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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q (MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
000-50914
_______________________
(Commission File Number)
BRIDGE CAPITAL HOLDINGS
______________________________________________________
(Exact name of registrant as specified in its charter)
CALIFORNIA
______________________________________________________________
(State or other jurisdiction of incorporation or organization)
80-0123855
____________________________________
(I.R.S. Employer Identification No.)
55 ALMADEN BOULEVARD, SAN JOSE, CA
________________________________________
(Address of principal executive offices)
95113
__________
(Zip Code)
(408) 423-8500
____________________________________________________
(Registrant's telephone number, including area code)
N/A
____________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Bridge Capital Holdings (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by checkmark whether registrant is an accelerated filer (as defined by
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of Common Stock outstanding as of October 22, 2004:
6,062,521
1
FORWARD-LOOKING STATEMENTS
IN ADDITION TO THE HISTORICAL INFORMATION, THIS QUARTERLY REPORT CONTAINS
CERTAIN FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND WHICH ARE SUBJECT TO THE "SAFE HARBOR" CREATED BY
THOSE SECTIONS. THE READER OF THIS QUARTERLY REPORT SHOULD UNDERSTAND THAT ALL
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS UNCERTAINTIES AND RISKS
THAT COULD AFFECT THEIR OUTCOME. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS
AND UNCERTAINTIES INCLUDE, AMONG OTHERS, (1) COMPETITIVE PRESSURE IN THE BANKING
INDUSTRY INCREASES SIGNIFICANTLY; (2) CHANGES IN THE INTEREST RATE ENVIRONMENT
REDUCES MARGINS; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR
REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS,
A DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT;
(5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND EXPENSES OF
COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY ACT AND OUR
DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE AND (7) CHANGES IN SECURITIES MARKETS.
THEREFORE, THE INFORMATION IN THIS QUARTERLY REPORT SHOULD BE CAREFULLY
CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY.
FORWARD-LOOKING STATEMENTS ARE GENERALLY IDENTIFIABLE BY THE USE OF TERMS SUCH
AS "BELIEVE", "EXPECT", "INTEND", "ANTICIPATE", "ESTIMATE", "PROJECT", "ASSUME,"
"PLAN," "PREDICT," "FORECAST," "IN MANAGEMENT'S OPINION," "MANAGEMENT CONSIDERS"
OR SIMILAR EXPRESSIONS. WHEREVER SUCH PHRASES ARE USED, SUCH STATEMENTS ARE AS
OF AND BASED UPON THE KNOWLEDGE OF MANAGEMENT, AT THE TIME MADE AND ARE SUBJECT
TO CHANGE BY THE PASSAGE OF TIME AND/OR SUBSEQUENT EVENTS, AND ACCORDINGLY SUCH
STATEMENTS ARE SUBJECT TO THE SAME RISKS AND UNCERTAINTIES NOTED ABOVE WITH
RESPECT TO FORWARD-LOOKING STATEMENTS.
THE READER SHOULD REFER TO THE MORE COMPLETE DISCUSSION OF SUCH RISKS IN THE
BRIDGE BANK N.A.'S ANNUAL REPORTS ON FORM 10-K OR FILE WITH THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
BRIDGE CAPITAL HOLDINGS
Balance Sheet (unaudited)
(dollars in thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
_____________________________
CASH AND DUE FROM BANKS $ 9,608 $ 9,572
FEDERAL FUNDS SOLD
56,580 47,975
_____________________________
Total cash and equivalents
66,188 57,547
_____________________________
INVESTMENT SECURITIES AVAILABLE FOR SALE
26,414 24,347
LOANS, net of allowance for credit losses of $3,910 at
September 30, 2004 and $2,683 at December 31, 2003.
275,399 191,053
PREMISES AND EQUIPMENT
2,152 1,515
ACCRUED INTEREST RECEIVABLE
1,218 864
OTHER ASSETS
13,190 3,253
_____________________________
TOTAL $ 384,561 $ 278,579
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand noninterest-bearing $ 135,772 $ 76,510
Demand interest-bearing
2,028 6,954
Savings
159,785 115,930
Time
51,351 47,000
_____________________________
Total deposits
348,936 246,394
_____________________________
ACCRUED INTEREST PAYABLE
47 48
OTHER LIABILITIES
3,728 2,183
_____________________________
TOTAL LIABILITIES
352,711 248,625
_____________________________
COMMITMENTS AND CONTINGENCIES
- -
SHAREHOLDERS' EQUITY
Preferred stock, $2.50 par value; 10,000,000 shares authorized;
none issued
Common stock, $2.50 par value; 10,000,000 shares authorized;
6,062,521 shares issued and outstanding at September 30, 2004
6,051,646 shares issued and outstanding at December 31,
2003. 32,869 32,800
Retained earnings
(946) (2,853)
Accumulated other comprehensive (loss) income
(73) 7
_____________________________
TOTAL SHAREHOLDERS' EQUITY
31,850 29,954
_____________________________
TOTAL $ 384,561 $ 278,579
=============================
The accompanying notes are an integral part of the financial statements.
3
BRIDGE CAPITAL HOLDINGS
Statement of Operations (unaudited)
(dollars in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
_______________________ _______________________
2004 2003 2004 2003
_______________________ _______________________
INTEREST INCOME:
Loans $ 4,904 $ 3,098 $ 12,671 $ 8,328
Federal funds sold 102 108 357 269
Investment securities available for sale 148 21 396 76
_______________________ _______________________
TOTAL INTEREST INCOME 5,154 3,227 13,424 8,673
_______________________ _______________________
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 3 5 17 17
Money market and savings 438 280 1,254 645
Certificates of deposit 243 309 750 886
_______________________ _______________________
TOTAL INTEREST EXPENSE 684 594 2,021 1,548
_______________________ _______________________
NET INTEREST INCOME 4,470 2,633 11,403 7,125
Provision for credit losses 611 82 1,385 564
_______________________ _______________________
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 3,859 2,551 10,018 6,561
_______________________ _______________________
OTHER INCOME:
Service charges on deposit accounts 98 52 270 124
Gain on sale of SBA loans 534 615 1,920 1,497
Other non interest income 202 82 545 238
_______________________ _______________________
TOTAL OTHER INCOME 834 749 2,735 1,859
_______________________ _______________________
OTHER EXPENSES:
Salaries and benefits 2,050 1,805 5,623 4,787
Premises and fixed assets 476 392 1,522 1,078
Other 782 630 2,372 1,675
_______________________ _______________________
TOTAL OTHER EXPENSES 3,308 2,827 9,517 7,540
_______________________ _______________________
INCOME BEFORE INCOME TAXES 1,385 473 3,236 880
Income taxes 568 1,329 -
_______________________ _______________________
NET INCOME $ 817 $ 473 $ 1,907 $ 880
======================= =======================
Basic earnings per share $ 0.13 $ 0.08 $ 0.32 $ 0.15
======================= =======================
Diluted earnings per share $ 0.12 $ 0.07 $ 0.29 $ 0.14
======================= =======================
Average common shares outstanding 6,055,227 6,051,584 6,053,049 6,050,566
======================= =======================
Average common and equivalent shares outstanding 6,589,985 6,435,407 6,591,627 6,294,794
======================= =======================
The accompanying notes are an integral part of the financial statements.
4
BRIDGE CAPITAL HOLDINGS
Statements of Cash Flows (unaudited)
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
_______________________________
2004 2003
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,907 $ 880
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 1,385 564
Depreciation and amortization 682 501
Increase in accrued interest receivable and other
assets (10,291) (272)
Increase in accrued interest payable and other
liabilities 1,598 746
________ ________
Net cash (used in) provided by operating
activities (4,719) 2,419
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (17,554) (5,792)
Proceeds from maturity of securities available for sale 15,200 12,277
Net increase in loans (85,731) (40,998)
Purchase of fixed assets (1,166) (203)
________ ________
Net cash used in investing activities (89,251) (34,716)
________ ________
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase in deposits 102,542 62,458
Common stock issued 69 10
________ ________
Net cash provided by financing activities 102,611 62,468
________ ________
NET INCREASE IN CASH AND EQUIVALENTS: 8,641 30,171
Cash and equivalents at beginning of period 57,547 34,846
________ ________
Cash and equivalents at end of period $ 66,188 $ 65,017
======== ========
OTHER CASH FLOW INFORMATION:
Cash paid for interest $ 2,034 $ 1,572
======== ========
Cash paid for income taxes $ 1,231 $ -
======== ========
The accompanying notes are an integral part of the financial statements.
5
BRIDGE CAPITAL HOLDINGS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION.
The accompanying unaudited financial statements of Bridge Capital Holdings (the
Bank) have been prepared in accordance with generally accepted accounting
principals applicable in the United States of America and pursuant to the rules
and regulations of the SEC. The interim financial data as of September 30, 2004
and for the three and nine months ended September 30, 2004 and September 30,
2003 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. For further information refer to the
audited financial statements of The Company for the year ended December 31,
2003. Results of operations for the quarter and nine months ended September 30,
2004, are not necessarily indicative of full year results.
On October 1, 2004, Bridge Bank, National Association announced completion of a
bank holding company structure which was approved by shareholders at the Bank's
annual shareholders' meeting held on May 20, 2004. The bank holding company,
formed as a California corporation, is named Bridge Capital Holdings.
Information in this report dated prior to September 30, 2004 in for Bridge Bank,
N.A.
Bridge Capital Holdings was formed for the purpose of serving as the holding
company for Bridge Bank and will be supervised by the Board of Governors of the
Federal Reserve System. Effective October 1, 2004, Bridge Capital Holdings
acquired 100% of the voting shares of Bridge Bank, National Association. As a
result of the transaction, the former shareholders of Bridge Bank received one
share of common stock of Bridge Capital Holdings for every one share of common
stock of Bridge Bank owned.
Prior to the share exchange, the common stock of the Bank had been registered
with the Office of Comptroller of the Currency. As a result of the share
exchange, common stock of Bridge Capital Holdings is now considered registered
with the Securities and Exchange Commission. Future filings will be made with
the SEC rather than the Office of the Comptroller of the Currency and will be
available on the SEC's website, HTTP://WWW.SEC.GOV as well as on the Company's
website HTTP://WWW.BRIDGEBANK.COM.
The comparative balance sheet information as of December 31, 2003 is derived
from the audited financial statements.
Certain amounts in the prior years' financial statements have been reclassified
to conform with the current presentation. These reclassifications have no effect
on the previously reported income.
USE OF ESTIMATES.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from those estimates.
6
EARNINGS PER SHARE.
Basic net income per share is computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is determined using the weighted
average number of common shares outstanding during the period, adjusted for the
dilutive effect of common stock equivalents, consisting of shares that might be
issued upon exercise of common stock options. Common stock equivalents are
included in the diluted net income per share calculation to the extent these
shares are dilutive.
Earnings per share calculation
Quarter ended September 30, Nine months ended September 30,
___________________________ _______________________________
2004 2003 2004 2003
__________ __________ __________ __________
Net income $ 817,000 $ 473,000 $1,907,000 $ 880,000
__________ __________ __________ __________
Weighted average shares used in
computing:
Basic earnings per share 6,055,227 6,051,584 6,053,049 6,050,566
Dilutive potential common shares
related to stock options using
the treasury stock method 534,758 383,823 538,578 244,228
__________ __________ __________ __________
Total average shares and equivalents 6,589,985 6,435,407 6,591,627 6,294,794
Basic earnings per share $ 0.13 $ 0.08 $ 0.32 $ 0.15
========== ========== ========== ==========
Diluted earnings per share $ 0.12 $ 0.07 $ 0.29 $ 0.14
========== ========== ========== ==========
All options are dilutive.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock Based Compensation" as amended by SFAS No. 148
"Accounting for Stock -Based Compensation. Under the provisions of SFAS No. 123,
the Bank is encouraged, but not required, to measure compensation costs related
to its employee stock compensation plan under the fair value method. If the Bank
elects not to recognize compensation expense under this method, it is required
to disclose the pro forma net income and net income per share effects based on
SFAS No. 123 fair value methodology. The Bank has elected to adopt the
disclosure provisions of this statement.
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in its
accounting for stock options. All stock options are granted at fair value at the
date of the grant. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation for the Company's stock option plan been
determined consistent with SFAS No. 123, the Company's net income per share
would have changed to the pro forma amounts indicated below.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing model, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions;
7
WEIGHTED AVERAGE ASSUMPTIONS
September 30, September 30,
2004 2003
____________________________
Expected life 52 months 60 months
Stock Volatility 19.86% 14.00%
Risk free interest rate 4.09% 2.28%
Dividend yield 0.00% 0.00%
The Company's stock options generally vest annually over a period of 3
to 4 years. If the computed fair value of the 2004 and 2003 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
would have been as follows:
Quarter ended Nine months
September 30, September 30,
_____________________ _________________________
2004 2003 2004 2003
_________ _________ ___________ _________
Net income as reported $ 817,000 $ 473,000 $ 1,907,000 $ 880,000
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (45,000) (77,000) (159,000) (274,000)
Pro forma net income $ 772,000 $ 396,000 $ 1,748,000 $ 606,000
Earnings per share:
Basic-as reported $ 0.13 $ 0.08 $ 0.32 $ 0.15
Basic-pro forma $ 0.13 $ 0.07 $ 0.29 $ 0.10
Diluted-as reported $ 0.12 $ 0.07 $ 0.29 $ 0.14
Diluted-pro forma $ 0.12 $ 0.06 $ 0.27 $ 0.10
COMPREHENSIVE INCOME.
SFAS No. 130, "Reporting Comprehensive Income" requires that all items
recognized under accounting standards as components of comprehensive earnings be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. This Statement also requires
that an entity classify items of other comprehensive earnings by their nature in
an annual financial statement. Other comprehensive earnings include unrealized
gains and losses, net of tax, on marketable securities classified as
available-for-sale. The Company had cumulative other comprehensive income (loss)
totaling $(73,000), net of tax, at September 30, 2004. The Company had no other
comprehensive income for the quarter ended September 30, 2003.
8
(dollars in thousands) Quarter ended September 30, Nine months ended September 30,
___________________________ _______________________________
2004 2003 2004 2003
_____ _____ ______ _____
Net income $ 817 $ 473 $1,907 $ 880
Other comprehensive earnings-
Net unrealized gains on
securities available for sale (73) - (73) -
_____ _____ ______ _____
Total comprehensive income $ 744 $ 473 $1,834 $ 880
===== ===== ====== =====
SEGMENT INFORMATION.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information, requires certain information about the operating segments of the
Bank. 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 single
operating segment.
2. SECURITIES
The amortized cost and approximate fair values of securities at September 30,
2004 and December 31, 2003 are as follows:
(dollars in thousands)
as of September 30, 2004
______________________________________________
Gross Unrealized
__________________ Fair
Cost Gains Losses Value
______________________________________________
U. S. Treasury Securities $ 99 $ - $ - $ 99
U. S. Government Agency Securities 26,438 1 (124) 26,315
Money Market Mutual Funds - - - -
______________________________________________
Total securities available for sale 26,537 1 (124) 26,414
______________________________________________
Total investment securities portfolio $ 26,537 $ 1 $ (124) $ 26,414
==============================================
as of December 31, 2003
______________________________________________
Gross Unrealized
__________________ Fair
Cost Gains Losses Value
______________________________________________
U. S. Treasury Securities $ 100 $ - $ - $ 100
U. S. Government Agency Securities 14,236 13 (2) 14,247
Money Market Mutual Funds 10,000 - - 10,000
______________________________________________
Total securities available for sale 24,336 13 (2) 24,347
______________________________________________
Total investment securities portfolio $ 24,336 $ 13 $ (2) $ 24,347
==============================================
9
The scheduled maturities of securities available for sale at September 30, 2004
were as follows:
MATURITY OF INVESTMENT SECURITIES PORTFOLIO
(dollars in thousands)
Securities available for sale September 30, 2004
__________________________________________________________________________
Amortized Fair
Cost Value
_____________________
Due in one year or less $10,131 $10,113
Due after one year through five years 16,406 16,301
Due after five years through ten years 0 0
Due after ten years 0 0
____________________
Total securities available for sale 26,537 26,414
____________________
Total Investment securities $26,537 $26,414
====================
As of September 30, 2004, investment securities with carrying values of
approximately $99,000 were pledged as collateral at the Federal Reserve Bank for
Treasury Tax and Loans. As of September 30, 2004 there were no unrealized losses
attributable to securities invested for a period greater than 12 months.
3. LOANS
The balances in the various loan categories are as follows as of September 30,
2004 and December 31, 2003.
(in thousands)
September 30, December 31,
2004 2003
_______________________________
Commercial and other $ 94,071 $ 73,846
SBA 41,370 39,412
Real estate construction 44,784 35,065
Real estate other 76,939 28,036
Factoring and asset based lending 19,839 13,106
Other 3,280 4,984
__________________________
Loans, gross 280,283 194,449
Net deferred loan fees (974) (713)
__________________________
Total loan portfolio 279,309 193,736
Less allowance for credit losses (3,910) (2,683)
__________________________
Loans, net $275,399 $191,053
==========================
The Company has the ability and the intent to sell all or a portion of
certain SBA loans in the loan portfolio and, as such, carries the saleable
portion of these loans at the lower of aggregate cost or fair value. Of the
$41.4 million in SBA loans in the loan portfolio at September 30, 2004, $10.2
million was classified as held for sale. At September 30, 2004 and December 31,
2003, the fair value of SBA loans held for sale exceeded aggregate cost and
therefore, SBA loans were carried at aggregate cost.
10
4. PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on a straight-line
basis over the shorter of the lease term, generally three to fifteen years, or
the estimated useful lives of the assets, generally three to five years.
Premises and equipment at September 30, 2004 and December 31, 2003 are comprised
of the following:
September 30, 2004
______________________ Accumulated Net Book
Cost Depreciation Value
_______ ____________ ________
Leasehold improvements $ 1,560 $ (410) $ 1,150
Furniture and fixtures 622 (245) 377
Capitalized software 912 (528) 384
Equipment 800 (559) 241
_______ ________ _______
Totals $ 3,894 $ (1,742) $ 2,152
======= ======== =======
December 31, 2003
______________________ Accumulated Net book
Cost Depreciation Value
_______ ____________ ________
Leasehold improvements $ 981 $ (279) $ 702
Furniture and fixtures 391 (165) 226
Capitalized Software 655 (369) 286
Equipment 790 (489) 301
_______ ________ _______
Totals $ 2,817 $ (1,302) $ 1,515
======= ======== =======
5. INCOME TAXES
The Company's effective tax rate was 41.00% for the period ended
September 30, 2004 and 0% for the nine months ended September 30, 2003 as a
result of net operating losses and net operating loss carryforward. Income tax
expense of $200K and a release of valuation allowance with respect to a net
deferred tax asset of approximately $2.0 million were recognized in the fourth
quarter of 2003 as the Company determined that the net deferred tax asset met
the realizability standards of SFAS No. 109.
6. MANAGEMENT REPRESENTATION
Any unaudited interim financial statements furnished shall reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. A statement to that
effect shall be included. Such adjustments shall include, for example,
appropriate estimated provisions for bonus and profit sharing arrangements
normally determined or settled at year end. If all such adjustments are of a
normal recurring nature, a statement to that effect shall be made; otherwise,
there shall be furnished information describing in appropriate details the
nature and amount of any adjustments other than normal recurring adjustments
entering into the determination of the results shown.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Certain matters discussed or incorporated by reference in this
Quarterly Report on Form 10-Q are forward-looking statements that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Changes to such risks and uncertainties, which could
impact future financial performance, include, among others, (1) competitive
pressures in the Banking industry; (2) changes in interest rate environment; (3)
general economic conditions, nationally, regionally and in operating market
areas; (4) changes in the regulatory environment; (5) changes in business
conditions and inflation; (6) costs and expenses of complying with the internal
control provisions of the Sarbanes-Oxley Act and our degree of success in
11
achieving compliance and (7) changes in securities markets. Therefore, the
information in this quarterly report should be carefully considered when
evaluating business prospects of the Company.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are integral to understanding the results
reported. Our most complex accounting policies require management's judgment to
ascertain the valuation of assets, liabilities, commitments and contingencies.
We have established detailed policies and control procedures that are intended
to ensure valuation methods are well controlled and applied consistently from
period to period. In addition, the policies and procedures are intended to
ensure that the process for changing methodologies occurs in an appropriate
manner. The following is a brief description of our current accounting policies
involving significant management valuation judgments.
Allowance for Loan Losses: The allowance for loan losses represents
management's best estimate of losses inherent in the existing loan portfolio.
The allowance for loan losses is increased by the provision for loan losses
charged to expense and reduced by loans charged off, net of recoveries. The
provision for loan losses is determined based on management's assessment of
several factors: reviews and evaluation of specific loans, changes in the nature
and volume of the loan portfolio, current economic conditions and the related
impact on specific borrowers and industry groups, historical loan loss
experiences, the level of classified and nonperforming loans and the results of
regulatory examinations.
Loans are considered impaired if, based on current information and
events, it is probable that we will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate stipulated in the loan agreement, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. In measuring the fair value of the collateral, management
uses assumptions and methodologies consistent with those that would be utilized
by unrelated third parties.
Changes in the financial condition of individual borrowers, in economic
conditions, in historical loss experience and in the condition of the various
markets in which collateral may be sold may all affect the required level of the
allowance for loan losses and the associated provision for loan losses.
The Company has the ability and the intent to sell all or a portion of
certain SBA loans in the loan portfolio and, as such, carries the saleable
portion of these loans at the lower of aggregate cost or fair value. At
September 30, 2004 and December 31, 2003, the fair value of SBA loans exceeded
aggregate cost and therefore, SBA loans were carried at aggregate cost.
In calculating gain on the sale of SBA loans, the Company performs an
allocation based on the relative fair values of the sold portion and retained
portion of the loan. The Company's assumptions are validated by reference to
external market information.
Available-for-sale securities: the fair value of most securities
classified as available-for-sale is based on quoted market prices. If quoted
market prices are not available, fair values are extrapolated from the quoted
prices of similar instruments.
Deferred tax assets: We use an estimate of future earnings to support
our position that the benefit of our deferred tax assets will be realized. If
future income should prove non-existent or less than the amount of the deferred
tax assets within the tax years to which they may be applied, the asset will not
be realized and our net income will be reduced.
Supplemental Employee Retirement Plan: The Company has entered into
supplemental employee retirement agreements with certain executive and senior
officers. The measurement of the liability under these agreements includes
estimates involving life expectancy, length of time before retirement, and
expected benefit levels. Should these estimates prove materially wrong, we could
incur additional or reduced expense to provide the benefits.
12
SELECTED FINANCIAL DATA
The following presents selected financial data and ratios as of and for
the quarter and nine months ended September 30, 2004 and 2003.
STATEMENT OF OPERATIONS DATA:
(dollars in thousands) Quarter ended September 30, Nine months ended September 30,
___________________________ _______________________________
2004 2003 2004 2003
_________ _________ __________ __________
Interest income $ 5,154 $ 3,227 $ 13,424 $ 8,673
Interest expense 684 594 2,021 1,548
_________ _________ __________ __________
Net interest income 4,470 2,633 11,403 7,125
Provision for credit losses 611 82 1,385 564
_________ _________ __________ __________
Net interest income after provision
for credit losses 3,859 2,551 10,018 6,561
_________ _________ __________ __________
Noninterest income 834 749 2,735 1,859
Noninterest expenses 3,308 2,827 9,517 7,540
_________ _________ __________ __________
Income before income taxes 1,385 473 3,236 880
Income taxes 568 - 1,329 -
_________ _________ __________ __________
Net income $ 817 $ 473 $ 1,907 $ 880
========= ========= ========== ==========
PER SHARE DATA:
Basic income per share $ 0.13 $ 0.08 $ 0.32 $ 0.15
========= ========= ========== ==========
Diluted income per share $ 0.12 $ 0.07 $ 0.29 $ 0.14
========= ========= ========== ==========
Shareholders' equity per share $ 5.25 $ 4.54 $ 5.25 $ 4.54
========= ========= ========== ==========
Cash dividend per common share $ - $ - $ - $ -
========= ========= ========== ==========
Quarter ended September 30,
BALANCE SHEET DATA: 2004 2003
__________________ ___________________________
Balance sheet totals:
Assets $ 384,561 $ 245,282
Loans, net 275,399 166,779
Deposits 348,936 215,817
Shareholders' equity 31,850 27,454
Average balance sheet amounts:
Assets $ 348,666 $ 231,044
Loans, net 258,923 163,859
Deposits 314,547 202,424
Shareholders' equity 31,282 27,183
SELECTED RATIOS:
Return on average equity 10.45% 6.96%
Return on average assets 0.94% 0.82%
Efficiency ratio 62.37% 83.59%
Leverage capital ratio 9.13% 11.88%
Net chargeoffs to average loans 0.00% 0.00%
Allowance for loan losses to total loans 1.40% 1.42%
Average equity to average assets 8.97% 11.77%
13
SUMMARY OF FINANCIAL RESULTS - QUARTER ENDED SEPTEMBER 30, 2004
The Company reported net income of $817,000 ($0.13 basic and $0.12
diluted earnings per share) for the quarter ended September 30, 2004 as compared
to $473,000 ($0.08 basic and $0.07 diluted earnings per share) for the quarter
ended September 30, 2003. The increase in net income resulted primarily from
increases in net interest income and non-interest income offset, in part, by
increases in provisions for credit losses, operating expenses and income tax
expense.
The table below highlights the changes in the nature and sources of income and
expense.
Quarter ended September 30,
___________________________
2004 2003 Change
Operations _______ _______ _______
(dollars in thousands)
Interest income $ 5,154 $ 3,227 $ 1,927
Interest expense 684 594 90
_______ _______ _______
Net interest income 4,470 2,633 1,837
Provision for credit losses 611 82 529
_______ _______ _______
Net interest income after provision
for credit losses 3,859 2,551 1,308
_______ _______ _______
Other income 834 749 85
Other expenses 3,308 2,827 481
_______ _______ _______
Income before income taxes 1,385 473 912
Income taxes 568 - 568
_______ _______ _______
Net income $ 817 $ 473 $ 344
======= ======= =======
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.
The following table details the average balances, interest income and
expense and the effective yields/rates for earning assets and interest-bearing
liabilities for the quarters ended September 30, 2004 and 2003.
14
Three months ended September 30,
2004 2003
-------------------------------- --------------------------------
(in thousands)
YIELDS INTEREST YIELDS INTEREST
AVERAGE OR INCOME/ AVERAGE OR INCOME/
BALANCE RATES EXPENSE BALANCE RATES EXPENSE
-------------------------------- --------------------------------
ASSETS
Interest earning assets:
Loans (1) $263,359 7.4% $ 4,904 $166,702 7.4% $ 3,098
Federal funds sold 28,655 1.4% 102 43,106 1.0% 108
Investment securities (2) 30,666 1.9% 148 9,027 0.9% 21
-------------------------------- --------------------------------
Total interest earning assets 322,680 6.4% 5,154 218,835 5.9% 3,227
-------------------- --------------------
Noninterest-earning assets:
Cash and due from banks 19,850 11,564
All other assets (3) 6,136 645
------------ ------------
TOTAL $348,666 $231,044
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 2,866 0.4% $ 3 $ 3,309 0.6% $ 5
Savings and money market 141,255 1.2% 438 74,335 1.5% 280
Time 47,014 2.1% 243 49,605 2.5% 309
-------------------------------- --------------------------------
Total interest bearing liabilities 191,135 1.4% 684 127,249 1.9% 594
-------------------- --------------------
Noninterest-bearing liabilities:
Demand deposits 123,412 75,175
Accrued expenses and
other liabilities 2,837 1,437
Shareholders' equity 31,282 27,183
------------ ------------
TOTAL $348,666 $231,044
============ ============
------------ -----------
Net interest income 5.5% $ 4,470 4.8% $ 2,633
==================== ====================
(1) Loan fee amortization of $569,000 and 306,000, respectively, is
included in interest income. Nonperforming loans have been
included in average loan balances.
(2) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis. Yields are based on amortized cost.
(3) Net of average allowance for credit losses of $3,572,000 and
$2,345,000, respectively.
INTEREST INCOME
The average balance sheet and the general interest rate environment
drive net interest income. Net interest income for the quarter ended September
30, 2004 was $4,470,000 comprised of $5,154,000 in interest income and $684,000
in interest expense. Net interest income for the three months ended September
30, 2003 was $2,633,000 comprised of $3,227,000 in interest income and $594,000
in interest expense. Net interest income for the quarter ended September 30,
2004 represented an increase of $1.8 million or 70% over the same period one
year earlier.
15
The following table shows the effect of the interest differential of
volume and rate changes for the quarters ended September 30, 2004 and 2003. 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.
VOLUME/RATE ANALYSIS
(dollars in thousands) Quarter ended September 30,
2004 vs. 2003
_____________________________________
Increase (decrease)
due to change in
_____________________________________
Average Average Total
Volume Rate Change
_________ _______ _______
Interest income:
Loans $ 1,796 $ 10 $ 1,806
Federal funds sold (36) 30 (6)
Investment securities 50 77 127
_________ _______ _______
Total interest income 1,810 # 117 1,927
_________ _______ _______
Interest expense:
Demand (1) (1) (2)
Savings 252 (94) 158
Time (16) (50) (66)
_________ _______ _______
Total interest expense 235 # (145) 90
_________ _______ _______
Change in net interest income $ 1,575 $ 262 $ 1,837
========= ======= =======
The increase in net interest income was primarily due to growth in
average earning assets. Average earning assets for the quarter ended September
30, 2004 were $322.7 million and represented growth of $103.9 million or 48%
over $218.8 million for the same period in 2003. The net interest margin (net
interest income divided by average earning assets) was 5.5% for the quarter
ended September 30, 2004 and compared to 4.8% for the same quarter in 2003.
Average gross loans were $263.3 million for the three months ended
September 30, 2004, an increase of $96.6 million or 58% over $166.7 million for
the same period one year earlier. The average yield on loans was 7.4% for the
quarter ended September 30, 2004 and compared to 7.4% for the same quarter in
2003. During the quarter ended September 30, 2004, the ratio of average gross
loans to average deposits (one measure of leverage) increased to 83.7% from
82.4% in the comparable period of 2003. In addition, average loans comprised
81.6% of average earning assets in the three months ended September 30, 2004
compared to 76.2% in the first quarter of 2003. Primarily as a result of the
increased leverage, the yield on average earning assets increased to 6.4% in the
three months ended September 30, 2004 from 5.9% in 2003.
Other earning assets, consisting of investment securities, federal
funds sold and interest bearing deposits in other Banks, averaged $59.3 million
for the quarter ended September 30, 2004, an increase of $7.2 million or 13.8%
from $52.1 million for the three months ended September 30, 2003.
INTEREST EXPENSE
Interest expense was $684,000 for the quarter ended September 30, 2004,
which represented an increase of $90,000 or 15.2% over $594,000 for the
comparable period of 2003. The increase in interest expense reflects growth in
average interest-bearing liabilities in 2004 compared to 2003. Average
interest-bearing liabilities were $191.1 million for the three months ended
September 30, 2004, an increase of $63.9 million, or 50.2%, over $127.2 million
for the same period one year earlier. The average rate paid on interest-bearing
liabilities was 1.4% in the quarter ended September 30, 2004 compared to 1.9% in
the second quarter of 2003.
Net interest income is the principal source of the Company's operating
earnings. Significant factors affecting net interest income are: rates, volumes
and mix of the loan, investment and deposit portfolios. Due to the nature of the
16
Company's lending markets, in which the majority of loans are generally tied to
Prime Rate, it is believed that an increase in interest rates should positively
affect the Company's future earnings, while a decline should have a negative
impact. However, it is not feasible to provide an accurate measure of such a
change because of the many factors (many of them uncontrollable) influencing the
result.
PROVISION FOR CREDIT LOSSES
The Bank maintains an allowance for credit losses which is based, in
part, on the Company's and industry loss experience, the impact of economic
conditions within the Company's market area, and, as applicable, the State of
California, the value of underlying collateral, loan performance and inherent
risks in the loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating expense and
recoveries of previously charged-off loans. The Bank provided $611,000 to the
allowance for credit losses for the three months ended September 30, 2004, as
compared to $82,000 for the same period in 2003. There were no loans charged off
and $9,000 in recoveries during the three months ended September 30, 2004. There
were no charge-offs and $8,000 in recoveries during the comparable three month
period ended September 30, 2003. At September 30, 2004, the allowance for credit
losses was $3,910,000 representing 1.40% of total loans, as compared to
$2,414,000 representing 1.42% of total loans at September 30, 2003 and
$2,683,000 representing 1.38% of total loans at December 31, 2003.
The following schedule summarizes the activity in the allowance for
credit losses:
Quarter ended
September 30, September 30,
2004 2003
--------------------------------
Balance, beginning of period $ 3,290 $ 2,324
Loans charged off by category:
Commercial and other - -
Real estate Construction - -
Real estate term - -
Factoring and asset-based - -
Consumer - -
--------------------------------
Total chargeoffs - -
--------------------------------
Recoveries by category:
Commercial and other 9 8
Real estate Construction - -
Real estate term - -
Factoring and asset-based - -
Consumer - -
--------------------------------
Total recoveries 9 8
--------------------------------
Net (recoveries) chargeoffs 9 8
Provision charged to expense 611 82
--------------------------------
Balance, end of period $ 3,910 $ 2,414
================================
Ratio of net charge-offs during the
period to average loans outstanding 0.00% 0.00%
Ratio of allowance for credit losses
to loans outstanding at end of period 1.40% 1.42%
Allowance to nonperforming loans
at end of period 358.06% -
The accrual of interest on loans would be discontinued and any accrued
and unpaid interest is reversed when, in the opinion of management, there is
significant doubt as to the collectibility of interest or principal or when the
payment of principal or interest is ninety days past due, unless the amount is
well-secured and in the process of collection. There were two non-accrual loans
totaling $1,092,000 at September 30, 2004 and one non-accrual loan totaling
$59,000 at December 31, 2003.
17
Non-accrual loans at September 30, 2004 consisted of two SBA loans
totaling $1,092,000. Both loans carry 75% guarantees from the U.S. Small
Business Administration. The guaranteed portion of the first loan was sold to
the secondary market with a remaining liability to The Company of $56,000. The
loan is secured by business assets, and though the borrower continues to make
monthly principal and interest payments, the Company's prospects for full
repayment remain uncertain. The second loan totaling $1,036,000, is secured by
real estate and business assets, though the value of the business assets are
currently believed to be negligible. The analysis of the Company's potential
loss is ongoing, however management believes that reserves are adequate to
address the Company's potential exposure.
In addition, at September 30, 2004 and December 31, 2003, there were no
loans past due 90 days or more as to principal or interest and still accruing
interest.
At September 30, 2004 and December 31, 2003 there were no properties
owned by the Bank acquired through the foreclosure process and there were no
restructured loans.
The following table summarizes nonperforming loans at September 30,
2004 and December 31, 2003.
Nonperforming Loans September 30, December 31,
(dollars in thousands) 2004 2003
-------------------------------
Loans accounted for on a non-accrual basis $ 1,092 $ 59
Loans restructured and in compliance with modified terms - -
Other loans with principal or interest contracturally past due
90 days or more - -
-------------------------------
$ 1,092 $ 59
===============================
Management is of the opinion that the allowance for credit losses is maintained
at a level adequate for known and unidentified losses inherent in the loan
portfolio. However, the Company's loan portfolio, which includes approximately
$43 million in real estate and $79 million in construction and land loans,
representing approximately 43% of the portfolio, could be adversely affected if
California economic conditions and the real estate market in the Company's
market area were to weaken. The effect of such events, although uncertain at
this time, could result in an increase in the level of non-performing loans and
OREO and the level of the allowance for loan losses, which could adversely
affect the Company's future growth and profitability.
OTHER INCOME
The following table sets forth the components of other income and the
percentage distribution of such income for the three months ended September 30,
2004 and 2003.
OTHER INCOME
(dollars in thousands) 2004 2003
----------------------- ------------------------
Amount Percent Amount Percent
----------------------- ------------------------
Gain on sale of SBA loans $ 534 64.0% $ 576 76.9%
SBA loan servicing income 88 10.5% 44 5.9%
Depositor service charges 98 11.8% 53 7.1%
Other operating income 114 13.7% 76 10.1%
------------ ------------
$ 834 100.0% $ 749 100.0%
============ ============
Other income totaled $834,000 in the second quarter of 2004, an
increase of $85,000 or 11.3% over $749,000 in 2003. Other income consists
18
primarily of net gains recognized on sales of SBA loans, SBA loan packaging fees
and service charge income on deposit accounts.
OTHER EXPENSE
The components of other expense are set forth in the following table
for the three months ended September 30, 2004 and 2003.
Other Expense as a Percent of Average Earning Assets
(dollars in thousands) 2004 2003
------------------------ ------------------------
Amount Percent Amount Percent
------------------------ ------------------------
Salaries and benefits $ 2,050 2.5% $ 1,806 3.3%
Occupancy 339 0.4% 240 0.4%
Furniture and equipment 138 0.2% 151 0.3%
Data processing 185 0.2% 132 0.2%
Legal and professional 102 0.1% 101 0.2%
Other 494 0.6% 397 0.7%
------------ ------------
$ 3,308 4.1% $ 2,827 5.2%
============ ============
Operating expenses were $3,308,000 for the three months ended September
30, 2004, an increase of $481,000 or 17.0% from $2,827,000 at September 30,
2003. As a percentage of average earning assets, other expenses for the three
months ended September 30, 2004 and 2003 were 4.2% and 5.2%, respectively, on an
annualized basis. In 2004, operating expenses were comprised primarily of
salaries and benefits of $2,050,000, which compared to $1,806,000 in 2003, and
occupancy expense of $339,000 which compared to $240,000 on 2003. The increase
in salaries and benefits was primarily due to the additional headcount related
to expansion of the business. At September 30, 2004, the Bank employed 73 FTE
compared to 56 FTE on the same date one year earlier. The increase in occupancy
expense is primarily due to expense related to the new facility at 55 Almaden
Blvd, San Jose, California which opened in the first quarter of 2004.
19
SUMMARY OF FINANCIAL RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 2004
The Company reported net income of $1,907,000 ($0.32 basic and $0.29
diluted earnings per share) for the nine months ended September 30, 2004 as
compared to $880,000 ($0.15 basic and $0.14 diluted earnings per share) for the
nine months ended September 30, 2003. The increase in net income resulted
primarily from increases in net interest income and non-interest income offset,
in part, by increases in provisions for loan losses, operating expenses and
income tax expense.
The table below highlights the changes in the nature and sources of income and
expense.
Nine months ended September 30,
Operations 2004 2003 Change
--------------- --------------- ------------
(dollars in thousands)
Interest income $ 13,424 $ 8,673 $ 4,751
Interest expense 2,021 1,548 473
--------------- --------------- ------------
Net interest income 11,403 7,125 4,278
Provision for credit losses 1,385 564 821
--------------- --------------- ------------
Net interest income after
provision for credit losses 10,018 6,561 3,457
--------------- --------------- ------------
Other income 2,735 1,859 876
Other expenses 9,517 7,540 1,977
--------------- --------------- ------------
Income before income taxes 3,236 880 2,356
Income taxes 1,329 - 1,329
--------------- --------------- ------------
Net income $ 1,907 $ 880 $ 1,027
=============== =============== ============
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.
The following table details the average balances, interest income and
expense and the effective yields/rates for earning assets and interest-bearing
liabilities for the nine months ended September 30, 2004 and 2003.
20
Nine months ended September 30,
2004 2003
---------------------------------- ----------------------------------
(in thousands)
YIELDS INTEREST YIELDS INTEREST
AVERAGE OR INCOME/ AVERAGE OR INCOME/
BALANCE RATES EXPENSE BALANCE RATES EXPENSE
---------------------------------- ----------------------------------
ASSETS
Interest earning assets:
Loans (1) $ 229,744 7.4% $12,671 $ 151,984 7.3% $ 8,328
Federal funds sold 44,615 1.1% 357 32,319 1.1% 269
Investment securities (2) 31,222 1.7% 396 9,552 1.1% 76
---------------------------------- ----------------------------------
Total interest earning assets 305,581 5.9% 13,424 193,855 6.0% 8,673
--------------------- ---------------------
Noninterest-earning assets:
Cash and due from banks 17,604 10,584
All other assets (3) 3,520 786
------------- -------------
TOTAL $ 326,705 $ 205,225
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 3,751 0.6% $ 17 $ 3,291 0.7% $ 17
Savings and money market 130,822 1.3% 1,254 56,473 1.5% 645
Time 45,792 2.2% 750 47,528 2.5% 886
Other - - - 2 0.0% -
---------------------------------- ----------------------------------
Total interest bearing liabilities 180,365 1.5% 2,021 107,294 1.9% 1,548
--------------------- ---------------------
Noninterest-bearing liabilities:
Demand deposits 113,723 69,706
Accrued expenses and
other liabilities 2,432 1,328
Shareholders' equity 30,185 26,897
------------- -------------
TOTAL $ 326,705 $ 205,225
============= ------------ ============= ------------
Net interest income 5.0% $11,403 4.9% $ 7,125
===================== =====================
(1) Loan fee amortization of $1,495,000 and 866,000, respectively, is
included in interest income. Nonperforming loans have been
included in average loan balances.
(2) Interest income is reflected on an actual basis, not a fully
taxable equivalent basis. Yields are based on amortized cost.
(3) Net of average allowance for credit losses of $3,115,000 and
$2,108,000, respectively.
21
INTEREST INCOME
The average balance sheet and the general interest rate environment
drive net interest income. Net interest income for the nine months ended
September 30, 2004 was $11,403,000 comprised of $13,424,000 in interest income
and $2,021,000 in interest expense. Net interest income for the nine months
ended September 30, 2003 was $7,125,000 comprised of $8,673,000 in interest
income and $1,548,000 in interest expense. Net interest income for the nine
months ended September 30, 2004 represented an increase of $4.3 million or 60%
over the same period one year earlier.
The following table shows the effect of the interest differential of volume and
rate changes for the nine months ended September 30, 2004 and 2003. 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.
VOLUME/RATE ANALYSIS
(dollars in thousands) Nine months ended
2004 vs. 2003
---------------------------------------------
Increase (decrease)
due to change in
------------ ------------- ------------
Average Average Total
Volume Rate Change
------------ ------------- ------------
Interest income:
Loans $ 4,261 $ 82 $ 4,343
Federal funds sold 102 (14) 88
Investment securities 172 148 320
Other - - -
------------ ------------- ------------
Total interest income 4,535 217 4,752
------------ ------------- ------------
Interest expense:
Demand 2 (2) -
Savings and money market 849 (240) 609
Time (32) (104) (136)
Other - - -
------------ ------------- ------------
Total interest expense 819 (346) 473
------------ ------------- ------------
Change in net interest income $ 3,716 $ 563 $ 4,279
============ ============= ============
The increase in net interest income was primarily due to growth in
average earning assets. Average earning assets for the nine months ended
September 30, 2004 were $305.6 million and represented growth of $111.7 million
or 58% over $193.9 million for the same period in 2003. The net interest margin
(net interest income divided by average earning assets) was 5.0% for the nine
months ended September 30, 2004 and compared to 4.9% for the same nine months in
2003.
Average gross loans were $229.7 million for the nine months ended
September 30, 2004, an increase of $77.7 million or 51% over $152.0 million for
the same period one year earlier. The average yield on loans was 7.4% for the
nine months ended September 30, 2004 and compared to 7.3% for the same nine
months in 2003. During the nine months ended September 30, 2004, the ratio of
average gross loans to average deposits (one measure of leverage) decreased to
78.1% from 85.9% in the comparable period of 2003. In addition, average loans
comprised 75.2% of average earning assets in the nine months ended September 30,
2004 compared to 78.4% in the first nine months of 2003. Primarily as a result
of the change in composition of average earning assets, the yield on average
earning assets decreased to 5.9% in the nine months ended September 30, 2004
from 6.0% in 2003.
22
Other earning assets, consisting of investment securities, federal
funds sold and interest bearing deposits in other banks, averaged $75.8 million
for the nine months ended September 30, 2004, an increase of $33.9 million or
77.4% from $41.9 million for the nine months ended September 30, 2003.
INTEREST EXPENSE
Interest expense was $2,021,000 for the nine months ended September 30,
2004, which represented an increase of $473,000 or 30.6% over $1,548,000 for the
comparable period of 2003. The increase in interest expense reflects growth in
average interest-bearing liabilities in 2004 compared to 2003. Average
interest-bearing liabilities were $180.4 million for the nine months ended
September 30, 2004, an increase of $70.1 million, or 68.1%, over $107.3 million
for the same period one year earlier. The average rate paid on interest-bearing
liabilities was 1.5% in the nine months ended September 30, 2004 compared to
1.90% in the first nine months of 2003.
Net interest income is the principal source of the Company's operating
earnings. Significant factors affecting net interest income are: rates, volumes
and mix of the loan, investment and deposit portfolios. Due to the nature of the
Company's lending markets, in which the majority of loans are generally tied to
Prime Rate, it is believed that an increase in interest rates should positively
affect the Company's future earnings, while a decline should have a negative
impact. The risk is mitigated to some degree in a declining rate environment by
the implementation of rate floors in a portion of the loans that are tied to
Prime Rate. However, it is not feasible to provide an accurate measure of such a
change because of the many factors (many of them uncontrollable) influencing the
result.
PROVISION FOR CREDIT LOSSES
The Company maintains an allowance for credit losses which is based, in
part, on the Company's and industry loss experience, the impact of economic
conditions within the Company's market area, and, as applicable, the State of
California, the value of underlying collateral, loan performance and inherent
risks in the loan portfolio. The allowance is reduced by charge-offs and
increased by provisions for credit losses charged to operating expense and
recoveries of previously charged-off loans. The Company provided $1,385,000 to
the allowance for credit losses for the nine months ended September 30, 2004, as
compared to $564,000 for the same period in 2003. There were $190,000 in loans
charged off and $32,000 in recoveries during the nine months ended September 30,
2004. There were no charge-offs and $85,000 in recoveries during the comparable
nine month period ended September 30, 2003. At September 30, 2004, the allowance
for credit losses was $3,910,000 representing 1.40% of total loans, as compared
to $2,414,000 representing 1.42% of total loans at September 30, 2003 and
$2,683,000 representing 1.38% of total loans at December 31, 2003.
The following schedule summarizes the activity in the allowance for
credit losses:
23
Nine months ended
September 30,
2004 2003
----------------------------
Balance, beginning of period $ 2,683 $ 1,765
Loans charged off by category:
Commercial and other 190 -
Real estate Construction - -
Real estate term - -
Factoring and asset-based - -
Consumer - -
----------------------------
Total chargeoffs 190 -
----------------------------
Recoveries by category:
Commercial and other 32 85
Real estate Construction - -
Real estate term - -
Factoring and asset-based - -
Consumer - -
----------------------------
Total recoveries 32 85
----------------------------
Net chargeoffs (recoveries) 158 (85)
Provision charged to expense 1,385 564
----------------------------
Balance, end of year $ 3,910 $ 2,414
============================
Ratio of net charge-offs during the
period to average loans outstanding 0.07% -0.06%
Ratio of allowance for credit losses
to loans outstanding at end of period 1.40% 1.40%
Allowance to nonperforming loans
at end of period 358.06% -
The accrual of interest on loans would be discontinued and any accrued
and unpaid interest is reversed when, in the opinion of management, there is
significant doubt as to the collectibility of interest or principal or when the
payment of principal or interest is ninety days past due, unless the amount is
well-secured and in the process of collection. There were two non-accrual loans
totaling $1,092,000 at September 30, 2004 and one non-accrual loan totaling
$59,000 at December 31, 2003.
See "Summary of Financial Results for the Quarter ended September 30,
2004-Provision for Credit Losses" for a discussion of nonperforming assets.
24
OTHER INCOME
The following table sets forth the components of other income and the
percentage distribution of such income for the nine months ended September 30,
2004 and 2003.
Other Income
(dollars in thousands) 2004 2003
----------------------- ------------------------
Amount Percent Amount Percent
----------------------- ------------------------
Gain on sale of SBA loans $ 1,920 70.2% $ 1,497 80.5%
SBA loan servicing income 229 8.4% 124 6.7%
Depositor service charges 270 9.9% 124 6.7%
Other operating income 316 11.5% 114 6.1%
----------------------- ------------------------
$ 2,735 100.0% $ 1,859 100.0%
============ ============
Other income totaled $2,735,000 in the nine months ended September 30,
2004, an increase of $875,000 or 47% over $1,859,000 in 2003. Other income
consists primarily of net gains recognized on sales of SBA loans, SBA loan
packaging fees and service charge income on deposit accounts.
OTHER EXPENSE
The components of other expense are set forth in the following table
for the nine months ended September 30, 2004 and 2003.
Other Expense as a Percent of Average Earning Assets
(dollars in thousands)
2004 2003
----------------------- ------------------------
Amount Percent Amount Percent
----------------------- ------------------------
Salaries and benefits $ 5,623 2.5% $ 4,787 3.3%
Occupancy 1,084 0.5% 651 0.4%
Furniture and equipment 439 0.2% 426 0.3%
Data processing 507 0.2% 374 0.3%
Legal and professional 348 0.2% 248 0.2%
Other 1,516 0.7% 1,054 0.7%
----------- ------------
$ 9,517 4.2% $ 7,540 5.2%
=========== ============
Operating expenses were $9,517,000 for the nine months ended September
30, 2004, an increase of $1,977,000 or 26% from $7,540,000 at September 30,
2003. As a percentage of average earning assets, other expenses for the nine
months ended September 30, 2004 and 2003 were 4.2% and 5.2%, respectively, on an
annualized basis. In 2004, operating expenses were comprised primarily of
salaries and benefits of $5,623,000, which compared to $4,787,000 in 2003, and
occupancy expense of $1,084,000 which compared to $651,000 on 2003. The increase
in salaries and benefits was primarily due to the additional headcount related
to expansion of the business. At September 30, 2004, The Company employed 73 FTE
compared to 56 FTE on the same date one year earlier. The increase in occupancy
expense is primarily due to expense related to the new facility at 55 Almaden
Blvd, San Jose, California.
25
BALANCE SHEET
Total assets of Bridge Capital Holdings at September 30, 2004 were
$384.6 million, an increase of $106.0 million (38%) as compared to $278.6
million at December 31, 2003. Growth in total assets was principally due to an
increase in loan balances.
The following table shows the Company's loans by type and their
percentage distribution for the periods ended September 30, 2004 and December
31, 2003.
LOAN PORTFOLIO
(dollars in thousands) September 30, December 31,
2004 2003
--------------------------------
Commercial and other $ 94,071 $ 73,846
SBA 41,370 39,412
Real estate construction 44,784 35,065
Real estate other 76,939 28,036
Factoring and Asset based 19,839 13,106
Other 3,280 4,984
--------------------------------
Total gross loans 280,283 194,449
Net deferred loan fees (974) (713)
Total loan portfolio 279,309 193,736
--------------------------------
Less allowance for credit losses (3,910) (2,683)
--------------------------------
Loans, net $ 275,399 $ 191,053
================================
Commercial and other 33.5% 38.0%
SBA 14.7% 20.3%
Real estate construction 16.0% 18.0%
Real estate term 27.5% 14.4%
Factoring and Asset based 7.1% 6.7%
Other 1.2% 2.6%
--------------------------------
Total gross loans 100.0% 100.0%
================================
Net loan balances increased to $275.4 million at September 30, 2004,
which represented an increase of $84.3 million (44.1%) as compared to $191.1
million at December 31, 2003. The increase in loans was primarily in real estate
other (including home equity lines), commercial and Factoring/Asset based
lending without a concentration in any one specific category of loans, although
overall real estate secured loans comprise over 43% of loan balances at
September 30, 2004. The increase was a result of general marketing efforts.
The Company's commercial loan portfolio represents loans to small and
middle-market businesses in the Santa Clara county region. Commercial loans were
$94.1 million at September 30, 2004, which represented an increase of $20.3
million or 27% over $73.8 million at December 31, 2003. At September 30, 2004,
commercial loans comprised 34% of total loans outstanding compared to 38% at
December 31, 2003.
In September of 2002, the Company established an SBA lending group in
Santa Clara with a loan production office in Sacramento county. In October 2003,
The Company established a loan production office in San Diego county. The
Company, as a Preferred Lender, originates SBA loans and participates in the SBA
7A and 504 SBA lending programs. Under the 7A program, a loan is made for
commercial or real estate purposes. The SBA guarantees these loans and the
guarantee may range from 70% to 90% of the total loan. In addition, the loan
could be collateralized by a deed of trust on real estate. Under the 504
26
program, The Company lends directly to the borrower and takes a first deed of
trust to the subject property. In addition the SBA, through a Community
Development Corporation, makes an additional loan to the borrower and takes a
deed of trust subject to the Company's position. The Company's position in
relation to the real estate "piggyback" loans can range from 50% to 70% loan to
value. At September 30, 2004, SBA loans comprised $41.4 million, or 15%, of
total loans, an increase of $2.0 million, or 5%, from $39.4 million at December
31, 2003. 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, 2004 and December 31,
2003, the fair value of SBA loans exceeded aggregate cost and therefore, SBA
loans were carried at aggregate cost.
The Company's construction loan portfolio primarily consists of loans
to finance individual single-family residential homes, approximately half of
which are owner-occupied projects. Construction loans increased $9.7 million, or
28%, to $44.8 million at September 30, 2004 from $35.1 million at December 31,
2003. Construction loan balances at September 30, 2004 comprised 16% of total
loans compared to 18% at December 31, 2003.
Other real estate loans increased $48.9 million or 174% to $76.9
million at September 30, 2004 over $28.0 million at December 31, 2003. The
increase in other real estate loans was approximately equally divided between
home equity lines of credit, land loans and other real estate term loans. At
September 30, 2004, other real estate loans represented 28% of total loans
compared to 14% at December 31, 2003.
Average total assets of the Company for the nine months ended September
30, 2004 were $326.7 million. Average earning assets reached $305.6 million,
representing 94% of total assets, in the nine months ended September 30, 2004
with an average yield of 5.9%. The decrease in yield reflects the change in the
composition of average earning assets. At September 30, 2004, average loan
balances comprised $229.7 million, representing 75% of average earning assets
and 78% of average deposits as compared to $159.3 million at December 31, 2003
representing 75% of average earning assets and 82% of average deposits.
Deposits increased $102.5 million or 42% from $246.4 million at
December 31, 2003 to $348.9 million at September 30, 2004. The increase in
deposits was primarily in non-interest bearing demand and money market accounts.
The increase can be attributed to marketing efforts to attract new account
relationships and the increased level of title and escrow company funds on
deposit at September 30, 2004. Deposit totals at September 30, 2004 included
$64.5 million, or 19%, in title and escrow company account balances compared to
$28.4 million, or 12%, at December 31, 2003. Excluding title and escrow company
account balances, deposits increased $66.4 million or 30% compared to December
31, 2003.
At September 30, 2004, the total number of deposit accounts reached
2,096 with an average balance per account (excluding title) of approximately
$142,243.
Average deposits for the nine months ended September 30, 2004 were
$294.1 million comprised of average interest-bearing deposits of $180.4 million
and average non-interest bearing demand deposits of $113.7 million. The average
rate paid on interest-bearing deposits was 1.5% and the Company's overall net
interest margin was 5.0%.
CAPITAL RESOURCES
The Company is subject to the Comptroller of the Currency's (the
"Comptroller") capital guidelines and regulations governing capital adequacy for
national Banks. Additional capital requirements may be imposed on Banks based on
market risk. The FDIC requires a Tier 1 CAPITAL1/ ratio to total assets ratio of
8% for new banks during the first three years of operation.
- ---------------
1/ TIER 1 CAPITAL IS GENERALLY DEFINED AS THE SUM OF THE CORE CAPITAL ELEMENTS
LESS GOODWILL AND CERTAIN INTANGIBLES. THE FOLLOWING ITEMS ARE DEFINED AS CORE
CAPITAL ELEMENTS: (1) COMMON STOCKHOLDERS' EQUITY; (II) QUALIFYING NONCUMULATIVE
PERPETUAL PREFERRED STOCK AND RELATED SURPLUS; AND (III) MINORITY INTERESTS IN
THE EQUITY ACCOUNTS OF CONSOLIDATED SUBSIDIARIES.
27
After the first three years of operations, the Comptroller requires a
minimum leverage ratio of 3% of Tier 1 capital to total assets for national
banks that have received the highest composite regulatory rating (a regulatory
measurement of capital, assets, management, earnings and liquidity) and that are
not anticipating or experiencing any significant growth. All other institutions
are required to maintain a leverage ratio of at least 100 to 200 basis points
above the 3% minimum.
The Comptroller's regulations also require national banks to maintain a
minimum ratio of qualifying total capital to risk-weighted assets of 8.00%.
Risk-based capital ratios are calculated with reference to risk-weighted assets,
including both on and off-balance sheet exposures, which are multiplied by
certain risk weights assigned by the Comptroller to those assets. At least
one-half of the qualifying capital must be in the form of Tier 1 capital.
The risk-based capital ratio focuses principally on broad categories of
credit risk, and might not take into account many other factors that can affect
a Company's financial condition. These factors include overall interest rate
risk exposure; liquidity, funding and market risks; the quality and level of
earnings; concentrations of credit risk; certain risks arising from
nontraditional activities; the quality of loans and investments; the
effectiveness of loan and investment policies; and management's overall ability
to monitor and control financial and operating risks, including the risk
presented by concentrations of credit and nontraditional activities. The
Comptroller has addressed many of these areas in related rule-making proposals.
In addition to evaluating capital ratios, an overall assessment of capital
adequacy must take account of each of these other factors including, in
particular, the level and severity of problem and adversely classified assets.
For this reason, the final supervisory judgment on a Company's capital adequacy
may differ significantly from the conclusions that might be drawn solely from
the absolute level of the Company's risk-based capital ratio. The Comptroller
has stated that banks generally are expected to operate above the minimum
risk-based capital ratio. Banks contemplating significant expansion plans, as
well as those institutions with high or inordinate levels of risk, should hold
capital consistent with the level and nature of the risks to which they are
exposed.
Further, the Banking agencies have adopted modifications to the
risk-based capital regulations to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a Company's current and future
earnings and equity capital arising from movements in interest rates. While
interest rate risk is inherent in a Company's role as financial intermediary, it
introduces volatility to Bank earnings and to the economic value of the Bank.
The Banking agencies have addressed this problem by implementing changes to the
capital standards to include a Company's exposure to declines in the economic
value of its capital due to changes in interest rates as a factor that the
Banking agencies consider in evaluating an institution's capital adequacy. Bank
examiners consider a Company's historical financial performance and its earnings
exposure to interest rate movements as well as qualitative factors such as the
adequacy of a Company's internal interest rate risk management.
Finally, institutions with significant trading activities must measure
and hold capital for exposure to general market risk arising from fluctuations
in interest rates, equity prices, foreign exchange rates and commodity prices
and exposure to specific risk associated with debt and equity positions in the
trading portfolio. General market risk refers to changes in the market value of
on-balance-sheet assets and off-balance-sheet items resulting from broad market
movements. Specific market risk refers to changes in the market value of
individual positions due to factors other than broad market movements and
includes such risks as the credit risk of an instrument's issuer. The additional
capital requirements apply effective January 1, 1998 to institutions with
trading assets and liabilities equal to 10% or more of total assets or trading
activity of $1 billion or more. The federal Banking agencies may apply the
market risk regulations on a case-by-case basis to institutions not meeting the
eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and
interest rate risk, the federal Banking agencies will evaluate an institution in
its periodic examination on the degree to which changes in interest rates,
28
foreign exchange rates, commodity prices or equity prices can affect a financial
institution's earnings or capital. In addition, the agencies focus in the
examination on an institution's ability to monitor and manage its market risk,
and will provide management with a clearer and more focused indication of
supervisory concerns in this area.
Under certain circumstances, the Comptroller may determine that the
capital ratios for a national Bank shall be maintained at levels, which are
higher than the minimum levels required by the guidelines. A national Bank which
does not achieve and maintain adequate capital levels as required may be subject
to supervisory action by the Comptroller through the issuance of a capital
directive to ensure the maintenance of required capital levels. In addition, the
Bank is required to meet certain guidelines of the Comptroller concerning the
maintenance of an adequate allowance for credit losses.
The Company's Tier 1 capital at September 30, 2004 was $31.0 million
comprised of $32.8 million of capital stock and surplus partially offset by an
accumulated deficit (including pre-opening operations) of $1.8 million.
The following table shows the Company's capital ratios at September 30,
2004 and December 31, 2003 as well as the minimum capital ratios required to be
deemed "well capitalized" under the regulatory framework.
Required To be Well
For Capital Capitalized Under
Bank Adequacy Prompt Corrective
As of September 30, 2004 Actual Purposes Action Provisions
-------------------------------------------------------
(in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
Total Capital 35,760 10.95% 26,129 8.00% 13,880 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 31,850 9.75% 13,064 4.00% 8,328 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 31,850 9.13% 13,947 4.00% 6,692 5.00%
(to Average Assets)
As of December 31, 2003
Total Capital 32,637 14.68% 17,781 8.00% 22,226 10.00%
(to Risk Weighted Assets)
Tier 1 Capital 29,954 13.48% 8,890 4.00% 13,336 6.00%
(to Risk Weighted Assets)
Tier 1 Capital 29,954 13.47% 8,898 4.00% 11,123 5.00%
(to Average Assets)
However, de novo Banks are generally required to hold capital in excess
of the amounts depicted in the table above. FDIC policies generally preclude
dividend payments during the first three years of operation, allow cash
dividends to be paid only from net operating income, and do not permit dividends
to be paid until an appropriate allowance for loans and lease losses has been
established and overall capital is adequate. The FDIC requires that a depository
institution maintain a Tier 1 capital to assets ratio of not less than 8% during
the first three years of operation.
The Company was considered well capitalized at September 30, 2004.
29
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
LIQUIDITY/INTEREST RATE SENSITIVITY
The Company manages its liquidity to provide adequate funds at an
acceptable cost to support borrowing requirements and deposit flows of its
customers. At September 30, 2004 and December 31, 2003, liquid assets as a
percentage of deposits were 26.5% and 33.2%, respectively. In addition to cash
and due from Banks, liquid assets include interest-bearing deposits in other
Banks, Federal funds sold and securities available for sale. To date, The
Company has deployed its earning assets primarily in money market instruments
and Fed funds to address the potential volatility of the title Bank deposit
balances and to accommodate projected loan funding.
The Company has $14 million in Federal funds lines of credit available
with correspondent Banks to meet liquidity needs and additionally has
approximately $16 million in borrowing capacity at the Federal Home Loan Bank of
San Francisco. The Company's balance sheet position is asset-sensitive (based
upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts). This balance sheet position generally
provides a hedge against rising interest rates, but has a detrimental effect
during times of interest rate decreases. Net interest income is generally
negatively impacted in the short term by a decline in interest rates.
Conversely, an increase in interest rates should have a short-term positive
impact on net interest income.
The following table sets forth the distribution of repricing
opportunities, based on contractual terms of the Company's earning assets and
interest-bearing liabilities at September 30, 2004, the interest rate
sensitivity gap (i.e. interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap, the
interest rate sensitivity gap ratio (i.e. interest rate sensitive assets divided
by interest rate sensitive liabilities) and the cumulative interest rate
sensitivity gap ratio.
DISTRIBUTION OF REPRICING OPPORTUNITIES
September 30, 2004
(dollars in thousands)
After three After six After one
Within months but months but year but After
three within six within one within five
months months year five years years Total
-----------------------------------------------------------------------
Federal funds sold $ 56,580 $ - $ - $ - $ - $ 56,580
U.S. Treasury securities - 99 - - - 99
Agency securities - 6,032 3,982 16,301 - 26,315
Loans 137,078 15,956 43,203 51,689 32,357 280,283
-----------------------------------------------------------------------
Total earning assets 193,658 22,087 47,185 67,990 32,357 363,277
-----------------------------------------------------------------------
Interest checking, money market
and savings 161,813 - - - - 161,813
Certificates of deposit:
Less than $100,000 1,380 2,583 4,193 7,980 - 16,136
$100,000 or more 24,108 1,891 6,376 2,840 - 35,215
-----------------------------------------------------------------------
Total interest-bearing liabilities 187,301 4,474 10,569 10,820 - 213,164
-----------------------------------------------------------------------
Interest rate gap $ 6,357 $17,613 $36,616 $ 57,170 $ 32,357 $150,113
=======================================================================
Cumulative interest rate gap $ 6,357 $23,970 $60,586 $117,756 $150,113
============================================================
Interest rate gap ratio 1.03 4.94 4.46 6.28 0.00
============================================================
Cumulative interest rate gap ratio 1.03 1.12 1.30 1.55 1.70
============================================================
Based on the contractual terms of its assets and liabilities, the Company's
balance sheet as September 30, 2004 was asset sensitive in terms of its
short-term exposure to interest rates. That is, at September 30, 2004 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
30
interest income is negatively impacted by a decline in interest rates and
positively impacted by an increase in interest rates. To partially mitigate the
adverse impact of declining rates, the majority of variable rate loans made by
the Company have been written with a minimum "floor" rate.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The definition of "off-balance sheet arrangements" includes any transaction,
agreement or other contractual arrangement to which an entity is a party under
which we have:
o Any obligation under a guarantee contract that has the
characteristics as defined in paragraph 3 of FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantee including Indirect Guarantees of Indebtedness to Others"
("FIN 45");
o A retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as
credit, liquidity or market risk support to that entity for such
assets, such as a subordinated retained interest in a pool of
receivables transferred to an unconsolidated entity;
o Any obligation, including a contingent obligation, under a
contract that would be accounted for as a derivative instrument,
except that it is both indexed to the registrant's own stock and
classified in stockholders' equity; or
o Any obligation, including contingent obligations, arising out of a
material variable interest, as defined in FASB Interpretation No.
46, "Consolidation of Variable Interest Entities" ("FIN 46"), in
an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to the registrant, or engages
in leasing, hedging or research and development services with the
registrant.
In the ordinary course of business, we have issued certain guarantees
which qualify as off-balance sheet arrangements, as of September 30,
2004 those guarantees include the following:
Financial Letters of Credit in the amount of $2,063,000.
The table below summarizes the Company's off-balance sheet contractual
obligations.
Off-balance Sheet Arrangement and Aggregate Contractual Obligations
Payments due by period
--------------------------------------------------------------
Less than 1 - 3 4 - 5 More than
Contractual Obligations Total 1 year years years 5 years
- -------------------------------------------- ----------- ----------- --------- ----------
(in thousands)
Unfunded loan commitments $ 94,581 $70,768 $ 10,463 $ 1,436 $ 11,914
Long-term contracts 519 335 184 - -
Operating leases 9,461 793 1,479 1,629 5,560
------------ ----------- ----------- --------- ----------
Total $ 104,561 $71,896 $ 12,126 $ 3,065 $ 17,474
============ =========== =========== ========= ==========
31
ITEM 4 - CONTROLS AND PROCEDURES
As of September 30, 2004, we carried out an evaluation under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective.
There has been no change in our internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, such control.
32
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Bank is not a defendant in any pending legal proceedings and no
such proceedings are known to be contemplated. No director, officer, affiliate,
more than 5% shareholder of the Bank or any associate of these persons is a
party adverse to the Bank or has a material interest adverse to the Bank in any
material legal proceeding.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
On October 1, 2004, Bridge Bank, National Association announced
completion of a bank holding company structure which was approved by
shareholders at the Bank's annual shareholders' meeting held on May 20, 2004.
The bank holding company, formed as a California corporation, is named Bridge
Capital Holdings.
Bridge Capital Holdings was formed for the purpose of serving as the
holding company for Bridge Bank and will be supervised by the Board of Governors
of the Federal Reserve System. Effective October 1, 2004, Bridge Capital
Holdings acquired 100% of the voting shares of Bridge Bank, National
Association. As a result of the transaction, the former shareholders of Bridge
Bank received one share of common stock of Bridge Capital Holdings for every one
share of common stock of Bridge Bank owned.
Prior to the share exchange, the common stock of the Bank had been
registered with the Office of Comptroller of the Currency under Section 12(g) of
the Securities Exchange Act of 1934 (the "Exchange Act"). As a result of the
share exchange, pursuant to Rule 12g-3(a) under the Exchange Act, common stock
of Bridge Capital Holdings is deemed registered under Section 12(g) of the
Exchange Act. Future exchange act filings will be made with the Securities and
Exchange Commission rather than the Office of the Comptroller of the Currency
and will be available on the SEC's website, HTTP://WWW.SEC.GOV as well as on the
Company's website HTTP://WWW.BRIDGEBANK.COM.
ITEM 6 - EXHIBITS
(A) EXHIBITS
See Index to Exhibits at page 33 of this quarterly Report on Form 10-Q.
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
31. Rule 13a-14(a) Certifications.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32. Certifications
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
- ------------------------
34
SIGNATURES
In accordance with Section 13 or 15(d) 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 8, 2004 By: \s\ DANIEL P. MYERS
____________________________
Daniel P. Myers
President and Chief
Executive Officer
(Principal Executive Officer)
Dated: November 8, 2004 By: \s\ THOMAS A. SA
____________________________
Thomas A. Sa
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
35