Bridge Bank BBNK
January 05, 2007 - 6:17pm EST by
skyhawk887
2007 2008
Price: 20.05 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 126 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Bridge Bank (BBNK) is a cheap, easy-to-understand, highly profitable, fast growing (all organic), and undiscovered Silicon Valley commercial bank (with limited exposure to real estate) run by a veteran management group. One particular catalyst over the next year, in addition to the likelihood of continued strong core operating results, is the potential acquisition of one or two major competitors (Comerica or Greater Bay Bancorp— legitimate rumors abound) which would likely create significant customer and employee dislocation, allowing BBNK an opportunity to gain market share and accelerate its already high growth. (The banking industry is replete with stories of small banks taking advantage of merger dislocation in their markets.) A second catalyst would be a secondary offering that would improve the limited liquidity of the stock (averages 7K shares per day, and management is aware of the discount it is causing). The stock trades at 12.9 times my 2007 estimate of $1.55, making it very inexpensive relative to high performing banks that trade near 20 times and many sub-par banks that trade at 14+ times. It also trades at a very low 2.6 times book value despite a 20% ROE. With the help of one or two disruptive mergers in its markets, I think BBNK can double in two years and triple in the next five.

 

Key Highlights of Bridge Bank

  • 6.7% net interest margin, which puts it easily in the top 1% of banks in the country. Its business model, particularly its success at gathering core deposits, has made it immune to the shape of the yield curve.
  • Excellent profitability, with a 1.4% ROA, up from 1.2% YOY and a 20% ROE, up from 16% YOY
  • Loan growth of 20% YOY and core deposit growth of 19% YOY
  • EPS growth of 55% YOY
  • Superb credit quality—no charge-offs in 2006.
  • Experienced management group coming from Bank of America, Silicon Valley Bank, Comerica, and Greater Bay. They continue to be highly successful in recruiting key employees from other competitors.
  • Limited competition—industry consolidation has limited the field to a couple of bureaucratic mega-banks (Bank of America, Wells) and a handful of large regional banks (and two of the largest—Greater Bay Bancorp and Comerica— are poorly run).

 

Excellent Balance Sheet Characteristics

A bank’s balance sheet drives its earnings (loans are booked as assets and produce interest revenue; deposits are booked as liabilities on which it must pay interest) and BBNK’s balance sheet is one of the best in the country, with low cost core deposits (i.e. no cd’s) making up 77% of their total funding base (vs. less than 50% at most banks) and loans spread across a diversified commercial base. Below is a quick snapshot of their earning assets and funding costs and the rates they charge and pay:

 

 

 

Q3/06

 

 

 

Q3/05

 

 

Average

Interest

Yield/

 

Average

Interest

Yield/

Assets:

Balance $M

$M

Cost %

 

Balance $M

$M

Cost %

Loans

473.3

12.8

10.8

 

378.4

8.7

9.2

Federal Funds Sold

110.2

1.5

5.3

 

45.8

0.4

3.5

Investment Securities (MBS & bonds)

11.3

0.1

4.0

 

17.5

0.1

2.4

Total interest-earning assets

594.8

14.3

9.6

 

441.6

9.2

8.3

Other assets

41.5

 

 

 

43.7

 

 

Total assets

636.3

 

 

 

485.3.3

 

 

 

 

 

 

 

 

 

 

Liabilities and  equity:

 

 

 

 

 

 

 

low interest checking

3.9

0.0

0.9

 

4.2

0.0

0.9

Savings

288.9

2.7

3.8

 

205.1

1.1

2.1

Certificates of deposit

116.4

1.2

4.2

 

52.6

0.5

3.5

Borrowings

17.5

0.3

5.8

 

12.0

0.2

5.9

Total interest bearing funding

426.7

4.2

4.0

 

273.9

1.7

2.6

 

 

 

 

 

 

 

 

Non-interest-bearing demand

156.9

0.0

0.0

 

169.6

0.0

0.0

 

 

 

 

 

 

 

 

Other liabilities

6.8

 

 

 

5.1

 

 

Stockholders’ equity

45.8

 

 

 

36.7

 

 

Total liabilities and equity

636.3

 

 

 

485.3

 

 

 

 

 

 

 

 

 

 

Net interest/net interest margin

 

10.1

6.7

 

 

7.4

6.7

 

As you can see, their assets are mostly high yielding adjustable rate loans. On the funding side, you can see that the vast majority comes from low-rate savings and non-interest bearing demand accounts. This favorable asset/funding mix is what has allowed the net interest margin to remain stable at its very high rate of 6.7%. (The net interest margin, or NIM, roughly approximates the difference betweens asset yields and deposit costs. Most banks have NIMs of 3-5%.) Their ability to rapidly grow core deposits while the broad banking industry has seen shrinkage over the last year is truly remarkable (customers are switching into more interest rate sensitive products like cd’s). While management has been talking down expectations for the NIM, I would not be surprised to see it stabilize or even rise from the current level.

 

Good additional information on BBNK is available in their August investor presentation, which can be found at the following link: http://ofccolo.snl.com/cache/1500011013.pdf  It is short (19 slides) and definitely worth spending a couple minutes flipping through. Page 13 gives a great visual break-down of the balance sheet, specifically the loan portfolio. You will note that real estate based loans make up only 38% of loans (construction loans at 19%, land development loans at 6% and commercial real estate loans at 13%) vs. 50%+ at many California commercial banks. Below is a quick breakdown of BBNK’s loan portfolio as of Q3/06:

 

Loan Type

Q3/06 ($ in millions)

Q4/05 ($ in millions)

Commercial & Industrial

186

182

SBA

52

47

Construction

99

85

Commercial Real Estate

105

84

Factoring/asset based lending

37

38

Other

6

4

Total

486

440

 

All-Star Management Team

Despite BBNK’s small size, it has a veteran leadership team with decades of experience at very large, sophisticated financial institutions including Bank of America, Comerica, and Silicon Valley Bank. (Pages 7 and 8 of the presentation have a great break-out.). In particular, three recent recruits from Silicon Valley Bank (SIVB) stand out. Jeannie Kao was a top executive within their import/export trade finance operations, a very profitable and growing niche business, and is now leading it for BBNK. Mike Field, who was with SIVB almost from the beginning, is now leading BBNK’s efforts to serve technology companies and their relatively specialized deposit/cash management needs. Paul Gibson, hired in early November, will be heading their technology practice on the east coast, out of Reston, VA. (SIVB is a somewhat legendary bank in the Bay Area that has carved out a profitable niche serving technology companies—the stock has been a 10+ bagger in the last 12 years, although the growth has slowed more recently.) BBNK’s ability to recruit all-stars will remain a key competitive advantage.

 

Silicon Valley Is Booming, And BBNK Is Levered To Silicon Valley

While Google continues to be the poster child of Silicon Valley’s resurgence since the dot-com bust, many other start-ups have also been doing well (i.e. YouTube and SunPower) and several other older companies have been experiencing a renaissance (like Apple and HP). Given Stanford University’s key roll as an incubator and the entrepreneurial spirit engrained in the region, the beneficial cycle is likely to continue. While some banks can thrive in poor economic environments (M&T Bank, based in chronically recessionary upstate NY, is a great example), most banks do much better in regions of the country that have strong economic growth. While there is much concern about the real estate market in California, technology innovation, entrepreneurship and solid population growth in the Silicon Valley area will likely limit any real estate softness in the area. Additionally, the 49ers’ increasingly likely move from San Francisco to Santa Clara will create hundreds of millions, if not billions  of dollars in infrastructure spending and support an already tight employment market. As one piece of evidence of the Valley’s resilience, look how seamlessly it absorbed the dot-com bust and the billions in destroyed wealth and the out-migration of thousands of employees. It barely registered and banks in the region did not report any serious sort of asset quality problems. While I am not arguing that Silicon Valley is recession-proof, I do think it is more immune than most other regions of the country. Incidentally, the Wall Street Journal had a very interesting article (October 5, 2006, page B1) highlighting Silicon Valley’s unique economy and its ability to continue attracting businesses and entrepreneurs from across the country.

 

Recent Results Are Very Good

Q3/06 EPS of $0.34 was up 55% compared to the $0.22 reported a year ago and up 17% vs. Q2/06’s $0.29 (which was understated by $0.02). Revenue was up 30% YOY and 5.2% from Q2/06 (21% annualized). The net interest margin was 6.73%, up slightly from 6.67% a year ago, but down a sharp 31 basis points from Q2/06. While this decline looks initially alarming, the reason for the decline is actually good. BBNK has been very successful in gathering low cost deposits. Rather than investing them in imprudent loans, it chose to invest the deposits in highly liquid, short term securities yielding around 5.3% (see the growth in Fed Funds assets in the table up above). Since the Fed Funds rate of 5.25% is lower than BBNK’s existing margin of 6.73%, the addition of these assets mathematically brings the margin down. However, this isn’t a concern because the earnings generated from such assets are riskless and can easily be deployed into higher yielding loans. The key result to look at is dollars of net interest income, which grew from $9.3M in Q2 to $10.1M in Q3. That is growth of 9% despite a 30 basis point drop in the margin, and to repeat, it wasn’t achieved by making risky loans, as many others banks do (if you are interested in a beautiful example of this, check out FBTX, a small Texas bank that is making foolish construction loans in Colorado, Arizona and New Jersey); it was done the hard way—by gathering low cost deposits and investing them in riskless assets.

 

Loan growth has slowed down from a 20%+ clip earlier in 2006 to only 7% annualized in Q3/06. The slow-down is entirely understandable given real estate and recession concerns, but the continued strong employment numbers, a stable housing market in Silicon Valley, a robust M&A, IPO, and VC market, and a surging stock market are likely to encourage more business expansion shortly. Management has described the lending environment as “cautiously optimistic.” Additionally, BBNK’s proven ability to continue hiring away key talent will allow it to grow in a flat market.

 

The balance sheet is also very solid, with tangible equity to assets most recently at 7.2% (many banks run at 5-7%) and the loan loss reserve ratio at 1.39% (many banks have dropped this to near 1.00% in the last 5 years). Asset quality is excellent. They do have two non-performing loans totaling $2.6M, but neither has incurred any charge-offs, and the larger of the two credits ($2.3M) is an SBA loan with excess real estate collateral and has likely already been favorably resolved or will be so in Q1/07.

 

It is important to note that these impressive revenue and earnings growth numbers aren’t distorted by any one-timers or competitor M&A activity. They are being achieved through strong organic growth centered around recruiting top talent and gaining profitable customers. Given BBNK’s small size, recent success, ability to attract key talent, their growing brand recognition, and the economic strength of Silicon Valley, I see no reason why revenue and EPS growth can’t continue at 20%+ for several years.

 

Valuation

At $20, the stock trades at 12.9 times my 2007 estimate of $1.55, which does not currently include the impact of any potential competitor M&A activity. (In such a scenario, I think they could do $1.60 and be set up for a superb 2008.) Tangible book value at year end 2006 will likely be $7.80, putting price to tangible book at under 2.6 times (on which it is earning a high 20% ROE). Many high-performing banks trade at PEs of 20 and P/TB ratios near 4.0. Such a valuation would put BBNK at over $30, or up 50%+ within the next year.

Catalyst

Acquisition of one or two key competiors, allowing BBNK to take share

Secondary offering in late 2007 would improve liquidity
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    Description

    Bridge Bank (BBNK) is a cheap, easy-to-understand, highly profitable, fast growing (all organic), and undiscovered Silicon Valley commercial bank (with limited exposure to real estate) run by a veteran management group. One particular catalyst over the next year, in addition to the likelihood of continued strong core operating results, is the potential acquisition of one or two major competitors (Comerica or Greater Bay Bancorp— legitimate rumors abound) which would likely create significant customer and employee dislocation, allowing BBNK an opportunity to gain market share and accelerate its already high growth. (The banking industry is replete with stories of small banks taking advantage of merger dislocation in their markets.) A second catalyst would be a secondary offering that would improve the limited liquidity of the stock (averages 7K shares per day, and management is aware of the discount it is causing). The stock trades at 12.9 times my 2007 estimate of $1.55, making it very inexpensive relative to high performing banks that trade near 20 times and many sub-par banks that trade at 14+ times. It also trades at a very low 2.6 times book value despite a 20% ROE. With the help of one or two disruptive mergers in its markets, I think BBNK can double in two years and triple in the next five.

     

    Key Highlights of Bridge Bank

     

    Excellent Balance Sheet Characteristics

    A bank’s balance sheet drives its earnings (loans are booked as assets and produce interest revenue; deposits are booked as liabilities on which it must pay interest) and BBNK’s balance sheet is one of the best in the country, with low cost core deposits (i.e. no cd’s) making up 77% of their total funding base (vs. less than 50% at most banks) and loans spread across a diversified commercial base. Below is a quick snapshot of their earning assets and funding costs and the rates they charge and pay:

     

     

     

    Q3/06

     

     

     

    Q3/05

     

     

    Average

    Interest

    Yield/

     

    Average

    Interest

    Yield/

    Assets:

    Balance $M

    $M

    Cost %

     

    Balance $M

    $M

    Cost %

    Loans

    473.3

    12.8

    10.8

     

    378.4

    8.7

    9.2

    Federal Funds Sold

    110.2

    1.5

    5.3

     

    45.8

    0.4

    3.5

    Investment Securities (MBS & bonds)

    11.3

    0.1

    4.0

     

    17.5

    0.1

    2.4

    Total interest-earning assets

    594.8

    14.3

    9.6

     

    441.6

    9.2

    8.3

    Other assets

    41.5

     

     

     

    43.7

     

     

    Total assets

    636.3

     

     

     

    485.3.3

     

     

     

     

     

     

     

     

     

     

    Liabilities and  equity:

     

     

     

     

     

     

     

    low interest checking

    3.9

    0.0

    0.9

     

    4.2

    0.0

    0.9

    Savings

    288.9

    2.7

    3.8

     

    205.1

    1.1

    2.1

    Certificates of deposit

    116.4

    1.2

    4.2

     

    52.6

    0.5

    3.5

    Borrowings

    17.5

    0.3

    5.8

     

    12.0

    0.2

    5.9

    Total interest bearing funding

    426.7

    4.2

    4.0

     

    273.9

    1.7

    2.6

     

     

     

     

     

     

     

     

    Non-interest-bearing demand

    156.9

    0.0

    0.0

     

    169.6

    0.0

    0.0

     

     

     

     

     

     

     

     

    Other liabilities

    6.8

     

     

     

    5.1

     

     

    Stockholders’ equity

    45.8

     

     

     

    36.7

     

     

    Total liabilities and equity

    636.3

     

     

     

    485.3

     

     

     

     

     

     

     

     

     

     

    Net interest/net interest margin

     

    10.1

    6.7

     

     

    7.4

    6.7

     

    As you can see, their assets are mostly high yielding adjustable rate loans. On the funding side, you can see that the vast majority comes from low-rate savings and non-interest bearing demand accounts. This favorable asset/funding mix is what has allowed the net interest margin to remain stable at its very high rate of 6.7%. (The net interest margin, or NIM, roughly approximates the difference betweens asset yields and deposit costs. Most banks have NIMs of 3-5%.) Their ability to rapidly grow core deposits while the broad banking industry has seen shrinkage over the last year is truly remarkable (customers are switching into more interest rate sensitive products like cd’s). While management has been talking down expectations for the NIM, I would not be surprised to see it stabilize or even rise from the current level.

     

    Good additional information on BBNK is available in their August investor presentation, which can be found at the following link: http://ofccolo.snl.com/cache/1500011013.pdf  It is short (19 slides) and definitely worth spending a couple minutes flipping through. Page 13 gives a great visual break-down of the balance sheet, specifically the loan portfolio. You will note that real estate based loans make up only 38% of loans (construction loans at 19%, land development loans at 6% and commercial real estate loans at 13%) vs. 50%+ at many California commercial banks. Below is a quick breakdown of BBNK’s loan portfolio as of Q3/06:

     

    Loan Type

    Q3/06 ($ in millions)

    Q4/05 ($ in millions)

    Commercial & Industrial

    186

    182

    SBA

    52

    47

    Construction

    99

    85

    Commercial Real Estate

    105

    84

    Factoring/asset based lending

    37

    38

    Other

    6

    4

    Total

    486

    440

     

    All-Star Management Team

    Despite BBNK’s small size, it has a veteran leadership team with decades of experience at very large, sophisticated financial institutions including Bank of America, Comerica, and Silicon Valley Bank. (Pages 7 and 8 of the presentation have a great break-out.). In particular, three recent recruits from Silicon Valley Bank (SIVB) stand out. Jeannie Kao was a top executive within their import/export trade finance operations, a very profitable and growing niche business, and is now leading it for BBNK. Mike Field, who was with SIVB almost from the beginning, is now leading BBNK’s efforts to serve technology companies and their relatively specialized deposit/cash management needs. Paul Gibson, hired in early November, will be heading their technology practice on the east coast, out of Reston, VA. (SIVB is a somewhat legendary bank in the Bay Area that has carved out a profitable niche serving technology companies—the stock has been a 10+ bagger in the last 12 years, although the growth has slowed more recently.) BBNK’s ability to recruit all-stars will remain a key competitive advantage.

     

    Silicon Valley Is Booming, And BBNK Is Levered To Silicon Valley

    While Google continues to be the poster child of Silicon Valley’s resurgence since the dot-com bust, many other start-ups have also been doing well (i.e. YouTube and SunPower) and several other older companies have been experiencing a renaissance (like Apple and HP). Given Stanford University’s key roll as an incubator and the entrepreneurial spirit engrained in the region, the beneficial cycle is likely to continue. While some banks can thrive in poor economic environments (M&T Bank, based in chronically recessionary upstate NY, is a great example), most banks do much better in regions of the country that have strong economic growth. While there is much concern about the real estate market in California, technology innovation, entrepreneurship and solid population growth in the Silicon Valley area will likely limit any real estate softness in the area. Additionally, the 49ers’ increasingly likely move from San Francisco to Santa Clara will create hundreds of millions, if not billions  of dollars in infrastructure spending and support an already tight employment market. As one piece of evidence of the Valley’s resilience, look how seamlessly it absorbed the dot-com bust and the billions in destroyed wealth and the out-migration of thousands of employees. It barely registered and banks in the region did not report any serious sort of asset quality problems. While I am not arguing that Silicon Valley is recession-proof, I do think it is more immune than most other regions of the country. Incidentally, the Wall Street Journal had a very interesting article (October 5, 2006, page B1) highlighting Silicon Valley’s unique economy and its ability to continue attracting businesses and entrepreneurs from across the country.

     

    Recent Results Are Very Good

    Q3/06 EPS of $0.34 was up 55% compared to the $0.22 reported a year ago and up 17% vs. Q2/06’s $0.29 (which was understated by $0.02). Revenue was up 30% YOY and 5.2% from Q2/06 (21% annualized). The net interest margin was 6.73%, up slightly from 6.67% a year ago, but down a sharp 31 basis points from Q2/06. While this decline looks initially alarming, the reason for the decline is actually good. BBNK has been very successful in gathering low cost deposits. Rather than investing them in imprudent loans, it chose to invest the deposits in highly liquid, short term securities yielding around 5.3% (see the growth in Fed Funds assets in the table up above). Since the Fed Funds rate of 5.25% is lower than BBNK’s existing margin of 6.73%, the addition of these assets mathematically brings the margin down. However, this isn’t a concern because the earnings generated from such assets are riskless and can easily be deployed into higher yielding loans. The key result to look at is dollars of net interest income, which grew from $9.3M in Q2 to $10.1M in Q3. That is growth of 9% despite a 30 basis point drop in the margin, and to repeat, it wasn’t achieved by making risky loans, as many others banks do (if you are interested in a beautiful example of this, check out FBTX, a small Texas bank that is making foolish construction loans in Colorado, Arizona and New Jersey); it was done the hard way—by gathering low cost deposits and investing them in riskless assets.

     

    Loan growth has slowed down from a 20%+ clip earlier in 2006 to only 7% annualized in Q3/06. The slow-down is entirely understandable given real estate and recession concerns, but the continued strong employment numbers, a stable housing market in Silicon Valley, a robust M&A, IPO, and VC market, and a surging stock market are likely to encourage more business expansion shortly. Management has described the lending environment as “cautiously optimistic.” Additionally, BBNK’s proven ability to continue hiring away key talent will allow it to grow in a flat market.

     

    The balance sheet is also very solid, with tangible equity to assets most recently at 7.2% (many banks run at 5-7%) and the loan loss reserve ratio at 1.39% (many banks have dropped this to near 1.00% in the last 5 years). Asset quality is excellent. They do have two non-performing loans totaling $2.6M, but neither has incurred any charge-offs, and the larger of the two credits ($2.3M) is an SBA loan with excess real estate collateral and has likely already been favorably resolved or will be so in Q1/07.

     

    It is important to note that these impressive revenue and earnings growth numbers aren’t distorted by any one-timers or competitor M&A activity. They are being achieved through strong organic growth centered around recruiting top talent and gaining profitable customers. Given BBNK’s small size, recent success, ability to attract key talent, their growing brand recognition, and the economic strength of Silicon Valley, I see no reason why revenue and EPS growth can’t continue at 20%+ for several years.

     

    Valuation

    At $20, the stock trades at 12.9 times my 2007 estimate of $1.55, which does not currently include the impact of any potential competitor M&A activity. (In such a scenario, I think they could do $1.60 and be set up for a superb 2008.) Tangible book value at year end 2006 will likely be $7.80, putting price to tangible book at under 2.6 times (on which it is earning a high 20% ROE). Many high-performing banks trade at PEs of 20 and P/TB ratios near 4.0. Such a valuation would put BBNK at over $30, or up 50%+ within the next year.

    Catalyst

    Acquisition of one or two key competiors, allowing BBNK to take share

    Secondary offering in late 2007 would improve liquidity

    Messages


    SubjectQuestions
    Entry01/08/2007 10:02 AM
    Memberthoreau941
    Nice writeup. I have a few questions:

    1. I'm not a banking analyst, but the yield on BBNK's loan book seems to be high. How are they able to get such high yields? Is there a risk that they may be making risky loans to get better yields?

    2. Do you get the sense that management is willing to slow down loan growth if they can't source enough high quality loans?

    3. How has BBNK been able to grow deposits as quickly as is has? Do they use elements of Commerce Bank's model?

    Thanks for the idea.

    Subjectthoreau
    Entry01/08/2007 11:37 AM
    Memberskyhawk887
    Thanks for the questions.

    1- While BBNK's loan yields are higher than most large banks, the yields are not that different from some other small banks which I follow. However, one of the reasons they have high average loan yields is that they are almost exclusively a commercial bank. Commercial loans almost always have higher rates than residential/consumer loans like mortgages. In general, commercial loan rates to a bank's best/lowest-risk customers are based on the prime rate, which is Fed Funds plus 300 basis points, or 8.25% currently. We must also remember that BBNK is serving the small and middle market, which is more risky (allowing BBNK to charge higher rates) and has less competition (i.e. Bank of America is not making $500,000 commercial loans). In the end, BBNK's strong credit quality (i.e. no charge-offs in 2006) give me confidence they are making smart loans. Additionally, their loan loss reserve ratio (if you need more explanation on what this means, please ask) of 1.39% is much higher than most other banks, which means they have a larger cushion to deal with the emergence of any bad loans in the future.

    2- Loan growth did slow down notably in Q3. See my comments on the recent results. I think this is very indicative of exactly what you ask--they will not make just any loan to have a good quarter. They are focused on the long run.

    3- They DO NOT have a Commerce model regarding deposit growth. CBH's branch strategy is aimed very much at the retail investor. (Across the industry, I think it is only a matter of time before we start to see many new branches being shuttered because of their poor profitability.) BBNK has only a couple of branches. It is focused on commercial relationships, which are drven more by personal, face-to-face relationships rather than branch location convenience. Once the initial relationship is established, a lot of the customer's needs can be serviced virtually. BBNK's key to growing deposits is recruiting all-star employees from other banks, who already have the relationships with the end customers. BBNK also has sophisticated technology and products to serve a lot of the Silicon Valley start-ups with specialized cash management needs. This is what SIVB built its business on. While BBNK doesn't want to focus as narrowly on venture capital companies (like SIVB did), it realizes there is a significant deposit opportunity and limited competition in serving these unique, cash-rich companies.

    SubjectMore Questions
    Entry01/08/2007 02:04 PM
    Memberthoreau941
    Thanks for the answers. I took a look at the 10-K. They've done an impressive job building the business over the last few years. A few more questions:

    1. How big do you think they can make this company? Will deposit and asset growth slow down after a while, or is this a 12-20% grower for the next 10 years?

    2. How significant is the competitive advantage provided by their technology for servicing Silicon Valley startups? Are there any other major competitive advantages the company possesses?

    3. How much can they grow their deposit franchise within Silicon Valley before saturating their addressable niche? Would their business model work in other areas which have fewer startups?

    4. BBNK's percentage of low cost deposits is really impressive. How is the company able to keep deposit rates so low?

    5. How sticky do you think their deposits are relative to other banks?

    6. How good do you think management is? Are they smart? Are they hungry?

    7. How is their model different from SIVB?

    8. How would you suggest learning more about the company? Is there anything you suggest reading other than the investor presentation? Whom do you speak with at the company?

    Thanks again for the idea and the answers.

    SubjectAnswers
    Entry01/08/2007 03:46 PM
    Memberskyhawk887
    I have copied your questions and pasted in answers:

    1. How big do you think they can make this company? Will deposit and asset growth slow down after a while, or is this a 12-20% grower for the next 10 years?

    A: I think they can grow 12-20% for 10 years. I expect to continue adding to this stock over the next couple of years. They are small and their market opportunity is very large. And if Comerica or Greater Bay sells, growth will accelerate.

    2. How significant is the competitive advantage provided by their technology for servicing Silicon Valley startups? Are there any other major competitive advantages the company possesses?

    A: Their technology is not a competitive advantage. However, by being a relatively young company, they do not have to deal with archaic closed-source platforms that some older banks have had to deal with. Their competitive advantage is lack of bureaucracy and the proven ability to attract key talent from competitors.

    3. How much can they grow their deposit franchise within Silicon Valley before saturating their addressable niche? Would their business model work in other areas which have fewer startups?

    A: I don’t have any hard numbers, but BBNK could quintuple in size and they’d still only be scratching the surface. They currently have less than 1% market share for Silicon Valley and the market is growing. Their most recent hire is a guy based in Virginia. Another guy is based in Texas. They also engage in some SBA lending (guaranteed by the government) in Sacramento.

    4. BBNK's percentage of low cost deposits is really impressive. How is the company able to keep deposit rates so low?

    A: Commercial banking is a relationship/service driven business. It is not price sensitive. By the way, do you know what rate you are getting on your current checking account?

    5. How sticky do you think their deposits are relative to other banks?

    A: I think they are very sticky. It all comes down to relationships.

    6. How good do you think management is? Are they smart? Are they hungry?

    A: Management is smart, but running a commercial bank is not rocket science. It is about having the right people and the right relationships, and looking at the board and top executives, it easy to conclude that BBNK has a lot of highly experienced people with deep relationships.

    7. How is their model different from SIVB?

    A: It’s not that different, but part of SIVB’s business model involved taking warrants in tech companies to which they lent—a great business in the 90s. BBNK is for the most part a plain vanilla commercial bank.

    8. How would you suggest learning more about the company? Is there anything you suggest reading other than the investor presentation? Whom do you speak with at the company?

    A: Both CFO Tom Sa and CEO Dan Myers are friendly and accessible. I would probably try calling Tom first. To repeat, this is a simple story. There just isn’t that much to dig into after looking through the presentation and flipping through the K’s and Q’s. If you can get comfortable with the idea of investing in any bank, there is nothing that should make BBNK stand out in terms of risk.

    One thing that would probably help in getting comfortable with BBNK is to look at other well run, small banks across the country. Some names that I look at include CACB (based in Bend, Oregon; just expanded via acquisition into Boise), FTBK (construction-focused lender based near Seattle), PNFP (based in Nashville, they are benefiting from the merger between AmSouth and Regions), MCBC and MBWM( both based in Grand Rapids, MI—-both banks were formed in 1998 and had huge runs after Fifth Third Bank (FITB) bought Old Kent in 2000, which was the market share leader in Grand Rapids.

    Another thing that would probably help is to get comfortable with the economic and real estate outlook for Silicon Valley. Try a few web searches, but the following is a good example: http://www.mercurynews.com/mld/mercurynews/business/16365393.htm



    SubjectQuestions
    Entry01/08/2007 03:53 PM
    Memberdavid101
    Skyhawk,

    Couple of questions for you:

    1. NIM - Given that their NIM has increased 200 bps since 2003, how sustainable is the current NIM? It looks like they benefited from the prime rate moving on the asset side while the interest paid on the liability side has stayed low.

    2. Given that they are dealing with higher risk loans, is zero charge-offs sustainable?

    3. Is there another link to the investor presentation? When I clicked on it, I got an error.

    4. Who owns the shares? I see insiders own about 19% but there is very little institutional ownership. Also, how did they come public?

    David

    Subjectdavid
    Entry01/08/2007 07:07 PM
    Memberskyhawk887
    Thanks for the questions. My answers are included after your questions.

    1. NIM - Given that their NIM has increased 200 bps since 2003, how sustainable is the current NIM? It looks like they benefited from the prime rate moving on the asset side while the interest paid on the liability side has stayed low.

    A: Predicting the NIM is more art than science and there are all sorts of derivative effects, but if BBNK is making $100 of loans at an interest rate of 10% and funding it with $25 of no-interest deposits, $40 of savings deposits at 4%, $20 of cd’s at 5%, and $5 with zero-cost equity, that translates to a spread of 6.9%. (10% - (.25*0% + .40*4% + 0.30*5% +.05*0%)) I believe the current 6.70% spread is sustainable, but this is of course dependent on how well BBNK sources deposits and finds loans. However, if the margin trickles down to 5-6% over a few years, but loan and deposit growth are in the 20%+ range, net interest revenue growth is still going to be very robust.

    BBNK is also not interested in holding onto a large book of low-yielding securities as most banks seem inclined to do. This also adds to the NIM.


    2. Given that they are dealing with higher risk loans, is zero charge-offs sustainable?

    A: Probably not, but right now things look good. Their loan loss reserve ratio is also higher than most banks.


    3. Is there another link to the investor presentation? When I clicked on it, I got an error.

    A: Here is the link to the corporate website. http://www.bridgebank.com/index.php
    Click on the investor relations link and then get the presentation from the drop down menu on the top right.


    4.
    Who owns the shares? I see insiders own about 19% but there is very little
    institutional ownership. Also, how did they come
    public?

    A: The link above has a history of the bank under the “About Bridge Bank” link. It IPO’d in the spring of 2001, raising $19M, although it didn’t get listed on Nasdaq until early 2003.

    The ownership base is very scattered and decidedly non-institutional. I do know of at least one other fund that has been accumulating shares for over the past year. Management is very aware that a secondary (assuming the capital can be efficiently put to use) would increase the institutional ownership and almost certainly improve the liquidity, and likely, the valuation.


    Subjectilliquid stock & wrts
    Entry01/09/2007 02:47 PM
    Memberevan73
    Thanks for the idea Skyhawk.

    Do you know if they recieve stock/warrants/other equity kickers from their startup customers and are building the valuation or appreciation of these illiquid items into their loan yield...?

    Along these lines, have they harvested some home runs in this end of the book that is masking weaker credit quality overall... possibly allowing them no show no delinquencies?

    Thanks.

    Subjectevan
    Entry01/09/2007 02:58 PM
    Memberskyhawk887
    They don't make any sort of warrant/equity investments in any companies. To the extent they are dealing with technology companies, it is generally in servicing their deposit needs.

    In general, the accounting rules and relatively tight regulatory oversight of banks do not allow for the type of financial shenanigans to which you are referring. (This is actually one of the benefits of following a regulated industry.)

    SubjectPop in the stock
    Entry01/09/2007 03:04 PM
    Memberpirate681
    Very well done write-up, any idea who was playing with the stock today?

    Subjectstock price
    Entry01/09/2007 03:11 PM
    Memberskyhawk887
    It looks like a couple of larger block trades pushed the price up. Given the relative illiquidity, I wouldn't trust the sustainability of the quote.

    Subjectwidemoat
    Entry01/10/2007 11:32 AM
    Memberskyhawk887
    The net interest margin (and more specifically, the net interest spread) is a function of two variables, the cost of funds and the yield on assets. For example, if BBNK is successful in raising $10 million in zero-cost deposits and invests them in overnight Fed funds at 5.25%, it will earn a spread of 5.25% on that new money. If Fed funds was 7.25%, BBNK’s incremental spread would be 7.25%. If it invests the $10M in loans yielding 10%, it will earn a 10% spread. Obviously, if BBNK has to pay any interest on its deposits, it will reduce the net spread by a corresponding amount. For example if it raises $10M in checking deposits that cost 2.5% and invests them in Fed funds at 5.25%, it will earn an incremental spread of 2.75%.

    By the way, the net interest margin is always a little bit higher than the net interest spread because it takes into account the benefit of equity as a source of zero-interest funding. The net interest spread is calculated as the average interest rate earned on loans and securities minus the average interest rate paid on deposits and borrowings. The net interest margin is calculated as net interest income divided by average earnings assets (i.e. loans and bonds).

    As a reminder, while margin is important, it is critical not to be myopically focused on it. For example, if BBNK can add $10 million of high quality loans at a still healthy net spread of 5%, that will add a very nice $500K in annual revenue. Because BBNK is not highly levered (only 7.2% tangible equity to assets) and already has high returns on equity (a 20% ROE (with no dividend payout) means it can fund 20% loan growth without incurring any additional leverage) it can afford to add assets that are somewhat less than its existing spread. The banks that get into trouble in rapidly adding assets are the ones with high cost structures and low ROEs. COBH (a franchisee of the famous CBH) and FBTX are two great examples of this. Ultimately, both will be forced to stop growing (because leverage has increased so much) or raise capital at very dilutive levels.

    SubjectBarron's article on SIVB
    Entry02/05/2007 09:18 AM
    Memberskyhawk887
    SIVB is the dominant Silicon Valley bank serving VC and technology companies. The Barron's article said they would be a good tkae-out target, reflecting Merrill Lynch's recent acquisition of San Francisco-based First Republic. I think any take-out of SIVB is highly unlikely given the very unique nature of SVB's franchise-- any acquiror would not have any sort of comparable VC/technology business and therefore would be totally at SVB's mercy if there were any problems during integration).

    However, if SIVB were to sell, this would undoubtedly be a huge positive for BBNK, as they already employ several ex-SIVB staffers, and a merger would be an excellent opportunity to recruit some key talent that has no interest in working for a large bureaucracy.

    In general, the MER-FRC deal should highlight how valuable some small banks can be.

    SubjectExcellent Q4 Results
    Entry02/09/2007 09:44 AM
    Memberskyhawk887
    -BBNK reported very good earnings of $0.35 per share vs. $0.34 in Q3/06 and $0.28 a year ago.
    -The net interest margin increased 4 basis points from Q3/06 to 6.77% (although it is still down from 7.00% a year ago).
    -Net interest revenue came in at $10.8M, up 29% from a year ago and up 7% from Q3.
    -Expenses were well-controlled, rising only $0.1M from Q3 and up only 22% from a year ago. The company has good operating leverage.
    -Credit quality was excellent. Non-performing assets (i.e. bad loans) declined sharply from 0.53% of total loans to 0.08% of total loans, as they resolved one key problem loan without incurring any losses. bp to 8 bp. The loan loss reserve ratio (LLRR) is 1.36% vs. 1.35% a year ago and 1.39% in Q3. You will be hard-pressed to find many banks in the country that have actually increased this ratio, while at the same time have NPAs drop. The quality of earnings is very high.
    -Loan growth was huge, up 11.5% from Q3 (not annualized) on a period-end basis. (Average loan balances, off which net interest revenue is derived, grew only 6.6%.) The strength on a period-end basis will show up next quarter, so the implications for Q1/07 revenue growth are quite good.

    I think BBNK is well on its way to earning $1.55 for 2007, putting it at a very compelling 13.6 times, for a bank growing at 20%+ in a very attractive Silicon Valley economy. (As a reminder, Merrill Lynch just bought San Francisco-based First Republic for 24 times and Wells Fargo just bought Sacramento-based Placer Sierra for 19 times. Neither bank had anything close to the growth of BBNK.)

    SubjectSell side coverage announced
    Entry03/23/2007 10:51 AM
    Memberskyhawk887
    DA Davidson, a research boutique that covers a lot of small and mid-cap banks on the west coast, initiated coverage of BBNK with a Buy rating and a $26 price target. Nothing new in the report, but it highlights the scarcity value in booming Silicon value, its high rpofitibility, and its room to grow rapidly for the next few years.

    Too give perspective, DA also initiated on three other banks as well, with two neutral ratings and one other buy.

    I would expect other sell-side firms to assume coverage over the enxt year as well.

    SubjectUpdate
    Entry04/15/2008 02:04 PM
    Memberbroncos727
    I am an admirer of this bank, but not yet a shareholder. Seems like price is anticipating a NIM compression. My preference has always been for loans to reset quickly though. Any thoughts here? Of course the comparables are much cheaper, and this one has probably performed ok against peers. Silicon valley seems to be the only bright spot (or at least not a problem) in the economy at the moment. No rush getting back with this reply, but thanks in advance.

    SubjectRE: Update
    Entry04/15/2008 05:58 PM
    Memberskyhawk887
    I exited my position about a month ago. The company has performed admirably, but I became increasingly nervous about the secular headwinds of California real estate and their negative asset sensitivity to the Fed rate cuts. The insider selling in late February was another red flag. What ultimately pushed me over the edge to sell, however, was Google's stock chart--seems less likely now that Silicon Valley is as immune as once thought.

    Better to watch this one from the sidelines.

    SubjectRE: RE: Update
    Entry04/18/2008 06:59 PM
    Memberreg015
    Sorry, could I ask for a little clarification on your final statement? What is less likely now that Silicon Valley is "immune?"

    SubjectRE: RE: RE: Update
    Entry04/20/2008 06:37 PM
    Memberskyhawk887
    To clarify, it seems less likely that banks operating in Silicon Valley, such as Bridge Bank, are immune to the rising amount of bad loans that have been occurring across the entire banking sector.

    And just to note, BBNK did put out their Q1/08 results on Thursday afternoon--not very pretty, stock was down 7% on Friday.

    EPS comes in at $0.22 per share, down from a $0.40 runrate. The primary cause was a large increase in the loan loss provision expense ($2.4M up form $0.6M in Q4/07) as a result of the large increase in bad loans ($15.6M from $4.9M in Q4).

    Book value per share actually increased by $0.54 to $10.58, primarily as a result of their interest rate swaps (put on last year to lock in high net interest margin).

    The stock now trades at 1.5 times book and 11-20 times earnings depending on how bad asset quality and loan loss provisions will get. I think the stock will be in the penalty box for a while.
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