10-K 1 a12-1412_110k.htm 10-K

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


 

FORM 10-K

 

x

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2011

Commission File No. 001-34096

 


 

BRIDGE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

  NEW YORK   

11-2934195

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

 2200 MONTAUK HIGHWAY, BRIDGEHAMPTON, NEW YORK 

   11932   

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (631) 537-1000

 

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, Par Value of $0.01 Per Share

 

The Nasdaq Stock Market, LLC

 

Securities registered pursuant to Section 12 (g) of the Act:

 

(Title of Class)
None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) of this chapter is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

Large accelerated filer o   Accelerated filer x   Non-accelerated filer o   Smaller reporting company o

 

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

 

The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on June 30, 2011, was $134,103,707.

 

The number of shares of the Registrant’s common stock outstanding on March 6, 2012 was 8,474,176.

 

Portions of the following documents are incorporated into the Parts of this Report on Form 10-K indicated below:

 

The Registrant’s definitive Proxy Statement for the 2011 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2012 (Part III).

 

 

 

 


Table of Contents

 

 

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

 

 

 

Item 1

 

Business

 

1

 

 

 

 

 

Item 1A

 

Risk Factors

 

7

 

 

 

 

 

Item 1B

 

Unresolved Staff Comments

 

9

 

 

 

 

 

Item 2

 

Properties

 

9

 

 

 

 

 

Item 3

 

Legal Proceedings

 

10

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

 

10

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

10

 

 

 

 

 

Item 6

 

Selected Financial Data

 

13

 

 

 

 

 

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

 

 

 

 

 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 8

 

Financial Statements and Supplementary Data

 

34

 

 

 

 

 

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

78

 

 

 

 

 

Item 9A

 

Controls and Procedures

 

78

 

 

 

 

 

Item 9B

 

Other Information

 

78

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

 

78

 

 

 

 

 

Item 11

 

Executive Compensation

 

78

 

 

 

 

 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

79

 

 

 

 

 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 

79

 

 

 

 

 

Item 14

 

Principal Accountant Fees and Services

 

79

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15

 

Exhibits and Financial Statement Schedules

 

79

 

 

 

 

 

SIGNATURES

 

 

 

80

 

 

 

 

 

EXHIBIT INDEX

 

 

81

 

 

 

 


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PART I

 

Item 1. Business

 

Bridge Bancorp, Inc. (the “Registrant” or “Company”) is a registered bank holding company for The Bridgehampton National Bank (the “Bank”). The Bank was established in 1910 as a national banking association and is headquartered in Bridgehampton, New York. The Registrant was incorporated under the laws of the State of New York in 1988, at the direction of the Board of Directors of the Bank for the purpose of becoming a bank holding company pursuant to a plan of reorganization; under which the former shareholders of the Bank became the shareholders of the Company. Since commencing business in March 1989, after the reorganization, the Registrant has functioned primarily as the holder of all of the Bank’s common stock. In May 1999, the Bank established a real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”) as an operating subsidiary. The assets transferred to BCI are viewed by the bank regulators as part of the Bank’s assets in consolidation. The operations of the Bank also include Bridge Abstract LLC (“Bridge Abstract”), a wholly owned subsidiary of the Bank which is a broker of title insurance services. In October 2009, the Company formed Bridge Statutory Capital Trust II (the “Trust”) as a subsidiary, which sold $16.0 million of 8.5% cumulative convertible Trust Preferred Securities (the “Trust Preferred Securities”) in a private placement to accredited investors.

 

The Bank operates twenty branches on eastern Long Island. Federally chartered in 1910, the Bank was founded by local farmers and merchants. For a century, the Bank has maintained its focus on building customer relationships in this market area. The mission of the Company is to grow through the provision of exceptional service to its customers, its employees, and the community. The Company strives to achieve excellence in financial performance and build long term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) home equity loans; (3) construction loans; (4) residential mortgage loans; (5) secured and unsecured commercial and consumer loans; (6) FHLB, FNMA, GNMA and FHLMC mortgage-backed securities and collateralized mortgage obligations; (7) New York State and local municipal obligations; and (8) U.S government sponsored entity (“U.S. GSE”) securities. The Bank also offers the CDARS program, providing up to $50.0 million of FDIC insurance to its customers. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, individual retirement accounts and investment services through Bridge Investment Services, offering a full range of investment products and services through a third party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. The Bank’s customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

 

The Bank employs 227 people on a full-time and part-time basis. The Bank provides a variety of employment benefits and considers its relationship with its employees to be positive. In addition, the Company has an equity incentive plan under which it may issue shares of the common stock of the Company.

 

All phases of the Bank’s business are highly competitive. The Bank faces direct competition from a significant number of financial institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence. There is also competition for banking business from competitors outside of its market areas. Most of these competitors are significantly larger than the Bank, and therefore have greater financial and marketing resources and lending limits than those of the Bank. The fixed cost of regulatory compliance remains high for community banks as compared to their larger competitors that are able to achieve economies of scale. The Bank considers its major competition to be local commercial banks as well as other commercial banks with branches in the Bank’s market area. Other competitors include savings banks, credit unions, mortgage brokers and financial services firms other than financial institutions such as investment and insurance companies. Increased competition within the Bank’s market areas may limit growth and profitability.  Additionally, as the Bank’s market area expands westward, competitive pressure in new markets is expected to be strong. The title insurance abstract subsidiary also faces competition from other title insurance brokers as well as directly from the companies that underwrite title insurance. In New York State, title insurance is obtained on most transfers of real estate and mortgage transactions.

 

The Bank’s principal market area is located in Suffolk County, New York. Suffolk County is located on the eastern portion of Long Island and has a population of approximately 1.5 million. Eastern Long Island is semi-rural. Surrounded by water and including the Hamptons and North Fork, the region is a recreational destination for the New York metropolitan area, and a highly regarded resort locale world-wide. While the local economy flourishes in the summer months as a result of the influx of tourists and second homeowners, the year-round population has grown considerably in recent years, resulting in a reduction of the seasonal fluctuations in the economy. Industries represented in the marketplace include retail establishments; construction and trades; restaurants and bars; lodging and recreation; professional entities; real estate; health services; passenger transportation and agricultural and related businesses. During the last decade, the Long Island wine industry has grown with an increasing number of new wineries and vineyards locating in the region each year. The vast majority of businesses are considered small businesses employing fewer than ten full-time employees. In recent years, more national chains have opened retail stores within the villages on the north and south forks of the island. Major employers in the region include the municipalities, school districts, hospitals, and financial institutions.

 

 

 

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Since 2007, the Bank has opened eight new branches. In 2007, the Bank opened three new branches located in the Village of Southampton, Cutchogue, and Wading River. In April 2009, the Bank opened a new branch in Shirley, New York, and in December 2009, the Bank opened a new full service branch facility in the Village of East Hampton. During 2010, the Bank opened three new branches; Center Moriches in May, Patchogue in September and Deer Park in October. In November 2010, the Bank relocated its branch at 26 Park Place, East Hampton, New York to 55 Main Street, East Hampton, New York. The recent branch openings move the Bank geographically westward and demonstrate its commitment to traditional growth through branch expansion. In May 2011, the Bank acquired Hamptons State Bank (“HSB”) which increased the Bank’s presence in an existing market with a branch located in the Village of Southampton. In July 2011, the Bank converted the former HSB customers to its core operating system. Management spent considerable time ensuring the transition progressed smoothly for HSB’s former customers and shareholders. Management has demonstrated its ability to successfully integrate the former HSB customers and achieve expected cost savings while continuing to execute its business strategy. In September 2011, the Bank obtained OCC approval for its 21st branch in Ronkonkoma, New York. This location’s proximity to MacArthur Airport complements the Patchogue branch and extends the Bank’s reach into the Bohemia market. Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships.

 

The Bank routinely adds to its menu of products and services, continually meeting the needs of consumers and businesses. We believe positive outcomes in the future will result from the expansion of our geographic footprint, investments in infrastructure and technology and continued focus on placing our customers first. Plans for 2012 include a new internet banking platform and mobile banking products.

 

The Company, the Bank and its subsidiaries with the exception of the real estate investment trust, which files its own federal and state income tax returns, report their income on a consolidated basis using the accrual method of accounting and are subject to federal and state income taxation. In general, banks are subject to federal income tax in the same manner as other corporations. However, gains and losses realized by banks from the sale of available for sale securities are generally treated as ordinary income, rather than capital gains or losses. The Bank is subject to the New York State Franchise Tax on Banking Corporations based on certain criteria. The taxation of net income is similar to federal taxable income subject to certain modifications.

 

REGULATION AND SUPERVISION

 

The Bridgehampton National Bank

 

The Bank is a national bank organized under the laws of the United States of America. The lending, investment, and other business operations of the Bank are governed by federal law and regulations and the Bank is prohibited from engaging in any operations not specifically authorized by such laws and regulations. The Bank is subject to extensive regulation by the Office of the Comptroller of the Currency (“OCC”) and to a lesser extent by the Federal Deposit Insurance Corporation (“FDIC”), as its deposit insurer as well as by the Board of Governors of the Federal Reserve System. The Bank’s deposit accounts are insured up to applicable limits by the FDIC under its Deposit Insurance Fund (“DIF”). A summary of the primary laws and regulations that govern the operations of the Bank are set forth below.

 

Loans and Investments

 

There are no restrictions on the type of loans a national bank can originate and/or purchase. However, OCC regulations govern the Bank’s investment authority. Generally, a national bank is prohibited from investing in corporate equity securities for its own account. Under OCC regulations, a national bank may invest in investment securities, which is generally defined as securities in the form of a note, bond or debenture. The OCC classifies investment securities into five different types and, depending on its type, a national bank may have the authority to deal in and underwrite the security. The OCC has also permitted national banks to purchase certain noninvestment grade securities that can be reclassified and underwritten as loans.

 

Lending Standards

 

The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators.

 

 

 

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Federal Deposit Insurance

 

The Bank is a member of the DIF, which is administered by the FDIC. Deposit accounts at the Bank are insured by the FDIC. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the deposit insurance available on all deposit accounts to $250,000. In addition, certain non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. Refer to Item 1A. Risk Factors for more detailed information related to this new regulation.

 

Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s rate depends upon the category to which it is assigned, and certain adjustments specified by FDIC regulations. Assessment rates, as adjusted, previously ranged from seven to 77.5 basis points of assessable deposits. No institution may pay a dividend if in default of the federal deposit insurance assessment.  In May 2009, the FDIC issued a final rule to impose an emergency special assessment of 5 basis points on all banks based on their total assets less tier one capital as of June 30, 2009.  The special assessment was payable on September 30, 2009. During the second quarter of 2009, the Company recorded an expense of $0.4 million related to the FDIC special assessment. On November 12, 2009, the FDIC issued a final rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform 3 basis point increase in assessment rates effective on January 1, 2011. The Company’s prepayment of FDIC assessments for 2010, 2011 and 2012 was $3.8 million which will be amortized to expense over three years. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by the President. Section 331(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the FDIC to change the definition of the assessment base which assessment fees are determined. The new definition for the assessment base is the average consolidated total assets of the insured depository institution less the average tangible equity of the insured depository institution, rather than deposits. A reduction in the assessment rate was anticipated since the assessment base will increase for most institutions. The new methodology became effective on April 1, 2011 and the Company recorded a reduction in its FDIC assessment fees of $0.4 million during 2011 compared to 2010. The new financial reform legislation created a new Consumer Financial Protection Bureau, tightened capital standards and resulted in new laws and regulations that are expected to increase the cost of operations. Refer to Item 1A. Risk Factors for more detailed information related to this new regulation.

 

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

 

In addition to the FDIC assessments, the Financing Corporation (FICO) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2011, the annualized FICO assessment was equal to 0.66 basis points of average consolidated total assets less average tangible equity.

 

Capitalization

 

Under OCC regulations, all national banks are required to comply with minimum capital requirements. For an institution determined by the OCC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization, rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier I capital to total assets of 3%. For all other institutions, the minimum leverage capital ratio is not less than 4%. Tier I capital is the sum of common shareholders’ equity, non-cumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.

 

The OCC regulations require national banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the OCC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0% risk weight, loans secured by one-to-four family residential properties generally have a 50% risk weight, and commercial loans have a risk weighting of 100%.

 

National banks, such as the Bank, must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at least one-half must be Tier I capital. Total capital consists of Tier I capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier I capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.

 

 

 

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The OCC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The OCC also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

 

Safety and Soundness Standards

 

Each federal banking agency, including the OCC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.

 

On February 7, 2011, the FDIC approved a rulemaking to implement Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that prohibits incentive-based compensation that encourages inappropriate risk taking.

 

Prompt Corrective Regulatory Action

 

Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

 

The OCC may order national banks which have insufficient capital to take corrective actions. For example, a bank which is categorized as “undercapitalized” would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a bank would be required to guarantee that the bank complies with the restoration plan. A “significantly undercapitalized” bank would be subject to additional restrictions. National banks deemed by the OCC to be “critically undercapitalized” would be subject to the appointment of a receiver or conservator.

 

Dividends

 

Under federal law and applicable regulations, a national bank may generally declare a dividend, without approval from the OCC, in an amount equal to its year-to-date net income plus the prior two years’ net income that is still available for dividend.

 

Transactions with Affiliates and Insiders

 

Sections 23A and 23B of the Federal Reserve Act govern transactions between a national bank and its affiliates, which includes the Company. The Federal Reserve Board has adopted Regulation W, which comprehensively implements and interprets Sections 23A and 23B, in part by codifying prior Federal Reserve Board interpretations under Sections 23A and 23B.

 

An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the bank for the purposes of Sections 23A and 23B; however, the OCC has the discretion to treat subsidiaries of a bank as affiliates on a case-by-case basis. Sections 23A and 23B limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and limit all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The statutory sections also require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by an association with an affiliate and any purchase of assets or services by an association from an affiliate must be on terms that are substantially the same, or at least as favorable, to the bank as those that would be provided to a non-affiliate.

 

A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and any of certain entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section 22(h) of the Federal Reserve Act and the FRB’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks. All loans by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain loans secured by the officer’s residence, may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested director not participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests,

 

 

 

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would exceed either $500,000 or the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that are prevailing at the time for comparable transactions with other persons and must not present more than a normal risk of collectibility. An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.

 

Examinations and Assessments

 

The Bank is required to file periodic reports with and is subject to periodic examination by the OCC. Federal regulations generally require annual on-site examinations for all depository institutions and annual audits by independent public accountants for all insured institutions. The Bank is required to pay an annual assessment to the OCC to fund its supervision.

 

Community Reinvestment Act

 

Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC in connection with its examination of the Bank, to assess its record of meeting the credit needs of its community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations specify that a bank’s CRA performance will be considered in its expansion (e.g., branching) proposals and may be the basis for approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, the Bank was rated “satisfactory” with respect to its CRA compliance.

 

USA PATRIOT Act

 

The USA PATRIOT Act of 2001 gave the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA PATRIOT Act also required the federal banking agencies to take into consideration the effectiveness of controls designed to combat money laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if the Bank engages in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. The Bank has established policies, procedures and systems designed to comply with these regulations.

 

Bridge Bancorp, Inc.

 

The Company, as a bank holding company controlling the Bank, is subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA applicable to bank holding companies. The Company is required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board.

 

The Federal Reserve Board has adopted consolidated capital adequacy guidelines for bank holding structured similarly to those of the OCC for the Bank. As of December 31, 2011, the Company’s total capital and Tier 1 capital ratios exceeded these minimum capital requirements. The Dodd-Frank Act requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. That will eliminate the inclusion of certain instruments from Tier 1 capital, such as trust preferred securities, that are currently includable for bank holding companies with consolidated assets of less than $15 billion as of December 31, 2009 are grandfathered.

 

The policy of the Federal Reserve Board is that a bank holding company must serve as a source of strength to its subsidiary banks by providing capital and other support in times of distress. The Dodd-Frank Act codified the source of strength policy and requires the issuance of implementing regulations.

 

Under the prompt corrective action provisions of federal law, a bank holding company parent of an undercapitalized subsidiary bank is required to guarantee, within specified limits, the capital restoration plan that is required of an undercapitalized bank. If an undercapitalized bank fails to file an acceptable capital restoration plan or fails to implement an accepted plan, the Federal Reserve Board may prohibit the bank holding company parent of the undercapitalized bank from paying dividends or making any other capital distribution.

 

As a bank holding company, the Company is required to obtain the prior approval of the Federal Reserve Board to acquire more than 5% of a class of voting securities of any additional bank or bank holding company or to acquire all, or substantially all, the assets of any additional bank or bank holding company. In addition, the bank holding companies may generally only engage in activities that

 

 

 

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are closely related to banking as determined by the Federal Reserve Board. Bank holding companies that meet certain criteria may opt to become a financial holding company and thereby engage in a broader array of financial activities.

 

Federal Reserve Board policy is that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past two years is sufficient to fund the dividends and the prospective rate of earnings retention is consistent with the company’s capital needs, asset quality and overall financial condition.

 

A bank holding company is required to receive prior Federal Reserve Board approval of the redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, will be equal to 10% or more of the company’s consolidated net worth. Such approval is not required for a bank holding company that meets certain qualitative criteria.

 

These regulatory authorities have extensive enforcement authority over the institutions that they regulate to prohibit or correct activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound banking practices. Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions. Any change in laws and regulations, whether by the OCC, the FDIC, the Federal Reserve Board or through legislation, could have a material adverse impact on the Bank and the Company and their operations and stockholders. Additional information on regulatory requirements is set forth in Note 13 to the Consolidated Financial Statements.

 

The Company had nominal results of operations for 2011, 2010, and 2009 on a parent-only basis.  On December 20, 2011, the Company raised $24.1 million in capital from the sale of 1,377,000 shares of common stock to selected institutional and other private investors in a registered direct offering. In November 2011, the Company filed a prospectus supplement under which it may from time to time sell up to $10.0 million of its common stock pursuant to an at-the-market equity offering program. During 2011 the Company issued 30,220 shares of common stock and raised $0.6 million in capital under this program. On May 27, 2011, the Company issued 273,479 shares of common stock with an aggregate value of $5.8 million in connection with the acquisition of Hamptons State Bank. In 2009, the Company completed the private placement of $16.0 million in aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (the “TPS”), through its subsidiary, Bridge Statutory Capital Trust II. The TPS have a liquidation amount of $1,000 per security and the TPS shares are convertible into our common stock, at an effective conversion price of $31 per share.  The TPS mature in 30 years but are callable by the company at par any time after September 30, 2014. In April 2009, the Company announced that its Board of Directors approved and adopted a Dividend Reinvestment Plan (“DRP Plan”) and filed a registration statement on Form S-3 to register 600,000 shares of common stock with the Securities and Exchange Commission (“SEC”) pursuant to the DRP Plan. Since the inception of the DRP Plan in April 2009 through December 31, 2011, the Company has issued 307,912 shares of common stock and raised $6.3 million in capital. During 2008, the Company received approval and began trading on the NASDAQ Global Select Market under the symbol “BDGE”. Equity incentive plan grants of stock options and stock awards are recorded directly to the holding company. The Company’s sources of funds are dependent on dividends from the Bank, its own earnings, additional capital raised and borrowings. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank’s results of operations are primarily dependent on its net interest income. The Bank also generates non interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, investment services, income from its title insurance abstract subsidiary, and net gains on sales of securities and loans. The level of its non interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from its title insurance abstract subsidiary, and income tax expense, further affects the Bank’s net income.

 

The Company files certain reports with the Securities and Exchange Commission (“SEC”) under the federal securities laws. The Company’s operations are also subject to extensive regulation by other federal, state and local governmental authorities and it is subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. Management believes that the Company is in substantial compliance, in all material respects, with applicable federal, state and local laws, rules and regulations. Because the Company’s business is highly regulated, the laws, rules and regulations applicable to it are subject to regular modification and change. There can be no assurance that these proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect the Company’s business, financial condition or prospects.

 

OTHER INFORMATION

 

Through a link on the Investor Relations section of the Bank’s website of www.bridgenb.com, copies of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) for 15(d) of the Exchange Act, are made available, free of charge, as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. Copies of such reports and other information also are available at no charge to any person who requests them or at www.sec.gov. Such requests may be directed to Bridge Bancorp, Inc., Investor Relations, 2200 Montauk Highway, PO Box 3005, Bridgehampton, NY 11932, (631) 537-1000.

 

 

 

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Item 1A. Risk Factors

 

The concentration of our loan portfolio in loans secured by commercial and residential real estate properties located in eastern Long Island could materially adversely affect our financial condition and results of operations if general economic conditions or real estate values in this area decline.

 

Unlike larger banks that are more geographically diversified, the Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending area in Suffolk County which is located on eastern Long Island. The local economic conditions on eastern Long Island have a significant impact on the volume of loan originations and the quality of our loans, the ability of borrowers to repay these loans, and the value of collateral securing these loans. A considerable decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and could negatively affect our financial condition and results of operations. Additionally, while we have a significant amount of commercial real estate loans, the majority of which are owner-occupied, decreases in tenant occupancy may also have a negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

 

Changes in interest rates could affect our profitability.

 

The Bank’s ability to earn a profit, like most financial institutions, depends primarily on net interest income, which is the difference between the interest income that the Bank earns on its interest-earning assets, such as loans and investments, and the interest expense that the Bank pays on its interest-bearing liabilities, such as deposits. The Bank’s profitability depends on its ability to manage its assets and liabilities during periods of changing market interest rates.

 

In a period of rising interest rates, the interest income earned on the Bank’s assets may not increase as rapidly as the interest paid on its liabilities. In an increasing interest rate environment, the Bank’s cost of funds is expected to increase more rapidly than interest earned on its loan and investment portfolio as its primary source of funds is deposits with generally shorter maturities than those on its loans and investments. This makes the balance sheet more liability sensitive in the short term.

 

A sustained decrease in market interest rates could adversely affect the Bank’s earnings. When interest rates decline, borrowers tend to refinance higher-rate, fixed-rate loans at lower rates. Under those circumstances, the Bank would not be able to reinvest those prepayments in assets earning interest rates as high as the rates on those prepaid loans or in investment securities. In addition, the majority of the Bank’s loans are at variable interest rates, which would adjust to lower rates.

 

Changes in interest rates also affect the fair value of our securities portfolio.  Generally, the value of securities moves inversely with changes in interest rates.  As of December 31, 2011, our securities portfolio totaled $610.6 million.

 

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated the federal prohibition on paying interest on demand deposits effective July 21, 2011, thus allowing businesses to have interest-bearing checking accounts.  Depending on competitive responses, this change to existing law could increase our interest expense.

 

Strong competition within our market area may limit our growth and profitability.

 

The Bank’s market area is located in Suffolk County on eastern Long Island and its customer base is mainly located in the towns of East Hampton, Southampton, Southold and Riverhead. In 2009, the Bank expanded its market areas to include a branch in Shirley, New York located in the town of Brookhaven. In 2010, the Bank continued to expand westward to Center Moriches and Patchogue, New York located in the town of Brookhaven, New York and Deer Park, New York located within the town of Babylon. Competition in the banking and financial services industry remains intense. The profitability of the Bank depends on the continued ability to successfully compete. The Bank competes with commercial banks, savings banks, credit unions, insurance companies, and brokerage and investment banking firms. Many of our competitors have substantially greater resources and lending limits than the Bank and may offer certain services that the Bank does not provide. In addition, competitors may offer deposits at higher rates and loans with lower fixed rates, more attractive terms and less stringent credit structures than the Bank has been willing to offer. Furthermore, the high cost of living on the twin forks of eastern Long Island creates increased competition for the recruitment and retention of qualified staff.

 

Our future success depends on the success and growth of The Bridgehampton National Bank.

 

Our primary business activity for the foreseeable future will be to act as the holding company of the Bank. Therefore, our future profitability will depend on the success and growth of this subsidiary.  The continued and successful implementation of our growth strategy will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area.  In addition, our ability to successfully grow will depend on several factors, including favorable market conditions, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality.  While we believe we have the management resources, market opportunities and internal systems in place to obtain and successfully manage future growth, growth opportunities may not be available and we may not be successful in continuing our

 

 

 

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growth strategy.  In addition, continued growth requires that we incur additional expenses, including salaries and occupancy expense related to new branches and related support staff.  Many of these increased expenses are considered fixed expenses.  Unless we can successfully continue our growth, our results of operations could be negatively affected by these increased costs.  Finally, our growth is also affected by the seasonality of our markets in Eastern Long Island, including the Hamptons and North Fork, a region that is a recreational destination for the New York metropolitan area, and a highly regarded resort locale world-wide.  This seasonality results in more economic activity in the summer months and decrease activity in the off season, which can adversely impact the consistency and sustainability of growth.

 

The loss of key personnel could impair our future success.

 

Our future success depends in part on the continued service of our executive officers, other key management, as well as our staff, and on our ability to continue to attract, motivate, and retain additional highly qualified employees. The loss of services of one or more of our key personnel or our inability to timely recruit replacements for such personnel, or to otherwise attract, motivate, or retain qualified personnel could have an adverse effect on our business, operating results and financial condition.

 

We operate in a highly regulated environment.

 

The Bank and Company are subject to extensive regulation, supervision and examination by the OCC, the FDIC, the Federal Reserve Board and the SEC. Such regulation and supervision governs the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of the consumer rather than for the protection of shareholders. Recently regulators have intensified their focus on the USA PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. In order to comply with regulations, guidelines and examination procedures in this area as well as other areas of the Bank’s operations, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures, and systems we have in place are effective and there is no assurance that in every instance we are in full compliance with these requirements. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations.

 

We may be adversely affected by current economic and market conditions.

 

The national and global economic downturn that began in 2007 has resulted in unprecedented levels of financial market volatility which depressed the market value of financial institutions, limited access to capital and/or had a material adverse effect on the financial condition or results of operations of banking companies. Since 2008, significant declines in the values of mortgage-backed securities and derivative securities of financial institutions, government sponsored entities, and major commercial and investment banks has led to decreased confidence in financial markets among borrowers, lenders, and depositors, as well as disruption and extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. As a result, many lenders and institutional investors have reduced or ceased to provide funding to borrowers. While financial markets appear to be stabilizing, and there are a few positive signs of economic recovery, including increased local real estate activity, economic uncertainty remains. Unemployment rates are high and consumer confidence is low. While the timing of an economic recovery remains unknown, this may have an adverse affect on our financial condition and results of operations.  Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.

 

Increases to the allowance for credit losses may cause our earnings to decrease.

 

Our customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for credit losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance through charges to earnings would materially decrease our net income.

 

Bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and/or financial condition.

 

The trust preferred securities that we issued have rights that are senior to those of our common shareholders. The conversion of the trust preferred securities into shares of our common stock could result in dilution of your investment.

 

In October 2009 we issued $16 million of 8.5% cumulative convertible trust preferred securities from a special purpose trust, and we issued an identical amount of junior subordinated debentures to this trust.  Payments of the principal and interest on the trust preferred

 

 

 

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securities are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures that we issued to the trust are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the obligations with respect to the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on the junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

 

In addition, each $1,000 in liquidation amount of the trust preferred securities currently is convertible, at the option of the holder, into 32.2581 shares of our common stock.  The conversion of these securities into shares of our common stock would dilute the ownership interests of purchasers of our common stock in this offering.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our cost of operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) is significantly changing the bank regulatory structure and is affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

Certain provisions of the Dodd-Frank Act are expected to have a near-term effect on us. For example, a provision of the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts.  Depending on competitive responses, this significant change to existing law could increase our interest expense.

 

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators.  The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

 

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the many yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

 

Our information systems may experience an interruption or breach in security.

 

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

 Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

At present, the Registrant does not own or lease any property. The Registrant uses the Bank’s space and employees without separate payment. Headquarters are located at 2200 Montauk Highway, Bridgehampton, New York 11932. The Bank’s internet address is www.bridgenb.com.

 

All of the Bank’s properties are located in Suffolk County, New York. The Bank’s Main Office in Bridgehampton is owned. The Bank also owns buildings that house its Montauk Branch located at 1 The Plaza, Montauk; its Southold Branch located at 54790 Main Road,

 

 

 

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Southold; its Westhampton Beach Office at 194 Mill Road, Westhampton Beach; its Southampton Village Branch located at 150 Hampton Road, Southampton; and its East Hampton Village Branch located at 8 Gingerbread Lane, East Hampton. The Bank currently leases out a portion of the Montauk building and the Westhampton Beach building. The Bank leases thirteen additional properties in Suffolk County on Long Island as branch locations at 15 Frowein Road, Center Moriches; 32845 Main Road, Cutchogue; 410 Commack Road, Deer Park; 55 Main Street, East Hampton; 218 Front Street, Greenport; 48 East Montauk Highway, Hampton Bays; Mattituck Plaza, Main Road, Mattituck; 41 East Main Street, Patchogue; 2 Bay Street, Sag Harbor; 425 County Road 39A, Southampton; 243 Windmill Lane, Southampton; 6324 Route 25A, Wading River and 630 Montauk Highway, Shirley. Additionally, the Bank utilizes space for a branch in the retirement community, Peconic Landing at 1500 Brecknock Road, Greenport. The Bank currently subleases a portion of the leased property located in Patchogue. In 2011, the Bank purchased real estate in the Town of Southold which will also be considered as a site for a future branch facility.

 

Item 3. Legal Proceedings

 

The Registrant and its subsidiary are subject to certain pending and threatened legal actions that arise out of the normal course of business. In the opinion of management at the present time, the resolution of any pending or threatened litigation will not have a material adverse effect on its consolidated financial statements.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

COMMON STOCK INFORMATION

 

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol, “BDGE”.  The following table details the quarterly high and low sale prices of the Company’s common stock and the dividends declared for such periods.

 

At December 31, 2011 the Company had approximately 788 shareholders of record, not including the number of persons or entities holding stock in nominee or the street name through various banks and brokers.

 

COMMON STOCK INFORMATION

 

 

 

Stock Prices

 

 

 

 

 

High

 

Low

 

Dividends
Declared

 

By Quarter 2011

 

 

 

 

 

 

 

First

 

$

25.94

 

$

20.94

 

$

0.23

 

Second

 

$

22.68

 

$

20.73

 

$

 

Third

 

$

22.19

 

$

17.77

 

$

0.23

 

Fourth

 

$

20.79

 

$

17.51

 

$

0.23

 

 

 

 

Stock Prices

 

 

 

 

 

High

 

Low

 

Dividends
Declared

 

By Quarter 2010

 

 

 

 

 

 

 

First

 

$

26.05

 

$

21.30

 

$

0.23

 

Second

 

$

27.11

 

$

20.33

 

$

0.23

 

Third

 

$

26.50

 

$

21.57

 

$

0.23

 

Fourth

 

$

26.19

 

$

23.25

 

$

0.23

 

 

Stockholders received cash dividends totaling $6.1 million in 2011 and $5.8 million in 2010. During the second quarter of 2011, the Board revised its policy of dividend declaration to the month following the end of the quarter. This change in policy resulted in the declaration of the second quarter dividend in July 2011. The ratio of dividends per share to net income per share was 44.35% in 2011 compared to 63.42% in 2010.

 

 

 

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There are various legal limitations with respect to the Company’s ability to pay dividends to shareholders and the Bank’s ability to pay dividends to the Company.   Under the New York Business Corporation Law, the Company may pay dividends on its outstanding shares unless the Company is insolvent or would be made insolvent by the dividend.  Under federal banking law, the prior approval of the Federal Reserve Board and the Office Comptroller of the Currency (the “OCC”) may be required in certain circumstances prior to the payment of dividends by the Company or the Bank.  A national bank may generally declare a dividend, without approval from the OCC, in an amount equal to its year-to-date net income plus the prior two years’ net income that is still available for dividend.  At December 31, 2011, the Bank had $28.7 million of retained net income available for dividends to the Company.  The OCC also has the authority to prohibit a national bank from paying dividends if such payment is deemed to be an unsafe or unsound practice.  In addition, as a depository institution the deposits of which are insured by the FDIC, the Bank may not pay dividends or distribute any of its capital assets while it remains in default on any assessment due to the FDIC. The Bank currently is not (and never has been) in default under any of its obligations to the FDIC.

 

The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board has the authority to prohibit the Company from paying dividends if such payment is deemed to be an unsafe or unsound practice.

 

In April 2009, the Company announced that its Board of Directors approved and adopted a Dividend Reinvestment Plan (“DRP Plan”) and filed a registration statement on Form S-3 to register 600,000 shares of common stock with the Securities and Exchange Commission (“SEC”) pursuant to the DRP Plan. In April 2010, the Company increased the discount from 3% to 5%, and raised the quarterly optional cash purchase amount to $50,000 under the DRP Plan. Proceeds from the issuance of common stock related to the DRP Plan for the twelve months ended December 31, 2011 and 2010, was $4.6 million and $1.4 million, respectively. Since the inception of the DRP Plan in April 2009 through December 31, 2011, the Company has issued 307,912 shares of common stock and raised $6.3 million in capital. On May 27, 2011, the Company issued 273,479 shares of common stock with an aggregate value of $5.8 million in connection with the acquisition of Hamptons State Bank. In November 2011, the Company filed a prospectus supplement under which it may from time to time sell up to $10.0 million of its common stock pursuant to an at-the-market equity offering program. During 2011 the Company issued 30,220 shares of common stock and raised $0.6 million in capital under this program. On December 20, 2011, the Company raised $24.1 million in capital from the sale of 1,377,000 shares of common stock to selected institutional and other private investors in a registered direct offering.

 

 

 

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PERFORMANCE GRAPH

 

Pursuant to the regulations of the SEC, the graph below compares the performance of the Company with that of the total return for the NASDAQ® stock market and for certain bank stocks of financial institutions with an asset size $1 billion to $5 billion, as reported by SNL Financial L.C. from December 31, 2006 through December 31, 2011. The graph assumes the reinvestment of dividends in additional shares of the same class of equity securities as those listed below.

 

Bridge Bancorp, Inc.

 

 

 

 

Period Ended

 

Index

 

12/31/06

 

12/31/07

 

12/31/08

 

12/31/09

 

12/31/10

 

12/31/11

 

Bridge Bancorp, Inc.

 

100.00

 

105.14

 

83.80

 

113.24

 

120.53

 

100.51

 

NASDAQ Composite

 

100.00

 

110.66

 

66.42

 

96.54

 

114.06

 

113.16

 

SNL Bank $500M-$1B

 

100.00

 

72.84

 

60.42

 

43.31

 

49.09

 

44.77

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The Board of Directors approved a stock repurchase program on March 27, 2006 which approved the repurchase of 309,000 shares. No shares have been purchased during the year ended December 31, 2011. The total number of shares purchased as part of the publicly announced plan totaled 141,959 as of December 31, 2011. The maximum number of remaining shares that may be purchased under the plan totals 167,041 as of December 31, 2011. There is no expiration date for the stock repurchase plan. There is no stock repurchase plan that has expired or that has been terminated during the period ended December 31, 2011.

 

 

 

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Item 6. Selected Financial Data

 

Five-Year Summary of Operations

(In thousands, except per share data and financial ratios)

 

Set forth below are selected consolidated financial and other data of the Company. The Company’s business is primarily the business of the Bank. This financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company.

 

December 31,

 

2011

 

2010

 

2009

 

2008

 

2007

 

Selected Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

441,439

 

$

323,539

 

$

306,112

 

$

310,695

 

$

187,384

 

Securities, restricted

 

1,660

 

1,284

 

1,205

 

3,800

 

2,387

 

Securities held to maturity

 

169,153

 

147,965

 

77,424

 

43,444

 

5,836

 

Loans held for sale

 

2,300

 

 

 

 

 

Loans held for investment

 

612,143

 

504,060

 

448,038

 

429,683

 

375,236

 

Total assets

 

1,337,458

 

1,028,456

 

897,257

 

839,059

 

607,424

 

Total deposits

 

1,188,185

 

916,993

 

793,538

 

659,085

 

508,909

 

Total stockholders’ equity

 

106,987

 

65,720

 

61,855

 

56,139

 

51,109

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

$

50,426

 

$

44,899

 

$

43,368

 

$

39,620

 

$

35,864

 

Total interest expense

 

7,616

 

7,740

 

7,815

 

9,489

 

10,437

 

Net interest income

 

42,810

 

37,159

 

35,553

 

30,131

 

25,427

 

Provision for loan losses

 

3,900

 

3,500

 

4,150

 

2,000

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

38,910

 

33,659

 

31,403

 

28,131

 

24,827

 

Total non interest income

 

6,949

 

7,433

 

6,174

 

6,064

 

5,678

 

Total non interest expense

 

30,837

 

27,879

 

24,765

 

21,157

 

18,168

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

15,022

 

13,213

 

12,812

 

13,038

 

12,337

 

Income tax expense

 

4,663

 

4,047

 

4,049

 

4,288

 

4,043

 

Net income

 

$

10,359

 

$

9,166

 

$

8,763

 

$

8,750

 

$

8,294

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Ratios and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity

 

14.37

%

15.29

%

15.58

%

16.29

%

17.47

%

Return on average assets

 

0.88

%

0.95

%

1.06

%

1.24

%

1.38

%

Average equity to average assets

 

6.11

%

6.18

%

6.80

%

7.62

%

7.91

%

Dividend payout ratio

 

44.35

%

63.42

%

65.43

%

64.74

%

67.67

%

Basic earnings per share

 

$

1.54

 

$

1.45

 

$

1.41

 

$

1.42

 

$

1.36

 

Diluted earnings per share

 

$

1.54

 

$

1.45

 

$

1.41

 

$

1.42

 

$

1.36

 

Cash dividends declared per common share

 

$

0.69

 

$

0.92

 

$

0.92

 

$

0.92

 

$

0.92

 

 

 

 

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

 

This report may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).  Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company.  Words such as “expects,”  “believes,”  “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variation of such similar expressions are intended to identify such forward-looking statements.  Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title abstract subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies.  For this presentation, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

 

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines, changes in real estate values; a failure to realize or an unexpected delay in realizing, the growth opportunities and cost savings anticipated from the Hamptons State Bank merger; an unexpected increase in operating costs, customer losses and business disruptions following the Hamptons State Bank merger; expanded regulatory requirements as a result of the Dodd-Frank Act, which could adversely affect operating results; and other factors discussed elsewhere in this report, factors set forth under Item 1A., Risk Factors, and in quarterly and other reports filed by the Company with the Securities and Exchange Commission.  The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

 

OVERVIEW

 

Who We Are and How We Generate Income

 

Bridge Bancorp, Inc., a New York corporation, is a single bank holding company formed in 1989. On a parent-only basis, the Company has had minimal results of operations. The Company is dependent on dividends from its wholly owned subsidiary, The Bridgehampton National Bank (“the Bank”), its own earnings, additional capital raised, and borrowings as sources of funds. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank’s results of operations are primarily dependent on its net interest income, which is mainly the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, investment services, income from its title abstract subsidiary, and net gains on sales of securities and loans. The level of its non interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from its title insurance subsidiary, and income tax expense, further affects the Bank’s net income. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation.

 

Year and Quarterly Highlights

 

·                                           Net income of $3.0 million and $0.42 per diluted share for the fourth quarter 2011 compared to $2.4 million or $0.38 per diluted share for the fourth quarter 2010. Net income of $10.4 million and $1.54 per diluted share, including $0.5 million in acquisition costs, net of tax, associated with the HSB merger, which closed on May 27, 2011. Net income for 2010 was $9.2 million and $1.45 per diluted share.

 

·                                           Returns on average assets and equity for 2011 including $0.5 million in acquisition costs, net of tax, were 0.88% and 14.37%, respectively.

 

·                                           Net interest income increased to $42.8 million for 2011 compared to $37.2 million in 2010.

 

·                                           Net interest margin was 3.97% for 2011 and 4.22% for 2010.

 

·                                           Total assets of $1.3 billion at December 31, 2011, an increase of $0.3 billion or 30.0% over the same date last year.

 

 

 

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·                                           Total loans held for investments of $612.1 million at December 31, 2011, an increase of 21.4% from December 31, 2010.  Loans held for sale were $2.3 million at December 31, 2011.

 

·                                           Total investments of $612.3 million at December 31, 2011, an increase of 29.5% over December 31, 2010.

 

·                                           Total deposits of $1.2 billion at December 31, 2011, an increase of $271.2 million or 29.6% over 2010 level.

 

·                                           Allowance for loan losses, which was calculated on the loans originated by Bridgehampton (total loans excluding $31.9 million of HSB acquired loans), was 1.87% as of December 31, 2011, compared to 1.69% at December 31, 2010.

 

·                                           The Company’s capital levels increased compared to prior year with a Tier 1 Capital to quarterly average assets ratio of 9.3% as compared to 7.9% as of 2010. Stockholders’ equity totaled $107.0 million at December 31, 2011, an increase of $41.3 million from December 31, 2010 as a result of the capital raised through common stock offerings, the HSB transaction and the DRIP, as well as continued earnings growth, net of dividends.

 

·                                           A cash dividend of $0.23 per share was declared in January 2012 for the fourth quarter of 2011.

 

Significant Events

 

On February 8, 2011, the Company announced a definitive merger agreement under which the Bank would acquire HSB. The HSB transaction closed on May 27, 2011 resulting in the addition of total acquired assets on a fair value basis of $68.9 million, with loans of $38.9 million, investment securities of $24.2 million and deposits of $56.9 million. The transaction augments the Bank’s franchise in eastern Long Island and the combined entity serves customers through a network of 20 branches.

 

Under the terms of the Agreement, each share of Hamptons State Bank common stock was converted into 0.3434 shares of the Company’s common stock. The Company issued approximately 273,500 shares, with an aggregate value of $5.85 million and recorded goodwill of $2.0 million.

 

In November 2011, the Company filed a prospectus supplement under which it may from time to time sell up to $10.0 million of its common stock pursuant to an at-the-market equity offering program. During 2011, the Company issued 30,220 shares of common stock and raised $0.6 million in capital under the program. On December 20, 2011, the Company raised $24.1 million in capital from the sale of 1,377,000 shares of common stock to selected institutional and other private investors in a registered direct offering.

 

Current Environment

 

On February 27, 2009, the FDIC issued a final rule, effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk and to set new assessment rates beginning with the second quarter of 2009. In May 2009, the FDIC issued a final rule to impose an emergency special assessment of 5 basis points on all banks based on their total assets less tier one capital as of June 30, 2009.  The special assessment was payable on September 30, 2009. During the second quarter of 2009, the Company recorded an expense of $0.4 million related to the FDIC special assessment. In November 2009, the FDIC issued a final rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform 3 basis point increase in assessment rates effective on January 1, 2011. The Company’s prepayment of FDIC assessments for 2010, 2011 and 2012 was made on December 31, 2009 totaling $3.8 million which will be amortized to expense over three years.

 

On April 13, 2010, the FDIC approved an interim rule that extends the Transaction Account Guarantee Program which offers unlimited deposit insurance on non-interest bearing accounts until December 31, 2012.

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by the President. The Act permanently raised the current standard maximum deposit insurance amount to $250,000. Section 331(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the FDIC to change the definition of the assessment base from which assessment fees are determined. The new definition for the assessment base is the average consolidated total assets of the insured depository institution less the average tangible equity of the insured depository institution. The new methodology became effective on April 1, 2011 and the Company recorded a reduction in its FDIC assessment fees of $0.4 million in 2011. The financial reform legislation, among other things, created a new Consumer Financial Protection Bureau, tightened capital standards and resulted in new regulations that are expected to increase the cost of operations. Refer to Item 1A. Risk Factors for more detailed information related to this new regulation.

 

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+.   On August 8, 2011, Standard & Poor’s downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets

 

 

 

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of financial institutions, including the Bank.  These downgrades could adversely affect the market value of such instruments, and could adversely impact the Company’s ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratings will affect economic conditions.

 

Opportunities and Challenges

 

Since the second half of 2007 and continuing through 2010, the financial markets experienced significant volatility resulting from the continued fallout of sub-prime lending and the global liquidity crises. A multitude of government initiatives along with eight rate cuts by the Federal Reserve totaling 500 basis points have been designed to improve liquidity for the distressed financial markets. The ultimate objective of these efforts has been to help the beleaguered consumer, and reduce the potential surge of residential mortgage loan foreclosures and stabilize the banking system. As a result the yield on loans and investment securities has declined. The squeeze between declining asset yields and more slowly declining liability pricing has impacted margins.  Effective as of February 19, 2010, the Federal Reserve increased the discount rate 50 basis points to 0.75%. The Federal Reserve stated that this rate change was intended to normalize their lending facility and to step away from emergency lending to banks. From April 2010 through January 2012 the Federal Reserve decided to maintain the federal funds target rate between 0 and 25 basis points due to a continued national depressed housing market and tight credit markets.

 

Growth and service strategies have the potential to offset the tighter net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2007, the Bank has opened eight new branches. In 2007, the Bank opened three new branches located in the Village of Southampton, Cutchogue, and Wading River. In April 2009, the Bank opened a new branch in Shirley, New York, and in December 2009, the Bank opened a new full service branch facility in the Village of East Hampton. During 2010, the Bank opened three new branches; Center Moriches in May, Patchogue in September and Deer Park in October. The recent branch openings move the Bank geographically westward and demonstrate its commitment to traditional growth through branch expansion. In May 2011, the Bank acquired Hamptons State Bank which increased the Bank’s presence in an existing market with a branch located in the Village of Southampton. In July 2011, the Bank converted the former HSB customers to the Bank’s core operating system. Management spent considerable time ensuring the transition progressed smoothly for HSB’s former customers and shareholders. Management has demonstrated its ability to successfully integrate the former HSB customers and achieve expected cost savings while continuing to execute its business strategy. In September 2011, the Bank obtained OCC approval for its 21st branch in Ronkonkoma, New York. This location’s proximity to MacArthur Airport complements the Patchogue branch and extends the Bank’s reach into the Bohemia market. Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships.

 

2011 was another year of milestone achievements and significant change for the Company. The acquisition, organic growth and considerably higher capital demonstrate management’s ability to identify, leverage and efficiently execute on opportunities. Management foresees future opportunities to continue this trajectory and positive momentum.  The Bank’s customers and certain markets in which the Bank operates have been less affected than others by recent economic turmoil. However, the Bank’s customers and the Bank itself are not insulated from the general economic environment and its related impacts.  Recognizing this is critical to the
Company’s continued ability to execute its strategy. Management must continue to foster relationships with businesses and customers that share the same principles and philosophies for prudent and reasonable fiscal and operational management.

 

The current banking environment remains challenging in many respects.  The absolute level of interest rates and the potential for them to remain at or near historic lows, for an extended period, creates issues for margin management and heightened risks to the eventuality of higher rates. The omnipresent regulatory environment with its pending new regulations, rules and compliance burdens certainly contributes to uncertainty. Finally, the credit environment appears to be improving. However, there is the potential at any moment for a change depending on the impact of world and national events, or more localized issues with municipal budgets and the related fallout. Any one of these factors could affect economic activity and the Bank’s customers’ businesses, creating a domino effect on credit quality.

 

The prospects of the financial services sector and the Company continue to be impacted by the final outcome of the implementation of the Dodd-Frank Act.  This Act includes the repeal of Regulation Q, which prohibited the payment of interest on checking accounts, and the Durbin Amendment, which establishes fixed interchange fees and could impact future revenues and expenses.  The Company is awaiting the expected new rules, regulations and related compliance and process changes and will expand its compliance resources appropriately. The Bank continues to collaborate with its primary regulator to ensure compliance with current requirements and interpretations. It is the belief of management that its strong risk management culture is a primary reason for its long term success and management views the current challenges as opportunities to expand its business and deliver the promise of successful community banking to its customers and shareholders.

 

Corporate objectives for 2012 include: leveraging our expanding branch network to build customer relationships and grow loans and deposits; focusing on opportunities and processes that continue to enhance the customer experience at the Bank; improving operational efficiencies and prudent management of non-interest expense; and maximizing non-interest income through Bridge

 

 

 

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Abstract as well as other lines of business. The ability to attract, retain, train and cultivate employees at all levels of the Company remains significant to meeting these objectives. The Company has made great progress toward the achievement of these objectives, and avoided many of the problems facing other financial institutions as a result of maintaining discipline in its underwriting, expansion strategies, investing and general business practices. This strategy has not changed over the more than 100 years of our existence and will continue to be true. The Company has capitalized on opportunities presented by the market and diligently seeks opportunities for growth and to strengthen the franchise. The Company recognizes the potential risks of the current economic environment and will monitor the impact of market events as we consider growth initiatives and evaluate loans and investments. Management and the Board have built a solid foundation for growth and the Company is positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

 

CRITICAL ACCOUNTING POLICIES

 

Note 1 to our Consolidated Financial Statements for the year ended December 31, 2011 contains a summary of our significant accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance for loan losses is our most critical accounting policy. This policy is important to the presentation of our financial condition and results of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments, which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in our results of operations or financial condition.

 

The following is a description of our critical accounting policy and an explanation of the methods and assumptions underlying its application.

 

ALLOWANCE FOR LOAN LOSSES

 

Management considers the accounting policy on the allowance for loan losses to be the most critical and requires complex management judgment as discussed below. The judgments made regarding the allowance for loan losses can have a material effect on the results of operations of the Company.

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. If the allowance for loan losses is not sufficient to cover actual loan losses, the Company’s earnings could decrease.

 

The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

 

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; multi-family mortgages; residential real estate mortgages, first lien and home equity; commercial loans, secured and unsecured; installment/consumer loans; and real estate construction and land loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures, and concentrations in the portfolio when determining the allowances for each pool. In addition, we evaluate and consider the credit’s risk rating which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as

 

 

 

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well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at December 31, 2011, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

For additional information regarding our allowance for loan losses, see Note 3 to the Consolidated Financial Statements.

 

Acquired Loans

 

Loans that were acquired from the acquisition of Hamptons State Bank on May 27, 2011 are recorded at fair value with no carryover of the related allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Determining fair value of the loans involves estimating the amount and timing of expected principal and interest cash flows to be collected on the loans and discounting those cash flows at a market interest rate. Some of the loans at time of acquisition showed evidence of credit deterioration since origination.

 

For purchased credit impaired loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent increases to the expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount and recognized into interest income over the remaining life of the loan using the interest method. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses.

 

Purchased credit impaired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.

 

NET INCOME

 

Net income for 2011 totaled $10.4 million or $1.54 per diluted share while net income for 2010 totaled $9.2 million or $1.45 per diluted share, as compared to net income of $8.8 million, or $1.41 per diluted share for the year ended December 31, 2009. Net income increased $1.2 million or 13.0% compared to 2010 and net income for 2010 increased $0.4 million or 4.6% as compared to 2009. Significant trends for 2011 include: (i) a $5.7 million or 15.2% increase in net interest income; (ii) a $0.4 million increase in the provision for loan losses; (iii) a $0.5 million or 6.5% decrease in total non interest income; and (iv) a $3.0 million or 10.6% increase in total non interest expenses.

 

NET INTEREST INCOME

 

Net interest income, the primary contributor to earnings, represents the difference between income on interest earning assets and expenses on interest bearing liabilities. Net interest income depends upon the volume of interest earning assets and interest bearing liabilities and the interest rates earned or paid on them.

 

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the years indicated and reflect the average yield on assets and average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years shown. Average balances are derived from daily average balances and include nonaccrual loans. The yields and costs include fees, which are considered adjustments to yields. Interest on nonaccrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

 

 

 

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Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

(Dollars in thousands)

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

 

Average
Balance

 

Interest

 

Average
Yield/
Cost

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (1)

 

$

554,469

 

$

35,434

 

 

6.39

%

 

$

461,289

 

$

30,223

 

 

6.55

%

 

$

435,694

 

$

29,167

 

 

6.69

%

Mortgage-backed securities

 

 

277,073

 

 

9,000

 

 

3.25

 

 

 

242,997

 

 

9,585

 

 

3.94

 

 

 

227,471

 

 

11,074

 

 

4.87

 

Tax exempt securities (2)

 

 

124,616

 

 

4,417

 

 

3.54

 

 

 

104,824

 

 

4,153

 

 

3.96

 

 

 

76,746

 

 

3,381

 

 

4.41

 

Taxable securities

 

 

111,311

 

 

2,993

 

 

2.69

 

 

 

82,678

 

 

2,328

 

 

2.82

 

 

 

27,298

 

 

880

 

 

3.22

 

Federal funds sold

 

 

 

 

 

 

 

 

 

1,750

 

 

5

 

 

0.29

 

 

 

11,466

 

 

33

 

 

0.29

 

Deposits with banks

 

 

48,841

 

 

123

 

 

0.25

 

 

 

20,804

 

 

54

 

 

0.26

 

 

 

5,171

 

 

13

 

 

0.25

 

Total interest earning assets

 

 

1,116,310

 

 

51,967

 

 

4.66

 

 

 

914,342

 

 

46,348

 

 

5.07

 

 

 

783,846

 

 

44,548

 

 

5.68

 

Non interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

19,025

 

 

 

 

 

 

 

 

 

15,857

 

 

 

 

 

 

 

 

 

13,574

 

 

 

 

 

 

 

Other assets

 

 

44,952

 

 

 

 

 

 

 

 

 

39,707

 

 

 

 

 

 

 

 

 

29,397

 

 

 

 

 

 

 

Total assets

 

$

1,180,287

 

 

 

 

 

 

 

 

$

969,906

 

 

 

 

 

 

 

 

$

826,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

$

613,068

 

$

3,936

 

 

0.64

%

 

$

480,642

 

$

3,594

 

 

0.75

%

 

$

376,429

 

$

3,698

 

 

0.98

%

Certificates of deposit of $100,000 or more

 

 

115,895

 

 

1,264

 

 

1.09

 

 

 

100,775

 

 

1,489

 

 

1.48

 

 

 

94,691

 

 

2,154

 

 

2.27

 

Other time deposits

 

 

43,282

 

 

507

 

 

1.17

 

 

 

45,630

 

 

762

 

 

1.67

 

 

 

55,436

 

 

1,371

 

 

2.47

 

Federal funds purchased and repurchase agreements

 

 

17,582

 

 

543

 

 

3.09

 

 

 

22,128

 

 

530

 

 

2.40

 

 

 

29,607

 

 

401

 

 

1.35

 

Federal Home Loan Bank term advances

 

 

82

 

 

 

 

0.00

 

 

 

19

 

 

 

 

0.00

 

 

 

82

 

 

1

 

 

1.22

 

Junior subordinated debentures

 

 

16,002

 

 

1,366

 

 

8.54

 

 

 

16,002

 

 

1,365

 

 

8.53

 

 

 

2,263

 

 

190

 

 

8.40

 

Total interest bearing liabilities

 

 

805,911

 

 

7,616

 

 

0.95

 

 

 

665,196

 

 

7,740

 

 

1.16

 

 

 

558,508

 

 

7,815

 

 

1.40

 

Non interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

294,566

 

 

 

 

 

 

 

 

 

238,740

 

 

 

 

 

 

 

 

 

205,984

 

 

 

 

 

 

 

Other liabilities

 

 

7,721

 

 

 

 

 

 

 

 

 

6,028

 

 

 

 

 

 

 

 

 

6,086

 

 

 

 

 

 

 

Total liabilities

 

 

1,108,198

 

 

 

 

 

 

 

 

 

909,964

 

 

 

 

 

 

 

 

 

770,578

 

 

 

 

 

 

 

Stockholders’ equity

 

 

72,089

 

 

 

 

 

 

 

 

 

59,942

 

 

 

 

 

 

 

 

 

56,239

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,180,287

 

 

 

 

 

 

 

 

$

969,906

 

 

 

 

 

 

 

 

$

826,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/interest rate spread (3)

 

 

 

 

 

44,351

 

 

3.71

%

 

 

 

 

 

38,608

 

 

3.91

%

 

 

 

 

 

36,733

 

 

4.28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earning assets/net interest margin (4)

 

$

310,399

 

 

 

 

 

3.97

%

 

$

249,146

 

 

 

 

 

4.22

%

 

$

225,338

 

 

 

 

 

4.69

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest earning assets to interest bearing liabilities

 

 

 

 

 

 

 

 

138.52

%

 

 

 

 

 

 

 

 

137.45

%

 

 

 

 

 

 

 

 

140.35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Tax equivalent adjustment

 

 

 

 

 

(1,541

)

 

 

 

 

 

 

 

 

(1,449

)

 

 

 

 

 

 

 

 

(1,180

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

42,810

 

 

 

 

 

 

 

 

$

37,159

 

 

 

 

 

 

 

 

$

35,553

 

 

 

 

 

(1)                                  Amounts are net of deferred origination costs/ (fees) and the allowance for loan loss, and include loans held for sale.

(2)                                  The above table is presented on a tax equivalent basis.

(3)                                  Net interest rate spread  represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.

(4)                                  Net interest margin represents net interest income divided by average interest earning assets.

 

 

 

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RATE/VOLUME ANALYSIS

 

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The following table illustrates the extent to which changes in interest rates and in the volume of average interest earning assets and interest bearing liabilities have affected the Bank’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average earning assets include nonaccrual loans.

 


Years Ended December 31,

 

2011 Over 2010
Changes Due To

 

2010 Over 2009
Changes Due To

 

(In thousands)

 

Volume

 

Rate

 

Net
Change

 

Volume

 

Rate

 

Net
Change

 

Interest income on interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$

5,966

 

$

(755

)

$

5,211

 

$

1,678

 

$

(622

)

$

1,056

 

Mortgage-backed securities

 

 

1,231

 

 

(1,816

)

 

(585

)

 

722

 

 

(2,211

)

 

(1,489

)

Tax exempt securities (2)

 

 

733

 

 

(469

)

 

264

 

 

1,144

 

 

(372

)

 

772

 

Taxable securities

 

 

777

 

 

(112

)

 

665

 

 

1,570

 

 

(122

)

 

1,448

 

Federal funds sold

 

 

(3

)

 

(2

)

 

(5

)

 

(28

)

 

 

 

(28

)

Deposits with banks

 

 

71

 

 

(2

)

 

69

 

 

40

 

 

1

 

 

41

 

Total interest earning assets

 

 

8,775

 

 

(3,156

)

 

5,619

 

 

5,126

 

 

(3,326

)

 

1,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

 

913

 

 

(571

)

 

342

 

 

881

 

 

(985

)

 

(104

)

Certificates of deposit of $100,000 or more

 

 

320

 

 

(545

)

 

(225

)

 

115

 

 

(780

)

 

(665

)

Other time deposits

 

 

(37

)

 

(218

)

 

     (255

)

 

(215

)

 

(394

)

 

     (609

)

Federal funds purchased and repurchase agreements

 

 

(122

)

 

135

 

 

13

 

 

(121

)

 

250

 

 

129

 

Federal Home Loan Bank Advances

 

 

 

 

 

 

 

 

(1

)

 

 

 

(1

)

Junior subordinated debentures

 

 

 

 

1

 

 

1

 

 

1,172

 

 

3

 

 

1,175

 

Total interest bearing liabilities

 

 

1,074

 

 

(1,198

)

 

(124

)

 

1,831

 

 

(1,906

)

 

(75

)

Net interest income

 

$

7,701

 

$

(1,958

)

$

5,743

 

$

3,295

 

$

(1,420

)

$

1,875

 

 

(1)          Amounts are net of deferred origination costs/ (fees) and the allowance for loan loss, and include loans held for sale.

(2)          The above table is presented on a tax equivalent basis.

 

The net interest margin declined to 3.97% in 2011 compared to 4.22% for the year ended December 31, 2010 and 4.69% in 2009. The decrease in 2011 and 2010 was primarily the result of the historically low market interest rates which was partly offset by strong core deposit growth and higher loan demand.  The net interest margin during 2011 and 2010 was also impacted by a full year of interest expense related to the issuance of $16.0 million in junior subordinated debentures during the fourth quarter of 2009. The total average interest earning assets in 2011 increased $202.0 million or 22.1% over 2010 levels, yielding 4.66%, and the overall funding cost was 0.69%, including demand deposits. The yield on interest earning assets decreased approximately 41 basis points which was partly offset by a decrease in the cost of interest bearing liabilities of approximately 21 basis points during 2011 compared to 2010. The increase in average total deposits of $201.0 million primarily funded loans, which grew $93.2 million, while average total securities increased $82.5 million from the comparable 2010 levels. In addition, the Company’s strategy in 2011 to manage capital, liquidity and interest rate risk, resulted in an increase of $28 million in the average balance of lower yielding interest earning deposits with banks.

 

Net interest income was $42.8 million in 2011 compared to $37.2 million in 2010 and $35.6 million in 2009. The increase in net interest income of $5.7 million or 15.2% as compared to 2010, and the increase in net interest income of $1.6 million or 4.5% in 2010 as compared to 2009, primarily resulted from the effect of the increase in the volume of average total interest earning assets and the decrease in the cost of average total interest bearing liabilities being greater than the effect of the increase in volume of average total interest bearing liabilities and the decrease in yield on average total interest earning assets.

 

Average total interest earning assets grew by $202.0 million or 22.1% to $1.1 billion in 2011 compared to $914.3 million in 2010. During this period, the yield on average total interest earning assets decreased to 4.66% from 5.07%. Average total interest earning

 

 

 

Page -20-


Table of Contents

 

 

 

assets grew by $130.5 million or 16.6% to $914.3 million in 2010 compared to $783.8 million in 2009. During this period, the yield on average total interest earning assets decreased to 5.07% from 5.68%.

 

For the year ended December 31, 2011, average loans grew by $93.2 million or 20.2% to $554.5 million as compared to $461.3 million in 2010 and increased $25.6 million or 5.9% compared to $435.7 million in 2009. Real estate mortgage loans and commercial loans primarily contributed to the growth. The Bank remains committed to growing loans with prudent underwriting, sensible pricing and limited credit and extension risk.

 

For the year ended December 31, 2011, average total investments increased by $82.5 million or 19.2% to $513.0 million as compared to $430.5 million in 2010 and increased $99.0 million or 29.9% as compared to $331.5 million for 2009 levels. To position the balance sheet for the future and better manage capital, liquidity and interest rate risk, a portion of the available for sale investment securities portfolio was sold during 2011, 2010 and 2009 resulting in a net gain of $0.1 million, $1.3 million and $0.5 million, respectively. There were no federal funds sold in 2011 compared to average federal funds sold of $1.8 million in 2010 and $11.5 million in 2009. The decrease in the average federal funds sold in 2011 and 2010 was offset by increased average interest earning cash, which was $48.8 million in 2011, $20.8 million in 2010 and $5.2 million in 2009.

 

Average total interest bearing liabilities were $805.9 million in 2011 compared to $665.2 million in 2010 and $558.5 million in 2009. The Bank grew deposits in 2011 as a result of opening three new branches during 2010, building new relationships in existing markets and the HSB merger. During 2011, the Bank reduced interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates resulted in a decrease in the cost of interest bearing liabilities to 0.95% for 2011 compared to 1.16% for 2010 and 1.40% during 2009. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, an increase in short term interest rates initially results in a decrease in net interest income.  Additionally, the large percentages of deposits in money market accounts reprice at short term market rates making the balance sheet more liability sensitive. During the fourth quarter of 2009, the Company completed the private placement of $16.0 million in aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (the “TPS”), through its subsidiary, Bridge Statutory Capital Trust II. The Company issued $16.0 million of junior subordinated debentures (the “Debentures”) to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. The junior subordinated debentures bear interest at a fixed rate equal to 8.50% and mature on December 31, 2039.

 

For the year ended December 31, 2011, average total deposits increased by $201.0 million or 23.2% to $1.07 billion as compared to average total deposits of $865.8 million for the year ended December 31, 2010. Components of this increase include an increase in average demand deposits for 2011 of $55.9 million or 23.4% to $294.6 million as compared to $238.7 million in average demand deposits for 2010 and increased by $32.7 million or 15.9% compared to $206.0 million in average demand deposits for 2009. The average balances in savings, NOW and money market accounts increased $132.4 million or 27.6% to $613.1 million for the year ended December 31, 2011 compared to $480.6 million for the same period last year and increased $104.2 million or 27.7% over 2009 levels of $376.4 million. Average balances in certificates of deposit of $100,000 or more and other time deposits increased $12.8 million or 8.7% to $159.2 million for 2011 as compared to 2010 and decreased in 2010 $3.7 million or 2.5% as compared to 2009. Average public fund deposits comprised 18.2% of total average deposits during 2011, 18.8% in 2010 and 17.3% in 2009. Average federal funds purchased and repurchase agreements together with average Federal Home Loan Bank term advances decreased $4.5 million or 20.2% for the year ended December 31, 2011 as compared to average balances for 2010 and decreased $7.5 million or 25.4% for the year ended December 31, 2010 as compared to average balances for the same period in the prior year.

 

Total interest income increased to $50.4 million in 2011 from $44.9 million in 2010 and $43.4 million in 2009, an increase of 12.3% during 2011 from 2010 and a 3.5% increase during 2010 from 2009. The ratio of interest earning assets to interest bearing liabilities increased to 138.5% in 2011 as compared to 137.5% in 2010 and decreased compared to 140.4% in 2009. Interest income on loans increased $5.2 million in 2011 over 2010 and $1.1 million in 2010 over 2009 primarily due to growth in the loan portfolio. The yield on average loans was 6.4% for 2011, 6.6% for 2010 and 6.7% for 2009.

 

Interest income on investments in mortgage-backed, tax exempt and taxable securities increased $0.3 million or 1.7% in 2011 to $14.9 million from $14.6 million in 2010 and increased $0.5 million or 3.3% in 2010 from $14.2 million in 2009. Interest income on securities included net amortization of premiums on securities of $2.4 million in 2011 compared to net amortization of premiums on securities of $1.5 million in 2010 and net amortization of premiums on securities of $0.3 million in 2009. The tax adjusted average yield on total securities decreased to 3.2% in 2010 from 3.7% in 2010 and 4.6 % in 2009.

 

Total interest expense decreased $0.1 million or 1.6% to $7.6 million in 2011 and decreased $0.1 million or 0.96% to $7.7 million in 2010 from $7.8 million in 2009. The decrease in interest expense in 2011, 2010 and 2009 resulted from the Federal Reserve lowering the targeted federal funds rate and discount rate in previous years and the prudent management of deposit pricing. These reductions were partly offset by the interest paid of $1.4 million in 2011 and 2010 related to the $16.0 million of junior subordinated debentures. The cost of average interest bearing liabilities was 0.95% in 2011, 1.16% in 2010, and 1.40% in 2009.

 

 

 

Page -21-


Table of Contents

 

 

 

Provision for Loan Losses

 

The Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending area of Suffolk County which is located on the eastern portion of Long Island. The interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by its competitors, the Bank’s relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.

 

Loans of approximately $57.7 million or 9.4% of total loans at December 31, 2011 were categorized as classified loans compared to $43.9 million or 8.7% at December 31, 2010 and $31.7 million or 7.1% at December 31, 2009. Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans as management has information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis. The increase in the 2011 and 2010 levels of classified loans reflects the current economic environment as well as management’s decision during 2010 to enhance the asset and credit quality review process of the loan portfolio. This process includes the early identification of potential problem loans, a more stringent assessment of potential credit weaknesses and expanding the scope and depth of individual credit reviews. Additionally, higher classified loans as of December 31, 2011 primarily related to a $15.2 million increase in the special mention category as well as acquired classified loans from the HSB merger.

 

At December 31, 2011, approximately $37.2 million of these loans were commercial real estate (“CRE”) loans which were well secured with real estate as collateral. Of the $37.2 million of CRE loans, $34.6 million were current and $2.6 million were past due. In addition, all but $2.1 million of the CRE loans have personal guarantees.  At December 31, 2011, approximately $5.3 million of classified loans were residential real estate loans with $1.7 million current and $3.6 million past due. Commercial, financial, and agricultural loans represented $10.2 million of classified loans and $9.6 million was current and $0.6 million was past due. Approximately $4.6 million of classified loans represented real estate construction and land loans and $4.3 million was current and $0.3 million was past due. All real estate construction and land loans are well secured with collateral. The remaining $0.3 million in classified loans are consumer loans that are unsecured, have personal guarantees and demonstrate sufficient cash flow to pay the loans. Of the $0.3 million of consumer loans, $6,000 were past due with the remaining loans current. Due to the structure and nature of the credits, we do not expect to sustain a material loss on these relationships.

 

CRE loans, including multi-family loans, represented $305.3 million or 49.9% of the total loan portfolio at December 31, 2011 compared to $245.3 million or 48.7% at December 31, 2010 and $204.2 million or 45.6% at December 31, 2009. The Bank’s underwriting standards for CRE loans requires an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, the Bank’s underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios less than or equal to 75%.  The Bank considers charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on commercial real estate values when evaluating the appropriate level of the allowance for loan losses.  Real estate values in our geographic markets increased significantly from 2000 through 2007. Commencing in 2008, following the financial crisis and significant downturn in the economy, real estate values began to decline. This decline continued into 2009 and appears to have stabilized in 2010. The estimated decline in residential and commercial real estate values range from 15-20% from the 2007 levels, depending on the nature and location of the real estate.

 

As of December 31, 2011 and December 31, 2010, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $9.0 million and $9.9 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured (“TDR”) loans. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22.  Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required. These methods of fair value measurement for impaired loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

 

Nonaccrual loans decreased $2.5 million to $4.2 million or 0.68% of total loans at December 31, 2011 from $6.7 million or 1.34% of total loans at December 31, 2010. Approximately $2.0 million of the nonaccrual loans at December 31, 2011 and $4.7 million at December 31, 2010, represent troubled debt restructured loans. As of December 31, 2011 two of the borrowers with loans totaling $0.5 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $1.5 million is past due but is making payments. The decrease in nonaccrual troubled debt restructured loans at December 31, 2011 was due to two loans that were reported as held for sale at December 31, 2011 totaling $2.3 million and were subsequently sold in January 2012 at no additional gain or loss. Total nonaccrual troubled debt restructured loans are secured with collateral that has an appraised value of $4.2 million. In 2010, nonaccrual loans increased $0.8 million to $6.7 million from $5.9 million in 2009.

 

 

 

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Approximately $4.7 million of the nonaccrual loans at December 31, 2010 represented troubled debt restructured loans where the borrowers were complying with the modified terms of the loans and were currently making payments. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

 

In addition, the Company has four borrowers with performing TDR loans of $4.9 million at December 31, 2011 that are current and secured with collateral that has an appraised value of approximately $11.5 million.  At December 31, 2010, the Company had one borrower with TDR loans of $3.2 million that was current and secured with collateral that had an appraised value of approximately $5.4 million as well as personal guarantees. Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income on an accrual basis. In addition, the Bank has no commitment to lend additional funds to these debtors. Two of the loans were restructured during the third quarter of 2011 and one of the loans in the second quarter of 2011 and since that time the interest income recognized has been immaterial. The fourth loan was restructured during the third quarter of 2008 and since that time $0.4 million of interest income has been recognized.

 

The Bank had no foreclosed real estate at December 31, 2011, 2010 and 2009, respectively.

 

Net charge-offs were $1.6 million for the year ended December 31, 2011 compared to $1.0 for the year ended December 31, 2010 and $2.1 million for the year ended December 31, 2009. The ratio of allowance for loan losses to nonaccrual loans was 260%, 126% and 103%, at December 31, 2011, 2010, and 2009, respectively.

 

Based on our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, a provision for loan losses of $3.9 million was recorded in 2011 as compared to $3.5 million in 2010 and $4.2 million in 2009. The allowance for loan losses increased to $10.8 million at December 31, 2011 as compared to $8.5 million at December 31, 2010 and $6.0 million at December 31, 2009. As a percentage of total loans, the allowance was 1.77%, 1.69% and 1.35% at December 31, 2011, 2010 and 2009, respectively. In accordance with current accounting guidance, the acquired HSB loans are recorded at fair value, effectively netting estimated future losses against the loan balances. The allowance as a percentage of the Bank’s originated loans was 1.87% at December 31, 2011. Management continues to carefully monitor the loan portfolio as well as real estate trends in Suffolk County and eastern Long Island. The Bank’s consistent and rigorous underwriting standards preclude sub-prime lending, and management remains cautious about the potential for an indirect impact on the local economy and real estate values in the future.

 

The following table sets forth changes in the allowance for loan losses:

 

December 31,

 

2011

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses balance at beginning of period

 

$

8,497

 

 

$

6,045

 

 

$

3,953

 

 

$

2,954

 

 

$

2,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate mortgage loans

 

 

 

 

 

73

 

 

 

47

 

 

 

 

 

 

 

Multi-family loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgage loans

 

 

259

 

 

 

20

 

 

 

653

 

 

 

480

 

 

 

 

Commercial, financial and agricultural loans

 

 

372

 

 

 

879

 

 

 

1,098

 

 

 

534

 

 

 

203

 

Real estate construction and land loans

 

 

864

 

 

 

 

 

 

240

 

 

 

 

 

 

 

Installment/consumer loans

 

 

186

 

 

 

148

 

 

 

55

 

 

 

56

 

 

 

23

 

Total

 

 

1,681

 

 

 

1,120

 

 

 

2,093

 

 

 

1,070

 

 

 

226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate mortgage loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multi-family loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate mortgage loans

 

 

6

 

 

 

4

 

 

 

6

 

 

 

 

 

 

1

 

Commercial, financial and agricultural loans

 

 

96

 

 

 

56

 

 

 

28

 

 

 

53

 

 

 

13

 

Real estate construction and land loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Installment/consumer loans

 

 

19

 

 

 

12

 

 

 

1

 

 

 

16

 

 

 

54

 

Total

 

 

121

 

 

 

72

 

 

 

35

 

 

 

69

 

 

 

68

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

 

(1,560

)

 

 

(1,048

)

 

 

(2,058

)

 

 

(1,001

)

 

 

(158

)

Provision for loan losses charged to operations

 

 

3,900

 

 

 

3,500

 

 

 

4,150

 

 

 

2,000

 

 

 

600

 

Balance at end of period

 

$

10,837

 

 

$

8,497

 

 

$

6,045

 

 

$

3,953

 

 

$

2,954

 

Ratio of net charge-offs during period to average loans outstanding

 

 

(0.28%

)

 

 

(0.22%

)

 

 

(0.47%

)

 

 

(0.25%

)

 

 

(0.05%

)

 

 

 

 

Page -23-


Table of Contents

 

 

 

Allocation of Allowance for Loan Losses

 

The following table sets forth the allocation of the total allowance for loan losses by loan type:

 

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

(Dollars in thousands)

 

Amount

 

Percentage
of Loans
to Total
Loans

 

 

Amount

 

Percentage
of Loans
to Total
Loans

 

 

Amount

 

Percentage
of Loans
to Total
Loans

 

 

Amount

 

Percentage
of Loans
to Total
Loans

 

 

Amount

 

Percentage
of Loans
to Total
Loans

 

Commercial real estate mortgage loans

 

$

3,530

 

 

46.4

%

 

$

3,310

 

 

46.9

%

 

$

2,529

 

 

44.6

%

 

$

1,718

 

 

43.4

%

 

$

1,308

 

 

44.3

%

Multi-family loans

 

 

395

 

 

3.5

 

 

 

133

 

 

1.8

 

 

 

36

 

 

1.0

 

 

 

41

 

 

1.1

 

 

 

36

 

 

1.2

 

Residential real estate mortgage loans

 

 

2,280

 

 

23.1

 

 

 

1,642

 

 

28.0

 

 

 

1,781

 

 

27.5

 

 

 

1,158

 

 

29.3

 

 

 

864

 

 

29.2

 

Commercial, financial and agricultural loans

 

 

2,895

 

 

19.0

 

 

 

2,804

 

 

19.4

 

 

 

1,083

 

 

20.9

 

 

 

699

 

 

17.7

 

 

 

458

 

 

15.5

 

Real estate construction and land loans

 

 

1,465

 

 

6.6

 

 

 

185

 

 

2.0

 

 

 

346