Bridge Capital Holdings - FORM 10-Q

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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: September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

001-34165

(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

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller

reporting company)

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

The number of shares of Common Stock outstanding as of October 31, 2014: 16,034,019

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements	3

	Interim Consolidated Balance Sheets	3

	Interim Consolidated Statements of Operations	4

	Interim Consolidated Statements of Comprehensive Income	5

	Interim Consolidated Statements of Cash Flows	6

	Notes to Interim Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4	Controls and Procedures	57


PART II - OTHER INFORMATION

Item 1	Legal Proceedings	58

Item 1A	Risk Factors	58

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3	Defaults Upon Senior Securities	58

Item 4	Mine Safety Disclosures	58

Item 5	Other Information	58

Item 6	Exhibits	58

Signatures		59

Index to Exhibits

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PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY

Interim Consolidated Balance Sheets

(dollars in thousands)

	(unaudited)
	September 30,			December 31,
	2014			2013
ASSETS
Cash and due from banks	$	31,921		$	23,958
Federal funds sold	146,675			162,379
Total cash and equivalents	178,596			186,337

Interest bearing deposits in other banks	326			326
Investment securities:
Available for sale	305,767			292,977
Held to maturity	13,055			13,788
Trading securities	379			613
Total investment securities	319,201			307,378
Loans, net of allowance for credit losses of $22,439 at September 30, 2014 and $21,944 at December 31, 2013	1,193,094			1,050,960
Premises and equipment, net	3,697			2,081
Other real estate owned	23			31
Accrued interest receivable	5,236			4,323
Other assets	59,934			52,676
Total assets	$	1,760,107		$	1,604,112

LIABILITIES
Deposits:
Demand noninterest-bearing	$	1,055,815		$	954,727
Demand interest-bearing	13,886			11,115
Money market and savings	437,432			391,310
Time	32,065			48,940
Total deposits	1,539,198			1,406,092

Junior subordinated debt securities	17,527			17,527
Accrued interest payable	7			10
Other liabilities	21,870			17,736
Total liabilities	1,578,602			1,441,365

SHAREHOLDERS’ EQUITY
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2014 and December 31, 2013	—			—
Common stock, no par value; 30,000,000 shares authorized; 16,026,119 shares issued and outstanding at September 30, 2014; 15,859,098 shares issued and outstanding at December 31, 2013;	116,525			112,714
Retained earnings	65,360			51,946
Accumulated other comprehensive income (loss)	(380		)	(1,913		)
Total shareholders’ equity	181,505			162,747
Total liabilities and shareholders’ equity	$	1,760,107		$	1,604,112

The accompanying notes are an integral part of the financial statements.

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BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY

Interim Consolidated Statements of Operations (unaudited)

(dollars in thousands, except per share data)

	Three months ended				Nine months ended
	September 30,				September 30,
	2014		2013		2014		2013
INTEREST INCOME:
Loans	$	19,459	$	16,906	$	54,698	$	47,303
Federal funds sold	94		103		256		215
Investment securities	1,469		1,410		4,464		4,265
Interest bearing deposits in other banks	—		—		2		1
Total interest income	21,022		18,419		59,420		51,784

INTEREST EXPENSE:
Deposits:
Interest-bearing demand	1		1		2		2
Money market and savings	206		301		701		875
Certificates of deposit	48		67		166		196
Other	273		267		810		807
Total interest expense	528		636		1,679		1,880

Net interest income	20,494		17,783		57,741		49,904
Provision for credit losses	1,000		—		3,000		6,050
Net interest income after provision for credit losses	19,494		17,783		54,741		43,854

NON-INTEREST INCOME:
Service charges on deposit accounts	951		926		2,845		2,720
International fee income	717		632		2,279		1,940
Gain on sale of SBA loans	1,080		253		2,406		1,931
Gain on sale of securities	—		—		5		804
Other non interest income	1,787		899		3,729		2,990
Total non-interest income	4,535		2,710		11,264		10,385

OPERATING EXPENSES:
Salaries and benefits	9,589		8,393		28,018		24,108
Premises and fixed assets	1,207		1,051		3,670		3,030
Other operating expenses	4,000		3,708		11,867		10,761
Total operating expenses	14,796		13,152		43,555		37,899

Income before income taxes	9,233		7,341		22,450		16,340
Income taxes	3,802		2,914		9,036		6,649
Net income	$	5,431	$	4,427	$	13,414	$	9,691

Basic income per share	$	0.37	$	0.31	$	0.91	$	0.67
Diluted income per share	$	0.35	$	0.29	$	0.86	$	0.64
Average common shares outstanding	14,812,197		14,450,150		14,746,404		14,429,649
Average common and equivalent shares outstanding	15,574,795		15,231,454		15,531,792		15,140,979

The accompanying notes are an integral part of the financial statements.

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BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY

Interim Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013

NET INCOME	$	5,431		$	4,427		$	13,414		$	9,691

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains (losses) on securities available-for-sale	131			(5,061		)	2,043			(4,619		)
Related tax benefit (expense)	(54		)	2,076			(839		)	2,551
Reclassification adjustment for realized (gains) on securities (1)	—			—			(5		)	(804		)
Related tax expense	—			—			2			(327		)
Unrealized gains on supplemental executive retirement plan	13			12			38			37
Related tax (expense)	(5		)	(5		)	(15		)	(15		)
Unrealized gains on cash flow hedges	188			131			514			517
Related tax (expense)	(76		)	(52		)	(205		)	(207		)
Other comprehensive income (loss), net of tax	$	197		$	(2,899	)	$	1,533		$	(2,867	)
COMPREHENSIVE INCOME	$	5,628		$	1,528		$	14,947		$	6,824

(1) Amounts are included in net gains on sale of securities on the Consolidated Statements of Operations in total non-interest income.

The accompanying notes are an integral part of the financial statements.

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BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY

Interim Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

	Nine months ended September 30,
	2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,414		$	9,691
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses	3,000			6,050
Depreciation and amortization	895			863
Write down of other real estate owned	8			10
Net (gain) on sale of loans	(2,406		)	(1,931		)
Net (gain) on sale of other real estate owned	—			(472		)
Deferred income tax (credit)	345			2,034
Stock based compensation	2,636			2,538
Loans originated for sale	(44,964		)	(46,933		)
Proceeds from loan sales	38,230			37,141
Net (gain) on sale of securities	(5		)	(804		)
(Increase) decrease in accrued interest receivable and other assets	(8,158		)	3,830
Increase in accrued interest payable and other liabilities	4,683			1,708
Net cash provided by used in operating activities	7,678			13,725

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale	(76,034		)	(109,983		)
Proceeds from sale of available for sale and trading securities	22,194			27,735
Proceeds from maturity of securities available for sale	44,060			63,092
Proceeds from the sale of other real estate owned	—			575
Net increase in loans	(135,994		)	(97,299		)
Net decrease in interest bearing deposits in other banks	—			9
Purchase of fixed assets	(2,511		)	(677		)
Net cash used in investing activities	(148,285		)	(116,548		)

CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits	133,106			119,274
Proceeds from issuance of common stock	1,220			—
Purchase of treasury stock	(1,459		)	587
Net cash provided by financing activities	132,867			119,861

NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS:	(7,740		)	17,038
Cash and equivalents at beginning of period	186,337			131,041
Cash and equivalents at end of period	$	178,596		$	148,079

OTHER CASH FLOW INFORMATION:
Cash paid for interest	$	1,707		$	1,912
Cash paid for income taxes	$	10,900		$	7,900

The accompanying notes are an integral part of the financial statements.

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BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY

Notes to Interim Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited financial statements of Bridge Capital Holdings and Bridge Bank, N.A. (the Company) 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 September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 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 quarters and nine months ended September 30, 2014 and 2013, respectively, are not necessarily indicative of full year results.

The comparative balance sheet information as of December 31, 2013 is derived from the audited financial statements; however, it does not include all disclosures required by accounting principles generally accepted in the United States of America.

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.

Recent Accounting Pronouncements

Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2014-14, Receivables — Troubled Debt Restructuring by Creditors (“Topic 310-40”), The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) The loan has a government guarantee that is not separable from the loan before foreclosure, 2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, 3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. ASU No. 2014-14 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2014-11, Transfers & Servicing (“Topic 860”) — Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. ASU No. 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

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Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2014-09, Revenue from Contracts with Customers (“Topic 606”), requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2014-04, Receivables — Troubled Debt Restructurings by Creditors (“Sub-topic 310-40”) — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for annual and interim period beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2014-01, Investments — Equity Method and Joint Ventures (“Topic 323”) — Accounting for Investments in Qualified Affordable Housing Projects amends an existing guidance to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognized the net investment performance in the income statement as a component of income tax expense or benefit. For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method of investment or a cost method of investment in accordance with Subtopic 970-323. ASU No. 2014-01 is effective for annual and interim period beginning after December 15, 2014. The adoption of this ASU is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.

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 and vesting of restricted stock. Common stock equivalents are included in the diluted net income per share calculation to the extent these shares are dilutive. See Note 2 to the financial statements for additional information on earnings per share.

Stock-Based Compensation

The Company has adopted guidance issued by the FASB that clarifies the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes-Merton (“BSM”) option-pricing model to determine the fair-value of stock-based awards. The Company recorded $995,000 ($631,000 net of tax) and $2.6 million ($1.7 million, net of tax) of stock-based compensation expense during the three and nine months ended September 30, 2014, and recorded $887,000 ($565,000 net of tax) and $2.5 million ($1.6 million, net of tax) of stock-based compensation expense during the three and nine months ended September 30, 2013, as a result of the adoption of the guidance issued by the FASB.

No stock-based compensation costs were capitalized as part of the cost of an asset as of September 30, 2014 and December 31, 2013. As of September 30, 2014, $13.0 million of total unrecognized compensation cost related to stock options and restricted stock units is expected to be recognized over a weighted-average period of 3.4 years.

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Comprehensive Income

The Company has adopted accounting guidance issued by the FASB that requires 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 an adjustment to fully recognize the liability associated with the supplemental executive retirement plan, unrealized gains and losses, net of tax, on cash flow hedges, and unrealized gains and losses, net of tax, on marketable securities classified as available-for-sale. The Company had an accumulated other comprehensive loss totaling $380,000, net of tax, as of September 30, 2014 and an accumulated other comprehensive loss totaling $1.9 million, net of tax, as of December 31, 2013.

Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable and the significance of those inputs in the fair value measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data and views of market participants. The three levels for measuring fair value are based on the reliability of inputs.

See Note 8 to the financial statements for more information and disclosures relating to the Company’s fair value measurements.

Securities

The Company classifies its investment securities into three categories, available for sale, held to maturity, or trading securities, at the time of purchase. Securities available for sale are reported at fair value with unrealized holding gains and/or losses, net of tax, recorded as a separate component of shareholders’ equity. Securities held to maturity are measured at amortized cost based on the Company’s positive intent and ability to hold the securities to maturity. Trading securities are reported at fair value with any unrealized gain or loss recorded in the income statement.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Gains and losses on sales of securities are computed on a specific identification basis.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of OTTI is recognized through earnings.

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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.

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Segment Information

The Company has adopted accounting guidance issued by the FASB that 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.

Derivative Instruments and Hedging Activities

The Company has adopted guidance issued by the FASB that clarifies the disclosure requirements for derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by the guidance, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualified as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and that qualify as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under current accounting guidance. See Note 9 to the financial statements for additional information on derivative instruments and hedging activities.

2. Earnings Per Share

Basic net earnings per share is computed by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net earnings 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 and vesting of restricted stock. Common stock equivalents are included in the diluted net earnings per share calculation to the extent these shares are dilutive. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net earnings per share available to common shareholders is as follows:

	Three months ended				Nine months ended
(dollars in thousands,	September 30,				September 30,
except per share amounts)	2014		2013		2014		2013

Net income	$	5,431	$	4,427	$	13,414	$	9,691

Weighted average shares:
Basic common shares	14,812,197		14,450,150		14,746,404		14,429,649
Diluted potential common shares related to stock options and restricted stock	762,598		781,304		785,388		711,330
Total average common equivalent shares	15,574,795		15,231,454		15,531,792		15,140,979

Basic earnings per share	$	0.37	$	0.31	$	0.91	$	0.67
Diluted earnings per share	$	0.35	$	0.29	$	0.86	$	0.64

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There were 163,250 and 169,750 options to acquire common stock (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2014, respectively, because to do so would have been anti-dilutive.

3. Securities

As of September 30, 2014 and December 31, 2013, the Company had securities available for sale of $305.8 million and $293.0 million, respectively, securities held to maturity of $13.1 million and $13.8 million, respectively, and trading securities of $379,000 and $613,000, respectively. The securities classified as held to maturity were being held for purposes of the Community Reinvestment Act.

The amortized cost and approximate fair values of securities as of September 30, 2014 and December 31, 2013 are as follows:

	As of September 30, 2014
			Gross Unrealized					Fair
(dollars in thousands)	Cost		Gains		Losses			Value
Securities available for sale
Debt securities:
U.S. government agencies	$	46,762	$	197	$	(474	)	$	46,485
Mortgage backed securities	225,476		2,642		(2,432		)	225,686
Corporate bonds	31,034		171		(23		)	31,182
Municipal bonds	2,435		—		(21		)	2,414
Total debt securities	305,707		3,010		(2,950		)	305,767

Total securities available for sale	$	305,707	$	3,010	$	(2,950	)	$	305,767

Securities held to maturity
Debt securities:
Mortgage backed securities	$	13,055	$	190	$	(40	)	$	13,205
Total debt securities	13,055		190		(40		)	13,205

Total securities held to maturity	$	13,055	$	190	$	(40	)	$	13,205

Trading securities	$	379	$	—	$	—		$	379

Total investment securities	$	319,141	$	3,200	$	(2,990	)	$	319,351

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	As of December 31, 2013
			Gross Unrealized					Fair
	Cost		Gains		Losses			Value
Securities available for sale
Debt securities:
U.S. government agencies	$	17,453	$	51	$	(575	)	$	16,929
Mortgage backed securities	237,593		3,246		(4,452		)	236,387
Corporate bonds	37,474		116		(99		)	37,491
Municipal bonds	2,435		—		(266		)	2,170
Total debt securities	294,955		3,413		(5,392		)	292,977

Total securities available for sale	$	294,955	$	3,413	$	(5,392	)	$	292,977

Securities held to maturity
Debt securities:
Mortgage backed securities	$	13,788	$	136	$	(240	)	$	13,683

Total securities held to maturity	$	13,788	$	136	$	(240	)	$	13,683

Trading securities	$	613	$	—	$	—		$	613

Total investment securities	$	309,356	$	3,549	$	(5,632	)	$	307,273

The scheduled maturities of investment securities at September 30, 2014 and December 31, 2013 were as follows:

	September 30, 2014
	Amortized		Fair
(dollars in thousands)	Cost		Value
Securities available for sale
Due in one year or less	$	6,178	$	6,200
Due after one year through five years	69,795		70,326
Due after five years through ten years	73,504		73,353
Due after ten years	156,230		155,888
Total securities available for sale	305,707		305,767

Securities held to maturity
Due in one year or less	$	—	$	—
Due after one year through five years	6,798		6,807
Due after five years through ten years	—		—
Due after ten years	6,257		6,398
Total securities held to maturity	13,055		13,205

Total investment securities	$	318,762	$	318,972

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	December 31, 2013
	Amortized		Fair
(dollars in thousands)	Cost		Value

Securities available for sale	$	12,124	$	12,200
Due after one year through five years	63,699		64,617
Due after five years through ten years	75,466		74,769
Due after ten years	143,666		141,391
Total securities available for sale	294,955		292,977

Securities held to maturity
Due in one year or less	$	—	$	—
Due after one year through five years	7,052		7,060
Due after five years through ten years	—		—
Due after ten years	6,736		6,623
Total securities held to maturity	13,788		13,683

Total investment securities	$	308,743	$	306,660

As of September 30, 2014 and December 31, 2013, no investment securities were pledged as collateral. As of September 30, 2014, $759,000 in unrealized losses was attributable to thirty-four securities that had been in an unrealized loss position for less than 12 months. As of December 31, 2013, $5.3 million in unrealized losses was attributable to seventy-eight securities that had been in an unrealized loss position for less than 12 months. The unrealized losses were primarily due to the impact of long-term interest rates on the value of the mortgage-based investment securities. Because the Company had the ability to hold these investments and doesn’t intend to sell these investments until a recovery in fair value, which may be maturity, these investments were not considered to be other-than-temporarily impaired as of September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014, $2.2 in unrealized losses was attributable to forty-one securities that had been in an unrealized loss position for greater than 12 months. As of December 31, 2013, $300,000 in unrealized losses was attributable to five securities that had been in an unrealized loss position for greater than 12 months. These unrealized losses, which had been in an unrealized loss position for one year or longer as of September 30, 2014 and December 31, 2013, were caused by market interest rate increases subsequent to the purchase of the securities or price fluctuations driven by volatility of the housing market conditions. Because the Company had the ability to hold these investments and doesn’t intend to sell these investments until a recovery in fair value, which may be maturity, these investments were not considered to be other-than-temporarily impaired as of September 30, 2014 and December 31, 2013, respectively.

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4. Loans

The balances in the various loan categories are as follows as of September 30, 2014 and December 31, 2013:

	September 30,			December 31,
(dollars in thousands)	2014			2013

Commercial	$	712,113		$	585,559
Real estate construction	78,445			51,518
Land loans	15,659			13,572
Real estate other	134,463			122,063
Factoring and asset based	162,198			192,783
SBA	113,146			106,406
Other	3,720			5,730
Total gross loans	1,219,744			1,077,631
Unearned fee income	(4,211		)	(4,727		)
Total loan portfolio	1,215,533			1,072,904
Less allowance for credit losses	(22,439		)	(21,944		)
Loans, net	$	1,193,094		$	1,050,960

The Company individually categorizes larger, non-homogenous loans into credit risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for loan risk ratings:

Pass — Loans classified as pass include larger non-homogenous loans not meeting the risk rating definitions below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention — Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt by the borrower. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Substandard loans for which payments have ceased and are 90 days or more past due, or for which the likelihood of full collection of interest and principal is doubtful, are placed on nonaccrual. Loans that have been placed on nonaccrual status are also considered impaired.

The following table summarizes the credit quality of the loan portfolio, based upon internally assigned risk ratings, as of September 30, 2014 and December 31, 2013.

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	September 30, 2014
			Special				Substandard
(dollars in thousands)	Pass		Mention		Substandard		(Nonaccrual)		Total

Commercial	$	696,628	$	9,578	$	3,305	$	2,602	$	712,113
Real estate construction	78,445		—		—		—		78,445
Land loans	15,659		—		—		—		15,659
Real estate other	121,152		—		11,443		1,868		134,463
Factoring and asset based	153,195		1,532		7,028		443		162,198
SBA	102,470		777		6,460		3,439		113,146
Other	3,720		—		—		—		3,720
Total gross loans	$	1,171,269	$	11,887	$	28,236	$	8,352	$	1,219,744

	As of December 31, 2013
			Special				Substandard
(dollars in thousands)	Pass		Mention		Substandard		(Nonaccrual)		Total

Commercial	$	564,576	$	9,822	$	10,709	$	452	$	585,559
Real estate construction	51,518		—		—		—		51,518
Land loans	13,568		—		—		4		13,572
Real estate other	102,654		335		11,784		7,290		122,063
Factoring and asset based	181,526		2,317		3,309		5,631		192,783
SBA	97,940		216		6,512		1,738		106,406
Other	5,730		—		—		—		5,730
Total gross loans	$	1,017,512	$	12,690	$	32,314	$	15,115	$	1,077,631

For all loan classes, past due loans are reviewed on a monthly basis to identify loans for nonaccrual status. Loans are generally placed on non-accrual when payments have ceased and are 90 days or more past due, or when the likelihood of full collection of interest and principal is doubtful. However, if a loan is fully secured and in the process of collection and resolution of collection (generally within 90 days), then the loan will generally not be placed on nonaccrual, regardless of its delinquency status. Nonaccrual loans will not normally be returned to accrual status, although consideration will be given to situations where all past due principal and interest has been paid and the borrower has evidenced their ability to meet the contractual provisions of the note. When interest accruals are discontinued, all unpaid interest is reversed against current year income. The Company’s method of income recognition for loans classified as nonaccrual is to apply cash received to principal when the ultimate collectability of principal is in doubt or recognize interest income on a cash basis.

The following table summarizes the payment status of the loan portfolio as of September 30, 2014 and December 31, 2013.

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	As of September 30, 2014
			Still Accruing
			30-59 Days		60-89 Days		Over 90 Days
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Total

Commercial	$	709,511	$	—	$	—	$	—	$	2,602	$	712,113
Real estate construction	78,445		—		—		—		—		78,445
Land loans	15,659		—		—		—		—		15,659
Real estate other	131,303		1,292		—		—		1,868		134,463
Factoring and asset based	161,755		—		—		—		443		162,198
SBA	109,707		—		—		—		3,439		113,146
Other	3,640		53		27		—		—		3,720
Total gross loans	$	1,210,020	$	1,345	$	27	$	—	$	8,352	$	1,219,744

	As of December 31, 2013
			Still Accruing
			30-59 Days		60-89 Days		Over 90 Days
(dollars in thousands)	Current		Past Due		Past Due		Past Due		Nonaccrual		Total

Commercial	$	585,107	$	—	$	—	$	—	$	452	$	585,559
Real estate construction	51,518		—		—		—		—		51,518
Land loans	13,568		—		—		—		4		13,572
Real estate other	114,773		—		—		—		7,290		122,063
Factoring and asset based	187,152		—		—		—		5,631		192,783
SBA	104,668		—		—		—		1,738		106,406
Other	5,679		20		31		—		—		5,730
Total gross loans	$	1,062,465	$	20	$	31	$	—	$	15,115	$	1,077,631

A loan is categorized as a troubled debt restructuring if a significant concession is granted to provide for a reduction of either interest or principal due to deterioration in the financial condition of the borrower. Troubled debt restructurings can take the form of a reduction of the stated interest rate, splitting a loan into separate loans with market terms on one loan and concessionary terms on the other loan, receipts of assets from a debtor in partial or full satisfaction of a loan, the extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk, the reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, the reduction of accrued interest, or any other concessionary type of renegotiated debt. Depending on the payment history of the loan, a troubled debt restructuring can be considered performing and accruing interest or be placed on nonaccrual. However, all troubled debt restructurings are considered impaired.

As of September 30, 2014, the Company had eighteen loans totaling $12.2 million classified as troubled debt restructurings. The eighteen loans were comprised of one commercial loan, fifteen other real estate loans, and two SBA loans. Troubled debt restructurings represented 1.0% of total gross loans as of September 30, 2014. As of December 31, 2013, the Company had twenty loans totaling $12.9 million classified as troubled debt restructurings. The twenty loans were comprised of one commercial loan, sixteen other real estate loans, and three SBA loans. Troubled debt restructurings represented 1.2% of total gross loans as of December 31, 2013.

The Company did not have any commitments to lend additional funds for loans classified as troubled debt restructurings at September 30, 2014 and December 31, 2013.

During the three and nine months ended September 30, 2014 and September 30, 2013, there were no additional loans modified and designated as troubled debt restructurings. However, during this period, there was one loan previously designated as a non-performing troubled debt restructuring that has been upgraded and is currently designated as a performing troubled debt restructured loan.

A loan is considered to be in payment default when it is 90 days contractually past due under the modified terms. There were no loans modified within the last twelve months that defaulted during the three months ended September 30, 2014.

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The following table summarizes the loans categorized as troubled debt restructurings at September 30, 2014 and December 30, 2013. The troubled debt restructurings considered performing and nonaccrual are included in the “Substandard” and “Substandard (Nonaccrual)” categories, respectively, in the preceding credit quality table, and included in the “Current” and “Nonaccrual” categories, respectively, in the preceding payment status table.

	As of September 30, 2014
	Performing				Nonaccrual				Total
	Pre-		Post-		Pre-		Post-		Pre-		Post-
	Modification		Modification		Modification		Modification		Modification		Modification
(dollars in thousands)	Investment		Investment		Investment		Investment		Investment		Investment

Commercial	$	—	$	—	$	114	$	7	$	114	$	7
Real estate construction	—		—		—		—		—		—
Land loans	—		—						—		—
Real estate other	11,419		9,925		2,056		1,868		13,475		11,793
Factoring and asset based	—		—		—		—		—		—
SBA	442		438		—		—		442		438
Other	—		—		—		—		—		—
Total gross loans	$	11,861	$	10,363	$	2,170	$	1,875	$	14,031	$	12,238

	As of December 31, 2013
	Performing				Nonaccrual				Total
	Pre-		Post-		Pre-		Post-		Pre-		Post-
	Modification		Modification		Modification		Modification		Modification		Modification
	Investment		Investment		Investment		Investment		Investment		Investment

Commercial	$	—	$	—	$	114	$	77	$	114	$	77
Real estate construction	—		—		—		—		—		—
Land loans	—		—		—		—		—		—
Real estate other	6,443		5,088		7,564		7,290		14,007		12,378
Factoring and asset based	—		—		—		—		—		—
SBA	480		481		—		—		480		481
Other	—		—		—		—		—		—
Total gross loans	$	6,923	$	5,569	$	7,678	$	7,367	$	14,601	$	12,936

Loans are designated as 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. As of September 30, 2014 and December 31, 2013 loans designated as impaired consisted of nonaccrual loans and troubled debt restructurings.

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The following table summarizes the loans categorized as impaired at September 30, 2014 and December 31, 2013.

	September 30,		December 31,
(dollars in thousands)	2014		2013

Nonaccrual loans (1)	$	8,352	$	15,115
Trouble debt restructurings - performing	10,363		5,569
Loans past due 90 days or more and accruing interest	—		—
Loans current or past due less than 90 days and accruing interest	—		—
Total impaired loans	$	18,715	$	20,684

(1) Nonaccrual loans include troubled debt restructurings of $1.9 million and $7.4 million at September 30, 2014 and December 31, 2013, respectively.

Impaired loans at September 30, 2014 were comprised of loans with legal contractual balances totaling approximately $22.6 million reduced by approximately $648,000 received in non-accrual interest and impairment charges of $3.3 million which have been charged against the allowance for loan losses. As of September 30, 2014, there was an additional 22 loans with legal contractual balances totaling $16.1 million that have been fully charged off, for which the Company continues to pursue collection remedies.

Impaired loans at December 31, 2013 were comprised of loans with legal contractual balances totaling approximately $30.0 million reduced by $2.1 million received in non-accrual interest and impairment charges of $7.2 million which have been charged against the allowance for loan losses.

The following summarizes the breakdown of impaired loans by category as of September 30, 2014 and December 31, 2013:

	As of September 30, 2014				As of December 31, 2013
	Unpaid				Unpaid
	Principal		Recorded		Principal		Recorded
(dollars in thousands)	Balance		Investment		Balance		Investment

Commercial	$	4,387	$	2,602	$	856	$	452
Real estate construction	—		—		—		—
Land loans	—		—		32		4
Real estate other	11,939		11,793		14,863		12,378
Factoring and asset based	1,514		443		11,079		5,631
SBA	4,790		3,877		3,200		2,219
Other	—		—		—		—
Total gross loans	$	22,630	$	18,715	$	30,030	$	20,684

Consistent with the Company’s method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized using the accrual method. The Company did not record income from the receipt of cash payments related to nonaccrual loans during the three and nine months ended September 30, 2014 and 2013. Interest income recognized on impaired loans represents interest the Company recognized on performing troubled debt restructurings and loans greater than 90 days past due and still accruing interest.

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The following table summarizes the average recorded investment in impaired loans and related interest income recognized for the three months ended September 30, 2014 and 2013:

	Three months ended September 30,
	2014				2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized

Commercial	$	2,671	$	—	$	145	$	2
Real estate construction	—		—		—		—
Land loans	—		—		6		1
Real estate other	11,854		62		14,162		133
Factoring and asset based	880		—		4,899		90
SBA	3,155		8		2,315		25
Other	—		—		—		—
Total gross loans	$	18,559	$	70	$	21,527	$	251

	Nine months ended September 30,
	2014				2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized

Commercial	$	1,527	$	—	$	386	$	8
Real estate construction	—		—		—		—
Land loans	2		—		8		2
Real estate other	12,086		185		13,700		325
Factoring and asset based	3,037		—		3,782		226
SBA	3,048		23		2,402		78
Other	—		—		—		—
Total gross loans	$	19,700	$	208	$	20,277	$	639

The allowance consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired or are otherwise exhibiting negative credit characteristics suggesting potential loss exposure greater than historical loss experience would suggest. Specific reserves are calculated by evaluating the present value of expected future cash flows pertaining to the loan, the fair value of the collateral supporting the loan, less selling costs, or the loan’s observable market price. 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, as seen in the table below, there are typically only a small number of individual loans for which a specific reserve exists. General reserves 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; loan charge-off trends; changes in economic conditions, changes in business 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; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

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The allowance for loan losses totaled $22.4 million and $21.9 million as of September 30, 2014 and December 31, 2013, respectively. The following table summarizes the loans individually and collectively evaluated for impairment and the corresponding allowance for loan losses as of September 30, 2014 and December 31, 2013.

	As of September 30, 2014
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance

Commercial	$	2,602	$	350	$	709,511	$	9,826	$	712,113	$	10,176
Real estate construction	—		—		78,445		1,505		78,445		1,505
Land loans	—		—		15,659		421		15,659		421
Real estate other	11,793		163		122,670		2,265		134,463		2,428
Factoring and asset based	443		—		161,755		5,699		162,198		5,699
SBA	3,877		—		109,269		2,121		113,146		2,121
Other	—		—		3,720		89		3,720		89
Total	$	18,715	$	513	$	1,201,029	$	21,926	$	1,219,744	$	22,439

	As of December 31, 2013
	Individually Evaluated				Collectively Evaluated				Total Evaluated
	For Impairment				For Impairment				For Impairment
(dollars in thousands)	Loans		Allowance		Loans		Allowance		Loans		Allowance

Commercial	$	452	$	—	$	585,107	$	9,066	$	585,559	$	9,066
Real estate construction	—		—		51,518		1,013		51,518		1,013
Land loans	4		—		13,568		377		13,572		377
Real estate other	12,378		588		109,685		2,269		122,063		2,857
Factoring and asset based	5,631		—		187,152		6,136		192,783		6,136
SBA	2,219		—		104,187		2,363		106,406		2,363
Other	—		—		5,730		132		5,730		132
Total	$	20,684	$	588	$	1,056,947	$	21,356	$	1,077,631	$	21,944

Of the loans individually evaluated for impairment, thirteen real estate other loans, with a current balance of $5.8 million, and one commercial loan, with a current balance of $1.3 million, had an associated allowance for the period ending September 30, 2014. For the period ended December 31, 2013, of the loans individually evaluated for impairment, there were fourteen real estate other loans, with an aggregate balance of $6.1 million, that had an associated allowance.

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The following table summarizes the activity in the allowance for loan losses for the quarters and nine months ended September 30, 2014 and 2013.

	Three months ended September 30, 2014
				Real						Real			Factoring
				estate			Land			estate			and asset
(dollars in thousands)	Commercial			construction			loans			other			based			SBA			Other			Total

As of June 30, 2014	$	9,836		$	1,523		$	462		$	2,572		$	6,270		$	2,311		$	142		$	23,116
Provision charged to expense	1,985			(18		)	(41		)	(145		)	(529		)	(199		)	(53		)	1,000
Charge-offs	(1,655		)	—			—			—			(200		)	(345		)	—			(2,200		)
Recoveries	10			—			—			1			158			354			—			523
As of September 30, 2014	$	10,176		$	1,505		$	421		$	2,428		$	5,699		$	2,121		$	89		$	22,439

	Three months ended September 30, 2013
				Real					Real			Factoring
				estate		Land			estate			and asset
(dollars in thousands)	Commercial			construction		loans			other			based			SBA		Other		Total

As of June 30, 2013	$	8,094		$	683	$	330		$	3,565		$	5,435		$	2,247	$	116	$	20,470
Provision charged to expense	(1,681		)	90		(3		)	(466		)	1,933			97		30		—
Charge-offs	—			—		—			—			(1,660		)	—		—		(1,660		)
Recoveries	2,157			—		—			—			—			2		—		2,159
As of September 30, 2013	$	8,570		$	773	$	327		$	3,099		$	5,708		$	2,346	$	146	$	20,969

	Nine months ended September 30, 2014
				Real				Real			Factoring
				estate		Land		estate			and asset
(dollars in thousands)	Commercial			construction		loans		other			based			SBA			Other			Total

As of December 31, 2013	$	9,066		$	1,013	$	377	$	2,857		$	6,136		$	2,363		$	132		$	21,944
Provision charged to expense	2,529			492		24		(430		)	587			(159		)	(43		)	3,000
Charge-offs	(1,910		)	—		—		—			(1,530		)	(496		)	—			(3,936		)
Recoveries	491			—		20		1			505			413			—			1,430
As of September 30, 2014	$	10,176		$	1,505	$	421	$	2,428		$	5,699		$	2,121		$	89		$	22,439

	Nine months ended September 30, 2013
				Real					Real			Factoring
				estate		Land			estate			and asset
(dollars in thousands)	Commercial			construction		loans			other			based			SBA			Other		Total

As of December 31, 2012	$	6,394		$	673	$	333		$	5,178		$	4,352		$	2,905		$	113	$	19,948
Provision charged to expense	4,098			96		(9		)	(1,849		)	4,241			(560		)	33		6,050
Charge-offs	(4,294		)	—		—			(230		)	(2,885		)	—			—		(7,409		)
Recoveries	2,372			4		3			—			—			1			—		2,380
As of September 30, 2013	$	8,570		$	773	$	327		$	3,099		$	5,708		$	2,346		$	146	$	20,969

5. 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.

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Premises and equipment at September 30, 2014 and December 31, 2013 were comprised of the following:

	September 30, 2014
			Accumulated			Net Book
(dollars in thousands)	Cost		Depreciation			Value

Leasehold improvements	$	8,112	$	(5,669	)	$	2,443
Furniture and fixtures	1,281		(1,082		)	199
Capitalized software	4,623		(4,146		)	477
Equipment	3,527		(2,949		)	578
Total premises and equipment	$	17,543	$	(13,846	)	$	3,697

	December 31, 2013
			Accumulated			Net book
(dollars in thousands)	Cost		Depreciation			Value

Leasehold improvements	$	6,378	$	(5,344	)	$	1,034
Furniture and fixtures	1,138		(1,053		)	85
Capitalized software	4,369		(3,841		)	528
Equipment	3,147		(2,713		)	434
Total premises and equipment	$	15,032	$	(12,951	)	$	2,081

Depreciation and amortization amounted to $290,000 and $279,000 for the three months ended September 30, 2014 and September 30, 2013, respectively, and $895,000 and $863,000 for the nine months ended September 30, 2014 and September 30, 2013, respectively, and has been included in occupancy and/or furniture and equipment expense, depending on the nature of the expense, in the accompanying statements of operations.

6. Junior Subordinated Debt Securities and Other Borrowings

Junior Subordinated Debt Securities

On December 21, 2004, the Company issued $12,372,000 of junior subordinated debt securities (the “debt securities”) to Bridge Capital Trust I, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable in March 2035. Interest was payable quarterly on these debt securities at a fixed rate of 5.90% for the first five years, and thereafter interest accrues at LIBOR plus 1.98%. In April of 2008, the Company entered into an interest rate swap agreement to fix the variable cash outflows associated with the debt securities to Bridge Capital Trust I for an additional five years at 6.11%. See “Footnote 9 - Derivatives and Hedging Activities” for further discussion. The debt securities can be redeemed at par at the Company’s option beginning in March 2010; they can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance.

The Company also purchased a 3% minority interest in the Trust. The balance of the equity of the Trust is comprised of mandatorily redeemable preferred securities.

On March 30, 2006 the Company issued $5,155,000 of junior subordinated debt securities (the “debt securities”) to Bridge Capital Trust II, a statutory trust created under the laws of the State of Delaware. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable in March 2037. Interest was payable quarterly on these debt securities at a fixed rate of 6.60% for the first five years, and thereafter interest accrues at LIBOR plus 1.38%. In September of 2008, the Company entered into an interest rate swap agreement to fix the variable cash outflows associated with the debt securities to Bridge Capital Trust II for an additional five years at 6.09%. See “Footnote 9 - Derivatives and Hedging Activities” for further discussion. The debt securities can be redeemed at par at the Company’s option beginning in April 2011; they can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance.

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The Company also purchased a 3% minority interest in the Trust. The balance of the equity of the Trust is comprised of mandatorily redeemable preferred securities.

Based upon accounting guidance, these Trusts are not consolidated into the company’s financial statements. The Federal Reserve Board has ruled that subordinated notes payable to unconsolidated special purpose entities (“SPE’s”) such as these Trusts, net of the bank holding company’s investment in the SPE, qualify as Tier 1 Capital, subject to certain limits.

Other Borrowings

There were no other borrowings at September 30, 2014 and at December 31, 2013.

As of September 30, 2014, the Company had a total borrowing capacity with the Federal Home Loan Bank of San Francisco of approximately $397.0 million for which the Company had collateral in place to borrow $86.0 million. As of September 30, 2014, $10.0 million of this borrowing capacity was pledged to secure a letter of credit.

The Company also has unsecured borrowing lines with correspondent banks totaling $47.0 million. At September 30, 2014, there were no balances outstanding on these lines.

7. Stock-Based Compensation

The Company has elected to use the BSM option-pricing model, which incorporates various assumptions including volatility, expected life, and interest rates. The expected volatility is based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors including implied volatility in market traded options on the Company’s common stock. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees.

The weighted average assumptions used for the three and nine month periods ended September 30, 2014 and 2013 and the resulting estimates of weighted-average fair value per share of stock options granted during those periods are as follows:

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013

Expected life	75 months			75 months			75 months			75 months

Stock volatility	35.00		%	35.00		%	35.00		%	35.00		%

Risk free interest rate	1.96		%	1.70		%	1.95		%	1.59		%

Dividend yield	0.00		%	0.00		%	0.00		%	0.00		%

Fair value per share	$	8.48		$	6.34		$	8.81		$	6.15

8. Fair Value of Financial Instruments

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Company to estimate the fair values of its financial instruments at September 30, 2014 and December 31, 2013:

Cash and Cash Equivalents, Fed Funds Sold and Interest bearing deposits in other banks

The carrying amounts of these instruments approximate the fair value and are classified as Level 1 in the fair value hierarchy.

Investment Securities

For investment securities, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.

Loans

The fair value of variable rate loans that reprice frequently and with no significant change in credit risk is based on the carrying value and results in a classification of Level 3 within the fair value hierarchy. Fair value for other loans are estimated using discounted cash flow analysis using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification in the fair value hierarchy. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

Bank Owned Life Insurance

Cash surrender values are provided by the carrier on a periodic basis and approximate fair value of the life insurance policies. These values are considered within Level 3 of the valuation hierarchy.

Warrant Portfolio

Warrants are recorded at fair value on a recurring basis using a Black-Scholes valuation model. The Black-Scholes valuation model utilizes five inputs: exercise price, expected life, volatility, risk free rate and dividends. The Corporation holds a portfolio of warrants for generally nonmarketable equity securities. These warrants are primarily from non-public technology and life science companies obtained as part of the loan origination process. The Company classifies warrants as Level 3 of the valuation hierarchy.

Deposits

The fair value of demand deposits (e.g. interest and non-interest bearing, savings and certain types of money market accounts) are, by definition , equal to the amount payable in demand at the reporting date (i.e. carrying value) resulting in a Level 1 classification in the fair value hierarchy. The carrying amounts of variable rate, fixed-term money market accounts and certificate of deposits approximates their fair value at the reporting date in a Level 2 classification in the fair value hierarchy. Fair values for fixed rate certificate of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

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Junior Subordinated Debt Securities

Represents the fair value of the trust preferred securities, and approximates the pricing of a preferred security at current market prices and are classified as Level 3.

Cash Flow Hedge

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs — model-derived credit spreads. The level in the fair value hierarchy within which the fair value measurement in their entirety fall shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety. Because the inputs used to measure the fair value of the Company’s derivatives fall into different levels of the fair value hierarchy, as of September 30, 2014 and December 31, 2013, the Company has assessed the significance of the impact of the credit valuations adjustment on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies its derivative valuations in Level 2 of the fair value hierarchy.

	As of September 30, 2014
	Carrying								Fair
(dollars in thousands)	Value		Level 1		Level 2		Level 3		Value

Financial assets:
Cash and due from banks	$	31,921	$	31,921	$	—	$	—	$	31,921
Federal funds sold	146,675		146,675		—		—		146,675
Interest bearing deposits in other banks	326		326		—		—		326
Investments securities	319,201		—		319,351		—		319,351
Loans and leases, net of unearned fees	1,215,533		—		—		1,214,113		1,214,113
Bank owned life insurance	16,962		—		—		16,962		16,962
Warrant portfolio	365		—		—		365		365

Financial liabilities:
Deposits	1,539,198		1,072,585		463,423		—		1,536,008
Junior subordinated debt securities	17,527		—		—		17,434		17,434
Cash flow hedge	588		—		588		—		588

	As of December 31, 2013
	Carrying								Fair
(dollars in thousands)	Value		Level 1		Level 2		Level 3		Value

Financial assets:
Cash and due from banks	$	23,958	$	23,958	$	—	$	—	$	23,958
Federal funds sold	162,379		162,379		—		—		162,379
Interest bearing deposits in other banks	326		326		—		—		326
Investments securities	307,378		—		307,273		—		307,273
Loans and leases, net of unearned fees	1,072,904		—		—		1,069,534		1,069,534
Bank owned life insurance	16,530		—		—		16,530		16,530
Warrant portfolio	340		—		—		340		340

Financial liabilities:
Deposits	1,406,092		973,493		429,619		—		1,403,112
Junior subordinated debt securities	17,527		—		—		15,709		15,709
Cash flow hedge	1,102		—		1,102		—		1,102

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The balances of assets and liabilities measured at fair value on a recurring basis are as follows:

	As of September 30, 2014
(dollars in thousands)	Total			Level 1		Level 2			Level 3

Securities available for sale
U.S. government agencies	$	46,485		$	—	$	46,485		$	—
Mortgage backed securities	225,687			—		225,687			—
Corporate bonds	31,182			—		31,182			—
Municipal bonds	2,414			—		2,414			—
Warrant portfolio	365			—		—			365
Cash flow hedge	(588		)	—		(588		)	—

Total	$	305,545		$	—	$	305,180		$	365

	As of December 31, 2013
	Total			Level 1		Level 2			Level 3

Securities available for sale
U.S. government agencies	$	16,929		$	—	$	16,929		$	—
Mortgage backed securities	236,387					236,387
Corporate bonds	37,491					37,491
Municipal bonds	2,170					2,170
Warrant portfolio	340			—		—			340
Cash flow hedge	(1,102		)	—		(1,102		)	—

Total	$	292,215		$	—	$	291,875		$	340

There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were not material for the quarter ended September 30, 2014.

The Company may be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

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Assets measured at fair value on a non-recurring basis for the quarters ended September 30, 2014 and December 31, 2013, included impaired loans and other real estate owned as follows:

	As of September 30, 2014
	Quoted Prices In		Significant		Significant
	Active Markets		Observable		Unobservable
	for Identical Assets		Inputs		Inputs
(dollar in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans:
Commercial	$	—	$	—	$	2,602	$	2,602
Real estate construction	—		—		—		—
Land loans	—		—		—		—
Real estate other	—		—		11,794		11,794
Factoring and asset based	—		—		443		443
SBA	—		—		3,876		3,876
Other	—		—		—		—
Total impaired loans	$	—	$	—	$	18,715	$	18,715

Other real estate owned:
Commercial	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—
Land loans	—		14		—		14
Real estate other	—		—		—		—
Factoring and asset based	—		—		—		—
SBA	—		9		—		9
Other	—		—		—		—
Total other real estate owned	$	—	$	23	$	—	$	23

	As of December 31, 2013
	Quoted Prices In		Significant		Significant
	Active Markets		Observable		Unobservable
	for Identical Assets		Inputs		Inputs
(dollar in thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Impaired loans:
Commercial	$	—	$	—	$	452	$	452
Real estate construction	—		—		—		—
Land loans	—		—		4		4
Real estate other	—		—		12,378		12,378
Factoring and asset based	—		—		5,631		5,631
SBA	—		—		2,219		2,219
Other	—		—		—		—
Total impaired loans	$	—	$	—	$	20,684	$	20,684

Other real estate owned:
Commercial	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—
Land loans	—		14		—		14
Real estate other	—		—		—		—
Factoring and asset based	—		—		—		—
SBA	—		17		—		17
Other	—		—		—		—
Total other real estate owned	$	—	$	31	$	—	$	31

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The fair value of impaired loans was determined using Level 3 assumptions, and represents impaired loan balances for which a specific reserve has been established or on which a write down has been taken. The Company charged-off $2.2 million and $1.7 million during the quarters ended September 30, 2014 and 2013, respectively, and $3.9 million and $7.4 million for the nine months ended September 30, 2014 and 2013, respectively, as a result of impaired loans.

Generally, the Company obtains third party appraisals (or property evaluations) and/or collateral audits in conjunction with internal analyses based on historical experience on its impaired loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for impaired loans, the Company will then discount the valuation (with additional discounts depending on the age of the appraisal) to cover both market price fluctuations and selling costs the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral. Information on the Company’s total impaired loan balances, and specific loss reserves associated with those balances, is included in Note 4, and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the “Allowance for Loan Losses” section.

The fair value of OREO was determined using Level 2 assumptions. There were no charge-offs during both quarters ended September 30, 2014 and 2013. The company charged off $8,000 for the nine months ended September 30, 2014 compared to $10,000 during the nine months ended September 30, 2013, as a result of declines in the OREO property values.

The following table presents quantitative information about fair value measurements for assets measured at fair value on a non-recurring basis:

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	As of September 30, 2014
					Range
	Fair		Valuation	Unobservable	(Weighted
	Value		Techniques	Inputs	Average)
Impaired loans:

Commercial	$	2,602	Collateral valuation/ discounted cash flow analysis	Management adjustment to reflect current conditions and selling costs	40-50%
Real estate other	11,794		Third party appraisal / property evaluation	Management adjustment to reflect current conditions and selling costs	10%
Factoring and asset based	443		Discounted cash flow analysis	Management adjustment to reflect current conditions and selling costs	75%
SBA	3,876		Third party appraisal / property evaluation	Management adjustment to reflect current conditions and selling costs	15-75%
Total impaired loans	$	18,715

Other real estate owned:

Commercial	$	—
Real estate construction	—
Land loans	14		Third party appraisal	Management adjustment to reflect current conditions and selling costs	15-25%
Real estate other	—
Factoring and asset based	—
SBA	9		Third party appraisal	Management adjustment to reflect current conditions and selling costs	15-25%
Other	—
Total other real esate owned	$	23

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	As of December 31, 2013
					Range
	Fair		Valuation	Unobservable	(Weighted-
	Value		Techniques	Inputs	Average)
Impaired loans:

Commercial	$	452	Discounted cash flow analysis	Management adjustment to reflect current conditions and selling costs	15-25%
Land loans	4		Third party appraisal	Management adjustment to reflect current conditions and selling costs	30%
Real estate other	12,378		Third party appraisal / property evaluation	Management adjustment to reflect current conditions and selling costs	5-20%
Factoring and asset based	5,631		Collateral valuation	Management adjustment to reflect current conditions and selling costs	50%
SBA	2,219		Third party appraisal / property evaluation	Management adjustment to reflect current conditions and selling costs	15-25%
Total impaired loans	$	20,684

Other real estate owned:

Land loans	$	14	Third party appraisal	Management adjustment to reflect current conditions and selling costs	15-25%
SBA	17		Third party appraisal	Management adjustment to reflect current conditions and selling costs	15-25%
Total other real estate owned	$	31

The unobservable inputs are based on management’s best estimates of appropriate discounts in arriving at fair market value. Increases or decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change in either direction of actual loss rates would have directionally opposite change in the calculation of the fair value of impaired loans.

9. Derivatives and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments. Specifically, the Company enters into derivative

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financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate loan assets and variable rate borrowings. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated in qualifying hedging relationships.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative instruments that were liabilities, as well as their classification on the balance sheet, as of September 30, 2014 and December 31, 2013. The Company did not have any derivative instruments that were assets as of September 30, 2014 and December 31, 2013.

(dollars in thousands)

		Fair Value
Derivatives Designated as	Balance Sheet	September 30,		December 31,
Hedging Instruments	Location	2014		2013

Interest rate contracts	Other assets	$	—	$	—
Interest rate contracts	Other liabilities	588		1,102
Total hedged derivatives		$	588	$	1,102

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For hedges of the Company’s variable-rate loan assets, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. For hedges of the Company’s variable-rate borrowings, interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments. As of September 30, 2014, the Company had two interest rate swaps with an aggregate notional amount of $17.5 million that were designated as cash flow hedges of interest rate risk associated with the Company’s variable-rate borrowings.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No hedge ineffectiveness was recognized during the three and nine months ended September 30, 2014 and 2013.

During the three and nine months ended September 30, 2014 and 2013, such derivatives were used to hedge the forecasted variable cash outflows associated with subordinated debt related to trust preferred securities. During the three months ended September 30, 2014 and September 30, 2013, the amount of pre-tax gain/(loss) recorded in AOCI due to the effective portion of changes in fair value of derivatives designated as cash flow hedges was $5,000 and $(49,000), respectively. During the nine months ended September 30, 2014 and September 30, 2013, the amount of pre-tax gain/(loss) recorded in AOCI due to the effective portion of changes in fair value of derivatives designated as cash flow hedges was $(26,000) and $(16,000), respectively.

Amounts reported in AOCI related to derivatives will be reclassified to interest income or expense, as applicable, as interest payments are received / made on the Company’s variable-rate assets/liabilities. During the next twelve months, the Company estimates that ($449,000) will be reclassified into net interest income as an increase to interest expense.

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The table below summarizes the impact of the Company’s derivative financial instruments (interest rate contracts) on earnings for the three and nine months ended September 30, 2014 and 2013. All derivative income or expense recognized during these periods was a result of the effective portion of cash flow hedges. There was no ineffective portion of cash flow hedges during the three and nine months ended September 30, 2014 and 2013, respectively, and as such there were no amounts included in derivative income or expense during these periods.

	Amount of gain/(loss) reclassified from AOCI
	into earnings - effective portion
	Three months ended						Nine months ended
	September 30,						September 30,
(dollars in thousands)	2014			2013			2014			2013

Net interest income	$	(182	)	$	(181	)	$	(540	)	$	(534	)
Non-interest income	—			—			—			—
Total derivative income	$	(182	)	$	(181	)	$	(540	)	$	(534	)

Credit Risk Related Contingent Features

The Company has an agreement with one of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of September 30, 2014 the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $610,000. As of September 30, 2014, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $1.2 million against its obligations under these agreements. If the Company had breached any of these provisions at September 30, 2014, it would have been required to settle its obligations under the agreements at the termination value.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

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; (2) changes in the interest rate environment; (3) unfavorable economic conditions, both nationally and regionally, continuing or worsening, resulting in, among other things, continued or increased deterioration in credit quality; (4) changes in the regulatory environment, including those resulting from the Dodd-Frank legislation; (5) changes in business conditions and inflation; (6) costs and expenses of complying with the internal control provisions of the Sarbanes-Oxley Act and our degree of success in achieving compliance; (7) changes in securities markets; (8) future credit loss experience; (9) civil disturbances of terrorist threats or acts, or apprehension about possible future occurrences of acts of this type; (10) the involvement of the United States in war or other hostilities; and (11) governmental action or inaction in response to economic and political conditions, would have unpredictable consequences for the economy and the banking industry. The reader is directed to the Company’s annual report on Form 10-K for the year ended December 31, 2013, for further discussion of factors which could affect the Company’s business and cause actual results to differ materially from those expressed in any forward-looking statement made in this report. The Company undertakes no obligation to update any forward-looking statements in this report. Therefore, the information in this quarterly report should be carefully considered when evaluating the business prospects of the Company.

General

Bridge Capital Holdings (the “Company”) serves as the holding company for Bridge Bank, National Association (the “Bank”). The Bank is a national banking association that is supervised by the Office of the Comptroller of the Currency. As a bank holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (the “FRB”).

The Bank maintains one branch office in the Silicon Valley region, and seven loan production offices located throughout the United States. The Bank’s lending solutions include working capital lines of credit, structured finance (asset-based lending and factoring), 7(a) and 504 Small Business Administration (SBA) loans, commercial real estate loans, sustainable energy project financing, growth capital loans, equipment financing, letters of credit, and corporate credit cards. The Bank’s depository and corporate banking services include cash and treasury management solutions, interest-bearing term deposit accounts, checking accounts, ACH payment and wire solutions, fraud protection, remote deposit capture through its Smart Deposit Express, courier services, and online banking. Additionally, the Bank’s International Banking Division serves clients operating in the global marketplace through services including foreign exchange (FX payments and hedging), letters of credit, and import/export financing.

The Company’s common stock is listed on the NASDAQ Global Select Market and is a component of the Russell 2000 Index.

Critical Accounting Policies

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

There have been no significant changes during the three and nine months ended September 30, 2014 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II, Item 7 of our 2013 Form 10-K.

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Executive Summary

The Company reported net operating income of $5.4 million for the three months ended September 30, 2014 representing an increase of $1.0 million or 22.7% compared to net operating income of $4.4 million for the same period one year ago. The Company reported earnings per diluted share of $0.35 and $0.29 for the quarters ended September 30, 2014 and 2013, respectively.

For the nine months ended September 30, 2014, the Company reported net operating income of $13.4 million, representing an increase of $3.7 million or 38.4% compared to net operating income of $9.7 million for same period one year ago. The Company reported earnings per diluted share of $0.86 and $0.64 for nine months ended September 30, 2014 and 2013, respectively.

For the quarter ended September 30, 2014, the Company’s return on average assets and return on average equity were 1.29% and 12.11%, respectively, and compared to 1.20% and 11.16%, respectively, for the same period in 2013. For the nine months ended September 30, 2014, the Company’s return on average assets and return on average equity were 1.12% and 10.44%, respectively, and compared to 0.92% and 8.43%, respectively, for the same period in 2013.

Additionally, an overview of the financial results for the quarter and nine months ended September 30, 2014 discussed in the MD&A include the following:

· Net interest income and non-interest income comprised total revenue of $25.0 million for the three months ended September 30, 2014, compared to $23.2 million for the three months ended June 30, 2014 and $20.5 million for the same period one year earlier. For the nine months ended September 30, 2014, total revenue of $69.0 million represented an increase of $8.7 million, or 14.5%, from $60.3 million for the nine months ended September 30, 2013.

· Net interest margin increased to 5.05% for the quarter ended September 30, 2014 compared to 5.03% for the second quarter of 2014 and 5.01% for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, net interest margin increased to 5.00% from 4.97% for the same period of 2013.

· Total assets grew to $1.76 billion at September 30, 2014, with loans comprising 73.9% of the average earning asset mix, compared to 73.8% in the prior quarter. Total deposits were $1.54 billion at September 30, 2014, which included demand deposits of $1.07 billion. At December 31, 2013, total assets and total deposits were $1.60 billion and $1.41 billion, respectively.

· Gross loans were $1.22 billion at September 30, 2014, representing an increase of $38.9 million, or 3.3%, compared to gross loans of $1.18 billion at June 30, 2014, and an increase of $142.1 million, or 13.2% compared to gross loans of $1.08 billion at December 31, 2013. Average loan balances increased by $56.5 million, or 5.0%, to $1.19 billion for the quarter ended September 30, 2014, compared to $1.13 billion for the quarter ended June 30, 2014, and increased $164.2 million, or 16.0% compared to gross loans of $1.02 billion at December 31, 2013.

· There was a $1.0 million provision for credit losses during the third quarter of 2014, compared to $1.5 million for the quarter ended June 30, 2014 and no provision recorded for the third quarter of 2013. Net charges-offs were $1.7 million for the quarter ended September 30, 2014, compared to net charge-offs of $1.0 million for the quarter ended June 30, 2014 and net recoveries of $499,000 for the quarter ended September 30, 2013.

· Allowance for credit losses represented 1.84% of total gross loans and 268.67% of nonperforming loans at September 30, 2014, compared to 1.96% of total gross loans and 179.18% of nonperforming loans at June 30, 2014 and 2.04% of total gross loans and 145.18% of nonperforming loans at December 31, 2013.

· Nonperforming assets decreased by $4.5 million to $8.4 million, or 0.48% of total assets, compared to $12.9 million or 0.79% of total assets at June 30, 2014. Nonperforming assets decreased by $6.8 million compared to $15.1 million or 0.94% of total assets at December 31, 2013.

· 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 14.37%, Tier I Capital Ratio was 13.12%, and Tier I Leverage Ratio was 11.69% at September 30, 2014.

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Selected Financial Data

The following table reflects selected financial data and ratios as of and for the quarters and nine months ended September 30, 2014 and 2013 (dollars in thousands, except per share data):

(dollars in thousands, except per share data)

	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013
Statement of Operations Data:
Interest income	$	21,022		$	18,419		$	59,420		$	51,784
Interest expense	528			636			1,679			1,880
Net interest income	20,494			17,783			57,741			49,904
Provision for credit losses	1,000			—			3,000			6,050
Net interest income after provision for credit losses	19,494			17,783			54,741			43,854
Other income	4,535			2,710			11,264			10,385
Other expenses	14,796			13,152			43,555			37,899
Income before income taxes	9,233			7,341			22,450			16,340
Income taxes	3,802			2,914			9,036			6,649
Net income	$	5,431		$	4,427		$	13,414		$	9,691

Per Share Data:
Basic earnings per share	$	0.37		$	0.31		$	0.91		$	0.67
Diluted earnings per share	0.35			0.29			0.86			0.64
Shareholders’ equity per share	11.33			9.94			11.33			9.94

Balance Sheet Data:
Balance sheet totals:
Assets	$	1,760,107		$	1,473,994		$	1,760,107		$	1,473,994
Loans, net	1,193,094			988,547			1,193,094			988,547
Deposits	1,539,198			1,281,822			1,539,198			1,281,822
Shareholders’ equity	181,505			156,728			181,505			156,728

Average balance sheet amounts:
Assets	$	1,675,045		$	1,465,860		$	1,605,946		$	1,402,566
Loans, net	1,160,867			953,969			1,107,467			928,927
Deposits	1,455,025			1,274,354			1,393,914			1,213,370
Shareholders’ equity	177,947			157,382			171,768			153,704

Selected Ratios:
Return on average assets	1.29		%	1.20		%	1.12		%	0.92		%
Return on average equity	12.11		%	11.16		%	10.44		%	8.43		%
Efficiency ratio	59.12		%	64.18		%	63.12		%	62.86		%
Risk based capital ratio	14.37		%	15.01		%	14.37		%	15.01		%
Net chargeoffs (recoveries) to average gross loans	0.14		%	-0.05		%	0.22		%	0.53		%
Allowance for loan losses to total loans	1.84		%	2.07		%	1.84		%	2.07		%
Average equity to average assets	10.62		%	10.74		%	10.70		%	10.96		%

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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 component of the Company’s earnings. Net interest income is affected by changes in the nature and volume of earning assets held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities.

Net interest income for the quarter ended September 30, 2014 was $20.5 million, which was comprised of $21.0 million in interest income and $528,000 in interest expense. Net interest income for the quarter ended September 30, 2013 was $17.8 million, which was comprised of $18.4 million in interest income and $636,000 in interest expense. Net interest income for the quarter ended September 30, 2014 represented an increase of $2.7 million, or 15.2% from the same period one year earlier. The increase in net interest income from the same period in the prior year was primarily attributable to an increase in average earning assets as a result of loan growth, combined with a decrease in non-performing loans, and a slightly higher level of loan related fees. Average earning assets of $1.61 billion for the quarter ended September 30, 2014 increased $200.0 million, or 14%, compared to $1.41 billion for the same quarter in 2013. Loan fee amortization for the quarter ended September 30, 2014 was $3.7 million, compared to $3.4 million for the quarter ended September 30, 2013.

Net interest income for the nine months ended September 30, 2014 was $57.7 million, which was comprised of $59.4 million in interest income and $1.7 million in interest expense. Net interest income for the nine months ended September 30, 2013 was $49.9 million, which was comprised of $51.8 million in interest income and $1.9 million in interest expense. Net interest income for the nine months ended September 30, 2014 represented an increase of $7.8 million or 15.7% from the same period one year earlier. The increase in net interest income from the same period one year ago was primarily attributed to an increase in average earning assets as a result of loan growth and excess liquidity generated from deposit growth, combined with a decrease in non-performing loans and a higher level of loan related fees. Loan fee amortization for the nine months ended September 30, 2014 was $10.0 million, compared to $8.2 million for the nine months ended September 30, 2013.

The composition of the average balance sheet impacts growth in net interest income. For the quarter ended September 30, 2014 average earning assets of $1.61 billion represented an increase of $200.0 million, or 14.2%, compared to $1.41 billion, for the same period in 2013. The Company’s loan-to-deposit ratio, a measure of leverage, averaged 81.68% during the quarter ended September 30, 2014, which represented an increase compared to an average of 76.91% for the same quarter of 2013 as a result of higher loan funding relative to deposit growth. For the nine months ended September 30, 2014 average earning assets of $1.54 billion represented an increase of $202.5 million, or 15.1%, compared to $1.34 billion for the same period in 2013. The Company’s loan-to-deposit ratio averaged 81.41% during the nine months ended September 30, 2014, representing an increase compared to an average of 78.56% for the same period in 2013, and was also a result of higher loan funding relative to deposit growth during that period.

The Company’s net interest margin (net interest income divided by average earning assets) for the quarter ended September 30, 2014 was 5.05% compared to 5.01% in the same period one year earlier. The increase in net interest margin compared to the quarter ended September 30, 2013 was primarily due to a more favorable balance sheet mix. The negative impact of reversal or foregone interest due to nonperforming assets was 4 basis points in the third quarter of 2014, compared with 9 basis points in the third quarter one year earlier

The Company’s net interest margin for the nine months ended September 30, 2014 was 5.00% compared to 4.97% in the same period one year earlier. The increase in net interest margin from the prior year was primarily due to a more favorable balance sheet mix and increased loan fees. The positive impact on the net interest margin from increased loan fees for the nine months ended September 30, 2014 compared to the same period one year ago was 4 basis points. The negative impact of reversal or foregone interest due to nonperforming assets was 3 basis points for the first nine months of 2014 compared to 7 basis points for same period one year earlier.

The following tables show the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin for the quarters and nine months ended September 30, 2014 and 2013.

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	Three months ended September 30,
	2014						2013
			Yields		Interest				Yields		Interest
	Average		or		Income/		Average		or		Income/
(dollars in thousands)	Balance		Rates		Expense		Balance		Rates		Expense
ASSETS
Interest earning assets (2):
Loans (1)	$	1,188,397	6.50	%	$	19,459	$	980,165	6.84	%	$	16,906
Federal funds sold	118,034		0.32	%	94		152,809		0.27	%	103
Investment securities	301,915		1.93	%	1,469		275,360		2.03	%	1,410
Other	326		0.00	%	—		326		0.00	%	—
Total interest earning assets	1,608,672		5.18	%	21,022		1,408,660		5.19	%	18,419

Noninterest-earning assets:
Cash and due from banks	27,473						27,024
All other assets (3)	38,900						30,176
TOTAL	$	1,675,045					$	1,465,860

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Demand	$	9,519	0.04	%	1		$	9,141	0.04	%	$	1
Savings	415,537		0.20	%	206		419,842		0.28	%	301
Time	32,149		0.59	%	48		49,918		0.53	%	67
Other	22,092		4.90	%	273		17,744		5.97	%	267
Total interest bearing liabilities	479,297		0.44	%	528		496,645		0.51	%	636

Noninterest-bearing liabilities:
Demand deposits	997,820						795,452
Accrued expenses and other liabilities	19,981						16,381
Shareholders’ equity	177,947						157,382
TOTAL	$	1,675,045					$	1,465,860

Net interest income and margin			5.05	%	$	20,494			5.01	%	$	17,783

(1) Loan fee amortization of $3.7 million and $3.4 million, respectively, is included in interest income. Nonperforming loans have been included in average loan balances.

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

(3) Net of average allowance for loan losses of $23.2 million and $21.6 million, respectively.

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	Nine months ended September 30,
	2014						2013
			Yields		Interest				Yields		Interest
	Average		or		Income/		Average		or		Income/
	Balance		Rates		Expense		Balance		Rates		Expense
ASSETS
Interest earning assets (2):
Loans (1)	$	1,134,802	6.44	%	$	54,698	$	953,235	6.63	%	$	47,303
Federal funds sold	115,596		0.30	%	256		114,876		0.25	%	215
Investment securities	293,264		2.04	%	4,464		273,048		2.09	%	4,265
Other	326		0.82	%	2		323		0.41	%	1
Total interest earning assets	1,543,988		5.15	%	59,420		1,341,482		5.16	%	51,784

Noninterest-earning assets:
Cash and due from banks	26,869						25,833
All other assets (3)	35,089						35,251
TOTAL	$	1,605,946					$	1,402,566

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Deposits:
Demand	$	9,213	0.03	%	2		$	9,943	0.03	%	$	2
Savings	398,417		0.24	%	702		403,523		0.29	%	875
Time	39,225		0.56	%	165		48,993		0.53	%	196
Other	22,454		4.82	%	810		19,652		5.49	%	807
Total interest bearing liabilities	469,309		0.48	%	1,679		482,111		0.52	%	1,880

Noninterest-bearing liabilities:
Demand deposits	947,059						750,911
Accrued expenses and other liabilities	17,810						15,840
Shareholders’ equity	171,768						153,704
TOTAL	$	1,605,946					$	1,402,566

Net interest income and margin			5.00	%	$	57,741			4.97	%	$	49,904

(1) Loan fee amortization of $10.0 million and $8.2 million, respectively, is included in interest income. Nonperforming loans have been included in average loan balances.

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

(3) Net of average allowance for loan losses of $22.8 million and $20.3 million, respectively.

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The following tables show the effect of the interest differential of volume and rate changes for the quarters and nine months ended September 30, 2014 and 2013. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.

	Three months ended September 30,
	2014 vs. 2013
	Increase (decrease)
	due to change in
	Average			Average			Total
(dollars in thousands)	Volume			Rate			Change
Interest income:
Loans	$	3,410		$	(857	)	$	2,553
Federal funds sold	(28		)	19			(9		)
Investment securities	129			(70		)	59
Other	—			—			—
Total interest income	3,511			(908		)	2,603

Interest expense:
Demand	—			—			—
Savings	(2		)	(93		)	(95		)
Time	(27		)	8			(19		)
Other	54			(48		)	6
Total interest expense	25			(133		)	(108		)

Change in net interest income	$	3,486		$	(775	)	$	2,711

	Nine months ended September 30,
	2014 vs. 2013
	Increase (decrease)
	due to change in
	Average			Average			Total
(dollars in thousands)	Volume			Rate			Change
Interest income:
Loans	$	8,752		$	(1,357	)	$	7,395
Federal funds sold	2			39			41
Investment securities	308			(109		)	199
Other	—			1			1
Total interest income	9,062			(1,426		)	7,636

Interest expense:
Demand	—			—			—
Savings	(9		)	(164		)	(173		)
Time	(41		)	10			(31		)
Other	101			(98		)	3
Total interest expense	51			(252		)	(201		)

Change in net interest income	$	9,011		$	(1,174	)	$	7,837

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.

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Interest Income

Interest income of $21.0 million in the quarter ended September 30, 2014 represented an increase of $2.6 million, or 14.1%, from $18.4 million in the same quarter one year earlier. The average yield on earning assets was 5.18% for the quarter ended September 30, 2014 compared to 5.19% for the quarter ended September 30, 2013. The average yield on interest earning assets remained relatively flat compared to the same period in the prior year.

Interest income of $59.4 million for the nine months ended September 30, 2104, represented an increase of $7.6 million, or 14.7%, from $51.8 million in the same period one year earlier. The average yield on earning assets was 5.15% for the nine months ended September 30, 2014, and 5.16% for the nine months ended September 30, 2013. The average yield on interest earning assets remained relatively flat compared to the first nine months of the prior year.

Average gross loans were $1.19 billion for three months ended September 30, 2014, an increase of $208.2 million or 21.2% from $980.2 million for the same period one year earlier. Average loans comprised 73.9% of average earning assets in the three months ended September 30, 2014 compared to 69.6% in the third quarter of 2013. For the nine months ended September 30, 2014, average gross loans were $1.13 billion, an increase of $181.6 million, or 19.0% from $953.2 million for the same period one year earlier. Average loans comprised 73.5% of average earning assets in the nine months ended September 30, 2014 compared to 71.1% in the first nine months of 2013.

Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $420.3 million for the quarter ended September 30, 2014, a decrease of $8.2 million or 1.9% from $428.5 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, other earning assets averaged $409.2 million, an increase of $20.9 million or 5.4% from $388.2 million for the nine months ended September 30, 2013.

Interest Expense

Interest expense was $528,000 for the quarter ended September 30, 2014, which represented a decrease of $108,000, or 17.0% from $636,000 for the comparable period of 2013. Average interest-bearing liabilities were $479.3 million for the three months ended September 30, 2014, a decrease of $17.3 million, or 3.5%, from $496.6 million for the same period one year earlier. The decrease in interest expense was primarily due to a lower rate paid on savings deposits.

For the nine months ended September 30, 2014, interest expense was $1.7 million, which represented a decrease of $201,000, or 10.7% from $1.9 million for the nine months ended September 30, 2013. Average interest-bearing liabilities were $469.3 million for the nine months ended September 30, 2014, a decrease of $12.8 million, or 2.7% from $482.1 million for the same period on year ago. The decrease in interest expense was primarily due to a decrease in average interest bearing deposits, combined with a lower rate paid on savings deposits.

Average interest bearing deposits were $457.2 million for the quarter ended September 30, 2014, which represented 31.4% of total average deposits and was a decrease of $21.7 million, or 4.5%, from $478.9 million representing 37.6% of total average deposits in the third quarter of 2013. For the nine months ended September 30, 2014, average interest bearing deposits were $446.9 million, which represented 32.1% of total average deposits and was a decrease of $15.6 million, or 3.4%, from $462.5 million representing 38.1% of total average deposits in the first nine months of 2013.

Other (non-deposit) interest bearing liabilities are primarily comprised of junior subordinated debt securities issued by the Company and other borrowings. The junior subordinated debt is intended to supplement capital requirements of the Company at a rate of interest that is fixed for five years. Other interest bearing liabilities averaged $22.1 million in the three months ended September 30, 2014 and $17.7 million for the comparable period of 2013. For the nine months ended September 30, 2014 and 2013, other interest bearing liabilities averaged $22.5 million and $19.7 million, respectively

The average rate paid on interest-bearing liabilities was 0.44% and 0.51% for the quarters ended September 30, 2014 and 2013, respectively, and 0.48% and 0.52% for the nine months ended September 30, 2014 and 2013, respectively.

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Credit Risk and Provision for Credit Losses

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

The Company charged-off $2.2 million during the three months ended September 30, 2014 compared to $1.7 million during the three months ended September 30, 2013. For the nine months ended September 30, 2014, the Company charged-off $3.9 million compared to $7.4 million for the same period in 2013. Loan recoveries of $523,000 were recognized during the third quarter of 2014 compared to $2.2 million for the three months ended September 30, 2013. For the nine month period ended September 30, 2014, loan recoveries of $1.4 million were recognized, compared to $2.4 million for the nine month period ended September 30, 2013.

The following schedule provides an analysis of the allowance for loan losses for the quarters ended September 30, 2014 and 2013, respectively:

	Three months ended						Nine months ended
	September 30,						September 30,
(dollars in thousands)	2014			2013			2014			2013

Balance, beginning of period	$	23,116		$	20,470		$	21,944		$	19,948
Provision for credit losses	1,000			—			3,000			6,050
Charge-offs	(2,200		)	(1,660		)	(3,936		)	(7,409		)
Recoveries	523			2,159			1,431			2,380
Balance, end of period	$	22,439		$	20,969		$	22,439		$	20,969

The allowance for loan losses was $22.4 million, or 1.84% of total loans, at September 30, 2014, compared to $21.0 million, or 2.07% of total loans, at September 30, 2013. The increase in the allowance for loan losses from September 30, 2013 to September 30, 2014 was primarily attributable to the growth of the loan portfolio.

The Company recorded a provision for credit losses of $1.0 million for the three months ended September 30, 2014, with no provision recorded for the quarter ending September 30, 2013. The Company provided $3.0 million to the allowance for credit losses for the nine months ended September 30, 2014, compared to $6.1 million for the same period in 2013. The increase in provision for credit losses for the current quarter was primarily due to an increase in net charge-offs from the same quarter of 2013 and growth in the loan portfolio. The decrease in provision for credit losses for the nine months ended September 30, 2014 was primarily due to a decrease in net charge-offs.

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Based on an evaluation of individual credits, historical credit loss experience by loan type, economic conditions, and the Company’s reassessment of risks noted above, management has allocated the allowance for loan losses as follows for the periods ending September 30, 2014 and December 31, 2013:

	September 30, 2014				December 31, 2013
			Percent of				Percent of
			ALLL in each				ALLL in each
			category to				category to
(dollars in thousands)	Amount		gross loans		Amount		gross loans

Commercial	$	10,176	0.8	%	$	9,066	0.8	%
Real estate construction	1,505		0.1	%	1,013		0.1	%
Land loans	421		0.0	%	377		0.0	%
Real estate other	2,428		0.2	%	2,857		0.3	%
Factoring and asset based	5,699		0.5	%	6,136		0.6	%
SBA	2,121		0.2	%	2,363		0.2	%
Other	89		0.0	%	132		0.0	%
	$	22,439	1.8	%	$	21,944	2.0	%

At September 30, 2014 nonperforming assets of $8.4 million, or 0.48% of total assets, compared to $15.1 million, or 0.94% of total assets, on December 31, 2013. The decrease in nonperforming assets from December 31, 2013 was primarily due to collections of $7.9 million, loans upgraded to performing status of $5.0 million, and $3.9 million in charge-offs, partially offset by additions of $10.0 million. The additions were comprised of one commercial relationship, one asset based lending credit, one real estate other credit, and one SBA credit. The following summarizes nonperforming assets at September 30, 2014 and December 31, 2013.

	September 30,		December 31,
(dollars in thousands)	2014		2013

Loans accounted for on a non-accrual basis	$	8,352	$	15,115
Other loans with principal or interest contractually past due 90 days or more and still accruing	—		—
Nonperforming loans	8,352		15,115
Other real estate owned	23		31
Nonperforming assets	$	8,375	$	15,146

Loans restructured and in compliance with modified terms	10,363		5,569

Nonperforming assets and restructured loans	$	18,738	$	20,715

The nonperforming assets at September 30, 2014 consisted of loans on nonaccrual or 90 days or more past due and still accruing totaling $8.4 million, and other real estate owned valued at $23,000. Nonperforming loans at September 30, 2014 were comprised of loans with legal contractual balances totaling approximately $12.3 million reduced by $648,000 received in nonaccrual interest and impairment charges of $3.3 million which have been charged against the allowance for loan losses. In addition, as of September 30, 2014, there was an additional 22 loans with legal contractual balances totaling $16.1 million that have been fully charged off, for which the Company continues to pursue collection remedies.

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

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The following table sets forth the components of nonperforming loans as of September 30, 2014 (dollars in thousands).

(dollars in thousands)

September 30, 2014

Category / Collateral	Amount

SBA:

Single family residence in San Francisco County	$	2,082
Single family residences in Riverside County	457
Mixed used building in Santa Clara County	287
Single family residences in Orange County & Riverside County	239
Special purpose facilities in Orange County	188
Special purpose facilities in San Diego County	113
Lot for single family homes in Contra Costa County	49
Commercial building in San Diego County	21
Light industrial warehouse space in Stanislaus County	3
	3,439
Commercial:

Business assets	2,602
	2,602
Real estate other:

Single family residences in Sacramento County	1,868
	1,868
Factoring/asset based lending:

Business assets	443
	443
Total nonperforming loans	$	8,352

Included in nonperforming loans at September 30, 2014 are loans totaling $1.9 million that have been modified in trouble debt restructurings, where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on a loan, payment extensions, forgiveness of principal, or other actions intended to maximize collection. In order for these loans to return to accrual status, the borrower must demonstrate a sustained period of timely payments. As of September 30, 2014, previously modified loans totaling $10.4 million were considered performing due to a sustained period of timely payments and therefore were accounted for on an accrual basis. There were no downgrades of trouble debt restructurings during the quarter or nine months ended September 30, 2014.

Management undertakes significant processes in order to identify potential problem loans in a timely manner. In addition to regular interaction with the Company’s borrowers, the relationship managers review the credit ratings for each loan on a monthly basis and identify any potential downgrades. For commercial and factoring/asset-based loans, the Company receives quarterly financial statements and other pertinent reporting, such as borrowing bases for asset-based facilities, so as to identify any deteriorating financial trends. Covenant compliance for these loans is also monitored on a quarterly basis. For real estate construction and land loans, the development, construction and lease up or sell out status of each project is monitored on a monthly basis. For SBA loans and loans secured by standing commercial or residential property, the Company receives updated rent rolls, operating statements, and/or tax returns on an annual basis. In addition, home equity loans are reviewed annually for deterioration in either the underlying property value or the borrower’s payment history. Management also engages a third party loan review firm that reviews the loan portfolio periodically to further identify potential problem loans. The loan review includes assessment of underwriting, quality of legal documents, management of the loan relationship, and adherence to the credit policy along with acceptable risk mitigation and rationale for exceptions to the policy.

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As part of the loan approval process, management identifies the nature and type of underlying collateral supporting individual loans. Prior to or at the time of initial advances, any required lien positions are verified using UCC lien searches for personal property collateral, or title insurance for real property collateral. The Company engages a third party loan review firm to conduct an annual review of its loan documentation and the related policies and procedures regarding the loan documentation process.

The Company primarily relies on fair market appraisals to determine the value of underlying real estate collateral. Appraisals are required for real property secured loans of $250,000 or more, including increases to existing loans of $250,000 or more. In the event there is evidence of deterioration in values, an evaluation of the collateral value and/or a full new appraisal is required for an extension of the loan maturity. Potential problem loans are typically reappraised every 12 months depending size, nature, current economic conditions and the borrower’s current financial performance and repayment history. The appraisals are performed by Board approved appraisers that have appropriate licensing and experience. Generally, when a prospective loan amount exceeds $3.0 million, the completed appraisal is further reviewed by a qualified third party review appraiser. To determine the value of underlying collateral for formula lines of credit that are predicated on a borrowing base of eligible assets, the Company typically requires a pre loan funding field audit of the borrower’s financial records to verify the accounts receivable, their eligibility for inclusion in the borrowing base, performance of the collateral and any asset concentrations.

On a monthly basis, relationship managers assess the collateral position of individual loans and identify any potential collateral shortfalls which, if left uncorrected, could result in deterioration of the repayment prospects for the loan at some future date. Any potential collateral shortfalls are incorporated into a written corrective action plan. The status of the corrective action plans are reviewed by executive management. Review of ability to acquire additional collateral and the related timeframes are addressed on an individual loan basis.

At the time a loan is classified as substandard (which includes any loan on non-accrual), the Company performs an impairment analysis of the collateral based on appraisals, field audits, other market value indicators, and Management’s judgment. Any shortfall between the collateral’s realization value and the loan balance is charged-off at that time when management believes the uncollectibility of the loan is confirmed. Impairment analyses are updated on a monthly basis. Additionally, as underlying collateral is reappraised the value of the collateral is reassessed and any additional charge-off is taken at that time. A similar practice is followed for downward adjustments to the Company’s OREO carrying value.

Management is of the opinion that the allowance for loan losses is maintained at a level adequate for known and unidentified losses inherent in the portfolio. However, although the Company is seeing a lower rate of inflow into problem assets generally, as well as a consistent reduction of carrying values through continued payments by borrowers on loans that have been placed on non-accrual, should circumstances change and management determines that the collectability of any of these credits becomes unlikely, there could be an adverse effect on the level of the allowance for loan losses and the Company’s future profitability.

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Non-interest Income

The following tables set forth the components of other income and the percentage distribution of such income for the three and nine months ended September 30, 2014 and 2013:

	Three months ended September 30,
	2014				2013
(dollars in thousands)	Amount		Percent		Amount		Percent

Gain on sale of SBA loans	$	1,080	23.8	%	$	253	9.3	%
Depositor service charges	951		21.0	%	926		34.2	%
Warrant income	941		20.7	%	234		8.6	%
International fee income	717		15.8	%	632		23.3	%
Visa fee income	381		8.4	%	246		9.1	%
SBA loan servicing income	155		3.4	%	146		5.4	%
Increase in value of life insurance	144		3.2	%	144		5.3	%
Net gain (loss) on sale of OREO	—		0.0	%	2		0.1	%
Other operating income	166		3.7	%	127		4.7	%

	$	4,535	100.0	%	$	2,710	100.0	%

	Nine months ended September 30,
	2014				2013
(dollars in thousands)	Amount		Percent		Amount		Percent

Depositor service charges	$	2,845	25.3	%	$	2,720	26.2	%
Gain on sale of SBA loans	2,406		21.4	%	1,931		18.6	%
International fee income	2,279		20.2	%	1,940		18.7	%
Warrant income	1,294		11.5	%	476		4.6	%
Visa fee income	1,048		9.3	%	646		6.2	%
SBA loan servicing income	477		4.2	%	386		3.7	%
Increase in value of life insurance	432		3.8	%	432		4.2	%
Net gain (loss) on sale of securities	5		0.0	%	804		7.7	%
Net gain on sale of OREO	—		0.0	%	472		4.5	%
Other operating income	478		4.3	%	578		5.6	%

	$	11,264	100.0	%	$	10,385	100.0	%

Non-interest income totaled $4.5 million in the third quarter of 2014, an increase of $1.8 million or 67.3% from $2.7 million in the third quarter of 2013. For the nine months ended September 30, 2014, non-interest income totaled $11.3 million, an increase of $879,000, or 8.5% from $10.4 million in the first nine months of 2013. Non-interest income generally consists primarily of gains recognized on sale of SBA loans, service charge income on deposit accounts, international fee income, visa fee income, SBA loan servicing income, warrant income, gains on sales of securities, and gains on sales of other real estate owned (OREO). The increase in non-interest income during the quarter ended September 30, 2014 compared to the same period in the prior year was primarily attributable to an increase in gains on sale of SBA loans and warrant income. The increase in non-interest income during the first nine months of the current year compared to the prior year was primarily attributable to an increase in warrant income, gains on sale of SBA loans, visa fee income and international fee income.

Revenue from sales of SBA loans is dependent 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) adjustments to programs by the SBA; (4) changes in activities of secondary market participants and; (5) other factors. The company recognized $1.1 million in gains on the sale of SBA loans sold during the three months ended September 30, 2014 compared to $253,000 in gains on the sale of SBA loans sold during the three months ended September 30, 2013 representing an increase of $827,000 or 326.9%. For the nine months ended September 30, 2014, the

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Company recognized $2.4 million in gains on the sale of SBA loans, representing an increase of $475,000, or 24.6% compared to $1.9 million for the nine months ended September 30, 2013. During the quarter ended September 30, 2014, the Company’s SBA group funded $23.6 million in new loans and sold $19.6 million, which included $3.4 million in loans funded in the previous year. This compares to $17.7 million funded and $5.8 million sold in the quarter ended September 30, 2013, which included $187,000 in loans funded in the previous year. During the nine months ended September 30, 2014, the Company’s SBA group funded $45.0 million in new loans and sold $35.8 million, which included $11.2 million in loans funded in the previous year. This compares to $46.9 million funded and $35.2 million sold in the nine months ended September 30, 2013, which included $13.3 million in loans funded in the previous year.

For the quarter ended September 30, 2014, service charge income on deposit accounts was $951,000, representing an increase of $25,000, or 2.7%, compared to $926,000 for the same period one year ago. For the nine months ended September 30, 2014, service charge income on deposit accounts was $2.8 million, representing an increase of $125,000, or 4.6%, compared to $2.7 million for same period one year earlier. The increases are primarily attributable to an increase in the deposit portfolio and deposit related analysis charges.

During the third quarter of 2014, the Company recognized $941,000 in warrant income compared to $234,000 recognized during the third quarter of 2013. For the nine months ended September 30, 2014, the Company recognized $1.3 million compared to $476,000 recognized for the same period one year earlier. Income from warrants is inherently event-driven and the contributions from warrants largely reflect the economic environment of IPOs and M&A activity.

The Company generates international fee income on spot contracts (binding agreements for the purchase or sale of currency for immediate delivery and settlement) and forward contracts (a contractual commitment for a fixed amount of foreign currency on a future date at an agreed upon exchange rate) in connection with client’s cross-border activities. The transactions incurred are during the ordinary course of business and are not speculative in nature. The Company recognizes income on a cash basis at the time of contract settlement in an amount equal to the spread created by the exchange rate charged to the client versus the actual exchange rate negotiated by the Company in the open market. During the third quarter of 2014, the Company recognized $717,000 in international fee income, representing an increase of $85,000, or 13.4%, compared to $632,000 for the same period one year ago. For the nine months ended September 30, 2014, the Company recognized $2.3 million in international fee income, representing an increase of $339,000, or 17.5%, compared to $1.9 million for the nine month period ended September 30, 2013. The increase in international fee income was primarily caused by an increase in client demand for international services.

The Visa card program, which was fully implemented in 2013, contributed $381,000 and $246,000 in non-interest income during the three months ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, the program contributed $1.0 million and $646,000, respectively. Visa income represents both interchange and annual fees.

The Company did not recognize any gain on sale of “other real estate owned” (OREO) for the quarter and nine months ended September 30, 2014, compared to $2,000 and $472,000 in gains on sale of OREO recognized during the quarter and nine months ended September 30, 2013, respectively.

Net interest income and non-interest income comprised total revenue of $25.0 million for the three months ended September 30, 2014, compared to $20.5 million for the same period one year earlier. For the nine months ended September 30, 2014 and 2013, net interest income and non-interest income comprised total revenue of $69.0 million and $60.3 million, respectively.

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Non-interest Expense

The components of other expense as a percentage of average earnings assets are set forth in the following tables for the three and nine months ended September 30, 2014 and 2013.

	Three months ended September 30,
	2014				2013
(dollars in thousands)	Amount		Percent		Amount		Percent

Salaries and benefits	$	9,589	2.4	%	$	8,393	2.4	%
Data processing	1,160		0.3	%	919		0.3	%
Occupancy	1,014		0.3	%	907		0.3	%
Marketing/Advertising	722		0.2	%	859		0.2	%
Legal and professional	399		0.1	%	381		0.1	%
Assessments	329		0.1	%	375		0.1	%
Loan/OREO	443		0.1	%	274		0.1	%
Deposit services	288		0.1	%	250		0.1	%
Furniture and equipment	192		0.0	%	144		0.0	%
Other	660		0.2	%	650		0.2	%

	$	14,796	3.6	%	$	13,152	3.8	%

	Nine months ended September 30,
	2014				2013
(dollars in thousands)	Amount		Percent		Amount		Percent

Salaries and benefits	$	28,018	2.4	%	$	24,109	2.4	%
Data processing	3,211		0.3	%	2,811		0.3	%
Occupancy	3,100		0.3	%	2,600		0.3	%
Marketing/Advertising	2,012		0.2	%	2,055		0.2	%
Legal and professional	1,393		0.1	%	1,312		0.1	%
Assessments	1,003		0.1	%	896		0.1	%
Loan/OREO	1,070		0.1	%	834		0.1	%
Deposit services	806		0.1	%	771		0.1	%
Furniture and equipment	570		0.0	%	429		0.0	%
Other	2,372		0.2	%	2,082		0.2	%

	$	43,555	3.8	%	$	37,899	3.8	%

Operating expenses were $14.8 million for the three months ended September 30, 2014, an increase of $1.6 million or 12.5% from $13.2 million at September 30, 2013. For the nine months ended September 30, 2014, operating expenses were $43.6 million, an increase of $5.7 million or 14.9% from $37.9 million at September 30, 2013. As a percentage of average earning assets, other expenses for the three months ended September 30, 2014 and 2013 were 3.6% and 3.8%, on an annualized basis. For the nine months ended September 30, 2014 and 2013, as a percentage of average earning assets, other expenses were 3.8% on an annualized basis. This increase was generally wide-spread across all categories. Overall, trends in non-interest expenses continue to reflect higher levels related to investments in new initiatives and personnel to support future growth.

Salaries and benefits expense of $9.6 million for the quarter ended September 30, 2014, compared to $8.4 million for the quarter ended September 30, 2013. For the nine month period ended September 30, 2014, salaries and benefits expense was $28.0 million compared to $24.1 million for the same period in 2013. The increase in salary and benefits expense for the current periods compared to the same periods in the prior year is primarily related to an increase in headcount to support growth and new initiatives, combined with annual salary increases necessary to remain competitive in the Company’s core markets and increased stock-based compensation due to long-term retention awards. As of September 30, 2014, the Company employed 250 full-time equivalents (FTE) compared to 230 FTE at September 30, 2013.

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Occupancy and equipment expense is comprised primarily of rent, leasehold improvements and depreciation expense for furniture, fixtures and equipment. For the current quarter, the Company recognized $1.2 million in occupancy and equipment expense compared to $1.1 million for the same period in 2013. For the nine months ended September 30, 2014, occupancy and equipment expense was $3.7 million compared to $3.0 million for the same period in 2013.

The Company contracts with third-party vendors for most data processing needs and to support technical infrastructure. Data processing expense for the third quarter of 2014 was $1.2 million which represented an increase of approximately $241,000 over $919,000 for the same period one year earlier. For the nine months ended September 30, 2014, data processing expense was $3.2 million, which was an increase of $400,000 compared to $2.8 million for the nine months ended September 30, 2013. The increase in data processing was primarily due to an increase in deposit transaction volumes.

Marketing expense of $722,000 for the period ended September 30, 2014 represented a decrease of $137,000 compared to $859,000 during the same period one year earlier. For the nine months ended September 30, 2014, marketing expense was $2.0 million, representing an increase of $43,000 compared to $2.1 million for the same period one year earlier. Over the past several years the Company has increased its marketing investments to raise the level of visibility of its brand. To leverage this increased brand visibility, the Company continues to fund marketing and sales initiatives to not only maintain brand awareness, but also to accelerate demand for the Company’s banking solutions.

Legal and professional charges were $399,000 for the quarter ended September 30, 2014 compared to $381,000 for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, legal and professional charges were $1.4 million, compared to $1.3 million for the same period in the prior year.

Regulatory assessments related to FDIC insurance pertaining to deposit balances, totaled $329,000 for the quarter ended September 30, 2014, compared to $375,000 for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, regulatory assessments were $1.0 million compared to $896,000 for the same period in 2013. Regulatory assessments fluctuate depending on asset size and other factors, including credit quality.

Other real estate owned (OREO) and loan related charges were $443,000 for the quarter ended September 30, 2014 compared to $274,000 for the quarter ended September 30, 2013, and $1.1 million for the nine months ended September 30, 2014, compared to $834,000 for the same period last year. The decrease in loan related charges for the current quarter compared to the same quarter last year is primarily a result of fluctuating collection costs. The increase in loan related charges for the current quarter and year versus the same periods in the prior year is largely due to the increase in expenses related to the Visa card program that was fully implemented in 2013.

The Company’s efficiency ratio, the ratio of non-interest expense to revenues, was 59.12% and 64.18% for the quarters ended September 30, 2014 and September 30, 2013, respectively, and 63.12% and 62.86% for the nine months ended September 30, 2014 and 2013, respectively.

Balance Sheet

Total assets of the Company at September 30, 2014 were $1.76 billion compared to $1.60 billion at December 31, 2013. The increase was driven by an increase in both the loan portfolio and investment securities. Gross loans increased to 72.3% of the earning asset mix from 69.6% at December 31, 2013.

Gross loan balances were $1.22 billion at September 30, 2014, which represented an increase of $142.1 million, or 13.2%, as compared to $1.08 billion at December 31, 2013. The increase in loans was broad-based throughout the portfolio with the most significant growth reflected in the commercial lending portfolio and with the exception of a decrease in the factoring and asset based lending portfolio.

The following table shows the Company’s loans by type and their percentage distribution as of September 30, 2014 and December 31, 2013.

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	September 30,			December 31,
(dollars in thousands)	2014			2013

Commercial	$	712,113		$	585,559
Real estate construction	78,445			51,518
Land loans	15,659			13,572
Real estate other	134,463			122,063
Factoring and asset based lending	162,198			192,783
SBA	113,146			106,406
Other	3,720			5,730
Total gross loans	1,219,744			1,077,631
Unearned fee income	(4,211		)	(4,727		)
Total loans	1,215,533			1,072,904
Less allowance for credit losses	(22,439		)	(21,944		)
Total loans, net	$	1,193,094		$	1,050,960

Commercial	58.4		%	54.3		%
Real estate construction	6.4		%	4.8		%
Land loans	1.3		%	1.3		%
Real estate other	11.0		%	11.3		%
Factoring and asset based lending	13.3		%	17.9		%
SBA	9.3		%	9.9		%
Other	0.3		%	0.5		%
Total gross loans	100.0		%	100.0		%

The Company’s commercial loan portfolio represents loans to small and middle-market businesses in the Santa Clara County region. Commercial loans were $712.1 million at September 30, 2014, which represented an increase of $126.6 million, or 21.6%, compared to $585.6 million at December 31, 2013. At September 30, 2014, commercial loans comprised 58.4% of total loans outstanding compared to 54.3% at December 31, 2013.

Approximately 58% of the Company’s construction loan portfolio consists of loans to finance individual single-family residential homes in markets in the Peninsula and South Bay region of Silicon Valley. The remainder is comprised of commercial development projects. The Company’s land loan portfolio consists of land and land development loans related to future construction credits. The Company’s construction and land loan portfolio together totaled approximately $94.1 million as of September 30, 2014 compared to $65.1 million as of December 31, 2013, representing an increase of $29.0 million or 44.6%. Construction and land loan balances at September 30, 2014 and December 31, 2013 comprised 7.7% and 6.1% of total loans, respectively.

Other real estate loans consist of commercial real estate and home equity lines of credit. Other real estate loans increased $12.4 million or 10.2% to $134.5 million at September 30, 2014 from $122.1 million at December 31, 2013. The increase in other real estate loans was primarily in non-owner occupied real estate loans and home equity lines of credit. Other real estate loans represented 11.0% of total loans at September 30, 2014, and 11.3% at December 31, 2013.

Factoring and asset-based lending represents purchased accounts receivable (factoring) and a structured accounts receivable lending program where the Company receives client specific payment for client invoices. Under the factoring program, the Company purchases accounts receivable invoices from its clients and then receives payment directly from the party obligated for the receivable. In most cases the Company purchases the receivables subject to recourse from the Company’s factoring client. The asset-based lending program requires a security interest in all of a client’s accounts receivable. At September 30, 2014, factoring/asset-based loans totaled $162.2 million or 13.3% of total loans, representing a decrease of $30.6 million or 15.9%, as compared to $192.8 million or 17.9% of total loans at December 31, 2013.

The SBA line of business operates primarily in Santa Clara 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

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loan is made for commercial or real estate purposes. The SBA guarantees these loans and the guarantee may range from 75% 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 Certified Development Corporation, makes an additional loan to the borrower and takes a deed of trust subject to the Company’s position. At September 30, 2014, SBA loans comprised $113.1 million, or 9.3%, of total loans, an increase of $6.7 million, or 6.3%, from $106.4 million or 9.9% of total loans at December 31, 2013. 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 September 30, 2014 and December 31, 2013, the fair value of SBA loans exceeded aggregate cost and therefore, SBA loans were carried at aggregate cost.

Other loans consist primarily of loans to individuals for personal uses, such as installment purchases, overdraft protection loans and a variety of other consumer purposes. At September 30, 2014, other loans totaled $3.7 million as compared to $5.7 million at December 31, 2013.

Deposits represent the Company’s principal source of funds. Most of the Company’s deposits are obtained from professionals, small-to-medium sized businesses, and individuals within the Company’s market area. The Company’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 September 30, 2014 and December 31, 2013:

	As of September 30,				As of December 31,
	2014				2013
	Total		Percent		Total		Percent
(dollars in thousands)	Amount		of Total		Amount		of Total

Noninterest-bearing demand	$	1,055,815	68.60	%	$	954,727	67.90	%
Interest-bearing demand	13,886		0.90	%	11,115		0.79	%
Money market and savings	437,432		28.42	%	391,310		27.83	%
Certificates of deposit:
Less than $100K	2,596		0.17	%	2,947		0.21	%
$100K and more	29,469		1.91	%	45,993		3.27	%

Total deposits	$	1,539,198	100.00	%	$	1,406,092	100.00	%

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Deposits increased $133.1 million or 9.5% from $1.41 billion at December 31, 2013 to $1.54 billion at September 30, 2014, as a result of an increase in total demand, money market and savings accounts. As of September 30, 2014, demand deposits and core deposits represented 69.5% and 97.9% of total deposits, compared to 68.7% and 96.5% at December 31, 2013.

Leverage

Total gross loan balances at September 30, 2014 were $1.22 billion. The resulting loan to deposit ratio was 79.2%. Other earning assets at September 30, 2014 were primarily comprised of investment securities, federal funds sold and interest-bearing deposits of $466.2 million. To date, the Company has deployed other earning assets primarily in short term fixed rate investments to mitigate interest rate risk associated with the Company’s asset-sensitive balance sheet, and in federal funds sold to address the potential volatility of deposit balances and to accommodate projected loan funding. When deploying other earning assets, the Company implements strategic decisions that may have a beneficial or adverse impact on net interest income and on the net interest margin to manage the business through a variety of economic cycles.

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 Company’s capital resources consist of shareholders’ equity, trust preferred securities and (for regulatory purposes) the allowance for loan losses (subject to limitations). At September 30, 2014, the Company’s capital resources increased $21.3 million to $214.1 million from $192.8 million at December 31, 2013. Tier 1 capital increased $20.0 million to $195.4 million at September 30, 2014. The Company’s Tier 1 capital at September 30, 2014 was comprised of $116.5 million of capital stock and surplus, $65.4 million in retained earnings and trust preferred securities up to the allowable limit of $17.0 million, offset by $3.3 million in disallowed deferred tax assets.

The Company is subject to capital adequacy guidelines issued by the Board of Governors and the OCC. The Company is required to maintain total capital equal to at least 8.0% of assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity including retained earnings (Tier 1 capital) and the remainder may consist of subordinated debt, cumulative preferred stock or a limited amount of allowance for loan losses. Certain assets and commitments to extend credit present less risk than others and will be assigned to lower risk-weighted categories requiring less capital allocation than the 8.0% total ratio. For example, cash and government securities are assigned to a 0.0% risk-weighted category, most home mortgage loans are assigned to a 50.0% risk-weighted category requiring a 4.0% capital allocation and commercial loans are assigned to a 100.0% risk-weighted category requiring an 8.0% capital allocation. As of September 30, 2014, the Company’s and the Bank’s total risk-based capital ratios were 14.37% and 12.73%, respectively (13.96% for the Company and 12.25% for the Bank at December 31, 2013).

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Regulatory Capital Ratios

The following table shows the Company’s capital ratios at September 30, 2014 and December 31, 2013 as well as the minimum capital ratios required to be deemed “well capitalized” under the regulatory framework.

	As of September 30,				As of December 31,
	2014				2013
(dollars in thousands)	Amount		Ratio		Amount		Ratio

Company Capital Ratios
Tier 1 Capital	$	195,402	13.12	%	$	175,432	12.70	%
(to Risk Weighted Assets)
Tier 1 capital minimum requirement	$	89,393	6.00	%	$	82,875	6.00	%

Total Capital	$	214,072	14.37	%	$	192,755	13.96	%
(to Risk Weighted Assets)
Total capital minimum requirement	$	148,988	10.00	%	$	138,125	10.00	%

Company Leverage
Tier 1 Capital	$	195,402	11.69	%	$	175,432	11.61	%
(to Average Assets)
Tier 1 capital minimum requirement	$	83,586	5.00	%	$	75,523	5.00	%

Bank Capital Ratios
Tier 1 Capital	$	170,501	11.48	%	$	151,700	11.00	%
(to Risk Weighted Assets)
Tier 1 capital minimum requirement	$	89,127	6.00	%	$	82,755	6.00	%

Total Capital	$	189,117	12.73	%	$	168,999	12.25	%
(to Risk Weighted Assets)
Total capital minimum requirement	$	148,545	10.00	%	$	137,925	10.00	%

Bank Leverage
Tier 1 Capital	$	170,501	10.23	%	$	151,700	10.06	%
(to Average Assets)
Tier 1 capital minimum requirement	$	83,332	5.00	%	$	75,408	5.00	%

The Company and the Bank were considered well capitalized at September 30, 2014 and December 31, 2013.

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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. Liquidity requirements are evaluated by taking into consideration factors such as deposit concentrations, seasonality and maturities, loan and lease demand, capital expenditures and prevailing and anticipated economic conditions. The Company’s business is generated primarily through customer referrals and employee business development efforts. The Company is primarily a business and professional bank and, as such, its deposit base is more susceptible to economic fluctuations. The Company strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. At September 30, 2014 and December 31, 2013, liquid assets as a percentage of deposits were 31.5% and 34.2%, respectively. In addition to cash and due from banks, liquid assets include interest-bearing deposits in other banks, Federal funds sold, securities available for sale and trading securities. The Company has $47.0 million in unsecured lines of credit available with correspondent banks to meet liquidity needs. At September 30, 2014, there were no balances outstanding on these lines. Additionally, as of September 30, 2014, the Company had a total borrowing capacity with the Federal Home Loan Bank of San Francisco of approximately $397.0 million for which the Company had collateral in place to borrow $86.0 million. As of September 30, 2014, $10.0 million of this borrowing capacity was pledged to secure a letter of credit.

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.

Management regularly reviews general economic and financial conditions, both external and internal, and determines whether the positions taken with respect to liquidity and interest rate sensitivity continue to be appropriate. The Company utilizes a monthly “Gap” report as well as a quarterly simulation model to identify interest rate sensitivity over the short- and long-term. Management considers the results of these analyses when implementing its interest rate risk management activities, including the utilization of certain interest rate hedges.

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 September 30, 2014, 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.

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	As of September 30, 2014
			After three		After six		After one
	Within		months but		months but		year but		After
	three		within six		within one		within		five
(dollars in thousands)	months		months		year		five years		years		Total

Federal funds sold	$	146,675	$	—	$	—	$	—	$	—	$	146,675
Interest bearing deposits in other banks	326		—		—		—		—		326
Investment securities	11,933		3,583		7,790		135,508		160,387		319,201
Loans	362,934		42,907		154,802		498,224		160,877		1,219,744
Total earning assets	$	521,868	$	46,490	$	162,592	$	633,732	$	321,264	$	1,685,946

Interest checking, money market and savings	451,318		—		—		—		—		451,318
Certificates of deposit:
Less than $100,000	1,506		364		570		156		—		2,596
$100,000 or more	6,586		3,752		9,324		9,807		—		29,469
Total interest-bearing liabilities	$	459,410	$	4,116	$	9,894	$	9,963	$	—	$	483,383

Interest rate gap	$	62,458	$	42,374	$	152,698	$	623,769	$	321,264	$	1,202,563
Cumulative interest rate gap	$	62,458	$	104,832	$	257,530	$	881,299	$	1,202,563

Interest rate gap ratio	0.12		0.91		0.94		0.98		1.00
Cumulative interest rate gap ratio	0.12		0.18		0.35		0.65		0.71

Based on the contractual terms of its assets and liabilities, the Company’s balance sheet at September 30, 2014 was asset sensitive in terms of its short-term exposure to interest rates. That is, at September 30, 2014 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, a significant portion of variable rate loans made by the Company have been written with a minimum “floor” rate.

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The following table shows the scheduled maturities of the loan portfolio at September 30, 2014 and December 31, 2013. Approximately 82.2% and 82.4% of the loan portfolio was priced with floating interest rates which limit the exposure to interest rate risk on long-term loans, as of September 30, 2014 and 2013, respectively.

	As of September 30, 2014
					Due after one
			Due one year		year through		Due after
(dollars in thousands)	Amount		or less		five years		five years

Commercial	$	712,113	$	271,237	$	390,840	$	50,036
Real estate construction	78,445		24,697		23,953		29,795
Real estate land	15,659		13,765		1,894		—
Real estate other	134,463		11,118		49,299		74,046
Factoring and asset based lending	162,198		105,233		56,965		—
SBA	113,146		342		1,539		111,265
Other	3,720		2,935		785		—
Total loans	$	1,219,744	$	429,327	$	525,275	$	265,142

	As of December 31, 2013
						Due after one
			Due one year			year through		Due after
	Amount		or less			five years		five years

Commercial	$	585,559	$	241,009		$	311,567	$	32,983
Real estate construction	51,518		18,001			11,973		21,544
Real estate land	13,572		11,395			2,177		—
Real estate other	122,063		11,644			43,666		66,753
Factoring and asset based lending	192,783		88,508			104,275		—
SBA	106,406		(1,607		)	1,489		106,524
Other	5,730		5,476			254		—
Total loans	$	1,077,631	$	374,426		$	475,401	$	227,804

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:

· Any obligation under a guarantee contract that has the characteristics as defined in accounting guidance related to Guarantor’s Accounting and Disclosure Requirements for Guarantee including Indirect Guarantees of Indebtedness to Others;

· 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;

· 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

· Any obligation, including contingent obligations, arising out of a material variable interest, as defined in accounting guidance, 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.

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In the ordinary course of business, we have issued certain guarantees which qualify as off-balance sheet arrangements, as of September 30, 2014 those guarantees include the following:

· Standby Letters of Credit in the amount of $21.9 million.

The table below summarizes the Company’s off-balance sheet contractual obligations:

	As of September 30, 2014
	Payments due by period
			Less than		1 - 3		3 - 5		More than
(dollars in thousands)	Total		1 year		years		years		5 years

Long-term contracts	$	1,508	$	696	$	812	$	—	$	—

Operating leases	25,987		4,196		6,296		5,455		10,040

Total	$	27,495	$	4,892	$	7,108	$	5,455	$	10,040

ITEM 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by SEC rules, the Company’s management evaluated the effectiveness, as of September 30, 2014, of the Company’s disclosure controls and procedures. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2014.

Internal Control over Financial Reporting

Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. No change occurred during the third quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

The Company is not a defendant in any pending material 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 1A — RISK FACTORS

There were no material changes in the risk factors that were disclosed in Item 1A, under the caption “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4 — MINE SAFETY DISCLOSURES

Not applicable

ITEM 5 — OTHER INFORMATION

Not applicable

ITEM 6 — EXHIBITS

(a) Exhibits

See Index to Exhibits at page 60 of this Quarterly Report on Form 10-Q.

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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: November 7, 2014	By:	/s/ Daniel P. Myers
	Daniel P. Myers
	President and Chief Executive Officer
	(Principal Executive Officer)


Dated: November 7, 2014	By:	/s/ Thomas A. Sa
	Thomas A. Sa
	Executive Vice President
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

Exhibit
Number		Description of Exhibit

(31.1)		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(31.2)		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32.1)		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350

(32.2)		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350

(101)		The following financial information from Bridge Capital Holdings Quarterly Report on Form 10-Q for the period ended September 30, 2014, filed with the SEC on November 7, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheet at September 30, 2014 and December 31, 2013, (ii) the Consolidated Statement of Income for the three and nine month periods ended September 30, 2014 and 2013, (iii) the Consolidated Statement of Comprehensive Income for the three and nine month periods ended September 30, 2014 and 2013, (iv) the Consolidated Statement of Cash Flows for the three and nine month periods ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.

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