10-K 1 a13-1446_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, 2012

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. x

 

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, 2012, was $191,463,050.

 

The number of shares of the Registrant’s common stock outstanding on March 11, 2013 was 8,974,740.

 

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 2012 Annual Meeting to be filed pursuant to Regulation 14A on or before April 30, 2013 (Part III).

 

 

 

 


Table of Contents

 

 

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

 

 

 

Item 1

 

Business

 

1

 

 

 

 

 

Item 1A

 

Risk Factors

 

7

 

 

 

 

 

Item 1B

 

Unresolved Staff Comments

 

11

 

 

 

 

 

Item 2

 

Properties

 

11

 

 

 

 

 

Item 3

 

Legal Proceedings

 

11

 

 

 

 

 

Item 4

 

Mine Safety Disclosures

 

11

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5

 

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

 

11

 

 

 

 

 

Item 6

 

Selected Financial Data

 

14

 

 

 

 

 

Item 7

 

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

 

15

 

 

 

 

 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 8

 

Financial Statements and Supplementary Data

 

36

 

 

 

 

 

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

80

 

 

 

 

 

Item 9A

 

Controls and Procedures

 

80

 

 

 

 

 

Item 9B

 

Other Information

 

80

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10

 

Directors, Executive Officers and Corporate Governance

 

80

 

 

 

 

 

Item 11

 

Executive Compensation

 

80

 

 

 

 

 

Item 12

 

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

 

81

 

 

 

 

 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

 

81

 

 

 

 

 

Item 14

 

Principal Accountant Fees and Services

 

81

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15

 

Exhibits and Financial Statement Schedules

 

81

 

 

 

 

 

SIGNATURES

 

 

 

82

 

 

 

 

 

EXHIBIT INDEX

 

 

83

 

 

 

 


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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 two 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  and non agency mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (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 257 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 maintains equity incentive plans under which it may issue shares of 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 2008, the Bank has opened seven new branches. In 2009, the Bank opened two new branches in Shirley and in the Village of East Hampton, New York. During 2010, the Bank opened three new branches located in Center Moriches, Patchogue and Deer Park, New York. In November 2010, the Bank relocated its branch at 26 Park Place, East Hampton, New York to 55 Main Street, East Hampton, New York. In June 2012, the Bank opened a new 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. In late December 2012, the Bank opened a new branch and administrative offices in Hauppauge, 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. 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 2013 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 had 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 was amortized to expense over three years. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed by the President. Section 331(b) of the Dodd-Frank 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. 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, 2012, the annualized FICO assessment was equal to 0.64 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.

 

On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules that would revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.  The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.  Among other things, the proposed rules would establish a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum Tier 1 capital to risk-based assets requirement (6% of risk-weighted assets) and assign higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The proposed rules would also require unrealized gains and losses on certain securities holdings to be included for purposes of calculating regulatory capital requirements.  The proposed rules would limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity Tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements.  The proposed rules indicated that the final rules would become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019.  However, the agencies subsequently indicated that, due to the volume of public comments received, the final rule has been delayed past January 1, 2013.

 

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.

 

The recently proposed rules that would increase regulatory capital standards would adjust the prompt corrective action tiers to account for the changes.

 

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-

 

 

 

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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, 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, but not identically, to those of the OCC for the Bank. As of December 31, 2012, the Company’s total capital and Tier 1 capital ratios exceeded these minimum capital requirements. The Dodd-Frank Act directs the Federal Reserve Board to issue consolidated capital

 

 

 

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requirements for depository institution holding companies that are less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. That will eliminate from Tier 1 capital the inclusion of certain instruments, such as trust preferred securities, that are currently includable by bank holding companies. The Dodd-Frank Act grandfathers instruments issued prior to May 19, 2010 for bank holding companies of under $15 billion in consolidated assets. The Company has issued trust preferred securities that should qualify for the grandfather.  However, the previously referenced proposed capital rules would impose a phase out of ineligible securities, including trust preferred securities, over ten years and does not refer to the grandfather provision. It is, therefore, uncertain whether any final rule will incorporate the Dodd-Frank Act grandfather.

 

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 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 14 to the Consolidated Financial Statements.

 

The Company had nominal results of operations for 2012, 2011, and 2010 on a parent-only basis.  On December 21, 2012, the Company filed a shelf registration statement on form S-3 to register up to $75 million of securities and a prospectus and prospectus supplement. On June 27, 2012, the Company filed a shelf registration statement on Form S-3 to register up to 800,000 of securities pursuant to the DRP Plan with the SEC. 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. No additional shares were issued under this program in 2012. 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, 2012, the Company has issued 856,005 shares of common stock and raised $16.8 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

 

 

 

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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.

 

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, 2012, our securities portfolio totaled $739.8 million.

 

 

 

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In addition, the Dodd-Frank 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. Since 2009, the Bank has expanded its market areas to include branches in the towns of Brookhaven, Babylon and Islip. During 2012, the Bank opened two new branches: one in June located in Ronkonkoma, New York and one in December 2012 located in Hauppauge, New York. The Bank also opened administrative offices in December 2012 in Hauppauge, New York, to better service customers as the Bank continues to move westward. 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 growth strategy.  In addition, continued growth requires that we incur additional expenses, including salaries, data processing 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

 

 

 

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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 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 Act is significantly changing the bank regulatory structure and is impacting the largest financial institutions as well as regional banks and community banks.  The federal regulatory agencies, specifically the SEC and the new Consumer Financial Protection Bureau, are given significant discretion in drafting the implementing regulations.

 

The major bank-related provisions under the Dodd-Frank Act pertain to: capital requirements; mortgage reform and minimum lending standards; consumer financial protection bureau; sale of mortgage loans (including risk retention requirements); FDIC insurance-related provisions; preemption standards for national banks; abolishment of the Office of Thrift Supervision; interchange fee for debit card transactions; Volcker Rule; regulation of derivatives/swaps;  Financial Services Oversight Council; resolution authority; and corporate governance matters (e.g.; “say on pay”; new executive compensation disclosure and clawbacks, etc.). Given the range of topics in the Dodd-Frank Act and the voluminous regulations required to implement by the Dodd-Frank Act, the full impact will not be known for some time.

 

Certain provisions of the Dodd-Frank Act impacted banks upon enactment of the legislation.  Examples of this were the permanent increase of FDIC deposit insurance limits, the FDIC Assessment Base calculation change and the removal of the cap for the Deposit Insurance Fund, all of which in turn affected banks’ FDIC deposit insurance premiums.  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

 

 

 

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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.

 

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules are uncertain.

 

On June 7, 2012, the Federal Reserve Board issued proposed rules that would substantially amend the regulatory risk-based capital rules applicable to us. The OCC subsequently approved these proposed rules on June 12, 2012. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III was initially intended to be implemented beginning January 1, 2013, however on November 9, 2012, the U.S. federal banking agencies announced that the proposed rules would not become effective on January 1, 2013, and it is not clear when the proposed rules will become effective.

 

Various provisions of the Dodd-Frank Act increase the capital requirements of financial institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating these ratios.  The proposed new minimum capital requirements would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. While the proposed Basel III changes and other regulatory capital requirements will result in higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied.  In addition, in the current economic and regulatory environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations.

 

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares.

 

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.

 

Information technology systems are critical to our business.  We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans.  We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur.  In addition, any compromise of our systems could deter customers from using our products and services.  Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

In addition, we outsource a majority of our data processing to certain third-party providers.  If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected.  Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

 

The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability.  Any of these events could have a material adverse effect on our financial condition and results of operations.

 

 

 

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Severe Weather, Acts of Terrorism and Other External Events Could Impact Our Ability to Conduct Business

 

Recent weather-related events have adversely impacted our market area, especially areas located near coastal waters and flood prone areas. Such events that may cause significant flooding and other storm-related damage may become more common events in the future. Financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising operating and communication systems and the metropolitan New York area remain central targets for potential acts of terrorism.  Such events could cause significant damage, impact the stability of our facilities and result in additional expenses, impair the ability of our borrowers to repay their loans, reduce the value of collateral securing repayment of our loans, and result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

 

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 branches located in; Montauk, Southold, Westhampton Beach, Southampton Village, and East Hampton Village. The Bank currently leases out a portion of the Montauk and Westhampton Beach buildings. The Bank leases fifteen additional properties in Suffolk County as branch locations. 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, 2012 the Company had approximately 858 shareholders of record, not including the number of persons or entities holding stock in nominee or the street name through various banks and brokers.

 

 

 

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COMMON STOCK INFORMATION

 

 

 

Stock Prices

 

 

 

 

High

 

Low

 

Dividends
Declared

By Quarter 2012

 

 

 

 

 

 

First

 

$

22.33

 

$

19.30

 

$

0.23

Second

 

$

23.59

 

$

19.02

 

$

0.23

Third

 

$

24.54

 

$

19.58

 

$

0.23

Fourth

 

$

23.24

 

$

19.07

 

$

0.46

 

 

 

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

 

Stockholders received cash dividends totaling $9.9 million in 2012 and $6.1 million in 2011. 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, and only three declared quarterly dividends during 2011. Due to the likelihood of a change in the tax rates on dividends beginning in 2013, management decided to accelerate the timing of the payment of the Company’s fourth quarter dividend to shareholders into calendar year 2012 resulting in five dividend payments in 2012. The ratio of dividends per share to net income per share was 77.50% in 2012 compared to 44.35% in 2011.

 

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, 2012, the Bank had $33.5 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.

 

 

 

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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, 2007 through December 31, 2012. 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

 

12/31/07

 

12/31/08

 

12/31/09

 

12/31/10

 

12/31/11

 

12/31/12

 

Bridge Bancorp, Inc.

 

100.00

 

79.71

 

107.70

 

114.63

 

95.60

 

103.09

 

NASDAQ Composite

 

100.00

 

60.02

 

87.24

 

103.08

 

102.26

 

120.42

 

SNL Bank $1B-$5B

 

100.00

 

82.94

 

59.45

 

67.39

 

61.46

 

75.78

 

 

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, 2012. The total number of shares purchased as part of the publicly announced plan totaled 141,959 as of December 31, 2012. The maximum number of remaining shares that may be purchased under the plan totals 167,041 as of December 31, 2012. 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, 2012.

 

 

 

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Table of Contents

 

 

 

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,

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Selected Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

$

529,070

 

$

441,439

 

$

323,539

 

$

306,112

 

$

310,695

 

Securities, restricted

 

 

2,978

 

1,660

 

1,284

 

1,205

 

3,800

 

Securities held to maturity

 

 

210,735

 

169,153

 

147,965

 

77,424

 

43,444

 

Loans held for sale

 

 

 

2,300

 

 

 

 

Loans held for investment

 

 

798,446

 

612,143

 

504,060

 

448,038

 

429,683

 

Total assets

 

 

1,624,713

 

1,337,458

 

1,028,456

 

897,257

 

839,059

 

Total deposits

 

 

1,409,322

 

1,188,185

 

916,993

 

793,538

 

659,085

 

Total stockholders’ equity

 

 

118,672

 

106,987

 

65,720

 

61,855

 

56,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Selected Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

 

 

$

54,514

 

$

50,426

 

$

44,899

 

$

43,368

 

$

39,620

 

Total interest expense

 

 

7,555

 

7,616

 

7,740

 

7,815

 

9,489

 

Net interest income

 

 

46,959

 

42,810

 

37,159

 

35,553

 

30,131

 

Provision for loan losses

 

 

5,000

 

3,900

 

3,500

 

4,150

 

2,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for loan losses

 

 

41,959

 

38,910

 

33,659

 

31,403

 

28,131

 

Total non interest income

 

 

10,673

 

6,949

 

7,433

 

6,174

 

6,064

 

Total non interest expense

 

 

33,780

 

30,837

 

27,879

 

24,765

 

21,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

18,852

 

15,022

 

13,213

 

12,812

 

13,038

 

Income tax expense

 

 

6,080

 

4,663

 

4,047

 

4,049

 

4,288

 

Net income

 

 

$

12,772

 

$

10,359

 

$

9,166

 

$

8,763

 

$

8,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Ratios and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity

 

 

11.78

%

14.37

%

15.29

%

15.58

%

16.29

%

Return on average assets

 

 

0.88

%

0.88

%

0.95

%

1.06

%

1.24

%

Average equity to average assets

 

 

7.49

%

6.11

%

6.18

%

6.80

%

7.62

%

Dividend payout ratio (1) (2)

 

 

77.50

%

44.35

%

63.42

%

65.43

%

64.74

%

Basic earnings per share

 

 

$

1.48

 

$

1.54

 

$

1.45

 

$

1.41

 

$

1.42

 

Diluted earnings per share

 

 

$

1.48

 

$

1.54

 

$

1.45

 

$

1.41

 

$

1.42

 

Cash dividends declared per common share

 

 

$

1.15

 

$

0.69

 

$

0.92

 

$

0.92

 

$

0.92

 

 

 

(1)          The dividend payout ratio for 2012 includes five declared quarterly dividends.

(2)          The dividend payout ratio for 2011 includes three declared quarterly dividends.

 

 

 

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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; 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. These reclassifications did not have an impact on net income or total stockholders’ equity.

 

Year and Quarterly Highlights

 

·

Net income of $3.4 million and $0.39 per diluted share for the fourth quarter 2012 compared to $3.0 million and $0.42 per diluted share for the fourth quarter 2011. Net income for 2012 was $12.8 million and $1.48 per diluted share, compared to $10.4 million and $1.54 per diluted share, including $0.5 million in acquisition costs, net of tax, associated with the HSB merger in 2011.

 

 

·

Returns on average assets and equity for 2012 were 0.88% and 11.78%, respectively.

 

 

·

Net interest income increased to $47.0 million for 2012 compared to $42.8 million in 2011.

 

 

·

Net interest margin was 3.52% for 2012 and 3.97% for 2011.

 

 

·

Total assets of $1.6 billion at December 31, 2012, an increase of $0.3 billion or 21.5% over the same date last year.

 

 

 

 

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·

Total loans held for investment of $798.4 million at December 31, 2012, an increase of 30.4% from December 31, 2011.

 

 

·

Total investment securities of $742.8 million at December 31, 2012, an increase of 21.3% over December 31, 2011.

 

 

·

Total deposits of $1.4 billion at December 31, 2012, an increase of $221.1 million or 18.6% over 2011 level.

 

 

·

Allowance for loan losses was 1.81% of loans as of December 31, 2012, compared to 1.77% at December 31, 2011.

 

 

·

The Company’s Tier 1 Capital to quarterly average assets ratio was 8.4% as of December 31, 2012, as compared to 9.3% as of 2011. Stockholders’ equity totaled $118.7 million at December 31, 2012, an increase of $11.7 million from December 31, 2011 as a result of the capital raised through the DRIP, as well as continued earnings growth, net of dividends.

 

 

·

A cash dividend of $0.23 per share was declared and paid in December 2012 for the fourth quarter of 2012.

 

Current Environment

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank 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 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 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.

 

On June 12, 2012, the OCC, the Federal Reserve and the FDIC issued proposed rules that would revise capital calculations and requirements. More specifically, the agencies are proposing to revise the risk based and leverage capital requirements consistent with the Basel Committee on Banking Supervision (“Basel III”), implement a new common equity Tier 1 minimum capital requirement, increase the minimum Tier 1 capital requirement, implement a new supplementary leverage ratio, apply limits on capital distributions and certain discretionary incentive payments if the Bank does not hold a specified buffer of common equity Tier 1 capital in addition to the minimum risk based capital requirements, revise the advanced approaches risk based capital rules consistent with Basel III and revise the calculation of risk weighted assets to enhance risk sensitivity.

 

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. Various government initiatives along with eight rate cuts by the Federal Reserve totaling 500 basis points were designed to improve liquidity for the distressed financial markets. The objective of these efforts was to help consumers, reduce the potential surge of residential mortgage loan foreclosures and stabilize the banking system. 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 September 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, tight credit markets and as an effort to foster employment. These actions have resulted in a prolonged low interest rate environment reducing yields on interest earning assets and compressing the Company’s net interest margin. In June 2012, the FOMC lowered its expectations for employment and GDP growth. In September 2012, the FOMC noted that economic activity was increasing, the growth in unemployment had slowed and the housing market was beginning to show signs of improvement. However, the FOMC anticipates maintaining federal funds target rate at least through mid-2015 in order to support economic and job growth.

 

Growth and service strategies have the potential to offset the compression on net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2008, the Bank has opened seven new branches. 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 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 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. 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.

 

 

 

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Challenges and Opportunities

 

Despite fiscal and monetary policy initiatives implemented to combat the recession, the Company continues operating in an unsettled economic environment. Five years after the financial crisis, the Banking environment remains uncertain with the fallout from both regulatory activity and the economic impact of decisions made during and subsequent to the crisis. The costs, in terms of compliance and greater capitalization, continue impacting shareholders expectations and returns.

 

While recent news on employment appears positive, issues still linger regarding the recovery’s strength and sustainability. Job creation remains a primary focus of the government, and the Federal Reserve Board’s (the “FRB”) recent announcements regarding continued quantitative easing is an attempt, through monetary policy, to increase economic activity and create jobs. Locally, the economy appears stronger than other parts of New York and the nation. The credit environment appears to be stabilizing and our Company and many of our customers avoided significant damage from the effects of Hurricane Sandy, however, the continued confidence of consumers and businesses remains critical to future economic activity.

 

The FRB’s activities have heightened the challenges for the banking industry. Lower rates, while beneficial for certain segments of the economy, pose issues for others. Customers who rely on their savings to provide income have been impacted, and industry wide banks are seeing the returns on their loans and investments decline. The eventuality of rising rates is one of the industry’s greatest challenges and threats, creating margin pressures and ultimately impacting credit, as businesses adjust and manage with potentially higher borrowing costs. These circumstances warrant proactive management to mitigate interest rate and credit risk and maintain overall profitability. During the twelve months ended December 31, 2012, the Company repositioned its balance sheet, as the continuing low rate environment presented opportunities to exit certain positions in the bond portfolio. Securities aggregating $152 million were sold at a net gain of $2.6 million.  A portion of the sales proceeds were used to repay borrowings with the balance available to fund future loan growth. Management believes this strategy was appropriate and prudent given current market indicators. Management is cautious managing the types of loans it originates and investment it makes, while remaining prepared to deal with the eventuality of higher rates. Additionally, although asset quality measures remain strong, management continues to prudently assess its reserves in light of continued weakness in the overall economy.

 

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. The Company expects new rules, regulations and related compliance and process changes and will increase its compliance resources appropriately. The proposed changes to calculating capital under Basel III may increase the complexity and level of capital requirements. 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. Management must maintain its stringent underwriting standards and diligently monitor credit concentrations and exposures as the Company grows. Management needs to prudently price all products and structure its balance sheet for the eventuality of higher rates. Management seeks new sources of revenue while monitoring expenditures and identifying opportunities to achieve efficiencies. Finally, management must capitalize on current competitors’ dislocations and distractions while investing in infrastructure and technology to be prepared for the evolving competitive landscape.

 

The Company’s record achievements in 2012 of substantial organic loan, deposit and revenue growth, coupled with strong asset quality and capitalization levels combined to deliver industry leading returns. This is a testament to the Company’s unwavering commitment to community banking, whereby the Company partners with its customers, delivering advice and solutions for their financial needs. This is the core of the Company’s business model and dedication to these principles contributes to its current success, and is paramount in all future initiatives. The key to delivering on the Company’s mission is combining its expanding branch network, improving technology, and experienced professionals with the critical element of local decision making. The successful expansion of the franchise’s geographic reach delivered the desired results; increasing core deposits and loans, and generating record levels of revenue and income. This revenue offset higher credit and compliance costs allowing the Company to continue building the infrastructure necessary to manage in today’s increasingly complex regulatory environment. 2012 marked another step in the continuing evolution of the Company and demonstrated ongoing commitment to identify, leverage and efficiently execute on market opportunities. Looking ahead, management sees the potential to continue this strategic course with similar positive results.

 

Corporate objectives for 2013 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 Abstract as well as other lines of business. Management believes there remain opportunities to grow its franchise and continued investments to generate core funding, quality loans and new sources of revenue, remain keys to continue creating long term shareholder value. Management remains committed to branch based banking and in June 2012, the Company opened a new branch in Ronkonkoma, near MacArthur Airport, a regional transportation hub. The bank opened its 22nd   branch in Hauppauge, New York, in December 2012. The Bank also received regulatory approval to open two additional branches in Shelter Island, New York and Rocky Point, New York. The Company expects to open these locations during the first half of 2013. The Company began to pilot its new electronic banking platform in the first quarter of 2013. This will allow the Company to enhance the delivery of current technology, and more importantly, effectively deliver the next generation of products and services to its existing and new customer base. The

 

 

 

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ability to attract, retain, train and cultivate employees at all levels of the Company remains significant to meeting corporate 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. 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, 2012 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 loan analyses are periodically performed on specific loans considered impaired. For collateral dependent impaired loans, appraisals are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, the Credit Administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics.  On a quarterly basis, the Company compares the actual selling price of collateral that has been sold, based on these independent sources, as well as recent appraisals associated with current loan origination activity, to the most recent appraised value to determine if additional adjustments should be made to the appraisal value to arrive at fair value.  Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. 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

 

 

 

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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 and trends in current values, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as 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, 2012, 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.

 

NET INCOME

 

Net income for 2012 totaled $12.8 million or $1.48 per diluted share while net income for 2011 totaled $10.4 million or $1.54 per diluted share, as compared to net income of $9.2 million, or $1.45 per diluted share for the year ended December 31, 2010. Net income increased $2.4 million or 23.3% compared to 2011 and net income for 2011 increased $1.2 million or 13.0% as compared to 2010. Significant trends for 2012 include: (i) a $4.1 million or 9.7% increase in net interest income; (ii) a $1.1 million increase in the provision for loan losses; (iii) a $3.8 million or 53.6% increase in total non interest income including net securities gains of $2.6 million; and (iv) a $3.0 million or 9.5% increase in total non interest expenses including a decline of $0.8 million of acquisition costs associated with the HSB merger that were incurred during 2011. The effective income tax rate was 32.3% for 2012 compared to 31.0% for 2011.

 

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,

 

2012

 

2011

 

2010

 

(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)

 

$

671,103

 

$

40,255

 

6.00

%

$

554,469

 

$

35,434

 

6.39

%

$

461,289

 

$

30,223

 

6.55

%

Mortgage-backed, CMOs and other asset-back securities

 

342,302

 

7,391

 

2.16

 

277,073

 

9,000

 

3.25

 

242,997

 

9,585

 

3.94

 

Tax exempt securities (2)

 

141,899

 

4,181

 

2.95

 

124,616

 

4,417

 

3.54

 

104,824

 

4,153

 

3.96

 

Taxable securities

 

191,445

 

4,068

 

2.12

 

111,311

 

2,993

 

2.69

 

82,678

 

2,328

 

2.82

 

Federal funds sold

 

 

 

 

 

 

 

1,750

 

5

 

0.29

 

Deposits with banks

 

27,840

 

78

 

0.28

 

48,841

 

123

 

0.25

 

20,804

 

54

 

0.26

 

Total interest earning assets

 

1,374,589

 

55,973

 

4.07

 

1,116,310

 

51,967

 

4.66

 

914,342

 

46,348

 

5.07

 

Non interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

22,760

 

 

 

 

 

19,025

 

 

 

 

 

15,857

 

 

 

 

 

Other assets

 

48,836

 

 

 

 

 

44,952

 

 

 

 

 

39,707

 

 

 

 

 

Total assets

 

$

1,446,185

 

 

 

 

 

$

1,180,287

 

 

 

 

 

$

969,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

$

718,559

 

$

3,738

 

0.52

%

$

613,068

 

$

3,936

 

0.64

%

$

480,642

 

$

3,594

 

0.75

%

Certificates of deposit of $100,000 or more

 

131,695

 

1,453

 

1.10

 

115,895

 

1,264

 

1.09

 

100,775

 

1,489

 

1.48

 

Other time deposits

 

40,949

 

416

 

1.02

 

43,282

 

507

 

1.17

 

45,630

 

762

 

1.67

 

Federal funds purchased and repurchase agreements

 

38,613

 

461

 

1.19

 

17,582

 

543

 

3.09

 

22,128

 

530

 

2.40

 

Federal Home Loan Bank term advances

 

18,068

 

122

 

0.68

 

82

 

 

0.00

 

19

 

 

0.00

 

Junior subordinated debentures

 

16,002

 

1,365

 

8.53

 

16,002

 

1,366

 

8.54

 

16,002

 

1,365

 

8.53

 

Total interest bearing liabilities

 

963,886

 

7,555

 

0.78

 

805,911

 

7,616

 

0.95

 

665,196

 

7,740

 

1.16

 

Non interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

365,999

 

 

 

 

 

294,566

 

 

 

 

 

238,740

 

 

 

 

 

Other liabilities

 

7,923

 

 

 

 

 

7,721

 

 

 

 

 

6,028

 

 

 

 

 

Total liabilities

 

1,337,808

 

 

 

 

 

1,108,198

 

 

 

 

 

909,964

 

 

 

 

 

Stockholders’ equity

 

108,377

 

 

 

 

 

72,089

 

 

 

 

 

59,942

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,446,185

 

 

 

 

 

$

1,180,287

 

 

 

 

 

$

969,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/interest rate spread (3)

 

 

 

48,418

 

3.29

%

 

 

44,351

 

3.71

%

 

 

38,608

 

3.91

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earning assets/net interest margin (4)

 

$

410,703

 

 

 

3.52

%

$

310,399

 

 

 

3.97

%

$

249,146

 

 

 

4.22

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest earning assets to interest bearing liabilities

 

 

 

 

 

142.61

%

 

 

 

 

138.52

%

 

 

 

 

137.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Tax equivalent adjustment

 

 

 

(1,459

)

 

 

 

 

(1,541

)

 

 

 

 

(1,449

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

46,959

 

 

 

 

 

$

42,810

 

 

 

 

 

$

37,159

 

 

 

 

 

(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.

 

 

 

Page -20-

 


Table of Contents

 

 

 

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,

 

2012 Over 2011
Changes Due To

 

2011 Over 2010
Changes Due To

 

(In thousands)

 

Volume

 

Rate

 

Net
Change

 

Volume

 

Rate

 

Net
Change

 

Interest income on interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (1)

 

$

7,089

 

$

(2,268

)

$

4,821

 

$

5,966

 

$

(755

)

$

5,211

 

Mortgage-backed, CMOs and other asset-backed securities

 

1,828

 

(3,437

)

(1,609

)

1,231

 

(1,816

)

(585

)

Tax exempt securities (2)

 

561

 

(797

)

(236

)

733

 

(469

)

264

 

Taxable securities

 

1,811

 

(736

)

1,075

 

777

 

(112

)

665

 

Federal funds sold

 

 

 

 

(3

)

(2

)

(5

)

Deposits with banks

 

(58

)

13

 

(45

)

71

 

(2

)

69

 

Total interest earning assets

 

11,231

 

(7,225

)

4,006

 

8,775

 

(3,156

)

5,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense on interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

609

 

(807

)

(198

)

913

 

(571

)

342

 

Certificates of deposit of $100,000 or more

 

141

 

48

 

189

 

320

 

(545

)

(225

)

Other time deposits

 

(27

)

(64

)

(91

)

(37

)

(218

)

(255

)

Federal funds purchased and repurchase agreements

 

387

 

(469

)

(82

)

(122

)

135

 

13

 

Federal Home Loan Bank Advances

 

93

 

29

 

122

 

 

 

 

Junior subordinated debentures

 

 

(1

)

(1

)

 

1

 

1

 

Total interest bearing liabilities

 

1,203

 

(1,264

)

(61

)

1,074

 

(1,198

)

(124

)

Net interest income

 

$

10,028

 

$

(5,961

)

$

4,067

 

$

7,701

 

$

(1,958

)

$

5,743

 

 

(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 3.52% in 2012 compared to 3.97% for the year ended December 31, 2011 and 4.22% in 2010. The decrease in 2012 and 2011 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 total average interest earning assets in 2012 increased $258.3 million or 23.1% over 2011 levels, yielding 4.07% and the overall funding cost was 0.57%, including demand deposits. The yield on interest earning assets decreased approximately 59 basis points which was partly offset by a decrease in the cost of interest bearing liabilities of approximately 17 basis points during 2012 compared to 2011. The increase in average total deposits of $190.4 million partially funded average lowering yielding securities of $162.6 million, and average net loans grew $116.6 million from the comparable 2011 levels.

 

Net interest income was $47.0 million in 2012 compared to $42.8 million in 2011 and $37.2 million in 2010. The increase in net interest income of $4.1 million or 9.7% as compared to 2011, and the increase in net interest income of $5.7 million or 15.2% in 2011 as compared to 2010, 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 $258.3 million or 23.1% to $1.4 billion in 2012 compared to $1.1 billion in 2011. During this period, the yield on average total interest earning assets decreased to 4.07% from 4.66%. 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%.

 

 

 

Page -21-


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For the year ended December 31, 2012, average loans grew by $116.6 million or 21.0% to $671.1 million as compared to $554.5 million in 2011 and increased $209.8 million or 45.5% compared to $461.3 million in 2010. 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, 2012, average total investments increased by $162.6 million or 31.7% to $675.6 million as compared to $513.0 million in 2011 and increased $245.1 million or 56.9% as compared to $430.5 million in 2010 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 2012, 2011 and 2010 resulting in a net gain of $2.6 million, $0.1 million and $1.3 million, respectively. There were no federal funds sold in 2012 and 2011 compared to average federal funds sold of $1.8 million in 2010. The zero balance in the average federal funds sold in 2012 and 2011 was offset by average interest earning cash balances of $27.8 million in 2012, $48.8 million in 2011 and $20.8 million in 2010.

 

Average total interest bearing liabilities were $963.9 million in 2012 compared to $805.9 million in 2011 and $665.2 million in 2010. The Bank grew deposits in 2012 as a result of opening one branch in 2012 and three new branches during 2010, building new relationships in existing markets and the HSB merger which was completed during 2011. During 2012, 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 0.78% for 2012 compared to 0.95% for 2011 and 1.16% for 2010. 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.

 

For the year ended December 31, 2012, average total deposits increased by $190.4 million or 17.8% to $1.26 billion as compared to average total deposits of $1.07 billion for the year ended December 31, 2011. Components of this increase include an increase in average demand deposits for 2012 of $71.4 million or 24.3% to $366.0 million as compared to a $294.6 million in average demand deposits for 2011 and increased by $127.3 million or 53.3% compared to $238.7 million in average demand deposits for 2010. The average balances in savings, NOW and money market accounts increased $105.5 million or 17.2% to $718.6 million for the year ended December 31, 2012 compared to $613.1 million for the same period last year and increased $237.9 million or 49.5% over 2010 levels of $480.6 million. Average balances in certificates of deposit of $100,000 or more and other time deposits increased $13.5 million or 8.5% to $172.6 million for 2012 as compared to 2011 and increased $26.2 million or 17.9% in 2011 as compared to 2010. Average public fund deposits comprised 17.3% of total average deposits during 2012, 18.2% in 2011 and 18.8% in 2010. Average federal funds purchased and repurchase agreements together with average Federal Home Loan Bank term advances increased $39.0 million or 220.9% for the year ended December 31, 2012 as compared to average balances for 2011 and decreased $4.5 million or 20.2% for the year ended December 31, 2011 as compared to average balances for the same period in the prior year.

 

Total interest income increased to $54.5 million in 2012 from $50.4 million in 2011 and $44.9 million in 2010, an increase of 8.1% during 2012 from 2011 and a 12.3% increase during 2011 from 2010. The ratio of interest earning assets to interest bearing liabilities increased to 142.6% in 2012 as compared to 138.5% in 2011 and 137.5% in 2010. Interest income on loans increased $4.8 million in 2012 over 2011 and $5.2 million in 2011 over 2010 primarily due to growth in the loan portfolio. The yield on average loans was 6.0% for 2012, 6.4% for 2011 and 6.6% for 2010.

 

Interest income on investments in mortgage-backed, tax exempt and taxable securities decreased $0.7 million or 4.6% in 2012 to $14.2 million from $14.9 million in 2011 and increased $0.3 million or 1.7% in 2011 from $14.6 million in 2010. Interest income on securities included net amortization of premiums on securities of $5.6 million in 2012 compared to net amortization of premiums on securities of $2.4 million in 2011 and net amortization of premiums on securities of $1.5 million in 2010. The tax adjusted average yield on total securities decreased to 2.3% in 2012 from 3.2% in 2011 and 3.7% in 2010.

 

Total interest expense remained flat at $7.6 million as compared to 2011 and decreased $0.1 million or 1.6% to $7.6 million in 2011 from $7.7 million in 2010 as a result of prudent management of deposit pricing. The cost of average interest bearing liabilities was 0.78% in 2012, 0.95% in 2011, and 1.16% in 2010.

 

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 $53.6 million or 6.7% of total loans at December 31, 2012 were categorized as classified loans compared to $57.7 million or 9.4% at December 31, 2011 and $43.9 million or 8.7% at December 31, 2010. Classified loans include loans with

 

 

 

Page -22-


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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 at least quarterly. The decrease in the 2012 levels of classified loans reflects the current economic environment. The 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, 2012, approximately $34.1 million of these loans were commercial real estate (“CRE”) loans which were well secured with real estate as collateral. Of the $34.1 million of CRE loans, $32.4 million were current and $1.7 million were past due. In addition, all but $2.1 million of the CRE loans have personal guarantees.  At December 31, 2012, approximately $5.6 million of classified loans were residential real estate loans with $3.4 million current and $2.2 million past due. Commercial, financial, and agricultural loans represented $10.3 million of classified loans and $9.8 million was current and $0.5 million was past due. Approximately $3.5 million of classified loans represented real estate construction and land loans, which were all current. All real estate construction and land loans are well secured with collateral. The remaining $0.1 million in classified loans are consumer loans that are unsecured and current, have personal guarantees and demonstrate sufficient cash flow to pay the loans. 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 $398.9 million or 50.0% of the total loan portfolio at December 31, 2012 compared to $305.3 million or 49.9% at December 31, 2011 and $245.3 million or 48.7% at December 31, 2010. 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 generally 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, 2012 and December 31, 2011, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $8.2 million and $9.0 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 $0.9 million to $3.3 million or 0.41% of total loans at December 31, 2012 from $4.2 million or 0.68% of total loans at December 31, 2011. Approximately $1.0 million of the nonaccrual loans at December 31, 2012 and $2.0 million at December 31, 2011, represent troubled debt restructured loans. As of December 31, 2012 two of the borrowers with loans totaling $0.3 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $0.7 million is currently in default and foreclosure proceedings have been initiated.  The decrease in nonaccrual troubled debt restructured loans at December 31, 2012 was primarily due to one loan totaling $0.3 million where the borrower has made six months of consecutive payments in accordance with the restructured terms and the loan is now a performing trouble debt restructure loan. In addition, one loan had $0.7 million in charge-offs in 2012. Nonaccrual troubled debt restructured loans are secured with collateral that has an appraised value of $2.7 million. In 2011, nonaccrual loans decreased $2.5 million to $4.2 million from $6.7 million in 2010. Approximately $2.0 million of the nonaccrual loans at December 31, 2011 represented troubled debt restructured loans where two of the borrowers with loans totaling $0.5 million were complying with the modified terms of the loans and were currently making payments.  Another borrower with loans totaling $1.5 million was past due but making payments. Furthermore, the Bank had no commitment to lend additional funds to these debtors.

 

In addition, the Company has six borrowers with performing TDR loans of $5.0 million at December 31, 2012 that are current and secured with collateral that has an appraised value of approximately $12.3 million. At December 31, 2011, the Company had four borrowers with TDR loans of $4.9 million that were current and secured with collateral that had an appraised value of approximately $11.5 million. 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 2012, one of the loans in the second quarter of 2012 and one loan in the first quarter of 2012 and since that time the interest income recognized has been immaterial. The fifth loan was restructured during the

 

 

 

Page -23-


Table of Contents

 

 

 

third quarter 2011 and since that time $0.08 million of interest income has been recognized. The sixth loan was restructured during the third quarter of 2008 and since that time $0.5 million of interest income has been recognized.

 

The Bank had $0.3 million of foreclosed real estate owned at December 31, 2012 and had none at December 31, 2011 and 2010, respectively.

 

Net charge-offs were $1.4 million for the year ended December 31, 2012 compared to $1.6 million for the year ended December 31, 2011 and $1.0 for the year ended December 31, 2010. The ratio of allowance for loan losses to nonaccrual loans was 439%, 260% and 126%, at December 31, 2012, 2011, and 2010, 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 $5.0 million was recorded in 2012 as compared to $3.9 million in 2011 and $3.5 million in 2010. The allowance for loan losses increased to $14.4 million at December 31, 2012 as compared to $10.8 million at December 31, 2011 and $8.5 million at December 31, 2010. As a percentage of total loans, the allowance was 1.81%, 1.77% and 1.69% at December 31, 2012, 2011 and 2010, respectively. In accordance with current accounting guidance, the acquired HSB loans were recorded at fair value, effectively netting estimated future losses against the loan balances. 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,

 

2012

 

2011

 

2010

 

2009

 

2008

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses balance at beginning of period

 

$

10,837

 

$

8,497

 

$

6,045

 

$

3,953

 

$

2,954

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate mortgage loans

 

 

 

73

 

47

 

 

Multi-family loans

 

 

 

 

 

 

Residential real estate mortgage loans

 

1,210

 

259

 

20

 

653

 

480

 

Commercial, financial and agricultural loans

 

285

 

372

 

879

 

1,098

 

534

 

Real estate construction and land loans

 

 

864

 

 

240

 

 

Installment/consumer loans

 

15

 

186

 

148

 

55

 

56

 

Total

 

1,510

 

1,681

 

1,120

 

2,093

 

1,070

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate mortgage loans

 

 

 

 

 

 

Multi-family loans

 

 

 

 

 

 

Residential real estate mortgage loans

 

7

 

6

 

4

 

6

 

 

Commercial, financial and agricultural loans

 

83

 

96

 

56

 

28

 

53

 

Real estate construction and land loans

 

 

 

 

 

 

Installment/consumer loans

 

22

 

19

 

12

 

1

 

16

 

Total

 

112

 

121

 

72

 

35

 

69

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

(1,398

)

(1,560

)

(1,048

)

(2,058

)

(1,001

)

Provision for loan losses charged to operations

 

5,000

 

3,900

 

3,500

 

4,150

 

2,000

 

Balance at end of period

 

$

14,439

 

$

10,837

 

$

8,497

 

$

6,045

 

$

3,953

 

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

 

(0.21

%)

(0.28

%)

(0.22

%)

(0.47

%)

(0.25

%)

 

 

 

 

Page -24-


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,

 

2012

 

2011

 

2010

 

2009

 

2008

 

(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

 

$

4,445

 

41.7

%

$

3,530

 

46.4

%

$

3,310

 

46.9

%

$

2,529

 

44.6

%

$

1,718

 

43.4

%

Multi-family loans

 

1,239

 

8.3

 

395

 

3.5

 

133

 

1.8

 

36

 

1.0

 

41

 

1.1

 

Residential real estate mortgage loans

 

2,803

 

18.0

 

2,280

 

23.1

 

1,642

 

28.0

 

1,781

 

27.5

 

1,158

 

29.3

 

Commercial, financial and agricultural loans

 

4,349

 

24.7

 

2,895

 

19.0

 

2,804

 

19.4

 

1,083

 

20.9

 

699

 

17.7

 

Real estate construction and land loans

 

1,375

 

6.1

 

1,465

 

6.6

 

185

 

2.0

 

346

 

4.3

 

268

 

6.8

 

Installment/consumer loans

 

228

 

1.2

 

272

 

1.4

 

423

 

1.9

 

270

 

1.7

 

69

 

1.7

 

Total

 

$

14,439

 

100.0

%

$

10,837

 

100.0

%

$

8,497

 

100.0

%

$

6,045

 

100.0

%

$

3,953

 

100.0

%

 

Non Interest Income

 

Total non interest income increased by $3.8 million or 53.6% in 2012 to $10.7 million and decreased by $0.5 million or 6.5% in 2011 to $6.9 million as compared to $7.4 million in 2010. The increase in total non interest income in 2012 compared to 2011 was primarily the result of $2.5 million increase in net securities gains recognized for 2012 compared to the same period last year. Title fee income related to Bridge Abstract increased $0.6 million or 60.9% to $1.6 million for 2012 compared to $1.0 million for the same period in 2011. Fees for other customer services were $3.0 million and represented an increase of $0.4 million or 15.9% from $2.6 million for the same period last year, related to higher electronic banking and investment services income. Service charges on deposit accounts increased $0.2 million or 5.6% to $3.3 million for 2012 compared to $3.1 million for the same period in 2011. The decrease in total non interest income in 2011 compared to 2010 was due to a decrease in net securities gains of $1.2 million and a decrease in revenues from the title insurance abstract subsidiary, Bridge Abstract, of $0.1 million, partially offset by an increase in service charges on deposit accounts of $0.4 million and an increase of $0.4 million in fees for other customer services.

 

Net securities gains of $2.6 million were recognized in 2012 compared to net securities gains of $0.1 million and $1.3 million recognized in 2011 and 2010, respectively. The sales of securities were due to repositioning of the available for sale investment portfolio. Bridge Abstract, the Bank’s title insurance abstract subsidiary, generated title fee income of $1.6 million in 2012, $1.0 million in 2011, and $1.1 million in 2010, respectively. The increase of $0.6 million or 60.9% in 2012 compared to 2011 was directly dependent on the number and average value of transactions processed by the subsidiary.

 

Service charges on deposit accounts for the year ended December 31, 2012 totaled $3.3 million, an increase of $0.2 million as compared to 2011. For the year ended December 31, 2011, service charges on deposit accounts totaled $3.1 million, an increase of $0.4 million as compared to 2010. These increases primarily represented higher overdraft fees. Fees from other customer services increased $0.4 million or 15.9% to $3.0 million in 2012 as compared to $2.6 million in 2011. Fees from other customer services increased $0.4 million or 18.0% to $2.6 million in 2011 as compared to $2.2 million in 2010. These increases were predominately due to higher electronic banking and investment services.

 

Other operating income for the year ended December 31, 2012 totaled $0.1 million in line with 2011 and 2010.

 

Non Interest Expense

 

Total non interest expense increased $3.0 million or 9.5% to $33.8 million in 2012 compared to $30.8 million over the same period in 2011 and increased $2.9 million or 10.6% in 2011 from $27.9 million in 2010.  The primary components of these increases were higher salaries and employees benefits, occupancy and equipment, marketing and advertising, extinguishment of debt, other operating expenses and amortization of core deposit intangible partially offset by lower professional services and FDIC assessments. Additionally during 2011, acquisition costs of $0.8 million were incurred related to the HSB merger.

 

Salaries and benefits increased $2.7 million or 14.8% to $20.7 million in 2012 as compared to $18.0 million in 2011 and increased $2.0 million or 12.9% from $16.0 million as of December 31, 2010. The increases in salary and benefits reflect additional positions to support the Company’s expanding infrastructure, new branches and a larger loan portfolio, and the related employee benefit costs, particularly pension expense.

 

Occupancy and equipment increased $0.2 million or 3.7% to $4.5 million compared to $4.3 million in 2011 and increased $0.3 million or 8.8% from $4.0 million in 2010. Marketing and advertising expense increased $0.3 million or 23.3% to $1.6 million in 2012 from $1.3 million in 2011 and increased $0.2 million or 16.7% from $1.1 million in 2010. Higher occupancy and equipment expense and

 

 

 

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marketing and advertising expense in 2012 and 2011 relates to the Company’s increased branch network. Professional services decreased $0.2 million or 14.5% to $1.0 million in 2012 from $1.2 million in 2011 and increased $0.1 million or 5.8% in 2011 from $1.1 million in 2010. Data/item processing expense was $0.6 million and remained in line with 2011 and 2010 levels. FDIC assessments remained at $0.8 million as compared to 2011 and decreased $0.5 to $0.8 million from $1.3 million or 35.2% in 2011 from 2010. For 2011 the Company incurred acquisition costs of $0.8 million and recorded amortization of core deposit intangibles of $0.04 million in connection with the HSB merger. Amortization of core deposit intangibles was $0.07 million in 2012.

 

Cost on Extinguishment of debt for 2012 was $0.2 million related to the prepayment of a $5 million repurchase agreement. Other operating expenses increased $0.6 million or 10.2% to $6.2 million compared to $5.6 million in 2011 and remained at $5.6 in 2011 compared to 2010.

 

Income Tax Expense

 

Income tax expense for December 31, 2012 was $6.1 million representing an increase of $1.4 million from 2011. Income tax expense for 2011 was $4.7 million representing and increase of $0.6 million from 2010. The increase in 2012 was due to an increase in income before income taxes of $3.9 million to $18.9 million from $15.0 million in 2011. The effective tax rate was 32.3% for the year ended December 31, 2012 compared to 31.0% for the year ended December 31, 2011. The increase was related to a lower percentage of interest income from tax exempt securities. The effective tax rate for the year ended December 31, 2010 was 30.6%. The increase in the effective tax rate for 2011 compared to 2010 was related to nondeductible acquisition costs related to the HSB merger.

 

FINANCIAL CONDITION

 

The assets of the Company totaled $1.62 billion at December 31, 2012, an increase of $287.3 million or 21.5% from the previous year-end with growth funded by deposits, borrowings and capital. This increase reflects strong organic growth in new and existing markets.

 

Cash and due from banks increased $20.9 million or 80.8% to $46.9 million compared to December 2011 levels and interest earning deposits with banks decreased $49.2 million or 91.8% as funds were invested in loan and securities. Total securities increased $129.2 million or 21.2% to $739.8 million and net loans increased $182.7 million or 30.4% to $784.0 million compared to December 2011 levels. There were no loans held for sale in 2012 compared to loans held for sale in 2011 of $2.3 million. Loans held for sale in 2011 represented one relationship with two loans that was sold in January 2012 and recorded previously as nonaccrual troubled debt restructured loans. The ability to grow the investment and loan portfolios, while minimizing interest rate risk sensitivity and maintaining credit quality remains a strong focus of management. Goodwill of $2.0 million and core deposit intangible of $0.3 million were recorded in 2011 in connection with the HSB merger. Core deposit intangible decreased $0.1 to $0.2 million in 2012 compared to $0.3 million in 2011. Total deposits grew $221.1 million to $1.41 billion at December 31, 2012 compared to $1.19 billion at December 2011. The deposit growth occurred in all markets and included both new commercial and consumer relationships. Demand deposits increased $207.7 million to $529.2 million as of December 31, 2012 compared to $321.5 million at December 31, 2011. Savings, NOW and money market deposits increased $39.0 million to $722.9 million at December, 2012 from $683.9 million at December 31, 2011. Certificates of deposit of $100,000 or more decreased $21.9 million to $118.7 million at December 31, 2012 from $140.6 million at December 31, 2011. Other time deposits decreased $3.7 million to $38.5 million as of December 31, 2012 from $42.2 at December 31, 2011.

 

Fed funds purchased and Federal Home Loan Bank overnight borrowings at December 31, 2012 were $44.5 million. There were no Federal Funds purchased and Federal Home Loan Bank overnight borrowings for 2011. Federal Home Loan Bank term advances were $15.0 million for December 31, 2012. There were no Federal Home Loan Bank term advances for December 31, 2011. Repurchase agreements decreased $4.5 million to $12.4 million or 26.7% compared to $16.9 million as of December 31, 2011. Other liabilities and accrued expenses decreased $0.4 million to $8.7 million as of December 31, 2012 from $9.1 million as of December 31, 2011 due to decreases in deferred taxes.

 

Stockholders’ equity was $118.7 million at December 31, 2012, an increase of $11.7 million or 10.9% from December 31, 2011, reflecting the proceeds from the issuance of shares of common stock under the Dividend Reinvestment Plan of $10.5 million, share based compensation of $1.3 million, an increase in the pension liability of $0.3 million, and net income of $12.8 million, partially offset by $9.9 million in declared cash dividends and a decrease in the unrealized gains in securities of $3.0 million. In December 2012, due to the likelihood of a change in the tax rates on dividends beginning in 2013, the Company decided to accelerate the timing of the payment of the Company’s fourth quarter dividend to shareholders of $0.23 per share into calendar year 2012 resulting in five dividend payments in 2012. This continues the Company’s long term trend of uninterrupted dividends.

 

Loans

 

During 2012, the Company continued to experience growth trends in commercial and residential real estate lending. The concentration of loans in our primary market areas may increase risk. 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

 

 

 

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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 the Company’s control would impact these local economic conditions and could negatively affect the financial results of the Company’s operations. Additionally, while the Company has 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 the Company’s earnings.

 

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.

 

The Bank targets its business lending and marketing initiatives towards promotion of loans that primarily meet the needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, the results of operations and financial condition may be adversely affected.

 

With respect to the underwriting of loans, there are certain risks, including the risk of non-payment that is associated with each type of loan that the Bank markets. Approximately 74.1% of the Bank’s loan portfolio at December 31, 2012 is secured by real estate. Approximately 41.7% of the Bank’s loan portfolio is comprised of commercial real estate loans.  Multifamily loans represent 8.3% of the Bank’s loan portfolio. Residential real estate mortgage loans represent 18.0% of the Bank’s loan portfolio and include home equity lines of credit of approximately 8.5% and residential mortgages of approximately 9.5% of the Bank’s loan portfolio. Real estate construction and land loans comprise approximately 6.1% of the Bank’s loan portfolio. Risks associated with a concentration in real estate loans include potential losses from fluctuating values of land and improved properties. Home equity loans represent loans originated in the Bank’s geographic markets with original loan to value ratios generally of 75% or less. The Bank’s residential mortgage portfolio includes approximately $2.0 million in interest only mortgages. The underwriting standards for interest only mortgages are consistent with the remainder of the loan portfolio and do not include any features that result in negative amortization. The largest loan concentrations by industry are loans granted to lessors of commercial property both owner occupied and non-owner occupied. The Bank uses conservative underwriting criteria to better insulate itself from a downturn in real estate values and economic conditions on eastern Long Island that could have a significant impact on the value of collateral securing the loans as well as the ability of customers to repay loans.

 

The remainder of the loan portfolio is comprised of commercial and consumer loans, which represent approximately 25.9% of the Bank’s loan portfolio. The primary risks associated with commercial loans are the cash flow of the business, the experience and quality of the borrowers’ management, the business climate, and the impact of economic factors. The primary risks associated with consumer loans relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating economic conditions or the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral securing the loan if the Bank must take possession of the collateral. Consumer loans also have risks associated with concentrations of specific types of consumer loans within the portfolio.

 

The Bank’s policy for charging off loans is a multi-step process. A loan is considered a potential charge-off when it is in default of either principal or interest for a period of 90, 120 or 180 days, depending upon the loan type, as of the end of the prior month. In addition to date criteria, other triggering events may include, but are not limited to, notice of bankruptcy by the borrower or guarantor, death of the borrower, and deficiency balance from the sale of collateral. These loans identified are presented for evaluation at the regular meeting of the Credit Risk Committee. A loan is charged off when a loss is reasonably assured. The recovery of charged-off balances is actively pursued until the potential for recovery has been exhausted, or until the expense of collection does not justify the recovery efforts.

 

Total loans grew $186.3 million or 30.4%, during 2012 and $110.4 million or 21.9% during 2011. Average net loans grew $116.6 million or 21.0% during 2012 over 2011 and $93.2 million or 20.2% during 2011 when compared to 2010. Real estate mortgage loans were the largest contributor of the growth for both 2012 and 2011 and increased $96.2 million or 21.6% and $60.1 million or 15.6%, respectively. Commercial real estate mortgage loans grew $48.9 million or 17.2% during 2012 and multi-family mortgage loans grew $44.7 million or 208.8% during 2012. Commercial, financial and agricultural loans increased $81.1 million or 69.7% in 2012 from 2011 and increased $18.7 million or 19.1% in 2011 from 2010. Real estate construction and land loans increased $8.1 million or 20.0% in 2012 and increased $30.6 million or 308.4% in 2011. Installment/consumer loans increased $0.6 million or 7.0% in 2012 and decreased $1.1 million or 11.3% during 2011. Fixed rate loans represented 31.7%, 27.0% and 27.7% of total loans at December 31, 2012, 2011, and 2010, respectively.

 

 

 

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The following table sets forth the major classifications of loans:

 

December 31,

 

2012

 

2011

 

2010

 

2009

 

2008

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate mortgage loans

 

$

332,782

 

$

283,917

 

$

236,048

 

$

199,712

 

$

186,543

 

Multi-family loans

 

66,080

 

21,402

 

9,217

 

4,447

 

4,503

 

Residential real estate mortgage loans

 

143,703

 

141,027

 

140,986

 

123,013

 

125,813

 

Commercial, financial and agricultural loans

 

197,448

 

116,319

 

97,663

 

93,682

 

75,919

 

Real estate construction and land loans

 

48,632

 

40,543

 

9,928

 

19,347

 

29,094

 

Installment/consumer loans

 

9,167

 

8,565

 

9,659

 

7,352

 

7,545

 

Total loans

 

797,812

 

611,773

 

503,501

 

447,553

 

429,417

 

Net deferred loan costs and fees

 

634

 

370

 

559

 

485

 

266

 

 

 

798,446

 

612,143

 

504,060

 

448,038

 

429,683

 

Allowance for loan losses

 

(14,439

)

(10,837

)

(8,497

)

(6,045

)

(3,953

)

Net loans

 

$

784,007

 

$

601,306

 

$

495,563

 

$

441,993

 

$

425,730

 

 

Selected Loan Maturity Information

 

The following table sets forth the approximate maturities and sensitivity to changes in interest rates of certain loans, exclusive of real estate mortgage loans and installment/consumer loans to individuals as of December 31, 2012:

 

 

 

Within One
Year

 

After One
But Within
Five Years

 

After
Five Years

 

Total

 

(In thousands)

 

 

 

 

 

 

 

 

 

Commercial loans

 

$

51,903

 

$

69,653

 

$

75,892

 

$

197,448

 

Construction and land loans (1)

 

33,562

 

5,575

 

9,495

 

48,632

 

Total

 

$

85,465

 

$

75,228

 

$

85,387

 

$

246,080

 

 

 

 

 

 

 

 

 

 

 

Rate provisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts with fixed interest rates

 

$

16,956

 

$

57,438

 

$

28,103

 

$

102,497

 

Amounts with variable interest rates

 

68,509

 

17,790

 

57,284

 

143,583

 

Total

 

$

85,465

 

$

75,228

 

$

85,387

 

$

246,080

 

 

(1)         Included in the “After Five Years” column, are one-step construction loans that contain a preliminary construction period (interest only) that automatically converts to amortization at the end of the construction phase.

 

 

 

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Past Due, Nonaccrual and Restructured Loans

 

The following table sets forth selected information about past due, nonaccrual, restructured loans and other real estate owned:

 

December 31,

 

2012

 

2011

 

2010

 

2009

 

2008

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Loans 90 days or more past due and still accruing

 

$

491

 

$

411

 

$

 

$

 

$

 

Nonaccrual loans

 

2,262

 

2,156

 

1,997

 

1,001

 

3,068

 

Restructured loans - Nonaccrual

 

1,027

 

2,004

 

4,728

 

4,890

 

 

Restructured loans - Performing

 

5,039

 

4,904

 

3,219

 

3,229

 

3,229

 

Other real estate owned, net

 

250

 

 

 

 

 

Total

 

$

9,069

 

$

9,475

 

$

9,944

 

$

9,120

 

$

6,297

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended December 31,

 

2012

 

2011

 

2010

 

2009

 

2008

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Gross interest income that has not been paid or recorded during the year under original terms:

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

$

155

 

$

122

 

$

123

 

$

52

 

$

127

 

Restructured loans

 

84

 

436

 

255

 

189

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross interest income recorded during the year:

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

 

$

33

 

$

41

 

$

17

 

$

37

 

$

189

 

Restructured loans

 

226

 

241

 

105

 

288

 

238

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments for additional funds

 

 

 

 

 

 

 

The following table sets forth impaired loans by loan type:

 

December 31,

 

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