Attached files
file | filename |
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EX-32.1 - EX-32.1 - Bridge Capital Holdings | v221050_ex32-1.htm |
EX-31.2 - EX-31.2 - Bridge Capital Holdings | v221050_ex31-2.htm |
EX-31.1 - EX-31.1 - Bridge Capital Holdings | v221050_ex31-1.htm |
EX-32.2 - EX-32.2 - Bridge Capital Holdings | v221050_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarterly Period Ended: March 31, 2011
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From ____________ to _____________
000-50914
(Commission File Number)
Bridge Capital Holdings
(Exact name of registrant as specified in its charter)
California
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80-0123855
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(State or other jurisdiction of
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(I.R.S. Employer Identification Number)
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incorporation or organization)
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55 Almaden Boulevard, San Jose, CA 95113
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (408) 423-8500
Bridge Bank, N.A. (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by checkmark whether registrant is 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 ¨
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company x
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(Do not check if a smaller
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reporting company)
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The number of shares of Common Stock outstanding as of April 30, 2011: 15,066,740
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item 1
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Financial Statements
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Interim Consolidated Balance Sheets
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4
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Interim Consolidated Statements of Operations
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5
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Interim Consolidated Statements of Cash Flows
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6
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Notes to Interim Consolidated Financial Statements
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7
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Item 2
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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23
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Item 3
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Quantitative and Qualitative Disclosures About Market Risk
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41
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Item 4
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Controls and Procedures
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43
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PART II - OTHER INFORMATION
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Item 1
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Legal Proceedings
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44
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Item 1A
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Risk Factors
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44
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Item 2
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Unregistered Sales of Equity Securities and Use of Proceeds
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44
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Item 3
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Defaults Upon Senior Securities
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44
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Item 4
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Submission of Matters to a Vote of Security Holders
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44
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Item 5
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Other Information
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44
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Item 6
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Exhibits
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44
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Signatures
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45
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Index to Exhibits
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46
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2
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 MARGIN; (3) GENERAL ECONOMIC CONDITIONS, EITHER NATIONALLY OR REGIONALLY, ARE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY; (4) CHANGES IN THE REGULATORY ENVIRONMENT; (5) CHANGES IN BUSINESS CONDITIONS AND INFLATION; (6) COSTS AND EXPENSES OF COMPLYING WITH THE INTERNAL CONTROL PROVISIONS OF THE SARBANES-OXLEY ACT AND OUR DEGREE OF SUCCESS IN ACHIEVING COMPLIANCE; (7) CHANGES IN SECURITIES MARKETS; (8) FUTURE CREDIT LOSS EXPERIENCE; (9) CIVIL DISTURBANCES OR TERRORIST THREATS OR ACTS, OR APPREHENSION ABOUT POSSIBLE FUTURE OCCURANCES OF ACTS OF THIS TYPE; AND (10) THE INVOLVEMENT OF THE UNITED STATES IN WAR OR OTHER HOSTILITIES. THEREFORE, THE INFORMATION IN THIS QUARTERLY REPORT SHOULD BE CAREFULLY CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF THE COMPANY.
Forward-looking statements are generally identifiable by the use of terms such as "believe", "expect", "intend", "anticipate", "estimate", "project", "assume," "plan," "predict," "forecast," “in management’s opinion,” “management considers” or similar expressions. Wherever such phrases are used, such statements are as of and based upon the knowledge of Management, at the time made and are subject to change by the passage of time and/or subsequent events, and accordingly such statements are subject to the same risks and uncertainties noted above with respect to forward-looking statements.
The Company’s primary operations and most of its customers are located in California. Other events, including those of September 11, 2001, have increased the uncertainty related to the national and California economic outlook and could have an effect on the future operations of the Company or its customers, including borrowers. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
The reader should refer to the more complete discussion of such risks in the Company’s Annual Reports on Form 10-K.
3
PART I - FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Interim Consolidated Balance Sheets
(dollars in thousands)
(unaudited)
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March 31,
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December 31,
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2011
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2010
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ASSETS
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Cash and due from banks
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$ | 15,001 | $ | 8,676 | ||||
Federal funds sold
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108,520 | 114,240 | ||||||
Total cash and equivalents
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123,521 | 122,916 | ||||||
Interest bearing deposits in other banks
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1,560 | 2,539 | ||||||
Investment securities available for sale
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204,177 | 217,303 | ||||||
Loans, net of allowance for credit losses of $15,171 at
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March 31, 2011 and $15,546 at December 31, 2010
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615,079 | 634,557 | ||||||
Premises and equipment, net
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2,396 | 2,580 | ||||||
Other real estate owned
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9,666 | 6,645 | ||||||
Accrued interest receivable
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3,592 | 3,439 | ||||||
Other assets
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38,446 | 39,752 | ||||||
Total assets
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$ | 998,437 | $ | 1,029,731 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY
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Deposits:
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Demand noninterest-bearing
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$ | 475,287 | $ | 443,806 | ||||
Demand interest-bearing
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5,096 | 5,275 | ||||||
Savings
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305,113 | 355,772 | ||||||
Time
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42,215 | 43,093 | ||||||
Total deposits
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827,711 | 847,946 | ||||||
Junior subordinated debt securities
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17,527 | 17,527 | ||||||
Other borrowings
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- | 7,672 | ||||||
Accrued interest payable
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36 | 48 | ||||||
Other liabilities
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30,797 | 14,235 | ||||||
Total liabilities
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876,071 | 887,428 | ||||||
Commitments and contingencies
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- | - | ||||||
SHAREHOLDERS' EQUITY
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Preferred stock, no par value; 10,000,000 shares authorized;
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no shares issued and outstanding at March 31, 2011 and
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23,864 shares issued and outstanding at December 31, 2010
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- | 23,864 | ||||||
Common stock, no par value; 30,000,000 shares authorized;
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15,066,670 shares issued and outstanding at March 31, 2011;
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14,510,379 shares issued and outstanding at December 31, 2010;
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101,546 | 100,435 | ||||||
Additional paid in capital
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4,566 | 4,408 | ||||||
Retained earnings
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17,154 | 15,784 | ||||||
Accumulated other comprehensive (loss) income
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(900 | ) | (2,188 | ) | ||||
Total shareholders' equity
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122,366 | 142,303 | ||||||
Total liabilities and shareholders' equity
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$ | 998,437 | $ | 1,029,731 |
The accompanying notes are an integral part of the financial statements.
4
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Interim Consolidated Statements of Operations (unaudited)
(dollars in thousands)
Three months ended
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March 31,
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2011
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2010
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INTEREST INCOME:
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Loans
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$ | 10,816 | $ | 10,106 | ||||
Federal funds sold
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82 | 59 | ||||||
Investment securities available for sale
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802 | 547 | ||||||
Interest bearing deposits in other banks
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10 | 45 | ||||||
Total interest income
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11,710 | 10,757 | ||||||
INTEREST EXPENSE:
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Deposits:
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Interest-bearing demand
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1 | 2 | ||||||
Money market and savings
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227 | 358 | ||||||
Certificates of deposit
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78 | 281 | ||||||
Other
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346 | 241 | ||||||
Total interest expense
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652 | 882 | ||||||
Net interest income
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11,058 | 9,875 | ||||||
Provision for credit losses
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750 | 1,250 | ||||||
Net interest income after provision for credit losses
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10,308 | 8,625 | ||||||
NON-INTEREST INCOME:
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Service charges on deposit accounts
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675 | 545 | ||||||
Gain on sale of SBA loans
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641 | - | ||||||
International fee income
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546 | 428 | ||||||
Other non interest income
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684 | 653 | ||||||
Total non-interest income
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2,546 | 1,626 | ||||||
OPERATING EXPENSES:
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Salaries and benefits
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5,378 | 5,284 | ||||||
Premises and fixed assets
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972 | 1,052 | ||||||
Other
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3,887 | 3,317 | ||||||
Total operating expenses
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10,237 | 9,653 | ||||||
Income before income taxes
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2,617 | 598 | ||||||
Income taxes
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1,047 | 233 | ||||||
Net income
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$ | 1,570 | $ | 365 | ||||
Preferred dividends
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200 | 1,060 | ||||||
Net income (loss) available to common shareholders
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1,370 | (695 | ) | |||||
Basic income (loss) per share
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$ | 0.10 | $ | (0.11 | ) | |||
Diluted income (loss) per share
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$ | 0.09 | $ | (0.11 | ) | |||
Average common shares outstanding
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14,089,577 | 6,576,923 | ||||||
Average common and equivalent shares outstanding
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14,466,839 | 6,576,923 |
The accompanying notes are an integral part of the financial statements.
5
BRIDGE CAPITAL HOLDINGS AND SUBSIDIARY
Interim Consolidated Statements of Cash Flows (unaudited)
(dollars in thousands)
Three months ended March 31,
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income
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$ | 1,570 | $ | 365 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
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Provision for credit losses
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750 | 1,250 | ||||||
Depreciation and amortization
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294 | 672 | ||||||
Net (gain) loss on sale of other real estate owned
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(262 | ) | - | |||||
Stock based compensation
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282 | 345 | ||||||
Loans originated for sale
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(6,141 | ) | (6,592 | ) | ||||
Proceeds from loan sales
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10,763 | - | ||||||
Net (gain) loss on sale of securities
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93 | 164 | ||||||
Deferred income tax (credit)
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112 | - | ||||||
(Increase) decrease in accrued interest receivable and other assets
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1,153 | 902 | ||||||
Increase (decrease) in accrued interest payable and other liabilities
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16,550 | (1,679 | ) | |||||
Net cash (used in) provided by operating activities
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25,164 | (4,573 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of securities available for sale
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(70,074 | ) | (36,437 | ) | ||||
Proceeds from sale of securities available for sale
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21,392 | 21,142 | ||||||
Proceeds from maturity of securities available for sale
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62,890 | 13,060 | ||||||
Proceeds from the sale of other real estate owned
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3,051 | 3,697 | ||||||
Net decrease (increase) in loans
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8,296 | (7,588 | ) | |||||
Net decrease (increase) in interest bearing deposits in other banks
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979 | 1,927 | ||||||
Purchase of fixed assets
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(110 | ) | (116 | ) | ||||
Net cash (used in) provided by investing activities
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26,424 | (4,315 | ) | |||||
CASH FLOW FROM FINANCING ACTIVITIES:
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Net (decrease) increase in deposits
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(20,235 | ) | 13,578 | |||||
(Decrease) in other borrowings
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(7,672 | ) | - | |||||
Common stock issued
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988 | 31,477 | ||||||
Redemption of preferred stock
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(23,864 | ) | (30,000 | ) | ||||
Payment of cash dividends
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(200 | ) | (257 | ) | ||||
Net cash provided by (used in) financing activities
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(50,983 | ) | 14,798 | |||||
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS:
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605 | 5,910 | ||||||
Cash and equivalents at beginning of period
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122,916 | 119,153 | ||||||
Cash and equivalents at end of period
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$ | 123,521 | $ | 125,063 | ||||
OTHER CASH FLOW INFORMATION:
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Cash paid for interest
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$ | 576 | $ | 630 | ||||
Cash paid for income taxes
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$ | 18 | $ | 88 | ||||
NON-CASH INVESTING ACTIVITIES:
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Loans transferred to other real estate owned
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$ | 5,810 | $ | 3,814 |
The accompanying notes are an integral part of the financial statements.
6
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 March 31, 2011 and for the three months ended March 31, 2011 and 2010 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 ended March 31, 2011 and 2010 are not necessarily indicative of full year results.
The comparative balance sheet information as of December 31, 2010 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
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310), was issued July 2010. The guidance significantly expands the disclosures that the Company must make about the credit quality of financing receivables and the allowance for credit losses. The objectives of the enhanced disclosures are to provide financial statement users with additional information about the nature of credit risks inherent in the Company’s financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses.
The disclosures as of the end of the reporting period are effective for the Company’s interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for the Company’s interim and annual periods beginning on or after December 15, 2010. The adoption of this Update requires enhanced disclosures and did not have a significant effect on the Company’s financial statements.
FASB ASU 2011-02, Disclosures about a Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (Topic 310), was issued April 2011. The guidance clarifies when a loan modification or restructuring is considered a troubled debt restructuring. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and will be applied retrospectively to the beginning of the annual period of adoption. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.
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 or warrants 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.
7
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 has recorded an incremental $282,000 ($188,000 net of tax) of stock-based compensation expense during the three months ended March 31, 2011 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 March 31, 2011. As of March 31, 2011, $5.1 million of total unrecognized compensation cost related to stock options and restricted stock units are expected to be recognized over a weighted-average period of 3.7 years.
Stock-based compensation reduced basic earnings per share by $0.01 and $0.04 and diluted earnings per share by $0.01 and $0.05 for the three months ended March 31, 2011 and 2010, respectively.
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 a cumulative other comprehensive loss totaling $(900,000), net of tax, as of March 31, 2011 and a cumulative other comprehensive loss totaling $(2.2 million), net of tax, as of December 31, 2010.
Three months ended
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(dollars in thousands)
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March 31,
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2011
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2010
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Net income
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$ | 1,570 | $ | 365 | ||||
Other comprehensive earnings- Net unrealized gains (losses) on securities available for sale
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1,175 | 327 | ||||||
Net unrealized gains (losses) on supplemental executive retirement plan
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6 | 7 | ||||||
Net unrealized gains (losses) on cash flow hedges
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107 | (282 | ) | |||||
Total comprehensive income (loss)
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$ | 2,858 | $ | 417 |
Allowance for Credit 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.
8
The allowance generally consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired; however, it is currently the Bank’s practice to immediately charge-off any identified financial loss pertaining to impaired loans versus providing a specific reserve. A loan is impaired when, based on current information and events, it is probable that the Bank 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.
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective 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 Bank determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
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 Bank 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.
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.
9
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 or warrants 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
|
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(dollars in thousands, except per share amounts)
|
March 31,
|
|||||||
2011
|
2010
|
|||||||
Net income
|
$ | 1,570 | $ | 365 | ||||
Less: dividends on preferred shares
|
(200 | ) | (1,060 | ) | ||||
Net income (loss) available to common shareholders
|
1,370 | (695 | ) | |||||
Weighted average shares used in computing
|
||||||||
basic earnings (loss) per share
|
14,089,577 | 6,576,923 | ||||||
Diluted potential common shares related to stock options,
|
||||||||
restricted stock, and preferred stock
|
377,262 | - | ||||||
Total average common shares and equivalents
|
14,466,839 | 6,576,923 | ||||||
Basic earnings (loss) per share
|
$ | 0.10 | $ | (0.11 | ) | |||
Diluted earnings (loss) per share
|
$ | 0.09 | $ | (0.11 | ) |
10
3. Securities
The amortized cost and approximate fair values of securities at March 31, 2011 and December 31, 2010 are as follows:
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||||||
Gross Unrealized
|
Fair
|
|||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Debt Securities:
|
||||||||||||||||
U.S. government agencies
|
$ | 31,849 | $ | 68 | $ | (126 | ) | $ | 31,791 | |||||||
Mortgage backed securities
|
127,335 | 969 | (276 | ) | 128,028 | |||||||||||
Collateralized mortgage obligations
|
17,680 | 43 | (3 | ) | 17,720 | |||||||||||
Corporate bonds
|
26,634 | 44 | (40 | ) | 26,638 | |||||||||||
Total debt securities
|
203,498 | 1,124 | (445 | ) | 204,177 | |||||||||||
Equity Securities:
|
- | - | - | - | ||||||||||||
Total securities available for sale
|
203,498 | 1,124 | (445 | ) | 204,177 | |||||||||||
Total investment securities
|
$ | 203,498 | $ | 1,124 | $ | (445 | ) | $ | 204,177 |
As of December 31, 2010
|
||||||||||||||||
Gross Unrealized
|
Fair
|
|||||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Debt Securities:
|
||||||||||||||||
U.S. government agency notes
|
$ | 49,417 | $ | 218 | $ | (61 | ) | $ | 49,574 | |||||||
Mortgage backed securities
|
121,105 | 360 | (1,845 | ) | 119,620 | |||||||||||
Collateralized mortgage obligations
|
- | - | - | - | ||||||||||||
Corporate bonds
|
7,908 | 48 | - | 7,956 | ||||||||||||
Total debt securities
|
178,430 | 626 | (1,906 | ) | 177,150 | |||||||||||
Equity Securities:
|
40,153 | 40,153 | ||||||||||||||
Total Securities Available for Sale
|
218,583 | 626 | (1,906 | ) | 217,303 | |||||||||||
Total Investment Securities
|
$ | 218,583 | $ | 626 | $ | (1,906 | ) | $ | 217,303 |
The scheduled maturities of securities available for sale at March 31, 2011 and December 31, 2010 were as follows:
(dollars in thousands)
|
March 31, 2011
|
|||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Due in one year or less
|
$ | 13,446 | $ | 13,582 | ||||
Due after one year through five years
|
80,801 | 81,271 | ||||||
Due after five years through ten years
|
45,209 | 45,394 | ||||||
Due after ten years
|
64,042 | 63,930 | ||||||
Total debt securities available for sale
|
203,498 | 204,177 | ||||||
Total equity securities available for sale
|
- | - | ||||||
Total investment securities
|
$ | 203,498 | $ | 204,177 |
11
(dollars in thousands)
|
December 31, 2010
|
|||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Due in one year or less
|
$ | 23,924 | $ | 24,050 | ||||
Due after one year through five years
|
67,159 | 67,142 | ||||||
Due after five years through ten years
|
38,207 | 37,364 | ||||||
Due after ten years
|
49,140 | 48,594 | ||||||
Total debt securities available for sale
|
178,430 | 177,150 | ||||||
Total equity securities available for sale
|
40,153 | 40,153 | ||||||
Total investment securities
|
$ | 218,583 | $ | 217,303 |
As of March 31, 2011 and December 31, 2010, no investment securities were pledged as collateral. As of March 31, 2011, there were no unrealized losses attributable to securities that had been in an unrealized loss position for greater than 12 months. As of December 31, 2010, $11,000 in unrealized losses was attributable to one security that had been in an unrealized loss position for greater than 12 months. This unrealized loss (on a mortgage backed security) which had been in an unrealized loss position for one year or longer as of December 31, 2010, was caused by market interest rate increases subsequent to the purchase of the security. Because the Bank has the ability to hold this investment until a recovery in fair value, which may be maturity, this investment was not considered to be other-than-temporarily impaired as of December 31, 2010.
4. Loans
The balances in the various loan categories are as follows as of March 31, 2011 and December 31, 2010:
March 31,
|
December 31,
|
|||||||
(dollars in thousands)
|
2011
|
2010
|
||||||
Commercial
|
$ | 256,865 | $ | 269,034 | ||||
Real estate construction
|
35,291 | 40,705 | ||||||
Land loans
|
8,235 | 9,072 | ||||||
Real estate other
|
139,499 | 138,633 | ||||||
Factoring and asset based lending
|
122,052 | 122,542 | ||||||
SBA
|
65,537 | 67,538 | ||||||
Other
|
4,193 | 4,023 | ||||||
Total gross loans
|
631,672 | 651,547 | ||||||
Unearned fee income
|
(1,422 | ) | (1,444 | ) | ||||
Total loan portfolio
|
630,250 | 650,103 | ||||||
Less allowance for credit losses
|
(15,171 | ) | (15,546 | ) | ||||
Loans, net
|
$ | 615,079 | $ | 634,557 |
The Bank categorizes loans into 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. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank 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 (Performing/Criticized) - 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.
12
Substandard (Performing/Criticized) - 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. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Impaired (Nonaccrual) – A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Troubled Debt Restructurings – 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; however, in some circumstances a troubled debt restructuring may be performing in compliance with modified terms for an extended period of time and therefore be placed on accrual status and deemed unimpaired. On March 31, 2011 and December 31, 2010 troubled debt restructurings on accrual status and deemed unimpaired totaled $4.5 million and $4.5 million, respectively.
Risk category of loans:
|
||||||||||||||||
(dollars in thousands)
|
||||||||||||||||
As of March 31, 2011
|
||||||||||||||||
Performing
|
||||||||||||||||
Pass
|
(Criticized)
|
Impaired
|
Total
|
|||||||||||||
Commercial
|
$ | 244,715 | $ | 10,785 | $ | 1,365 | $ | 256,865 | ||||||||
Real estate construction
|
33,309 | 1,982 | - | 35,291 | ||||||||||||
Land loans
|
4,281 | 1,359 | 2,595 | 8,235 | ||||||||||||
Real estate other
|
96,395 | 35,452 | 7,652 | 139,499 | ||||||||||||
Factoring and asset based lending
|
117,595 | 4,457 | - | 122,052 | ||||||||||||
SBA
|
57,785 | 7,543 | 209 | 65,537 | ||||||||||||
Other
|
837 | 3,356 | - | 4,193 | ||||||||||||
Total gross loans
|
$ | 554,918 | $ | 64,933 | $ | 11,821 | $ | 631,672 |
As of December 31, 2010
|
||||||||||||||||
Performing
|
||||||||||||||||
Pass
|
(Criticized)
|
Impaired
|
Total
|
|||||||||||||
Commercial
|
$ | 258,336 | $ | 9,568 | $ | 1,130 | $ | 269,034 | ||||||||
Real estate construction
|
31,395 | 3,968 | 5,342 | 40,705 | ||||||||||||
Land loans
|
4,384 | 1,512 | 3,176 | 9,072 | ||||||||||||
Real estate other
|
93,959 | 38,041 | 6,633 | 138,633 | ||||||||||||
Factoring and asset based lending
|
121,753 | 789 | - | 122,542 | ||||||||||||
SBA
|
60,315 | 6,995 | 228 | 67,538 | ||||||||||||
Other
|
822 | 3,014 | 187 | 4,023 | ||||||||||||
Total gross loans
|
$ | 570,964 | $ | 63,887 | $ | 16,696 | $ | 651,547 |
13
Past due and nonaccrual loans:
|
||||||||||||
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||
Still Accruing
|
||||||||||||
30-89 Days
|
Over 90 Days
|
Nonaccrual /
|
||||||||||
Past Due
|
Past Due
|
Impaired
|
||||||||||
Commercial
|
$ | - | $ | - | $ | 1,365 | ||||||
Real estate construction
|
- | - | - | |||||||||
Land loans
|
399 | - | 2,595 | |||||||||
Real estate other
|
- | 2,442 | 7,652 | |||||||||
Factoring and asset based lending
|
- | - | - | |||||||||
SBA
|
49 | - | 209 | |||||||||
Other
|
0 | - | - | |||||||||
Total gross loans
|
$ | 448 | $ | 2,442 | $ | 11,821 |
(dollars in thousands)
|
As of December 31, 2010
|
|||||||||||
Still Accruing
|
||||||||||||
30-89 Days
|
Over 90 Days
|
Nonaccrual /
|
||||||||||
Past Due
|
Past Due
|
Impaired
|
||||||||||
Commercial
|
$ | 1,860 | $ | - | $ | 1,130 | ||||||
Real estate construction
|
- | - | 5,342 | |||||||||
Land loans
|
- | - | 3,176 | |||||||||
Real estate other
|
- | - | 6,633 | |||||||||
Factoring and asset based lending
|
- | - | - | |||||||||
SBA
|
19 | - | 228 | |||||||||
Other
|
- | - | 187 | |||||||||
Total gross loans
|
$ | 1,879 | $ | - | $ | 16,696 |
There were 16 loans, totaling $11.8 million, on non-accrual and deemed impaired at March 31, 2011, and fifteen loans, totaling $16.7 million, on non-accrual and deemed impaired at December 31, 2010.
Average impaired loans for the periods ended March 31, 2011 and December 31, 2010 were $13.5 million and $17.9 million, respectively. The following summarizes the breakdown of impaired loans by category as of March 31, 2011 and December 31, 2010:
Impaired loans:
|
||||||||||||
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||
Upaid
|
Average
|
|||||||||||
Principal
|
Recorded
|
Recorded
|
||||||||||
Balance
|
Investment
|
Investment
|
||||||||||
Commercial
|
$ | 2,586 | $ | 1,365 | $ | 1,041 | ||||||
Real estate construction
|
- | - | 2,111 | |||||||||
Land loans
|
4,619 | 2,595 | 3,654 | |||||||||
Real estate other
|
9,483 | 7,652 | 6,343 | |||||||||
Factoring and asset based lending
|
- | - | - | |||||||||
SBA
|
374 | 209 | 221 | |||||||||
Other
|
- | - | 97 | |||||||||
Total gross loans
|
$ | 17,062 | $ | 11,821 | $ | 13,467 |
14
(dollars in thousands)
|
As of December 31, 2010
|
|||||||||||
Upaid
|
Average
|
|||||||||||
Principal
|
Recorded
|
Recorded
|
||||||||||
Balance
|
Investment
|
Investment
|
||||||||||
Commercial
|
$ | 2,116 | $ | 1,130 | $ | 1,020 | ||||||
Real estate construction
|
7,653 | 5,342 | 5,632 | |||||||||
Land loans
|
5,288 | 3,176 | 4,132 | |||||||||
Real estate other
|
7,861 | 6,633 | 6,441 | |||||||||
Factoring and asset based lending
|
- | - | 77 | |||||||||
SBA
|
390 | 228 | 369 | |||||||||
Other
|
- | 187 | 189 | |||||||||
Total gross loans
|
$ | 23,308 | $ | 16,696 | $ | 17,860 |
Income on such loans is only recognized to the extent that cash is received and where the future collection of principal is probable. Accrual of interest is resumed only when principal and interest are brought fully current and when such loans are considered to be collectible as to both principal and interest. There was no interest income recognized on impaired loans during the quarters ended March 31, 2011 and 2010.
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. The entire allowance is available for any loan that, in management’s judgment should be charged-off.
The allowance generally consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired; however, it is currently the Bank’s practice to immediately charge-off any identified financial loss pertaining to impaired loans versus providing a specific reserve. As such, the allowance for credit losses as of March 31, 2011 and December 31, 2010 reflected general reserves for non-impaired loans and was based on historical loss rates for each portfolio segment, adjusted for the effects of qualitative or environmental factors that were likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. Qualitative factors included 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.
15
The following table summarizes the activity in the allowance for loan losses for the quarters ended March 31, 2011 and 2010.
Analysis of the allowance for credit losses:
|
||||||||
(dollars in thousands)
|
March 31,
|
March 31,
|
||||||
2011
|
2010
|
|||||||
Balance, beginning of period
|
$ | 15,546 | $ | 16,012 | ||||
Loans charged off by category:
|
||||||||
Commercial and other
|
727 | 889 | ||||||
Real estate construction
|
- | - | ||||||
Real estate land
|
340 | 20 | ||||||
Real estate other
|
690 | 537 | ||||||
Factoring and asset-based lending
|
- | - | ||||||
Consumer
|
- | 606 | ||||||
Total charge-offs
|
1,757 | 2,051 | ||||||
Recoveries by category:
|
||||||||
Commercial and other
|
38 | 159 | ||||||
Real estate construction
|
491 | 778 | ||||||
Real estate land
|
102 | 7 | ||||||
Real estate other
|
- | - | ||||||
Factoring and asset-based lending
|
- | - | ||||||
Consumer
|
- | - | ||||||
Total recoveries
|
632 | 944 | ||||||
Net charge-offs (recoveries)
|
1,125 | 1,107 | ||||||
Provision charged to expense
|
750 | 1,250 | ||||||
Balance, end of period
|
$ | 15,171 | $ | 16,155 |
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.
Premises and equipment at March 31, 2011 and December 31, 2010 are comprised of the following:
(dollars in thousands)
|
March 31, 2011
|
|||||||||||
Accumulated
|
Net Book
|
|||||||||||
Cost
|
Depreciation
|
Value
|
||||||||||
Leasehold improvements
|
$ | 5,434 | $ | (3,667 | ) | $ | 1,767 | |||||
Furniture and fixtures
|
1,092 | (973 | ) | 119 | ||||||||
Capitalized software
|
3,259 | (3,004 | ) | 255 | ||||||||
Equipment
|
2,403 | (2,148 | ) | 255 | ||||||||
Construction in process
|
- | - | - | |||||||||
Totals
|
$ | 12,188 | $ | (9,792 | ) | $ | 2,396 |
16
(dollars in thousands)
|
December 31, 2010
|
|||||||||||
Accumulated
|
Net book
|
|||||||||||
Cost
|
Depreciation
|
Value
|
||||||||||
Leasehold improvements
|
$ | 5,427 | $ | (3,506 | ) | $ | 1,921 | |||||
Furniture and fixtures
|
1,075 | (952 | ) | 123 | ||||||||
Capitalized software
|
3,220 | (2,938 | ) | 282 | ||||||||
Equipment
|
2,356 | (2,102 | ) | 254 | ||||||||
Construction in process
|
- | - | - | |||||||||
Totals
|
$ | 12,078 | $ | (9,498 | ) | $ | 2,580 |
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 California. These debt securities are subordinated to effectively all borrowings of the Company and are due and payable in March 2035. Interest is 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%. 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 is 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%. 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.
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 March 31, 2011 while at December 31, 2010, other borrowings consisted of $7.7 million of SBA loans sold in the fourth quarter 2010. Certain recourse provisions in SBA sales agreements as of December 31, 2010 caused a delay in the recognition of the sale. Proceeds from SBA loan sales were recognized as a secured borrowing until the recourse provisions expired, which was typically three months after the settlement date. Upon expiration of the recourse provisions, the Bank recognized a gain on the sale and derecognized the loan receivable and the related secured borrowing. As of March 31, 2011, the recourse provisions in SBA loan sales agreements have been amended to comply with current accounting standards which provide for the immediate recognition of a gain on sale and derecognition of the related loan receivable.
As of March 31, 2011, the Company had a total borrowing capacity with the Federal Home Loan Bank of San Francisco of approximately $248.0 million for which the Company had collateral in place to borrow $34.0 million. As of March 31, 2011, $12.0 million of this borrowing capacity was pledged to secure a letter of credit.
The Bank also has unsecured borrowing lines with correspondent banks totaling $25.0 million. At March 31, 2011, there were no balances outstanding on these lines.
17
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 month periods ended March 31, 2011 and 2010 and the resulting estimates of weighted-average fair value per share of stock options granted during those periods are as follows:
Three months ended March 31,
|
||||||||
2011
|
2010
|
|||||||
Expected life
|
75 months
|
75 months
|
||||||
Stock volatility
|
35.00 | % | 45.00 | % | ||||
Risk free interest rate
|
2.50 | % | 2.69 | % | ||||
Dividend yield
|
0.00 | % | 0.00 | % | ||||
Fair value per share
|
$ | 3.56 | $ | 3.35 |
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.
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.
The balances of assets and liabilities measured at fair value on a recurring basis are as follows:
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||||||
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Securities available for sale
|
$ | 204,177 | $ | - | $ | 204,177 | $ | - | ||||||||
Cash flow hedge
|
(1,572 | ) | - | (1,572 | ) | - | ||||||||||
Warrant portfolio
|
724 | - | - | 724 | ||||||||||||
Total
|
$ | 203,329 | $ | - | $ | 202,605 | $ | 724 |
18
(dollars in thousands)
|
As of December 31, 2010
|
|||||||||||||||
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Securities available for sale
|
$ | 217,303 | $ | - | $ | 217,303 | $ | - | ||||||||
Cash flow hedge
|
(1,750 | ) | - | (1,750 | ) | - | ||||||||||
Warrant portfolio
|
724 | - | - | 724 | ||||||||||||
Total
|
$ | 216,277 | $ | - | $ | 215,553 | $ | 724 |
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were not material for the quarter ended March 31, 2011.
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. The assets measured at fair value on a non-recurring basis at March 31, 2011 and December 31, 2010 included OREO of $9.7 million and $6.6 million, respectively. The fair value of OREO was determined using Level 2 assumptions. The Company had no charge-offs during the quarter ended March 31, 2011 as a result of declines in the OREO property values. The assets measured at fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010 also included impaired loans of $14.3 million and $16.7 million, respectively. The fair value of impaired loans was determined using Level 3 assumptions. The Company charged-off $1.8 million during the quarter ended March 31, 2011 as a result of impaired loans.
The following estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts.
The following table presents the carrying amount and estimated fair value of certain assets and liabilities of the Company at March 31, 2011 and December 31, 2010. The carrying amounts reported in the balance sheets approximate fair value for the following financial instruments: cash and due from banks, federal funds sold, interest-bearing deposits in other banks, demand and savings deposits, bank owned life insurance, and cash flow hedge (see Note 3 for information regarding securities).
(dollars in thousands)
|
March 31, 2011
|
December 31, 2010
|
||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
Financial assets:
|
||||||||||||||||
Cash and due from banks
|
$ | 15,001 | $ | 15,001 | $ | 8,676 | $ | 8,676 | ||||||||
Federal funds sold
|
108,520 | 108,520 | 114,240 | 114,240 | ||||||||||||
Interest bearing deposits in other banks
|
1,560 | 1,560 | 2,539 | 2,539 | ||||||||||||
Investments securities
|
204,177 | 204,177 | 217,303 | 217,303 | ||||||||||||
Loans and leases, gross
|
630,250 | 637,311 | 650,103 | 663,030 | ||||||||||||
Bank owned life insurance
|
10,490 | 10,490 | 10,393 | 10,393 | ||||||||||||
Financial liabilities:
|
||||||||||||||||
Deposits
|
827,711 | 826,208 | 847,946 | 846,701 | ||||||||||||
Trust preferred securities
|
17,527 | 17,895 | 17,527 | 17,607 | ||||||||||||
Other borrowings
|
- | - | 7,672 | 7,650 | ||||||||||||
Cash flow hedge
|
(1,572 | ) | (1,572 | ) | (1,750 | ) | (1,750 | ) |
19
Loans
The fair value of loans with fixed rates is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings. For loans with variable rates that adjust with changes in market rates of interest, the carrying amount is a reasonable estimate of fair value.
Time deposits
The fair value of fixed maturity certificates of deposit is estimated using rates currently offered for deposits of similar remaining maturities.
Trust preferred securities
The fair value of the trust preferred securities approximates the pricing of a preferred security at current market prices.
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 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 March 31, 2011 and December 31, 2010. The Company did not have any derivative instruments that were assets as of March 31, 2011 and December 31, 2010.
Fair Value
|
||||||||||
Derivatives Designated as Hedging
|
Balance Sheet
|
March 31,
|
December 31,
|
|||||||
Instruments Under SFAS 133
|
Location
|
2010
|
2010
|
|||||||
Interest rate contracts
|
Other liabilities
|
$ | 1,572 | $ | 1,750 | |||||
Total hedged derivatives
|
$ | 1,572 | $ | 1,750 |
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 March 31, 2011, 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.
20
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. During the three months ended March 31, 2011 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 March 31, 2011 and March 31, 2010, 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 $60,000 and $$(368,000), respectively. During the three months ended March 31, 2011 and March 31, 2010, $(113,000) and $57,000, respectively was reclassified into earnings related to the effective portion of cash flow hedges.
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 months ended March 31, 2011 and 2010.
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 $625,000 will be reclassified as an increase to interest expense. During the three months ended March 31, 2010, the Company accelerated the reclassification of amounts in other comprehensive income to earnings as a result of the hedged forecasted transactions related to certain terminated interest rate swaps becoming probable not to occur. The accelerated amounts for the three months ended March 31, 2010 was a gain of $21,000. The Company did not accelerate any amounts during the quarter ended March 31, 2011.
The tables below presents the effect of the Company’s derivative financial instruments, interest rate contracts, on the income statement for the three months ended March 31, 2011 and 2010.
Interest Income
|
Non-Interest Income
|
Total Income
|
||||||||||||||||||||||
Three months
ended March 31,
|
Three months
ended March 31,
|
Three months
ended March 31,
|
||||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
2011
|
2009
|
|||||||||||||||||||
Amount of gain reclassified from AOCI into income - effective portion
|
$ | (113 | ) | $ | 57 | $ | - | $ | 21 | $ | (113 | ) | $ | 78 | ||||||||||
Amount of gain recognized in income on derivative - ineffective portion and amount excluded from effectiveness testing
|
- | - | - | - | - | - | ||||||||||||||||||
Total derivative income
|
$ | (113 | ) | $ | 57 | $ | - | $ | 21 | $ | (113 | ) | $ | 78 |
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 March 31, 2011 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 $1.6 million. As of March 31, 2011, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $2.4 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2011, it would have been required to settle its obligations under the agreements at the termination value.
21
10. Preferred Stock and Warrant under the TARP Capital Purchase Program
On December 23, 2008, the Company issued 23,864 shares of Series C Preferred Stock (Preferred Stock) and a 10-year Warrant to purchase up to 396,412 shares of the Company’s common stock at an exercise price of $9.03 per share. The Company sold the Preferred Stock and Warrant to the U.S. Treasury under the TARP Capital Purchase Program for an aggregate amount of $23.9 million. The Company has paid a cash dividend on the Preferred Stock of 5% per annum since the issuance.
The Company recorded the issuance of the Preferred Stock and Warrant as an increase in shareholders’ equity. The net proceeds from the transaction were allocated between Preferred Stock and the Warrant based on their respective fair values at the date of the issuance. Utilizing the results of a Black-Sholes model, the Company allocated approximately $70,000 to the Warrant (i.e. the discount on the Preferred Stock) to be amortized over a five year period.
On March 16, 2011, the Company fully redeemed all of its Preferred Stock under the TARP Capital Purchase Program for $23.9 million. The redemption was funded by the net proceeds from a $30.0 million private placement of the Company’s common stock completed in the fourth quarter of 2010. As a result of the early repayment, the Company recorded a $30,000 charge in the first quarter of 2011 to reflect the accelerated accretion of the remaining discount on the preferred stock.
On April 20, 2011, the Company negotiated and repurchased the Warrant held by the U.S. Treasury for $1.4 million, which was recorded as a reduction to shareholders’ equity.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” for additional preferred and common stock discussion.
22
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information, this quarterly report contains certain forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, and which are subject to the “Safe Harbor” created by those sections. The reader of this quarterly report should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company’s actual results could differ materially from those suggested by such forward-looking statements. Such risks and uncertainties include, among others, (1) competitive pressure in the banking industry increases significantly; (2) changes in interest rate environment reduces margin; (3) general economic conditions, either nationally or regionally are less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; (6) costs and expenses of complying with the internal control provisions of the Sarbanes-Oxley Act and our degree of success in achieving compliance; (7) changes in securities markets; (8) future credit loss experience; (9) civil disturbances of terrorist threats or acts, or apprehension about possible future occurrences of acts of this type; and (10) the involvement of the United States in war or other hostilities. Therefore, the information in this quarterly report should be carefully considered when evaluating the business prospects of the Company.
Critical Accounting Policies
Our accounting policies are integral to understanding the results reported. 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 that 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 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.
Sale of SBA Loans: The Company has the ability and the intent to sell all or a portion of certain SBA loans in the loan portfolio and, as such, carries the saleable portion of these loans at the lower of aggregate cost or fair value. At March 31, 2011 and December 31, 2010, 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.
23
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.
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.
24
Selected Financial Data
The following table reflects selected financial data and ratios as of and for the quarters ended March 31, 2011 and 2010.
(dollars in thousands, except per share data)
|
Three months ended
|
|||||||
March 31,
|
||||||||
|
2011
|
2010
|
||||||
Statement of Operations Data:
|
||||||||
Interest income
|
$ | 11,710 | $ | 10,757 | ||||
Interest expense
|
652 | 882 | ||||||
Net interest income
|
11,058 | 9,875 | ||||||
Provision for credit losses
|
750 | 1,250 | ||||||
Net interest income after provision for credit losses
|
10,308 | 8,625 | ||||||
Other income
|
2,546 | 1,626 | ||||||
Other expenses
|
10,237 | 9,653 | ||||||
Income before income taxes
|
2,617 | 598 | ||||||
Income taxes
|
1,047 | 233 | ||||||
Net income
|
$ | 1,570 | $ | 365 | ||||
Preferred dividends
|
200 | 1,060 | ||||||
Net income (loss) available to common shareholders
|
$ | 1,370 | $ | (695 | ) | |||
Per Share Data:
|
||||||||
Basic earnings (loss) per share
|
$ | 0.10 | $ | (0.11 | ) | |||
Diluted earnings (loss) per share
|
0.09 | (0.11 | ) | |||||
Shareholders' equity per share
|
8.12 | 8.00 | ||||||
Cash dividend per common share
|
- | - | ||||||
Balance Sheet Data:
|
||||||||
Balance sheet totals:
|
||||||||
Assets
|
$ | 998,437 | $ | 858,771 | ||||
Loans, net
|
615,079 | 568,093 | ||||||
Deposits
|
827,711 | 718,625 | ||||||
Shareholders' equity
|
122,366 | 110,493 | ||||||
Average balance sheet amounts:
|
||||||||
Assets
|
$ | 1,024,796 | $ | 843,770 | ||||
Loans, net
|
610,257 | 553,386 | ||||||
Deposits
|
850,633 | 702,621 | ||||||
Shareholders' equity
|
135,635 | 109,754 | ||||||
Selected Ratios:
|
||||||||
Return on average assets
|
0.62 | % | 0.18 | % | ||||
Return on average equity
|
4.69 | % | 1.35 | % | ||||
Efficiency ratio
|
75.25 | % | 83.93 | % | ||||
Risk based capital ratio
|
18.23 | % | 19.23 | % | ||||
Net chargeoffs to average gross loans
|
0.18 | % | 0.19 | % | ||||
Allowance for loan losses to total loans
|
2.40 | % | 2.76 | % | ||||
Average equity to average assets
|
13.24 | % | 13.01 | % |
25
Summary of Financial Results – Quarter ended March 31, 2011
The Company reported net operating income of $1.6 million for the three months ended March 31, 2011 representing an increase of $1.2 million, or 330.1%, compared to net operating income of $365,000 for the same period one year ago. Net income available to common shareholders was reduced by preferred dividends of $200,000 and $1.1 million during the first quarter of 2011 and 2010, respectively, resulting in earnings (loss) per diluted share of $0.09 and $(0.11), respectively. Preferred dividends decreased $860,000 compared to the same period one year earlier, resulting in quarter to date preferred dividends of $200,000 due to the early conversion of Series B and B-1 preferred shares in March 2010 and early redemption of Series C preferred shares in March 2011 (see discussion in Capital Resources section under Private Placement 2008 and Trouble Assets Relief Program (TARP)).
The table below highlights the changes in the nature and sources of income and expense.
Three months ended
|
||||||||||||
March 31,
|
Increase
|
|||||||||||
(dollars in thousands)
|
2011
|
2010
|
(Decrease)
|
|||||||||
Interest income
|
$ | 11,710 | $ | 10,757 | $ | 953 | ||||||
Interest expense
|
652 | 882 | (230 | ) | ||||||||
Net interest income
|
11,058 | 9,875 | 1,183 | |||||||||
Provision for credit losses
|
750 | 1,250 | (500 | ) | ||||||||
Net interest income after provision
|
||||||||||||
for credit losses
|
10,308 | 8,625 | 1,683 | |||||||||
Other income
|
2,546 | 1,626 | 920 | |||||||||
Other expenses
|
10,237 | 9,653 | 584 | |||||||||
Income before income taxes
|
2,617 | 598 | 2,019 | |||||||||
Income taxes
|
1,047 | 233 | 814 | |||||||||
Net income
|
$ | 1,570 | $ | 365 | $ | 1,205 | ||||||
Preferred dividends
|
200 | 1,060 | (860 | ) | ||||||||
Net income (loss) available to common shareholders
|
$ | 1,370 | $ | (695 | ) | $ | 2,065 |
Net Interest Income and Margin
Net interest income, the difference between interest earned on loans and investments and interest paid on deposits is the principal component of the Company's earnings. Net interest income is affected by changes in the nature and volume of earning assets held during the quarter, the rates earned on such assets and the rates paid on interest bearing liabilities.
Net interest income for the quarter ended March 31, 2011 was $11.1 million, which was comprised of $11.7 million in interest income and $652,000 in interest expense. Net interest income for the quarter ended March 31, 2010 was $9.9 million, which was comprised of $10.8 million in interest income and $882,000 in interest expense. Net interest income for the quarter ended March 31, 2011 represented an increase of $1.2 million or 12.0% from the same period one year earlier.
The composition of the average balance sheet impacts growth in net interest income. For the quarter ended March 31, 2011 average earning assets of $963.3 million represented an increase of $170,000, or 21.4%, compared to $793.3 million for the same period in 2010. The Company’s loan-to-deposit ratio, a measure of leverage, averaged 73.75% during the quarter ended March 31, 2011, which represented a decrease compared to an average of 81.27% for the same quarter of 2010 as a result of slower loan growth relative to deposit funding.
26
Changes in short-term interest rates also impact growth in net interest income as the interest rate earned on a majority of the Company’s assets, specifically the loan portfolio, adjust with changes in short-term market rates. As such, the nature of the Company’s balance sheet is that, over time as short-term interest rates change, income on interest earning assets has a greater impact on net interest income than interest paid on liabilities. The Company’s prime rate averaged 3.25% in the quarters ended March 31, 2011 and March 31, 2010.
The Company’s net interest margin (net interest income divided by average earning assets) for the quarter ended March 31, 2011 was 4.66% compared to 5.05% in the same period one year earlier. The decrease in net interest margin from 2010 to 2011 was primarily due to a lower yield on earning assets combined with decreased leverage. Additionally, during the first quarter of 2011, the Company experienced a significant pre-payment on a specific class of mortgage-backed securities which had a negative impact on the net interest margin of 9 basis points. The Company has since reduced its exposure to this class of security. The negative impact on the Company’s net interest margin from the reversal of foregone interest on nonperforming loans was 9 basis points in the first quarter of 2011 compared to 13 basis points for the same period in 2010.
The following table details the average balances, interest income and expense and the effective yields/rates for earning assets and interest-bearing liabilities for the quarters ended March 31, 2011 and 2010.
Three months ended March 31,
|
||||||||||||||||||||||||
(dollars in thousands)
|
2011
|
2010
|
||||||||||||||||||||||
Yields
|
Interest
|
Yields
|
Interest
|
|||||||||||||||||||||
Average
|
or
|
Income/
|
Average
|
or
|
Income/
|
|||||||||||||||||||
Balance
|
Rates
|
Expense
|
Balance
|
Rates
|
Expense
|
|||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||
Interest earning assets (2):
|
||||||||||||||||||||||||
Loans (1)
|
$ | 627,315 | 7.0 | % | $ | 10,816 | $ | 571,049 | 7.2 | % | $ | 10,106 | ||||||||||||
Federal funds sold
|
142,862 | 0.2 | % | 82 | 101,928 | 0.2 | % | 59 | ||||||||||||||||
Investment securities
|
188,549 | 1.7 | % | 802 | 111,235 | 2.0 | % | 547 | ||||||||||||||||
Other
|
4,544 | 0.9 | % | 10 | 9,056 | 2.0 | % | 45 | ||||||||||||||||
Total interest earning assets
|
963,270 | 4.9 | % | 11,710 | 793,268 | 5.5 | % | 10,757 | ||||||||||||||||
Noninterest-earning assets:
|
||||||||||||||||||||||||
Cash and due from banks
|
21,994 | 16,495 | ||||||||||||||||||||||
All other assets (3)
|
39,532 | 34,007 | ||||||||||||||||||||||
TOTAL
|
$ | 1,024,796 | $ | 843,770 | ||||||||||||||||||||
LIABILITIES AND
|
||||||||||||||||||||||||
SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
Interest bearing liabilities:
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
Demand
|
$ | 6,545 | 0.1 | % | 1 | $ | 6,058 | 0.1 | % | $ | 2 | |||||||||||||
Savings
|
345,187 | 0.3 | % | 227 | 274,861 | 0.5 | % | 358 | ||||||||||||||||
Time
|
43,608 | 0.7 | % | 78 | 75,335 | 1.5 | % | 281 | ||||||||||||||||
Other
|
24,436 | 5.7 | % | 346 | 17,749 | 5.5 | % | 241 | ||||||||||||||||
Total interest bearing liabilities
|
419,776 | 0.6 | % | 652 | 374,003 | 1.0 | % | 882 | ||||||||||||||||
Noninterest-bearing liabilities:
|
||||||||||||||||||||||||
Demand deposits
|
455,292 | 346,367 | ||||||||||||||||||||||
Accrued expenses and
|
||||||||||||||||||||||||
other liabilities
|
14,093 | 13,646 | ||||||||||||||||||||||
Shareholders' equity
|
135,635 | 109,754 | ||||||||||||||||||||||
TOTAL
|
$ | 1,024,796 | $ | 843,770 | ||||||||||||||||||||
Net interest income and margin
|
4.7 | % | $ | 11,058 | 5.0 | % | $ | 9,875 |
27
(1)
|
Loan fee amortization of $1.2 million and $897,000, 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 $15.7 million and $16.2 million, respectively.
|
The following table shows the effect of the interest differential of volume and rate changes for the quarters ended March 31, 2011 and 2010. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each.
(dollars in thousands)
|
Three months ended March 31,
|
|||||||||||
2011 vs. 2010
|
||||||||||||
Increase(decrease)
due to change in
|
||||||||||||
Average
|
Average
|
Total
|
||||||||||
Volume
|
Rate
|
Change
|
||||||||||
Interest income:
|
||||||||||||
Loans
|
$ | 970 | $ | (260 | ) | $ | 710 | |||||
Federal funds sold
|
23 | (0 | ) | 23 | ||||||||
Investment securities
|
329 | (74 | ) | 255 | ||||||||
Other
|
(10 | ) | (25 | ) | (35 | ) | ||||||
Total interest income
|
1,313 | (360 | ) | 953 | ||||||||
Interest expense:
|
||||||||||||
Demand
|
0 | (1 | ) | (1 | ) | |||||||
Savings
|
46 | (177 | ) | (131 | ) | |||||||
Time
|
(57 | ) | (146 | ) | (203 | ) | ||||||
Other
|
95 | 10 | 105 | |||||||||
Total interest expense
|
84 | (314 | ) | (230 | ) | |||||||
Change in net interest income
|
$ | 1,228 | $ | (45 | ) | $ | 1,183 |
Net interest income is the principal source of the Company’s operating earnings. Significant factors affecting net interest income are: rates, volumes and mix of the loan, investment and deposit portfolios. Due to the nature of the Company’s lending markets, in which the majority of loans are generally tied to prime rate, it is believed that an increase in interest rates should positively affect the Company’s future earnings, while a decline should have a negative impact. However, it is not feasible to provide an accurate measure of such a change because of the many factors (many of them uncontrollable) influencing the result.
Interest Income
Interest income of $11.7 million in the quarter ended March 31, 2011 represented an increase of $953,000, or 8.9%, from $10.8 million in the same quarter one year earlier. The average yield on earning assets was 4.93% for the quarter ended March 31, 2011 and 5.50% for the quarter ended March 31, 2010. The increase in interest income was primarily due to an increase in earning assets and a decrease in non-performing loans.
Average gross loans were $627.3 million for three months ended March 31, 2011, an increase of $56.3 million or 9.9% from $571.0 million for the same period one year earlier. Average loans comprised 65.1% of average earning assets in the three months ended March 31, 2011 compared to 72.0% in the first quarter of 2010.
Other earning assets, consisting of investment securities, federal funds sold and interest-bearing deposits, averaged $336.0 million for the quarter ended March 31, 2011, an increase of $113.7 million or 51.2% from $222.2 million for the three months ended March 31, 2010.
28
Interest Expense
Interest expense was $652,000 for the quarter ended March 31, 2011, which represented a decrease of $230,000, 26.1% from $882,000 for the comparable period of 2010. The decrease in interest expense reflects lower interest rates paid on liabilities offset slightly by higher balances of interest-bearing liabilities in the first quarter of 2011 compared to the same period in 2010. Average interest-bearing liabilities were $419.8 million for the three months ended March 31, 2011, an increase of $45.8 million, or 12.2%, from $374.0 million for the same period one year earlier.
Average interest bearing deposits were $395.3 million for the quarter ended March 31, 2011, which represented 46.5% of total average deposits and was an increase of $39.1 million, or 11.0%, from $356.3 million representing 50.7% of total average deposits in the first quarter of 2010.
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 $24.4 million and $17.7 million in the three months ended March 31, 2011 and 2010, respectively.
The average rate paid on interest-bearing liabilities of 0.63% in the quarter ended March 31, 2011 compared to 0.96% in the first quarter of 2010.
Credit Risk and 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 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 provided $750,000 to the allowance for credit losses for the three months ended March 31, 2011, compared to $1.3 million for the same period in 2010.
The Company’s loan charge-offs totaled $1.8 million during the first quarter ended March 31, 2011, compared to $2.1 million for the same period one year earlier. The Company recognized $632,000 and $944,000 in loan recoveries for the three months ended March 31, 2011 and 2010, respectively.
The following schedule provides an analysis of the allowance for credit losses for the quarter ended March 31, 2011 and 2010, respectively:
Three months ended
|
||||||||
(dollars in thousands)
|
March 31,
|
|||||||
2011
|
2010
|
|||||||
Balance, beginning of period
|
$ | 15,546 | $ | 16,012 | ||||
Provision for credit losses
|
750 | 1,250 | ||||||
Charge-offs
|
(1,757 | ) | (2,051 | ) | ||||
Recoveries
|
632 | 944 | ||||||
Balance, end of period
|
$ | 15,171 | $ | 16,155 |
The decrease in the allowance for loan losses of $984,000 from $16.2 million at March 31, 2010 to $15.2 million at March 31, 2011 is primarily attributable to a decrease in unidentified probable, estimable losses due to proactive loss recognition in prior periods.
Based on an evaluation of the 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 March 31, 2011 and December 31, 2010:
29
(dollars in thousands)
|
March 31, 2011
|
December 31, 2010
|
||||||||||||||
Percent of
|
Percent of
|
|||||||||||||||
ALLL in each
|
ALLL in each
|
|||||||||||||||
category to
|
category to
|
|||||||||||||||
Amount
|
gross loans
|
Amount
|
gross loans
|
|||||||||||||
Commercial
|
$ | 4,606 | 0.7 | % | $ | 4,616 | 0.7 | % | ||||||||
Real estate construction
|
1,159 | 0.2 | % | $ | 1,628 | 0.2 | % | |||||||||
Land loans
|
637 | 0.1 | % | $ | 622 | 0.1 | % | |||||||||
Real estate other
|
5,158 | 0.8 | % | $ | 5,358 | 0.8 | % | |||||||||
SBA
|
1,760 | 0.3 | % | $ | 1,670 | 0.3 | % | |||||||||
Factoring/ABL
|
1,764 | 0.3 | % | $ | 1,575 | 0.2 | % | |||||||||
Other
|
87 | 0.0 | % | $ | 77 | 0.0 | % | |||||||||
$ | 15,171 | 2.3 | % | $ | 15,546 | 2.4 | % |
Beginning in the second quarter of 2008, deterioration in economic conditions within the Company's market area and, as applicable, the State of California and/or national macroeconomic conditions resulted in increased stress to the loan portfolio, specifically construction and land development loans outside of the Company’s primary market of Santa Clara County and contiguous portions of San Mateo and Alameda counties.
In response to the deteriorating market conditions, the Company undertook steps to aggressively reduce the exposure to construction and land development loans with particular emphasis on loans outside of its primary market. Management curtailed new loan origination, thoroughly reviewed collateral values of projects approaching maturity and conservatively evaluated the market prospects of collateral for indications of impairments.
At March 31, 2011, the Company’s land development portfolio was reduced to $8.2 million with just $3.1 million remaining exposure outside of the primary market area. Further, over 50% of the remaining loans in this category are underwritten to amortizing term structures supported by cash flow from liquidity of the borrowers.
Construction loans at March 31, 2011 were $35.3 million with $4.4 million remaining on projects outside of the primary market area. In addition, at that date $19.8 million, or 56.2%, were loans to finance commercial projects and $900,000, or 2.5% were loans to finance residential projects of five or more units.
The aggressive management of credits in this category has resulted in elevated levels of nonperforming assets as loans are placed on nonaccrual through the marketing phase of the underlying project. In addition, loans placed on nonaccrual have been reduced to the level of indicated impairments. This has resulted in an elevated level of charge-offs. Management believes that this practice results in a recorded level of nonperforming assets that generally has been reduced to a net liquidation value, and as these assets are liquidated do not expect to incur additional significant losses. Non-performing loans at March 31, 2011, on average, have been reduced by approximately 27% of the remaining contractual balance, which was taken as a charge-off against the allowance for loan losses.
In response to the elevated level of charge-offs, migration of construction and land portfolios, and general deterioration in economic conditions the Company also increased provisions for potential loans losses and built the reserve to approximately 2.40% of total loans. The coverage ratio, the ratio of allowance for loan losses to nonperforming loans was 106.37% at March 31, 2011. Management believes that the coverage ratio reflects the conservative charge-off practice and that the allowance is adequate for losses not specifically identified in impairment analysis.
At March 31, 2011 nonperforming assets represented 2.40% of total assets, compared to 2.27% of total assets on December 31, 2010. Nonperforming assets increased slightly during the first quarter of 2011, primarily as a result of the aging of one particular note to 90 days past due. As repayment of $2.4 million loan was imminent at quarter-end, the loan remained on accrual status and no additional provision was required. The loan was paid off in full in April 2011. The following summarizes nonperforming assets at March 31, 2011 and December 31, 2010.
30
March 31,
|
December 31,
|
|||||||
(dollars in thousands)
|
2011
|
2010
|
||||||
Loans accounted for on a non-accrual basis
|
$ | 11,821 | $ | 16,696 | ||||
Other loans with principal or interest contracturally past due 90 days or more and still accruing
|
2,442 | - | ||||||
Nonperforming loans
|
14,263 | 16,696 | ||||||
Other real estate owned
|
9,666 | 6,645 | ||||||
Nonperforming assets
|
$ | 23,929 | $ | 23,341 | ||||
Loans restructured and in compliance with modified terms
|
4,456 | 4,494 | ||||||
Nonperforming assets and restructured loans
|
$ | 28,385 | $ | 27,835 |
The nonperforming assets at March 31, 2011 consisted of loans on nonaccrual or 90 days or more past due and still accruing totaling $14.3 million, and other real estate owned valued at $9.7 million. Nonperforming loans at March 31, 2011 were comprised of loans with legal contractual balances totaling approximately $19.6 million reduced by impairment charges of $5.3 million which have been charged against the allowance for credit losses. As a result, there no longer was an indicated potential loss exposure pertaining to nonperforming loans and no impairment reserves were required to be included in the allowance for credit losses.
The following table sets forth the components of nonperforming loans as of March 31, 2011 (dollars in thousands).
March 31, 2010
|
|||||
Classification
|
Amount
|
Collateral
|
|||
Land
|
1,723 |
Lots for retail development in Sacramento County
|
|||
Land
|
627 |
Lots for single family homes in Santa Clara County
|
|||
Land
|
205 |
Lots for single family homes in Idaho
|
|||
Land
|
40 |
Lot for commercial development in Calaveras County
|
|||
2,595 | |||||
Real estate other
|
6,518 |
Special purpose facility in Santa Cruz County
|
|||
Real estate other
|
758 |
Commercial building in Santa Clara County
|
|||
Real estate other
|
600 |
Single family residence in Placer County
|
|||
Real estate other
|
349 |
Single family residence in Santa Clara County
|
|||
Real estate other
|
191 |
Commercial office space in Santa Clara County
|
|||
Real estate other
|
185 |
Single family residence in San Francisco County
|
|||
Real estate other
|
62 |
Single family residence in Santa Cruz County
|
|||
Real estate other
|
12 |
Light industrial warehouse space in Stanislaus County
|
|||
Real estate other
|
6 |
Single family residence in Santa Clara County
|
|||
8,681 | |||||
Commercial
|
286 |
Business assets
|
|||
Commercial
|
259 |
Business assets
|
|||
545 | |||||
Total nonperforming loans
|
$ | 11,821 |
Included in nonperforming loans at March 31, 2011 are loans totaling $8.5 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 March 31, 2011, previously modified loans totaling $4.5 million were considered performing due to a sustained period of timely payments and therefore were accounted for on an accrual basis.
31
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, SBA, 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 loans secured by standing commercial or residential property, the Company receives updated rent rolls and operating statements 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 every four months 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.
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 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 reappraised at a minimum of every 6-12 months depending on current economic conditions. The appraisals are performed by Board approved appraisers that have appropriate licensing and experience. When a prospective loan amount exceeds $1.5 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 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 correction 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 loans 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. 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 credit losses is maintained at a level adequate for known and unidentified losses inherent in the loan portfolio. However, the Company's construction and land loan portfolios, representing approximately 6.9% of the total loan 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 other real estate owned and the level of the allowance for loan losses, which could adversely affect the Company's future growth and profitability.
32
Non-interest Income
The following table sets forth the components of other income and the percentage distribution of such income for the three months ended March 31, 2011 and 2010:
Three months ended March 31,
|
||||||||||||||||
(dollars in thousands)
|
2011
|
2010
|
||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Depositor service charges
|
$ | 675 | 26.5 | % | $ | 545 | 33.5 | % | ||||||||
Gain on sale of SBA loans
|
641 | 25.2 | % | - | 0.0 | % | ||||||||||
Foreign exchange upcharge
|
546 | 21.4 | % | 428 | 26.3 | % | ||||||||||
Gain on Sale of OREO
|
262 | 10.3 | % | 199 | 12.2 | % | ||||||||||
Warrant income
|
187 | 7.3 | % | - | 0.0 | % | ||||||||||
Increase in value of life insurance
|
97 | 3.8 | % | 97 | 6.0 | % | ||||||||||
SBA loan servicing income
|
80 | 3.1 | % | 107 | 6.6 | % | ||||||||||
Net gain (loss) on sale of securities
|
(93 | ) | -3.7 | % | 164 | 10.1 | % | |||||||||
Other income-cash flow hedge
|
- | 0.0 | % | 21 | 1.3 | % | ||||||||||
Other operating income
|
151 | 5.9 | % | 65 | 4.0 | % | ||||||||||
$ | 2,546 | 100.0 | % | $ | 1,626 | 100.0 | % |
Non-interest income totaled $2.5 million in the first quarter of 2011, an increase of $920,000 or 56.6% from $1.6 million in the first quarter of 2010. Non-interest income generally consists primarily of service charge income on deposit accounts, foreign exchange income, gains recognized on sales of SBA loans, and SBA loan servicing income. The increase in non-interest income during the quarter ending March 31, 2011 was primarily attributable to the increase in gain on sale of SBA loans of $641,000 and warrant income of $187,000.
For the quarter ended March 31, 2011 service charge income on deposit accounts was 675,000, representing an increase of $130,000, or 23.9%, compared to $545,000 for the same period one year ago. The increase is attributable to an increase in deposit related analysis charges.
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. There was $641,000 in gains recognized on sales of SBA loans during the quarter ended March 31, 2011 which represented an increase of 100.0% as there were no sales of SBA loans in the same period one year earlier.
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 first quarter of 2011, the Company recognized $546,000 in international fee income, representing an increase of $118,000, or 27.6%, compared to $428,000 for the same period one year ago. The increase was primarily caused by an increase in client demand for international services as a result of the current economic environment.
Non-interest Expense
The components of other expense as a percentage of average earnings assets are set forth in the following table for the three months ended March 31, 2011 and 2010.
33
Three months ended March 31,
|
||||||||||||||||
(dollars in thousands)
|
2011
|
2010
|
||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Salaries and benefits
|
$ | 5,378 | 2.3 | % | $ | 5,284 | 2.2 | % | ||||||||
Occupancy
|
839 | 0.4 | % | 841 | 0.4 | % | ||||||||||
Data processing
|
737 | 0.3 | % | 718 | 0.3 | % | ||||||||||
Marketing/Advertising
|
305 | 0.1 | % | 236 | 0.1 | % | ||||||||||
Deposit services
|
246 | 0.1 | % | 203 | 0.1 | % | ||||||||||
Legal and professional
|
578 | 0.2 | % | 642 | 0.3 | % | ||||||||||
Loan/OREO
|
586 | 0.2 | % | 340 | 0.1 | % | ||||||||||
Furniture and equipment
|
133 | 0.1 | % | 211 | 0.1 | % | ||||||||||
Other
|
1,435 | 0.6 | % | 1,178 | 0.5 | % | ||||||||||
$ | 10,237 | 4.3 | % | $ | 9,653 | 4.1 | % |
Operating expenses were $10.2 million for the three months ended March 31, 2011, an increase of $584,000 or 6.0% from $9.7 million at March 31, 2010. As a percentage of average earning assets, other expenses for the three months ended March 31, 2011 and 2010 were 4.3% and 4.1%, respectively, on an annualized basis. In 2011, operating expenses were comprised primarily of salaries and benefits of $5.4 million, which compared to $5.3 million in 2010. At March 31, 2011, the Company employed 168 full-time equivalents (FTE) compared to 164 FTE on the same date one year earlier. In addition, salaries and benefits included a charge of $282,000 and $345,000 to recognize compensation related to stock-based awards in the first quarter of 2011 and 2010, respectively.
In 2008, the FDIC proposed changes to the deposit insurance assessment system that went into effect in the second quarter of 2009. These changes were intended to apportion a larger percentage of the increase in deposit assessment to institutions categorized as “riskier” based on the four risk categories defined by the FDIC. Based upon the Company’s risk profile as well as participation in the Transaction Guarantee Program, the Company recognized $803,000 of this assessment compared to $608,000 for the same period one year earlier.
Balance Sheet
Total assets of the Company at March 31, 2011 were $998.4 million, a decrease of $31.3 million, or 3.0%, as compared to $1.0 billion at December 31, 2010. The decrease in total assets was principally due to a decrease in loan balances and investment securities.
The following table shows the Company’s loans by type and their percentage distribution as of March 31, 2011 and December 31, 2010.
34
(dollars in thousands)
|
March 31,
|
December 31,
|
||||||
2011
|
2010
|
|||||||
Commercial
|
$ | 256,865 | $ | 269,034 | ||||
Real estate construction
|
35,291 | 40,705 | ||||||
Land loans
|
8,235 | 9,072 | ||||||
Real estate other
|
139,499 | 138,633 | ||||||
Factoring and asset based lending
|
122,052 | 122,542 | ||||||
SBA
|
65,537 | 67,538 | ||||||
Other
|
4,193 | 4,023 | ||||||
Total gross loans
|
631,672 | 651,547 | ||||||
Unearned fee income
|
(1,422 | ) | (1,444 | ) | ||||
Total loans
|
630,250 | 650,103 | ||||||
Less allowance for credit losses
|
(15,171 | ) | (15,546 | ) | ||||
Total loans, net
|
$ | 615,079 | $ | 634,557 | ||||
Commercial
|
40.7 | % | 41.3 | % | ||||
Real estate construction
|
5.6 | % | 6.2 | % | ||||
Land loans
|
1.3 | % | 1.4 | % | ||||
Real estate other
|
22.1 | % | 21.3 | % | ||||
Factoring and asset based lending
|
19.3 | % | 18.8 | % | ||||
SBA
|
10.4 | % | 10.4 | % | ||||
Other
|
0.7 | % | 0.6 | % | ||||
Total gross loans
|
100.0 | % | 100.0 | % |
Gross loan balances were $631.7 million at March 31, 2011, which represented a decrease of $19.9 million, or 3.1%, as compared to $651.5 million at December 31, 2010. The decrease in loans was primarily in commercial, real estate construction and SBA loans.
The Company’s commercial loan portfolio represents loans to small and middle-market businesses in the Santa Clara County region. Commercial loans were $256.9 million at March 31, 2011, which represented a decrease of $12.2 million, or 4.5%, compared to $269.0 million at December 31, 2010. At March 31, 2011, commercial loans comprised 40.7% of total loans outstanding compared to 41.3% at December 31, 2010.
The Company’s construction and land development loan portfolio together totaled approximately $43.5 million as of March 31, 2011 compared to $49.8 million as of December 31, 2010, representing a decrease of $6.3 million or 12.6%. Construction and land development loan balances at March 31, 2011 and December 31, 2010 comprised 6.9% and 7.6%, respectively, of total loans.
Other real estate loans increased $866,000 or 0.6% to $139.5 million at March 31, 2011 over $138.6 million at December 31, 2010. The increase in other real estate loans was approximately equally split between home equity lines of credit and other real estate term loans. Other real estate loans represented 22.1% of total loans at March 31, 2011 compared to 21.3% at December 31, 2010.
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 March 31, 2011, factoring/asset- based loans totaled $122.1 million or 19.3% of total loans, representing a decrease of $490,000 or 0.4%, as compared to $122.5 million or 18.8% of total loans at December 31, 2010.
35
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 75% to 85% 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 March 31, 2011, SBA loans comprised $65.5 million, or 10.4%, of total loans, a decrease of $2.0 million, or 3.0%, from $67.5 million at December 31, 2010. The Company has the ability and the intent to sell all or a portion of the SBA loans and, as such, carries the saleable portion of SBA loans at the lower of aggregate cost or fair value. At March 31, 2011 and December 31, 2010, 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 March 31, 2011, other loans totaled $4.2 million as compared to $4.0 million at December 31, 2010.
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 March 31, 2011 and December 31, 2010.
(dollars in thousands)
|
March 31,
|
December 31,
|
||||||||||||||
2011
|
2010
|
|||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||
Noninterest-bearing demand
|
$ | 475,287 | 57.42 | % | $ | 443,806 | 52.34 | % | ||||||||
Interest-bearing demand
|
5,096 | 0.62 | % | 5,275 | 0.62 | % | ||||||||||
Money market and savings
|
305,113 | 36.86 | % | 355,772 | 41.96 | % | ||||||||||
Certificates of deposit:
|
||||||||||||||||
Less than $100
|
5,024 | 0.61 | % | 9,212 | 1.09 | % | ||||||||||
$100 and more
|
37,191 | 4.49 | % | 33,881 | 4.00 | % | ||||||||||
Total deposits
|
$ | 827,711 | 100.00 | % | $ | 847,946 | 100.00 | % |
Deposits decreased $20.2 million or 2.4% from $847.9 million at December 31, 2010 to $827.7 million at March 31, 2011. The decrease in deposits was primarily in savings accounts, partially offset by an increase in noninterest-bearing demand accounts. As of March 31, 2011, demand deposits and core deposits represented 58.0% and 94.9% of total deposits, compared to 50.5% and 90.8% in the same period one year earlier.
Leverage
Total gross loan balances at March 31, 2011 were $631.7 million. The resulting loan to deposit ratio was 73.75%. Other earning assets at March 31, 2011 were primarily comprised of investment securities, federal funds sold and interest-bearing deposits of $314.3 million. To date, the Company has deployed other earning assets primarily in federal funds sold to address the potential volatility of deposit balances and to accommodate projected loan funding, and in short term fixed rate investments to mitigate interest rate risk associated with the Company’s asset-sensitive balance sheet. 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.
During the fourth quarter of 2008 and throughout 2009 and 2010, as part of a strategic decision the Company effectively repositioned the composition of its balance sheet and improved its liquidity position by deploying other earning assets primarily in federal funds in direct response to the recent economic downturn and potential volatility of the deposit portfolio. During the fourth quarter of 2010 and the first quarter of 2011, the Company, in addition to maintaining a consistent balance in federal funds, also deployed excess liquidity in additional investment securities to increase net interest income and improve the net interest margin.
36
Capital Resources
The Company and the Bank are subject to the capital guidelines and regulations governing capital adequacy for bank holding companies and national banks. Additional capital requirements may be imposed on banks based on market risk. The FDIC requires a leverage ratio of 8.00% for new banks during the first three years of operation.
After the first three years of operations, the Comptroller requires a minimum leverage ratio of 3.00% 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 3.00% minimum.
The Comptroller's regulations also require national banks to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.00%. Risk-based capital ratios are calculated with reference to risk-weighted assets, including both on and off-balance sheet exposures, which are multiplied by certain risk weights assigned by the Comptroller to those assets. At least one-half of the qualifying capital must be in the form of Tier 1 capital.
The risk-based capital ratio focuses principally on broad categories of credit risk, and might not take into account many other factors that can affect a bank’s financial condition. These factors include overall interest rate risk exposure; liquidity, funding and market risks; the quality and level of earnings; concentrations of credit risk; certain risks arising from nontraditional activities; the quality of loans and investments; the effectiveness of loan and investment policies; and management’s overall ability to monitor and control financial and operating risks, including the risk presented by concentrations of credit and nontraditional activities. The Comptroller has addressed many of these areas in related rule-making proposals. In addition to evaluating capital ratios, an overall assessment of capital adequacy must take account of each of these other factors including, in particular, the level and severity of problem and adversely classified assets. For this reason, the final supervisory judgment on a bank’s capital adequacy may differ significantly from the conclusions that might be drawn solely from the absolute level of the Company’s risk-based capital ratio. The Comptroller has stated that banks generally are expected to operate above the minimum risk-based capital ratio. Banks contemplating significant expansion plans, as well as those institutions with high or inordinate levels of risk, should hold capital consistent with the level and nature of the risks to which they are exposed.
Further, the banking agencies have adopted modifications to the risk-based capital regulations to include standards for interest rate risk exposures. Interest rate risk is the exposure of a bank’s current and future earnings and equity capital arising from movements in interest rates. While interest rate risk is inherent in a bank’s role as financial intermediary, it introduces volatility to bank earnings and to the economic value of the Company. The banking agencies have addressed this problem by implementing changes to the capital standards to include a bank’s exposure to declines in the economic value of its capital due to changes in interest rates as a factor that the banking agencies consider in evaluating an institution’s capital adequacy. Bank examiners consider a bank’s historical financial performance and its earnings exposure to interest rate movements as well as qualitative factors such as the adequacy of a bank’s internal interest rate risk management.
Finally, institutions with significant trading activities must measure and hold capital for exposure to general market risk arising from fluctuations in interest rates, equity prices, foreign exchange rates and commodity prices and exposure to specific risk associated with debt and equity positions in the trading portfolio. General market risk refers to changes in the market value of on-balance-sheet assets and off-balance-sheet items resulting from broad market movements. Specific market risk refers to changes in the market value of individual positions due to factors other than broad market movements and includes such risks as the credit risk of an instrument’s issuer. The additional capital requirements apply effective January 1, 1998 to institutions with trading assets and liabilities equal to 10.0% or more of total assets or trading activity of $1.0 billion or more. The federal banking agencies may apply the market risk regulations on a case-by-case basis to institutions not meeting the eligibility criteria if necessary for safety and soundness reasons.
In connection with the recent regulatory attention to market risk and interest rate risk, the federal banking agencies will evaluate an institution in its periodic examination on the degree to which changes in interest rates, foreign exchange rates, commodity prices or equity prices can affect a financial institution’s earnings or capital. In addition, the agencies focus in the examination on an institution’s ability to monitor and manage its market risk, and will provide management with a clearer and more focused indication of supervisory concerns in this area.
37
Under certain circumstances, the Comptroller may determine that the capital ratios for a national bank shall be maintained at levels, which are higher than the minimum levels required by the guidelines. A national bank which does not achieve and maintain adequate capital levels as required may be subject to supervisory action by the Comptroller through the issuance of a capital directive to ensure the maintenance of required capital levels. In addition, the Company is required to meet certain guidelines of the Comptroller concerning the maintenance of an adequate allowance for loan and lease losses.
In response to increasing risk perceived in the economic environment, during the fourth quarter of 2008 the Company raised $53.9 million of additional capital. Additionally, to support tangible common equity as a component of Tier 1 capital and to ensure resources for the eventual TARP repayment, the Company successfully completed the sale of $30.0 million in common stock to a group of institutional investors in a private placement transaction during the fourth quarter of 2010. The following is a summary of these issuances:
Private Placement (2010)
On November 23, 2010, investors purchased $30.0 million of the Company’s common stock in a private placement transaction. The investors in the private placement purchased 3,508,771 shares of common stock at a price per share of $8.55. The price per share in the private placement was equal to the Nasdaq closing bid price of the Company’s common stock on November 18, 2010.
Under a Stock Purchase Agreement dated as of December 4, 2008 (see below), as amended, by and between the Company and Carpenter Fund Manager G.P., LLC, the Company granted certain participation rights to Carpenter Community BancFund, L.P., Carpenter Community BancFund-A, L.P. and Carpenter Community BancFund-CA, L.P. (collectively, the “Carpenter Funds”). As part of the November 23, 2010 private placement transaction, Carpenter Funds agreed to purchase an additional 1,103,275 common shares pursuant to the Stock Purchase Agreement. As a result, after the closing of this transaction, the Carpenter Funds held a total of 4,906,928 shares of the Company’s common stock or approximately 33.9% of the Company’s outstanding shares of common stock. Other than Carpenter, no Investor owned more than 9.9% of the Company’s common stock as a result of the sale of these common shares.
Private Placement (2008)
On December 4, 2008, the Carpenter Funds agreed to purchase $30.0 million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock in a private placement, subject to the United States Department of the Treasury approving our participation in the TARP Capital Purchase Program (see discussion below) and the Company satisfying all legal requirements for selling equity securities to the Treasury under the program.
On December 17, 2008, the Company completed the private placement sale of 131,901 shares of its Series B Mandatorily Convertible Cumulative Perpetual Preferred Stock and 168,099 shares of its Series B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock, for aggregate consideration of $30.0 million, which is $100 per share for both series of shares, to a private fund. The Series B and Series B-1 shares accrue dividends at a rate of 10% per annum, payable quarterly.
On March 31, 2010, the Company strengthened its capital position with the completion of an early conversion of the Series B and B-1 preferred shares. As a result of the conversion, the Company issued a total of 3,710,289 shares of its common stock and convertible promissory notes in the aggregate principal amount of $789,860 (the “Notes”) upon conversion of the Preferred Stock and as payment of all accrued but unpaid dividends thereon through September 30, 2010 pursuant to an agreement dated as of March 23, 2010. The effective conversion price of the Series B and B-1 Preferred was $8.46 per share, which was the closing price of the common stock reported on the Nasdaq Global Select Market on the date of the agreement.
The principal amount of the Notes accrued interest at the rate of 10% per annum and was convertible to common stock at the price of $8.46 per share. On June 17, 2010, the Notes were converted into 93,364 shares of common stock. As result of the conversion, there are no shares of Series B and B-1 Preferred outstanding, no shares of common stock issuable upon conversion of Notes.
38
Troubled Assets Relief Program (TARP)
On November 13, 2008, the United States Department of the Treasury (the Treasury) approved the Company’s participation in the TARP Capital Purchase Program, subject to the Company raising additional equity in an amount satisfactory to the Treasury. On December 4, 2008, investors agreed to purchase $30 million of the Company’s Series B and B-1 Mandatorily Convertible Cumulative Perpetual Preferred Stock in a private placement (see discussion above), subject to the Treasury approving the Company’s participation in the TARP Capital Purchase Program and its ability to satisfy all legal requirements for selling equity securities to the Treasury under the program. Based on discussions with the Treasury representatives, the Company understood that raising $30 million would satisfy the requirement of the Company raising additional equity.
On December 23, 2008, the Company issued 23,864 shares of its Fixed Rate Cumulative Perpetual Series C Preferred Stock, having a liquidation value of $23,864,000, to the Treasury. Dividends accrue at the rate of 5% per annum for the first five years and then 9% per annum thereafter. The dividends will be paid only as declared by the Board of Directors of the Company. However, in the event such dividends have not been paid for six or more quarters, whether or not consecutive, the Holders of the Series C Preferred shares will have the right to elect two members to the Company’s Board of Directors.
In addition the Company issued a warrant to purchase up to 396,412 shares of the Company’s common stock at a purchase price of $9.03 per share, subject to certain adjustment provisions such as stock splits, issuances of Common Stock at or below a specified price relative to the then current market price of the stock, and other provisions. The Warrant expires ten years from the issuance date. The Warrant is exercisable in whole or in part at any time except that the Treasury may not exercise more than one-half of the shares underlying the Warrant prior to the earlier of i) December 31, 2010 or ii) the date on which the Company receives gross proceeds of not less than $23,864,000 in one or more Qualified Equity Offerings. In addition, the Treasury has agreed not to exercise voting power with respect to any shares of Common Stock issued upon exercise of the Warrant.
Prior to December 31, 2011, unless the Company has redeemed the Series C Preferred shares or the Treasury has transferred the Series C Preferred Shares to a third party, consent of the Treasury will be required for the Company to 1) pay any dividend or other distribution to the holders of the Common Stock or 2) redeem, purchase or acquire any shares of Common Stock or other equity securities other than in connection with benefit plans consistent with past practices. In addition, the Company’s ability to declare common dividends or repurchase Common Stock or other equity securities will be subject to restrictions in the event the Company fails to declare and pay, or set aside for payment, the full amount of dividends on the Series C Preferred Shares. Finally, the Company has agreed, so long as the Treasury holds any securities of the Company, to ensure that its benefit plans with respect to its senior executive officers comply with the applicable provisions of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009.
On March 16, 2011, the Company fully redeemed all of its Preferred Stock under the TARP Capital Purchase Program for $23.9 million. The redemption was funded by the net proceeds from the $30.0 million private placement of the Company’s common stock completed in the fourth quarter of 2010. As a result of the early repayment, the Company recorded a $30,000 charge in the first quarter of 2011 to reflect the accelerated accretion of the remaining discount on the preferred stock.
On April 20, 2011, the Company negotiated and repurchased the Warrant held by the U.S. Treasury for $1.4 million, which was recorded as a reduction to shareholders’ equity.
Issuance costs of $600,000 incurred in connection with the issuance of both the private placements and TARP securities have been charged against Additional Paid in Capital.
The Company’s Tier 1 capital at March 31, 2011 was $140.2 million, which was comprised of $106.1 million of capital stock and surplus, $17.1 million in retained earnings and trust preferred securities up to the allowable limit of $17.0 million.
The following table shows the Company’s capital ratios at March 31, 2011 and December 31, 2010 as well as the minimum capital ratios required to be deemed “well capitalized” under the regulatory framework.
39
As of March 31,
|
As of December 31,
|
|||||||||||||||
(dollars in thousands)
|
2011
|
2010
|
||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
Company Capital Ratios
|
||||||||||||||||
Tier 1 Capital
|
$ | 140,215 | 16.98 | % | $ | 161,448 | 19.61 | % | ||||||||
(to Risk Weighted Assets)
|
||||||||||||||||
Tier 1 capital minimum requirement
|
$ | 49,559 | 6.00 | % | $ | 49,403 | 6.00 | % | ||||||||
Total Capital
|
$ | 150,599 | 18.23 | % | $ | 171,634 | 20.84 | % | ||||||||
(to Risk Weighted Assets)
|
||||||||||||||||
Total capital minimum requirement
|
$ | 82,598 | 10.00 | % | $ | 82,339 | 10.00 | % | ||||||||
Company Leverage
|
||||||||||||||||
Tier 1 Capital
|
$ | 140,215 | 13.68 | % | $ | 161,448 | 16.67 | % | ||||||||
(to Average Assets)
|
||||||||||||||||
Tier 1 capital minimum requirement
|
$ | 51,239 | 5.00 | % | $ | 48,429 | 5.00 | % | ||||||||
Bank Capital Ratios
|
||||||||||||||||
Tier 1 Capital
|
$ | 117,010 | 14.37 | % | $ | 117,010 | 14.37 | % | ||||||||
(to Risk Weighted Assets)
|
||||||||||||||||
Tier 1 capital minimum requirement
|
$ | 48,860 | 6.00 | % | $ | 48,860 | 6.00 | % | ||||||||
Total Capital
|
$ | 127,239 | 15.63 | % | $ | 127,239 | 15.63 | % | ||||||||
(to Risk Weighted Assets)
|
||||||||||||||||
Total capital minimum requirement
|
$ | 81,433 | 10.00 | % | $ | 81,433 | 10.00 | % | ||||||||
Bank Leverage
|
||||||||||||||||
Tier 1 Capital
|
$ | 117,010 | 11.45 | % | $ | 117,010 | 11.45 | % | ||||||||
(to Average Assets)
|
||||||||||||||||
Tier 1 capital minimum requirement
|
$ | 51,086 | 5.00 | % | $ | 51,086 | 5.00 | % |
The Company and the Bank were considered well capitalized at March 31, 2011 and December 31, 2010.
40
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. At March 31, 2011 and December 31, 2010, liquid assets as a percentage of deposits were 37.5% and 40.1%, respectively. In addition to cash and due from banks, liquid assets include interest-bearing deposits in other banks, Federal funds sold and securities available for sale. The Company has $25.0 million in Federal funds lines of credit available with correspondent banks to meet liquidity needs. At March 31, 2011, there were no balances outstanding on these lines. Additionally, as of March 31, 2011, the Company had a total borrowing capacity with the Federal Home Loan Bank of San Francisco of approximately $248.0 million for which the Company had collateral in place to borrow $34.0 million. As of March 31, 2011, $12.0 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.
The following table sets forth the distribution of repricing opportunities, based on contractual terms of the Company’s earning assets and interest-bearing liabilities at March 31, 2011, 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.
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||||||||||||||
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
|
$ | 108,520 | $ | - | $ | - | $ | - | $ | - | $ | 108,520 | ||||||||||||
Interest bearing deposits in other banks
|
1,225 | 302 | 33 | - | - | 1,560 | ||||||||||||||||||
Investment securities
|
6,031 | 4,291 | 3,260 | 81,271 | 109,324 | 204,177 | ||||||||||||||||||
Loans
|
214,100 | 46,556 | 69,365 | 167,548 | 134,103 | 631,672 | ||||||||||||||||||
Total earning assets
|
$ | 329,876 | $ | 51,149 | $ | 72,658 | $ | 248,819 | $ | 243,427 | $ | 945,929 | ||||||||||||
Interest checking, money market and savings
|
310,209 | - | - | - | - | 310,209 | ||||||||||||||||||
Certificates of deposit:
|
||||||||||||||||||||||||
Less than $100,000
|
2,395 | 1,959 | 530 | 140 | - | 5,024 | ||||||||||||||||||
$100,000 or more
|
18,955 | 10,638 | 7,346 | 252 | - | 37,191 | ||||||||||||||||||
Total interest-bearing liabilities
|
$ | 331,559 | $ | 12,597 | $ | 7,876 | $ | 392 | $ | - | $ | 352,424 | ||||||||||||
Interest rate gap
|
$ | (1,683 | ) | $ | 38,552 | $ | 64,782 | $ | 248,427 | $ | 243,427 | $ | 593,505 | |||||||||||
Cumulative interest rate gap
|
$ | (1,683 | ) | $ | 36,869 | $ | 101,651 | $ | 350,078 | $ | 593,505 | |||||||||||||
Interest rate gap ratio
|
(0.01 | ) | 0.75 | 0.89 | 1.00 | 1.00 | ||||||||||||||||||
Cumulative interest rate gap ratio
|
(0.01 | ) | 0.10 | 0.22 | 0.50 | 0.63 |
41
Based on the contractual terms of its assets and liabilities, the Company’s balance sheet at March 31, 2011 was asset sensitive in terms of its short-term exposure to interest rates. That is, at March 31, 2011 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.
The following table shows the scheduled maturities of the loan portfolio at March 31, 2011 and December 31, 2010. At March 31, 2011, approximately 77.7% of the loan portfolio is priced with floating interest rates which limit the exposure to interest rate risk on long-term loans.
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||||||
Due after one
|
||||||||||||||||
Due one year
|
year through
|
Due after
|
||||||||||||||
Amount
|
or less
|
five years
|
five years
|
|||||||||||||
Commercial and other
|
$ | 256,865 | $ | 133,900 | $ | 86,343 | $ | 23,429 | ||||||||
SBA
|
65,537 | 2,503 | 394 | 53,140 | ||||||||||||
Real estate construction
|
35,291 | 16,615 | 13,656 | 4,059 | ||||||||||||
Land loans
|
8,235 | 9,033 | 1,020 | 2,192 | ||||||||||||
Real estate-other
|
139,499 | 29,451 | 36,608 | 79,900 | ||||||||||||
Factoring / Asset-Based Lending
|
122,052 | 81,861 | 6,266 | - | ||||||||||||
Other
|
4,193 | 4,473 | 923 | - | ||||||||||||
Total loans
|
$ | 631,672 | $ | 277,836 | $ | 145,210 | $ | 162,720 |
As of December 31, 2010
|
||||||||||||||||
Due after one
|
||||||||||||||||
Due one year
|
year through
|
Due after
|
||||||||||||||
Amount
|
or less
|
five years
|
five years
|
|||||||||||||
Commercial
|
$ | 269,034 | $ | 143,890 | $ | 103,977 | $ | 21,167 | ||||||||
Real estate construction
|
40,705 | 17,153 | 17,386 | 6,166 | ||||||||||||
Real estate land
|
9,072 | 4,239 | 1,603 | 3,230 | ||||||||||||
Real estate other
|
138,633 | 20,446 | 47,380 | 70,807 | ||||||||||||
Factoring and asset based lending
|
122,542 | 98,722 | 23,820 | |||||||||||||
SBA
|
67,538 | 2,867 | 1,245 | 63,426 | ||||||||||||
Other
|
4,023 | 2,873 | 1,150 | |||||||||||||
Total loans
|
$ | 651,547 | $ | 290,190 | $ | 196,561 | $ | 164,796 |
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.
|
42
In the ordinary course of business, we have issued certain guarantees which qualify as off-balance sheet arrangements, as of March 31, 2011 those guarantees include the following:
·
|
Standby Letters of Credit in the amount of $15.0 million.
|
The table below summarizes the Company’s off-balance sheet contractual obligations:
(dollars in thousands)
|
As of March 31, 2011
|
|||||||||||||||||||
Payments due by period
|
||||||||||||||||||||
Less than
|
1 - 3 | 3 - 5 |
More than
|
|||||||||||||||||
Total
|
1 year
|
years
|
years
|
5 years
|
||||||||||||||||
Long-term contracts
|
$ | 9,271 | $ | 1,741 | $ | 3,469 | $ | 2,923 | $ | 1,138 | ||||||||||
Operating leases
|
4,104 | 798 | 1,392 | 1,392 | 522 | |||||||||||||||
Total
|
$ | 13,375 | $ | 2,539 | $ | 4,861 | $ | 4,315 | $ | 1,660 |
ITEM 4 – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness, as of March 31, 2011, 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 March 31, 2011.
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 first quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
43
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, 2010.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 – REMOVED AND RESERVED
ITEM 5 – OTHER INFORMATION
Not applicable
ITEM 6 – EXHIBITS
(a) Exhibits
See Index to Exhibits at page 46 of this Quarterly Report on Form 10-Q.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGE CAPITAL HOLDINGS
|
||
Dated: May 5, 2011
|
By:
|
/s/ Daniel P. Myers
|
Daniel P. Myers
|
||
President and Chief Executive Officer
|
||
(Principal Executive Officer)
|
||
Dated: May 5, 2011
|
By:
|
/s/ Thomas A. Sa
|
Thomas A. Sa
|
||
Executive Vice President
|
||
Chief Financial Officer
|
||
(Principal Financial and Accounting Officer)
|
45
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
|
46