity; or
o Any obligation, including contingent obligations, arising out of a
material variable interest, as defined in FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), in an
unconsolidated entity that provides financing, liquidity, market risk
or credit risk support to the registrant, or engages in leasing,
hedging or research and development services with the registrant.
In the ordinary course of business, we have issued certain guarantees
which qualify as off-balance sheet arrangements, as of March 31, 2005
those guarantees include the following:
Standby Letters of Credit in the amount of $6,838,000.
The table below summarizes the Company's off-balance sheet contractual
obligations.
Off-balance Sheet Arrangement and Aggregate Contractual Obligations
Payments due by period
---------------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Contractural Obligations Total 1 year years years 5 years
--------------------------------------------------------------------------------------------------------
Long-term contracts $ 424,000 $ 321,000 $ 103,000 $ - $ -
Operating leases 9,021,000 1,097,000 1,717,000 1,093,000 5,114,000
---------------------------------------------------------------------------
Total $ 9,445,000 $ 1,418,000 $ 1,820,000 $ 1,093,000 $ 5,114,000
===========================================================================
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" and its "internal control over financial reporting".
This evaluation was done under the supervision and with the participation of
management, including our President and Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective.
There has been no change in our internal control over financial
reporting that occurred during the fiscal quarter ended March 31, 2005 that has
materially affected, or is reasonably likely to materially affect, such control.
PART II
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a defendant in any pending legal proceedings and no
such proceedings are known to be contemplated. No director, officer, affiliate,
more than 5% shareholder of the Company or any associate of these persons is a
party adverse to the Company or has a material interest adverse to the Company
in any material legal proceeding.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
(A) EXHIBITS
See Index to Exhibits at page 25 of this Quarterly Report on Form 10-Q.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
31. Rule 13a-14(a) Certifications.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32. Certifications
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
- -----------------------
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.
BRIDGE CAPITAL HOLDINGS
Dated: May 5, 2005 By: \s\ DANIEL P. MYERS
____________________
Daniel P. Myers
President and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 5, 2005 By: \s\ THOMAS A. SA
__________________
Thomas A. Sa
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)