U.S. Securities and Exchange CommissionWashington, DC 20549 FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 Commission file Number 0-18546 BRIDGE BANCORP, INC NEW YORK 11-2934195 2200 Montauk Highway, Bridgehampton, New York 11932 Issuer's telephone number, including area code (631) 537-1000 Securities registered under Section 12 (g) of the Exchange Act: Common Stock, Par Value of $0.01 Per Share, (Title of Class) |
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No[ ]
The approximate market value of the voting stock helf by non-affiliates of the Registrant, based upon the closing price of the Common Stock on June 30, 2002, was $97,678,299.
TABLE OF CONTENTS
PART I
Item 1 Business 1
Item 2 Properties 3
Item 3 Legal Proceedings 3
Item 4 Submission of Matters to a Vote of Security Holders 3
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 4
Item 6 Selected Financial Data 5
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations 6
Item 7A Market Risk 19
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 41
PART III
Item 10 Directors and Executive Officers of the Registrant 41
Item 11 Executive Compensation 41
Item 12 Security Ownership of Certain Beneficial Owners and Management 41
Item 13 Certain Relationships and Related Transactions 41
PART IV
Item 14 Controls and Procedures 42
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8K 42
SIGNATURES 43
EXHIBIT INDEX 44
PART I
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 21, 2003, dated March 13, 2003, are incorporated by reference into Part III.
Item 1. Business
Bridge Bancorp, Inc. (the “Registrant” or “Company”) is a registered bank holding company, the sole subsidiary of which is The Bridgehampton National Bank (the “Bank”). The Registrant was organized as a New York business corporation and 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 the plan 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”). The assets transferred to BCI are viewed by the regulators as part of the Bank’s assets in consolidation. The establishment of BCI provides an additional vehicle for access by the Company to the capital markets for future investment purposes. In April 2002, the Bank capitalized a financial subsidiary, Bridgehampton Abstract Holding, LLC. This subsidiary, through its majority investment in Bridge Abstract, LLC, provides an opportunity for the Bank to offer title insurance. This financial subsidiary is not significant in terms of either assets or contributions to the Registrant’s results of operations for the year ended 2002.
At present, the Registrant does not own or lease any property and has no paid employees. The Registrant uses the Bank’s space and employees without separate payment.
The Bank was established in 1910 as a national banking association and is under the supervision of the Office of the Comptroller of the Currency (the “O.C.C.”). Its headquarters are located at 2200 Montauk Highway, Bridgehampton, New York 11932.
The Bank, a community-oriented financial institution, engages in full service commercial and consumer banking and limited trust business, including accepting time and demand deposits from the areas surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in (1) mortgages, secured and unsecured commercial and consumer loans; (2) mortgage backed securities; (3) obligations of New York State and local political subdivisions; and (4) U.S. government agency and treasury securities. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, online banking services, safe deposit boxes and individual retirement accounts.
The mission of the Company is to achieve excellence in financial performance and build long-term shareholder value through a steadfast commitment to our people, our customer relationships, and the community.
The business strategies, which are integral to the Company’s blueprint for growth, incorporate the following principles:
Building long-term relationships with our customers remains the cornerstone of the Bank’s brand. Key to the Bank’s ability to attract and retain customer relationships is the responsiveness of our senior management team, and a dedication to providing more for our customers in the way of products and services that keep pace. The development of lines of business that complement the Bank’s market niche is essential to the Bank’s success and overall business strategy. Outstanding customer service and an unwavering commitment to community involvement continue to be key to the Company’s corporate culture. We anticipate that this dedication will serve us well in the future.
With respect to the underwriting of loans, there are certain risks, including the risk of non-payment, that are associated with each type of loan that the Company markets. Risks associated with real estate loans include concentrations of loans in a loan type such as commercial real estate and fluctuating values of land and improved properties. The primary risks associated with commercial loans are the experience and quality of the borrower’s management, the business climate, the cash flow of the business 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 Company must take possession of the collateral. Consumer loans also have risks associated with concentrations of loans in a single type of loan.
The Company’s strategy in addressing and managing these types of risks is to follow its loan policies and underwriting practices, which include (i) granting loans on a sound and collectible basis; (ii) investing funds profitably for the benefit of the shareholders and the protection of depositors; (iii) understanding the needs of the business and the community and the Company’s general market area while maintaining a balance between maximum yield and minimum risk; (iv) ensuring that primary, secondary and tertiary sources of repayment are adequate in relation to the amount of the loan; (v) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category; (vi) ensuring that each loan is properly documented; and (vii) developing and applying adequate collection procedures.
The Company introduced a new corporate logo in June 2002. Its design reflects the synergy of a group of financial service companies, led by and including the Bank. The logo communicates the strength and stability of the Bank as a traditional banking provider and also the wider range of services provided by the companies that comprise The Bridge Group. The Bridge Group derives its name from the name of the holding company, Bridge Bancorp, Inc.
As part of the Company’s strategy to find ways to best utilize its available capital, during 2001 the Company instituted a stock repurchase plan repurchasing 117,590 shares of its common stock under the plan. In February 2002, the Company reapproved its stock repurchase plan allowing the repurchase of up to 5% of its current outstanding shares. The total number of treasury shares at December 31, 2002 was 139,611, or 3.3% of the total number of outstanding common shares of 4,117,986. At December 31, 2002, 61,264 shares remain to be repurchased under the current approved stock repurchase plan. In February 2003, the Company reaffirmed its stock repurchase program.
The Bank employs 113 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.
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. Most of these competitors are significantly larger than the Bank, and therefore have greater financial and marketing resources than those of the Bank. 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. The Bank’s market area is located on eastern Long Island, which is comprised of five towns: Riverhead, Southampton, East Hampton, Shelter Island and Southold. Although the Bank does maintain some customer relationships in Riverhead and Shelter Island towns, the majority of its customer base, and all of its branches are located in the towns of Southampton, East Hampton, and Southold. Population of the five towns in 2002 totaled 128,707. Excluding Riverhead and Shelter Island, the population was comprised of 56,254 residents in Southampton, 20,275 in East Hampton, and 21,015 in Southold. Population in these towns grew 1.35%, 1.76% and 0.86%, respectively, from 2001 to 2002. Median age of residents in 2002 was 40.4 in Southampton, 41.6 in East Hampton, and 44.7 in Southold. Median family income in 2002 was $65,144 in Southampton, $52,201 in East Hampton, and $61,108 in Southold.
Eastern Long Island is semi-rural. In recent years, the wine industry has matured, and currently there are approximately 25 vineyards located in the region. Surrounded by water and including the Hamptons, the region is a recreational destination for the New York metropolitan and surrounding areas. Retail establishments; construction and trades; restaurants, bars, lodging and recreation; and professional entities predominate among industries represented in this marketplace. Other industries that have grown significantly over the past five years include real estate, health services, wholesale distributors, and agricultural and related businesses. The vast majority of businesses are considered small businesses employing fewer than ten full-time employees, with most employing fewer than five. Key employers in the region include the municipalities, school districts, hospitals, and financial institutions.
The Registrant is subject to the regulation and supervision of the Federal Reserve Board and the Securities and Exchange Commission. The primary banking agency responsible for regulating the Bank is the Comptroller of the Currency. The Bank also is subject to regulation and supervision by the Federal Reserve Board and the Federal Deposit Insurance Corporation. Additional information on regulatory requirements is set forth in Note 11 to the Consolidated Financial Statements.
On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). This legislation impacts corporate governance of public companies, affecting their officers and directors, their audit committees, their relationships with their accountants and the audit function itself. Certain provisions of the Act became effective on July 30, 2002. Others will become effective as the SEC adopts appropriate rules.
The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate finance and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act’s principal legislation includes:
o the creation of an independent accounting oversight board to oversee the audit of public companies and auditors who perform such audits;
o auditor independence provisions which restrict non-audit services that independent accountants may provide to their audit clients;
o additional corporate governance and responsibility measures, including
(i) requiring the chief executive officer and chief financial officer to certify financial statements;
(ii) prohibiting trading of securities by officers and directors during periods in which certain employee benefit plans are prohibited from trading;
(iii) requiring a company's chief executive officer and chief financial officer to forfeit salary and bonuses, including profits on the sale of company securities, in certain situations; and
(iv) protecting whistleblowers and informants;
o expansion of the power of the audit committee, including the requirements that the audit committee
(i) have direct control of the engagement of the outside auditor,
(ii) be able to hire and fire the auditor, and
(iii) approve all non-audit services;
o expanded disclosure requirements, including accelerated reporting of stock transactions by insiders and the prohibition of most loans to directors and executive officers of non-financial institutions;
o mandatory disclosure by analysts of potential conflicts of interest; and
o a range of enhanced penalties for fraud and other violations.
Item 2. Properties
Facilities of the Registrant are located at 2200 Montauk Highway, Bridgehampton, New York in the Bank’s Main Office building. As such, the Registrant itself has no physical properties.
The Bank’s Main Office is owned in fee. The Bank also owns the building which houses its Southold Branch located at 54790 Main Road, Southold, New York. The Bank leases eight additional properties as branch locations at 425 County Road 39A, Southampton, New York; 26 Park Place, East Hampton, New York; 48 East Montauk Highway, Hampton Bays, New York; Mattituck Plaza, Main Road, Mattituck, New York; 218 Front Street, Greenport, New York; 94 Main Street, Southampton, New York; 2 Bay Street, Sag Harbor, New York; and 1 The Plaza, Montauk, New York. The Bank leases additional space at 184 Old Country Road, Riverhead, New York formerly used as a residential mortgage center. The Bank is currently subletting this space. In 2002, the Bank purchased property in the Village of Southampton, which it plans to construct a new branch office. Additionally, the Bank is currently in contract to buy fee title to two properties of which it intends to relocate a number of its leased branches.
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 financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK INFORMATION
The Company’s common stock is traded on the NASDAQ® over the counter bulletin board market under the symbol, “BDGE”. The following table details the quarterly high and low prices of the Company’s common stock and the dividends declared for such periods.
At December 31, 2002, the Company had approximately 710 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various banks and brokers.
COMMON STOCK INFORMATION
Stock Prices Dividends
High Low Declared
By Quarter 2002
First $20.700 $17.500 $0.15
Second $25.750 $19.450 $0.15
Third $26.000 $23.500 $0.15
Fourth $24.500 $22.000 $0.16
Stock Prices Dividends
High Low Declared
By Quarter 2001
First $17.500 $15.375 $0.13
Second $19.000 $17.000 $0.13
Third $20.000 $17.500 $0.14
Fourth $18.650 $17.500 $0.15
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, 2002 2001 2000 1999 1998
Selected Financial Data:
Securities available for sale (4) $182,416 $127,102 $115,537 $ 85,679 $ 70,526
Securities held to maturity (4) 11,023 16,159 11,314 12,290 3,969
Loans, net (4) 246,094 213,113 198,992 168,899 166,983
Total assets (4) 463,986 393,523 354,642 300,044 266,951
Total deposits 406,409 357,155 313,379 274,322 241,531
Total stockholders' equity (3) 39,971 32,861 28,788 23,672 22,232
Year Ended December 31,
Selected Operating Data:
Total interest income (including fee income) $ 26,486 $ 27,009 $ 25,458 $ 21,056 $ 19,019
Total interest expense 4,490 7,868 8,753 6,135 5,978
Net interest income 21,996 19,141 16,705 14,921 13,041
Provision for loan losses 220 323 105 420 425
Net interest income after provision
for loan losses 21,776 18,818 16,600 14,501 12,616
Total other income 3,405 2,419 1,734 2,264 2,671
Total other expenses 11,942 11,198 10,234 9,611 9,303
Income before income taxes 13,239 10,039 8,100 7,154 5,984
Provision for income taxes 4,722 3,292 2,464 2,387 2,089
Net income $ 8,517 $ 6,747 $ 5,636 $ 4,767 $3,895
December 31,
Selected Financial Ratios and Other Data:
Return on average equity (1) 25.93% 23.13% 21.86% 21.00% 19.19%
Return on average assets (1) 1.93% 1.74% 1.62% 1.59% 1.51%
Equity to assets (1) (4) 7.80% 7.87% 7.77% 8.15% 8.00%
Dividend payout ratio 29.57% 34.27% 36.83% 37.47% 38.05%
Diluted earnings per share (2) $2.05 $1.60 $1.32 $1.11 $0.91
Basic earnings per share (2) $2.07 $1.61 $1.33 $1.12 $0.92
Cash dividends declared per common share $0.61 $0.55 $0.49 $0.42 $0.35
(1) For purposes of these calculations, average stockholders' equity and average assets exclude the effect of changes in other comprehensive income, net of taxes.
(2) On July 20, 1998, the Board of Directors declared a three-for-one stock split in the form of a stock dividend payable August 31, 1998, to shareholders of record as of August 19, 1998. As a result, $14,439,990 was transferred from Undivided Profits and Capital Surplus at August 19, 1998 to reflect the issuance. All per share amounts have been adjusted to reflect the effects of this split.
(3) The equity section of the balance sheet also reflects the decrease in the par value of the Company's Common Stock from a par value of Five Dollars ($5.00) per share to a par value of One Cent ($0.01) per share. This change was authorized by the Board of Directors and adopted by the Shareholders at the Company's April 19, 1999 annual meeting. The change was effectuated during the second quarter of 1999 by filing an amendment to the Company's certificate of incorporation. Such reduction in par value permitted the Company to decrease its stated capital by approximately $21,203,000. Capital surplus increased by approximately $21,203,000, thereby providing the Company with the ability to allow payments of dividends from surplus if deemed advisable or necessary by the Board of Directors. Capital surplus has not been restated for prior periods. It should be realized, however, that as a practical matter the Company would only have the ability to pay out a moderate proportion of the aggregate increase in capital surplus as dividends since there are regulatory restrictions on the payment of dividends.
(4) Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This report, as well as other written communications made from time to time by the Company or the Bank and oral communications made from time to time by authorized officers of the Company or the Bank, 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," "estimates," and variations 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 with respect to earnings growth [on both accounting principles generally accepted in the United States of America ("GAAP") and cash basis]; revenue growth in retail banking, lending and other areas; origination volume in the Company`s consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from services and product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.
The Bank's annual results could differ materially from those management expectations contemplated by the forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, prevailing economic conditions, legislative and regulatory changes, 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, demand 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 and other economic, competitive, governmental, regulatory and technological factors affecting the Bank's operations, markets, products, services and prices. 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.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Consolidated Financial Statements for the year ended December 31, 2002 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.
Following is a description of our critical accounting policy and an explanation of the methods and assumptions underlying its application.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in our loan portfolio. We evaluate the adequacy of our allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. The allowance for loan losses has been determined in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies."
The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, delinquency trends, probable incurred losses, past loss experience, current economic conditions, and 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 SFAS No. 114, "Accounting by Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB Statement No. 114." Such evaluation, which includes a review of loans for which full collectibility is not reasonably assured, considers the estimated fair value of the underlying collateral, if any, current economic and regulatory conditions, current and historical loss experience of similar loans and other factors that determine risk exposure to arrive at an
adequate loan loss allowance for a specific 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; the estimates of the fair value of the underlying collateral; and the assessments of economic and regulatory conditions. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on commercial or secured consumer loans. The result of these analyses is the allocation of the overall allowance to individual valuation allowances for specific loans considered impaired.
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. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. Loan pool analyses are performed on the balance of the Bank's loan portfolio, primarily consisting of real estate loans as well as secured and unsecured commercial and consumer loans. The pools consist of aggregations of homogeneous loans having similar credit risk characteristics. Examples of pools defined by the Bank for this purpose are: home equity lines of credit, residential mortgages, commercial mortgages, consumer and commercial construction loans, commercial lines of credit and commercial installment loans and unsecured consumer loans. For each such defined pool there is a set of sub-pools based upon delinquency status, including: current, 30-59 days past due, 60-89 days past due, over 90 days past due and loans deemed classified by the Classification Committee of the Board of Directors. For each sub-pool, the Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in that pool of loans. These ranges are based upon a number of factors, including the risk characteristics of the pool, as well as probable and incurred loss and migration experience considering current economic conditions and industry norms. We also consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures. In addition, we evaluate and consider the impact that existing and projected 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. The ranges of loan pool valuation allowances developed by the Bank are applied to the outstanding principal balance of the loans in each pool and sub-pool; as a result, further allocations of the valuation allowance are made. 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.
The adequacy of the reserves are adjusted quarterly, to a level deemed appropriate by management, based on their risk assessment of the entire portfolio. Based on the Classification Committee's review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at December 31, 2002, management believes the allowance for loan losses has been established and maintained at levels adequate to reflect the probable losses incurred in our loan portfolio. While management uses available information to recognize losses on loans, future additions or reductions to the allowance may be necessary based on changes in economic or market 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 Bank's 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.
GENERAL
Bridge Bancorp, Inc. ("the Company"), a New York corporation, is a one-bank holding company formed effective March 31, 1989, and on a parent-only basis, had minimal results of operations for 2002, 2001 and 2000. In the event the Company subsequently expands its current operations, it will be 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 below 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. Interest income on loans and investments is a function of the average balances outstanding and the average rates earned during a period. Interest expense is a function of the average amount of interest bearing deposits and the average rates paid on such deposits during a period. The Bank also generates other income, such as fee income on deposit accounts and merchant credit and debit card processing programs, and net gains and losses on sales of securities and loans. The Bank's net income is further affected by the level of its other expenses, such as employees' salaries and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, the notes thereto and the other financial information included elsewhere in this filing. Certain reclassifications have been made to prior year amounts, and the related discussion and analysis, to conform to the current year presentation.
OVERVIEW
The record earnings performance in 2002 reflects multiple factors including: (a) the continued branch expansion program resulting in deposit growth to $406,409,000, a 13.8% increase over 2001, (b) maintenance of a strong net interest margin, (c) interest earning asset growth, (d) control over operating expenses, (e) continued strong credit quality, and (f) increased fee income. Each of these elements is discussed in the following sections. The Company continues to be dedicated to maintaining this performance through strategic planning and effective action to continue its goals. The Company's results of operations are significantly affected by general economic and competitive conditions (particularly changes in market interest rates), government policies, changes in accounting standards and actions of regulatory agencies. Management seeks to maintain the Company's asset quality for loans and other investments, and use appropriate portfolio and asset and liability management techniques in an effort to manage the effects of interest rate volatility on profitability and capital.
FINANCIAL CONDITION
The assets of the Company totaled $463,986,000 at December 31, 2002, an increase of $70,463,000 or 17.9% from the previous year-end. This increase mainly results from an increase in debt and equity securities of $50,178,000 or 35.0%, and an increase in total loans of $33,026,000 or 15.3%.
The Bank's loan portfolio consists primarily of real estate loans secured by commercial and residential properties located in the Bank's principal lending area. Interest rates charged by the Bank on loans are affected principally by market indices, competition, relationship and risk. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Total loans grew $33,026,000 or 15.3% since year end 2001. Average loans grew by $17,262,000 or 8.2% when compared to the prior year. Each component of the loan portfolio contributed to the growth; real estate mortgage loans increased $17,012,000 or 9.9%, real estate construction loans increased $3,736,000 or 42.5%, installment/consumer loans increased $1,862,000 or 30.3% and commercial and financial loans increased $10,411,000 or 36.8% since December 31, 2001. Growth in real estate loans is partially attributed to an increase in commercial mortgages and a marketing campaign promoting home equity loans.
The following table sets forth the major classifications of loans:
December 31, 2002 2001 2000 1999 1998
(In thousands)
Real estate mortgage loans $189,226 $172,214 $151,598 $128,643 $114,170
Commercial, financial, and
agricultural loans 38,692 28,281 28,475 24,918 20,381
Installment/consumer loans 8,011 6,149 6,838 4,714 6,973
Real estate construction loans 12,520 8,784 14,291 12,834 27,456
Total loans 248,449 215,428 201,202 171,109 168,980
Unearned income (61) (66) (110) (239) (284)
248,388 215,362 201,092 170,870 168,696
Allowance for loan losses (2,294) (2,249) (2,100) (1,971) (1,713)
Net loans $246,094 $213,113 $198,992 $168,899 $166,983
Selected Loan Maturity Information
The following table sets forth the approximate maturities and sensitivity to changes in interest rates of certain loans, exclusive of non-commercial real estate mortgages and consumer loans to individuals as of December 31, 2002.
After One
Within One But Within After
Year Five Years Five Years Total
(In thousands)
Commercial loans $4,086 $ 9,235 $101,407 $114,728
Construction loans (1) 1,025 1,715 7,248 9,988
Total loans $5,111 $10,950 $108,655 $124,716
Rate provisions:
Amounts with fixed interest rates $ - $ 5,399 $ 219 $ 5,618
Amounts with variable interest
rates 5,111 5,551 108,436 119,098
Total $5,111 $10,950 $108,655 $124,716
(1) included in the "After Five Years" column, are one-step construction loans that contain a preliminary construction period (interest only) that automatically convert to amortization at the end of the construction phase.
Past Due, Nonaccrual and Restructured Loans
The following table sets forth selected information about past due, nonaccrual and restructured loans.
December 31, 2002 2001 2000 1999 1998 (In thousands) Loans 90 days or more past due and still accruing $ - $ - $ - $ 1 $ 4 Nonaccrual loans 200 532 769 189 1,208 Restructured loans - - - 776 - Other real estate owned, net - - - - - Total $200 $532 $769 $966 $1,212
Year Ended December 31, Gross interest income that would have been recorded during the year under original terms: Nonaccrual loans $13 $ 66 $ 97 $63 $ 128 Restructured loans - - - - - Gross interest income recorded during the year: Nonaccrual loans $ 4 $ 17 $ 10 $ 4 $ 37 Restructured loans - - - - - Commitments for additional funds - - - - -
Total securities increased to $193,439,000 at December 31, 2002 from $143,261,000 at December 31, 2001. The available for sale portfolio increased 43.5% to $182,416,000 primarily as a result of increased holdings due to excess funds from increased deposits, and increases in principal repayments on loans and securities. Funds were deployed primarily into bullet agency securities and mortgage-backed securities, as the Bank filled out its liquidity ladder while maintaining shorter maturities in this historically low rate environment. Securities held as available for sale may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors. Obligations of U.S. Government Agencies increased to $57,965,000 at December 31, 2002 from $17,300,000 at December 31, 2001. The Bank continued to maintain its levels of mortgaged-backed securities, which represented approximately 48.2% of the available for sale balance at December 31, 2002.
December 31, 2002 2001 2000
(In thousands)
Gross Gross Estimated Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ - $ - $ - $ - $ - $ - $ - $ - $ 2,017 $ 15 $ - $ 2,032
Oblig. of U.S. Government agencies 55,683 2,282 - 57,965 17,073 235 (8) 17,300 6,944 106 - 7,050
Oblig. of NY State & pol. subs. 33,235 1,751 (3) 34,983 25,900 884 (9) 26,775 34,318 492 (29) 34,781
Mortgage-backed securities 84,716 3,136 - 87,852 79,264 2,370 (56) 81,634 68,923 1,724 (56) 70,591
Nonmarketable equity securities:
Federal Reserve Bank Stock 36 - - 36 36 - - 36 36 - - 36
Federal Home Loan Bank Stock 1,580 - - 1,580 1,357 - - 1,357 1,047 - - 1,047
Total available for sale 175,250 7,169 (3) 182,416 126,630 3,489 (17) 127,102 113,285 2,337 (85) $115,537
Held to maturity:
Oblig. of NY State & pol. subs. 11,023 9 - 11,032 16,159 59 - 16,218 11,314 17 - 11,331
Total held to maturity 11,023 9 - 11,032 16,159 59 - 16,218 11,314 17 - 11,331
Total debt and equity securities $186,273 $7,178 $ (3) $193,448 $139,789 $3,548 $ (17) $143,320 $124,599 $2,357 $(85) $126,868
The source of funds for the increase in assets was derived from increased deposits of $49,254,000 or 13.8%. There also was an increase in overnight borrowings of $12,300,000 from the prior year-end. Demand deposits increased $10,494,000 or 9.1%. This increase is attributed to growth in deposits partially associated with business development efforts in new and existing markets. Savings, N.O.W. and money market deposits increased $33,755,000 or 18.3%. This increase is primarily attributed to increased money market deposits both in public fund accounts and individual, partnership and corporate accounts. Certificates of deposit of $100,000 or more and other time deposits increased $5,005,000 or 8.7% over December 31, 2001.
Total stockholders’ equity was $39,971,000 at December 31, 2002, an increase of 21.6% over December 31, 2001. The increase of $7,110,000 was the result of net income for the year ended December 31, 2002 of $8,517,000; plus the proceeds of $62,000 from the exercise of incentive stock options pursuant to the equity incentive plan; plus $60,000 for the issuance of vested stock awards from treasury; less cash dividends declared of $2,518,000; less the purchase price of 57,000 shares of common stock which was acquired and is now held as treasury stock at a cost of $1,067,000; and plus the net increase in other comprehensive income, net of tax, of $2,056,000. Changes in market conditions were the primary reason for the net increase in unrealized appreciation in securities available for sale, which increased other comprehensive income.
ASSET AND LIABILITY MANAGEMENT
The Company’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits, and the credit quality of earning assets. Management’s asset and liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates.
The Company’s Asset and Liability Committee, comprised of members of senior management and the Board, meets quarterly to evaluate the impact of changes in market interest rates on assets and liabilities, net interest margin, capital and liquidity. Risk assessments are governed by policies and limits established by senior management which are reviewed and approved by the full Board of Directors. The economic environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be able to respond to changes in interest rates.
ANALYSIS OF 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 Bank’s average consolidated statements of financial condition and its consolidated statements of income for the years indicated and reflects 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 non-performing loans. The yields and costs include fees, which are considered adjustments to yields. Interest on non-accruing loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investment in debt and equity securities exclude unrealized appreciation/depreciation due to the application of SFAS No.115.
Year Ended December 31, 2002 2001 2000
(In thousands) Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Interest earning assets:
Loans (including fee income) $228,720 $17,485 7.6% $211,458 $18,188 8.6% $182,678 $17,012 9.3%
Mortgage backed securities 81,516 5,179 6.4 79,800 5,729 7.2 58,834 4,242 7.2
Tax exempt securities (1) 42,930 2,580 6.0 38,672 2,517 6.5 41,631 2,647 6.4
Taxable securities 41,913 1,798 4.3 12,693 793 6.2 16,866 1,099 6.5
Federal funds sold 16,909 295 1.7 15,025 498 3.3 14,944 948 6.3
Other securities 1,565 68 4.3 1,321 77 5.8 1,083 75 6.9
Deposits with banks 79 1 1.3 826 32 3.9 3,751 240 6.4
Total interest earning assets 413,632 27,406 6.6% 359,795 27,834 7.7% 319,787 26,263 8.2%
Non interest earning assets:
Cash and due from banks 15,685 14,176 13,196
Other assets 12,953 13,283 14,792
Total assets $442,270 $387,254 $347,775
Interest bearing liabilities:
Savings, N.O.W. and
money market deposits $225,278 $2,889 1.3% $186,011 $ 5,201 2.8% $155,680 $ 5,449 3.5%
Certificates of deposit
of $100,000 or more 24,038 706 2.9 25,296 1,181 4.7 29,779 1,665 5.6
Other time deposits 33,042 871 2.6 33,692 1,464 4.3 33,832 1,582 4.7
Federal funds purchased 965 17 1.8 479 19 4.0 859 57 6.6
Other borrowings 470 7 1.5 68 3 4.4 - - -
Total interest bearing
liabilities 283,793 4,490 1.6% 245,546 7,868 3.2% 220,150 8,753 4.0%
Non interest bearing liabilities:
Demand deposits 123,915 111,038 99,969
Other liabilities 1,712 1,498 1,870
Total liabilities 409,420 358,082 321,989
Stockholders' equity 32,850 29,172 25,786
Total liabilities and
stockholders' equity $442,270 $387,254 $347,775
Net interest income/interest
rate spread (1) 22,916 5.0% 19,966 4.5% 17,510 4.2%
Net earning assets/net yield on
average interest earnings
assets (2) $129,839 5.5% $114,249 5.6% $ 99,637 5.5%
Ratio of interest earning assets
to
Interest bearing liabilities 145.8% 146.5% 145.3%
Less: Tax equivalent adjustment (920) (825) (805)
Net interest income $21,996 $19,141 $16,705
(1) The above table is presented on a tax equivalent basis. Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. (2) Net interest margin represents net interest income divided by average interest-earning assets.
RATE/VOLUME ANALYSIS
Net interest income also can be analyzed in terms of the impact of changing rates and changing volumes. The following table illustrates the extent to which changes in interest rates and changes in the volume of 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) net changes. For purposes of this table, changes which are not due solely to volume changes or rate changes have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. Due to the numerous simultaneous volume and rate changes during the period analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average earning assets include nonaccrual loans.
Year Ended December 31, 2002 Over 2001 2001 Over 2000
Changes Due To Changes Due To
(In thousands) Volume Rate Net Change Volume Rate Net Change
Interest income on interest
earning assets:
Loans (including loan fee income) $1,455 $(2,158) $(703) $2,527 $(1,351) $1,176
Mortgage-backed securities 118 (668) (550) 1,487 - 1,487
Tax exempt securities (1) 265 (202) 63 (175) 45 (130)
Taxable securities 1,312 (307) 1,005 (258) (48) (306)
Federal funds sold 57 (260) (203) 5 (455) (450)
Other securities 13 (22) (9) 15 (13) 2
Deposits with banks (18) (13) (31) (138) (70) (208)
Total interest earning assets $3,202 $(3,630) $(428) $3,463 $(1,892) $1,571
Interest expense on interest
bearing liabilities:
Savings, N.O.W. and money market deposits $ 924 $(3,235) $(2,311) $ 953 $(1,201) $(248)
Certificates of deposits of $100,000 or more (55) (420) (475) (234) (250) (484)
Other time deposits (28) (566) (594) (17) (101) (118)
Federal funds purchased 13 (15) (2) (20) (18) (38)
Other borrowings 7 (3) 4 3 - 3
Total interest bearing liabilities $ 861 $(4,239) $(3,378) $ 685 $(1,570) $(885)
Net interest income $2,341 $ 609 $2,950 $2,778 $ (322) $2,456
(1) The above table is presented on a tax equivalent basis.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
General.
Net income for 2002 totaled $8,517,000, or $2.05 per share, as compared to net income of $6,747,000 or $1.60 per share for the year ended December 31, 2001. Net income for 2002 increased $1,770,000 or 26.2%, over 2001. Highlights include: (i) a $2,855,000 or 14.9% increase in net interest income; (ii) a $986,000 or 40.8% increase in total other income; and (iii) a $744,000 or 6.6% increase in total other expenses over the same period in 2001. The provision for income taxes increased $1,430,000 or 43.4%. In addition, net income reflects returns of 25.93% on average total stockholders' equity and 1.93% on average total assets as compared to the corresponding figures for December 31, 2001 of 23.13% on average total stockholders' equity and 1.74% on average total assets. For purposes of these calculations, average stockholders' equity excludes the effects of changes in other comprehensive income, net of taxes.
Net Interest Income.
Net interest income, the primary source of income, increased to $21,996,000 in 2002 from $19,141,000 in 2001. The increase of 14.9% reflects an increase in average interest earning assets to $413,632,000 in 2002 from $359,795,000 in 2001 or 15.0%. Average interest bearing liabilities increased to $283,793,000 in 2002 from $245,546,000 in 2001or 15.6%. The tax adjusted net yield on average interest earning assets decreased to 5.5% in 2002 from 5.6% in 2001.
Interest Income.
Total interest income decreased to $26,486,000 in 2002 from $27,009,000 in 2001, a decrease of 1.9%. The average yield on total interest earning assets for 2002 decreased to 6.6% from 7.7% for 2001.
Interest income on loans (including fee income) decreased $703,000 during 2002, as a result of a decrease in interest rates, offset by an increase in average loans of 8.2% to $228,720,000 in 2002 from $211,458,000 in 2001. The yield on average loans for 2002 decreased to 7.6% from 8.6% for 2001. Interest on investment in debt and equity securities increased $414,000 or 5.0% over 2001. The increase resulted from an increase in average investment in debt and equity securities of 26.7% to $167,924,000 in 2002 from $132,486,000 in 2001. The tax adjusted average yield on debt and equity securities decreased to 5.7% in 2002 from 6.9% in 2001.
Interest Expense.
Interest expense decreased $3,378,000 to $4,490,000 in 2002 from $7,868,000 in 2001. The decrease of 42.9% in interest expense was caused by the cost of average interest bearing liabilities decreasing to 1.6% during 2002 from 3.2% during 2001.
Provision for Loan Losses.
Total loans grew $33,026,000 or 15.3% since year end 2001. Average loans grew by $17,262,000 or 8.2% when compared to the prior year. Each component of the loan portfolio contributed to the growth, however, real estate mortgage loans were the primary contributor and increased $17,012,000 or 9.9%. Commercial loans increased $10,411,000 or 36.8% over December 31, 2001. Growth in real estate loans is partially attributed to an increase in commercial mortgages and a marketing campaign promoting home equity loans. Fixed rate loans represented 17.0% of total loans at December 31, 2002 and 22.5% of total loans at December 31, 2001.
The performance of the loan portfolio continued to be strong for the year ended December 31, 2002. Since December 31, 2001 non-performing loans decreased 62.4% from $532,000 to $200,000, representing 0.08% of loans, net, at December 31, 2002. The Company had no foreclosed real estate at December 31, 2002. Total non-performing assets represented 0.04% of total assets at the corresponding date.
By adherence to disciplined underwriting standards the Bank has minimized net losses from loans with net charge-offs of $155,000 for the year ended December 31, 2002. Net charge-offs for the year ended December 31, 2001 totaled $75,000. The Bank has maintained the strength of its loan portfolio, as evidenced by its ratio of allowance for loan losses to non-performing loans of 1147.0% and 422.7% at December 31, 2002 and 2001, respectively.
Loans of approximately $8,417,000 at December 31, 2002 were classified as potential problem loans, which represent 3.4% of total loans. These are loans for which management has information that indicates the borrower may not be able to comply with the present repayment terms. This was an increase from 2001 of $4,135,000, which represented 1.9% of total loans. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis. Management implemented an enhanced loan review analysis process during 2002, which assists in the early identification of problem loans. Due to the structure and nature of the credits, management is confident that the likelihood of sustaining a significant loss on these relationships is remote.
Based on management's continuing review of the overall loan portfolio and the current asset quality of the portfolio, a provision for loan losses of $220,000 was recorded in 2002. A $323,000 provision for loan losses was made for fiscal year end 2001. The allowance for loan losses increased to $2,294,000 at December 31, 2002, as compared to $2,249,000 at December 31, 2001. As a percentage of loans, the allowance was 0.92% at December 31, 2002 and 1.04% at December 31, 2001.
The following table sets forth changes in the allowance for loan losses.
December 31, 2002 2001 2000 1999 1998
(In thousands)
Allowance for loan losses
balance at beginning of period $2,249 $2,100 $1,971 $1,713 $1,393
Charge-offs:
Real estate mortgage loans 4 - 9 170 -
Commercial, financial and agricultural
loans 212 108 62 39 31
Installment/consumer loans 22 59 36 62 165
Total 238 167 107 271 196
Recoveries:
Real estate mortgage loans 8 29 58 - -
Commercial, financial and agricultural
loans 44 12 1 4 32
Installment/consumer loans 31 51 72 105 59
Total 83 92 131 109 91
Net charge-offs (recoveries) 155 75 (24) 162 105
Provision for loan losses
charged to operations 220 323 105 420 425
Balance before reclass to other
liabilities 2,314 2,348 2,100 1,971 1,713
Net change in other liabilities portion
allocated to off balance sheet items (20) (99) - - -
Balance at end of period $2,294 $2,249 $2,100 $1,971 $1,713
Ratio of net charge-offs during period
to average loans outstanding 0.07% 0.04% (0.01%) 0.10% 0.07%
Allocation of Allowance for Loan Losses.
The following table sets forth the allocation of the total allowance for loan losses by loan type.
Year Ended December 31, 2002 2001 2000 1999 1998
(In thousands) Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial, financial and
agricultural loans $591 15.6% $505 13.1% $560 14.2% $565 14.6% $421 12.0%
Real estate construction loans 227 5.0% 337 4.1% 305 7.1% 287 7.5% 430 16.3%
Real estate mortgage loans 1,160 76.2% 1,160 79.9% 1,031 75.3% 910 75.1% 659 67.6%
Installment/consumer loans 316 3.2% 247 2.9% 204 3.4% 209 2.8% 203 4.1%
Total $2,294 100.0% $2,249 100.0% $2,100 100.0% $1,971 100.0% $1,713 100.0%
Other Income.
Other income increased by $986,000 or 40.8% to $3,405,000 in 2002 compared to $2,419,000 in 2001. Service charges on deposit accounts for the year ended December 31, 2002 totaled $2,024,000, an increase of $662,000 or 48.6% over 2001. This increase is primarily attributed to an increase in service charge fees implemented in February 2002 and a decrease in the volume of waived fees during 2002. There were no net gains on securities during 2002 while net gains on securities of $78,000 were recognized in 2001. Fees for other customer services for the year ended December 31, 2002 totaled $1,280,000, an increase of $405,000 or 46.3% over 2001. This increase is partially attributed to merchant processing income due to an increase in the volume of merchant sales. Additionally during 2002, all ATM cards were converted to ATM/debit cards producing higher fee income.
Other operating income for the year ended December 31, 2002 totaled $101,000, a decrease of $3,000 or 2.9% over the last year. This decrease is due to the receipt of an insurance recovery resulting from a prior year loss totaling approximately $51,000 that was recognized during the second quarter of 2001.
Other Expenses. Other expenses increased by $744,000 or 6.6% to $11,942,000 in 2002 from $11,198,000 in 2001. The components of this change included an increase in salaries and employee benefits of $220,000 or 3.6%, reflecting salary and benefit increases and increased staffing, primarily for the new branch office in Hampton Bays that was staffed in the second quarter of 2002 and opened in July 2002; an increase in net occupancy expense of $107,000 or 10.4%; and an increase in furniture and fixture expense of $91,000 or 10.3%. Increases in net occupancy, as well as furniture and fixture expense, were partially attributed to the cost associated with the new branch offices. This increase also is attributed to depreciation expense of management information systems that were purchased during 2001 and the first quarter of 2002. Systems were purchased partially due to the introduction of consumer Internet banking. Increased advertising also attributed to this change as the Bank actively marketed its new branch network and product offerings.
Included in employee benefits is the expense of $155,000 and $100,000 for December 31, 2002 and 2001, respectively, related to a non-contributory pension plan covering all of the Bank’s eligible employees. See Note 7.a to the Consolidated Financial Statements. The pension expense is based upon a standard set of assumptions: discount rate, salary scale and the expected return on assets. The Bank continually reviews these assumptions to ensure the appropriate expense is recorded and a correct level of funding is maintained. Various factors were reviewed including, but not limited to Moody’s ratings, U.S. Treasury rates, and other trends.
Other operating expenses for the year ended December 31, 2002 totaled $2,863,000, an increase of $292,000 or 11.4% over the prior year. Increases were attributable to stationery costs as a result of the new logo as well as increases in consulting expenses.
Provision for Income Taxes.
The provision for income taxes increased to $4,722,000 for 2002 from $3,292,000 for 2001. This increase was due to income before income taxes increasing to $13,239,000 in 2002 from $10,039,000 in 2001. The effective tax rate for the year ended December 31, 2002 was 36% as compared to the prior year rate of 33%. This increase primarily results from the Bank holding less tax-exempt securities, and a reduction in the consolidated subsidiary’s income as a percentage of total income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General.
Net income for 2001 totaled $6,747,000, or $1.60 per share, as compared to net income of $5,636,000 or $1.32 per share for the year ended December 31, 2000. Net income for 2001 increased $1,111,000 or 19.7%, over 2000. Highlights include: (i) a $2,436,000 or 14.6% increase in net interest income; (ii) an increase in the provision for loan losses of $218,000; (iii) a $685,000 or 39.5% increase in total other income; and (iv) a $964,000 or 9.4% increase in total other expenses over the same period in 2000. The provision for income taxes increased $828,000 or 33.6%.
Net Interest Income.
Net interest income increased from $16,705,000 in 2000 to $19,141,000 in 2001. The increase of 14.6% reflects an increase in average interest earning assets from $319,787,000 in 2000 to $359,795,000 in 2001 or 12.5%. Average interest bearing liabilities increased from $220,150,000 in 2000 to $245,546,000 in 2001or 11.5%. The tax adjusted net yield on average interest earning assets for 2001 increased to 5.6% from 5.5% for 2000.
Interest Income.
Total interest income increased from $25,458,000 in 2000 to $27,009,000 in 2001, an increase of 6.1%. The tax adjusted yield on average interest earning assets for 2001 decreased to 7.7% from 8.2% for 2000.
Interest income on loans (including fee income) increased $1,176,000 during 2001 the result of an increase in average loans of 15.8% from $182,678,000 in 2000 to $211,458,000 in 2001. The yield on average loans for 2001 decreased to 8.6% from 9.3% for 2000. Interest on investment in debt and equity securities increased $1,033,000 or 14.2% over 2000. The increase resulted from an increase in average investment in debt and equity securities of 11.9% from $118,414,000 in 2000 to $132,486,000 in 2001. The tax adjusted average yield on debt and equity securities increased from 6.8% in 2000 to 6.9% in 2001.
Interest Expense.
Interest expense decreased $885,000 to $7,868,000 in 2001 from $8,753,000 in 2000. The decrease of 10.1% in interest expense was caused by the cost of average interest bearing liabilities decreasing to 3.2% during 2001 from 4.0% during 2000.
Provision for Loan Losses.
The Bank’s loan portfolio consists primarily of real estate loans secured by commercial real estate properties and residential properties located in the Bank’s principal lending area. The interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by its competitors. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Total loans grew $14,270,000 or 7.1% since fiscal year end 2000. Average loans grew by $28,780,000 or 15.8% when compared to the prior year. Each component of the loan portfolio contributed to the growth, however, real estate loans increased $15,106,000 or 9.1% while all other loans decreased $880,000 or 2.5% over December 31, 2000. Growth in real estate loans is partially attributed to a change in holding strategy whereby originated variable rate residential mortgages are held in portfolio instead of being sold on the secondary market, and a marketing campaign promoting home equity loans.
The performance of the loan portfolio continued to be strong for the twelve months ended December 31, 2001. Since December 31, 2000 non-performing loans decreased 44.6% from $769,000 to $532,000, representing 0.25 % of loans, net, at December 31, 2001. The Company had no foreclosed real estate at December 31, 2001. Total non-performing assets represented 0.14% of total assets at the corresponding date.
By adherence to its disciplined underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge offs of $75,000 for the year ended December 31, 2001, as opposed to net recoveries of $24,000 for the year ended December 31, 2000. The Bank has maintained the strength of its loan portfolio, as evidenced by its ratio of allowance for loan losses to non-performing loans of 422.7% and 273.1% at December 31, 2001 and 2000, respectively.
Loans of approximately $4,282,000 at December 31, 2001 were classified as potential problem loans. These are loans for which management has information, which indicates the borrower may not be able to comply with the present payment terms. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis.
Based on management’s continuing review of the overall loan portfolio and the current asset quality of the portfolio, a provision for loan losses of $323,000 was recorded in 2001. A $105,000 provision for loan losses was made for fiscal year end 2000. The allowance for loan losses increased to $2,249,000 at December 31, 2001, as compared to $2,100,000 at December 31, 2000. As a percentage of loans, the allowance was 1.04% at December 31, 2001 and 2000.
The Bank seeks to maintain its loans in performing status through, among other things, consistent monitoring of non-performing assets in an effort to return them to current status. The Bank also monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, delinquency trends, probable losses, past loss experience, current economic conditions, concentrations of credit. and other pertinent factors. Weight is also given to input from the Bank’s outside loan review consultants. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance. Based on management’s and the loan classification committee’s determination of the condition of the portfolio, the overall level of reserves is periodically adjusted to account for the inherent and specific risks within the entire portfolio. At minimum, the adequacy of these reserves are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee’s review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2001, management believes the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of the information available to them at the time of their examination.
Other Income.
Other income increased by $685,000 or 39.5% to $2,419,000 in 2001 compared to $1,734,000 in 2000. Service charges on deposit accounts for the year ended December 31, 2001 totaled $1,362,000, an increase of $305,000 or 28.9% over 2000. This increase is attributed to a change, in January of 2001, in the process of charging fees for checks drawn on non-sufficient funds and returned checks. Net gains on securities of $78,000 were recognized in 2001 compared to net losses of $255,000 in 2000, an increase of $333,000 or 130.6%. These fluctuations in the net gains and losses in securities sales result from management selling a portion of the lowest yielding securities in the available for sale investment portfolio during the second quarter of 2000 and the first quarter of 2001 and reinvesting the funds in securities earning current market rates of return.
Fees for other customer services for the year ended December 31, 2001 totaled $875,000, an increase of $100,000 or 12.9% over 2000. This increase is attributed to an increase in merchant processing income due to an increase in the volume of merchant sales during 2001 and fees received through the continued marketing of a new debit card product introduced during the third quarter of 1999.
Other operating income for the year ended December 31, 2001 totaled $104,000, a decrease of $53,000 or 33.8% over the last year. This decrease is primarily due to a decrease in income from the gain on the sale of mortgages of $106,000 or 89.7% partially offset by an insurance recovery resulting from a prior year loss totaling approximately $51,000 that was recognized during the second quarter of 2001. During the prior year, the Bank continued to sell mortgages into the secondary market as they converted from the construction phase to permanent mortgages. As these loans run off, the Bank instituted a change in strategy whereby originated variable rate residential mortgages are held in portfolio instead of being sold on the secondary market.
Other Expenses.
Other expenses increased by $964,000 or 9.4% to $11,198,000 in 2001 from $10,234,000 in 2000. The components of this change included an increase in salaries and employee benefits of $749,000 or 13.9% reflecting salary and benefit increases and increased staffing, primarily for the new branch office in Sag Harbor that the Bank opened in the first quarter of 2001; an increase in net occupancy expense of $143,000 or 16.1%; and an increase in fixed asset expense of $67,000 or 8.2%. Increased net occupancy expense resulted from the leasing of space for the new branch office in Sag Harbor. The increase in furniture and fixture expense is attributed to the depreciation of item processing assets located at the main office and fixed assets for the new branch offices in Greenport, opened during the second quarter of 2000, and Sag Harbor, opened in the first quarter of 2001.
Total other operating expenses for the year ended December 31, 2001 totaled $2,571,000, an increase of $67,000 or 2.7% over the prior year. During the second half of 2001, the Bank wrote off approximately $160,000 resulting from charge back losses on one merchant processing vendor. At this time, the Bank does not foresee further losses relative to this merchant as materially affecting earnings. During the first quarter of 2000, the Company had incurred nonrecurring set up costs to bring the item processing function in house. Expenses paid to a former vendor of these services remained high during the transition period. With more item processing transactions now being conducted in house, the fees paid to this vendor, as well as the item processing printing costs, are steadily declining. Item processing fees paid to an outside vendor decreased $75,000 or 93.2 % to $6,000 in 2001 from $81,000 in 2000.
Provision for Income Taxes.
The provision for income taxes increased to $3,292,000 for 2001 from $2,464,000 for 2000. This increase was due to income before income taxes increasing from $8,100,000 in 2000 to $10,039,000 in 2001. The effective tax rate for the year ended December 31, 2001 was 33% as compared to the prior year rate of 30%. This increase primarily results from the Bank holding less tax-exempt securities, and a reduction in the consolidated subsidiary’s income as a percentage of total income.
LIQUIDITY
The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments. Liquidity management addresses the ability to meet deposit withdrawals either on demand or contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise.
The Company’s principal source of liquidity is dividends from the Bank. Due to regulatory restrictions (see Note 1.k to the Consolidated Financial Statements), dividends from the Bank to the Company at December 31, 2002 were limited to $11,656,000, which represents the Bank’s 2002 retained net income and the net undivided profits from the previous two years. The dividends received from the Bank are used primarily for dividends to the shareholders. In the event the Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.
The Bank’s most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent upon the Bank’s operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and security principal repayments and maturities, growth in the core deposit base, and lines of credit with other financial institutions including the Federal Home Loan Bank. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and asset prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as deposit outflows, loans, asset and liability objectives and suggested O.C.C. measurements such as loan to capital ratios. Historically, the Bank has relied on its deposit base, drawn from its market area through its branch offices, as its principal source of funding. Although the Bank seeks to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to its customers, the Bank also strives to manage the overall cost of the funds needed to finance its strategies. At December 31, 2002, the Bank had aggregate lines of credit of $37,000,000 with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $17,000,000 is available on an unsecured basis; as of December 31, 2002, the Bank had $4,300,000 in such borrowings outstanding. The Bank also has the ability, as a member of the Federal Home Loan Bank (“FHLB”) system, to borrow against its unencumbered residential mortgages owned by the Bank. At December 31, 2002, the Bank was borrowing $8,000,000 from the FHLB. The Bank also has a master repurchase agreement with the FHLB, which further increased its borrowing capacity. In addition, the Bank has an approved broker relationship for the purpose of issuing brokered certificates of deposit under its contingency funding plan. The Bank does not anticipate the need to borrow under the master repurchase agreement or brokered certificates of deposit in the near future.
The Company’s liquidity positions are monitored daily to ensure the maintenance of an optimum level and efficient use of available funds. Excess short-term liquidity is invested in overnight federal funds sold. Management believes the Company has sufficient liquidity to meet its operating requirements.
CAPITAL RESOURCES
As a result of undistributed net income, plus the change in net unrealized appreciation in securities available for sale, net of tax, and the issuance of shares of common stock pursuant to the equity incentive plan, the Company’s stockholders’ equity increased to $39,971,000 at December 31, 2002 from $32,861,000 at December 31, 2001. The ratio of stockholders’ equity to total assets increased to 8.61% at year end 2002 from 8.35% at year end 2001.
Loan commitments outstanding as of December 31, 2002 totaled approximately $62,407,000. The funding of such commitments is derived from the primary sources of liquidity stated previously. See Note 9.c to the Consolidated Financial Statements for a discussion of loan commitments.
The following represents commitments outstanding at December 31, 2002:
Total
Amounts Less than One to Four to Over Five
Committed One Year Three Years Five Years Years
(In thousands)
Operating Leases $1,653 $ - $1,080 $ 245 $328
Standby letters of credit 2,817 2,141 676 - -
Loan commitments outstanding 4,720 4,720 - - -
Unused equity lines 27,312 2,508 6,338 18,306 160
Unused construction lines 4,211 75 1,389 - 2,747
Unused lines of credit 18,105 12,760 3,302 533 1,510
Unused overdraft lines 8,059 5,452 2,454 153 -
Total commitments outstanding $66,877 $27,656 $15,239 $19,237 $4,745
The Company exceeds the risk-based capital adequacy ratio levels required by the regulatory agencies (see Note 11 to the Consolidated Financial Statements). Management believes that the current capital levels along with future retained earnings will allow the Bank to maintain a position exceeding required levels more than adequate to meet the growth of the Bank or any higher ratios required by the discretionary authority of the regulators. The Company has the ability to issue additional common stock should the need arise.
The Company had return on average equity of 25.93%, 23.13%, and 21.86%, and return on average assets of 1.93%, 1.74%, and 1.62% for the years ended December 31, 2002, 2001, and 2000, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and notes thereto presented herein have been prepared in accordance with GAAP, which require the measurements of financial position and operating results in historical dollars, or current value, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Company’s operations. Unlike industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods or services.
IMPACT OF PROSPECTIVE ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to Note 1.o of Notes to Consolidated Financial Statements.
Item 7A. Market Risk
Significant increases in the level of market interest rates may adversely affect the fair value of securities and other interest earning assets. At December 31, 2002, $190,383,000 or 98.0% of the Company’s securities had fixed interest rates. Generally, the value of fixed rate instruments fluctuates inversely with the changes in interest rates. As a result, increases in interest rates could result in decreases in the market value of interest earning assets, which could adversely affect the Company’s results of operations if sold or, in the case of interest earning assets classified as available for sale, the Company’s stockholders’ equity if retained. Increases in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans originated by the Company and the average life of loans and securities, which can impact the yields earned on the Company’s loans and securities. In periods of decreasing interest rates, the average life of loans held by the Company may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets.
The Company utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure to net interest income to sustained interest rate changes. Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. The simulation model captures the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on the Company’s Statement of Condition. This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one year horizon given both a 200 basis point upward and downward shift in interest rates. Because of the current historically low rate environment, the simulation modeled was a 100 basis point shift downward at December 31, 2002. A parallel and pro rata shift in rates over a twelve-month period is assumed. The following reflects the Company’s net interest income sensitivity analysis at December 31, 2002 and 2001:
Change in Interest 2002 2001
Rates in Basis Potential Change Potential Change
Points in Net in Net
(RATE SHOCK) Interest Income Interest Income
$ Change % Change $ Change % Change
200 $(921,000) (4.04)% $ 197,000 1.05%
Static - - - -
(100) $ 421,000 1.85% $ (442,000) (2.36)%
(200) - - $(1,312,000) (6.99)%
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. While assumptions are developed based upon perceived current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change.
Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to or anticipating changes in interest rates.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share amounts)
December 31, December 31,
2002 2001
ASSETS
Cash and due from banks $10,706 $10,813
Interest earning deposits with banks 101 50
Federal funds sold - 13,500
Total cash and cash equivalents 10,807 24,363
Investment in debt and equity securities, net:
Securities available for sale, at fair value 182,416 127,102
Securities held to maturity (fair value of $11,032 and $16,218, respectively) 11,023 16,159
Total investment in debt and equity securities, net 193,439 143,261
Loans 248,388 215,362
Less:
Allowance for loan losses (2,294) (2,249)
Loans, net 246,094 213,113
Banking premises and equipment, net 9,827 8,781
Accrued interest receivable 2,608 2,153
Other assets 1,211 1,852
Total Assets $463,986 $393,523
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $125,560 $115,066
Savings, N.O.W. and money market deposits 218,016 184,261
Certificates of deposit of $100,000 or more 29,806 22,993
Other time deposits 33,027 34,835
Total deposits 406,409 357,155
Overnight borrowings 12,300 -
Accrued interest on depositors' accounts 1,142 625
Other liabilities and accrued expenses 4,164 2,882
Total Liabilities 424,015 360,662
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized: 20,000,000 shares; 4,257,597 issued; 4,117,986 and 4,166,264 shares
outstanding at December 31, 2002
and 2001, respectively 43 43
Surplus 21,125 21,154
Undivided profits 17,239 11,240
Less: Treasury Stock at cost, 139,611 and 91,333 shares at December 31, 2002 and 2001,
respectively (2,524) (1,608)
35,883 30,829
Accumulated other comprehensive income (loss):
Net unrealized gain on securities, net of taxes of $2,834,000 and $1,387,000 at December
31, 2002 and 2001, 4,333 2,085
respectively
Net minimum pension liability, net of taxes of $160,000 and $35,000 at December 31, 2002
and 2001, respectively (245) (53)
Total Stockholders' Equity 39,971 32,861
Total Liabilities and Stockholders' Equity $463,986 $393,523
See the accompanying notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31, 2002 2001 2000
Interest income:
Loans (including fee income) $17,485 $18,188 $17,012
Mortgage-backed securities 5,179 5,729 4,242
U.S. Treasury and government agency
securities 1,798 793 1,099
State and municipal obligations, tax
exempt 1,660 1,692 1,842
Federal funds sold 295 498 948
Other securities 68 77 75
Deposits with banks 1 32 240
Total interest income 26,486 27,009 25,458
Interest expense:
Savings, N.O.W. and money market deposits 2,889 5,201 5,449
Other time deposits 871 1,464 1,582
Certificates of deposit of $100,000 or
more 706 1,181 1,665
Federal funds purchased 17 19 57
Other borrowed money 7 3 -
Total interest expense 4,490 7,868 8,753
Net interest income 21,996 19,141 16,705
Provision for loan losses 220 323 105
Net interest income after provision for
loan losses 21,776 18,818 16,600
Other income:
Service charges on deposit accounts 2,024 1,362 1,057
Fees for other customer services 1,280 875 775
Net securities gains/(losses) - 78 (255)
Other operating income 101 104 157
Total other income 3,405 2,419 1,734
Other expenses:
Salaries and employee benefits 6,365 6,145 5,396
Net occupancy expense 1,136 1,029 886
Furniture and fixture expense 974 883 816
Data/Item processing 249 227 287
Advertising 355 343 345
Other operating expenses 2,863 2,571 2,504
Total other expenses 11,942 11,198 10,234
Income before provision for income taxes 13,239 10,039 8,100
Provision for income taxes 4,722 3,292 2,464
Net income $ 8,517 $ 6,747 $5,636
Basic earnings per share $ 2.07 $ 1.61 $ 1.33
Diluted earnings per share $ 2.05 $ 1.60 $ 1.32
See accompanying notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
Accumulated
Other
Common Stock Comprehensive
Shares Comprehensive Undivided Treasury Income
Outstanding Amount Surplus Income(1) Profits Stock (Loss) Total
Balance at December 31, 1999 4,257,597 $ 43 $21,261 $3,233 $ - $ (865) $23,672
Net income - - - $5,636 5,636 - - 5,636
Purchase of treasury stock (40,000) (653) (653)
Cash dividends declared, $0.49 per share - - - (2,076) - (2,076)
Net change in unrealized appreciation in securities
available
for sale, net of tax - - - 2,209 - - 2,209 2,209
Comprehensive Income - - - $7,845 - - - -
Balance at December 31, 2000 4,217,597 43 21,261 6,793 (653) 1,344 28,788
Net income - - - $6,747 6,747 - - 6,747
Purchase of treasury stock (70,590) - - (1,264) (1,264)
Issuance of vested stock awards from treasury 1,782 29 29
Exercise of stock options, and related tax benefit 17,475 (107) 12 280 185
Cash dividends declared, $0.55 per share (2,312) (2,312)
Other comprehensive income, net of tax
Net change in unrealized appreciation in securities
available for sale - - - 741 - - 741 741
Minimum pension liability adjustment - - - (53) - - (53) (53)
Comprehensive Income - - - $7,435 - - - -
Balance at December 31, 2001 4,166,264 43 21,154 11,240 (1,608) 2,032 32,861
Net income - - - $8,517 8,517 - - 8,517
Purchase of treasury stock (57,000) - - (1,067) (1,067)
Issuance of vested stock awards from treasury 3,222 7 53 60
Exercise of stock options, and related tax benefit 5,500 (36) 98 62
Cash dividends declared, $0.61 per share (2,518) (2,518)
Other comprehensive income, net of tax
Net change in unrealized appreciation in securities
available for sale - - - 2,248 - - 2,248 2,248
Minimum pension liability adjustment - - - (192) - - (192) (192)
Comprehensive Income - - - $10,573 - - - -
Balance at December 31, 2002 4,117,986 $ 43 $21,125 $17,239 $(2,524) $ 4,088 $39,971
(1) Disclosure of reclassification amount:
December 31, 2002 2001 2000
Comprehensive Income Items
Unrealized gain/(loss) arising during the period, net $2,248 $788 $2,057
of tax
Less: reclassification adjustment, net of taxes,
For losses/(gains) included in income - (47) 152
$2,248 $741 $2,209
See accompanying notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2002 2001 2000
Operating activities:
Net Income $8,517 $ 6,747 $ 5,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 220 323 105
Depreciation and amortization 982 923 838
Accretion of discounts (418) (275) (134)
Amortization of premiums 2,036 239 152
Earned or allocated expense of restricted stock
awards 60 58 35
SERP funding 107 97 -
Loss on the sale of assets - 6 -
Net securities (gains) losses - (78) 255
(Increase) decrease in accrued interest receivable (455) 12 (308)
Benefit (provision) for deferred income taxes 21 (133) 76
Decrease (increase) in other assets 629 (460) 141
Increase in accrued interest and other
liabilities and accrued 3 26 338
Net cash provided by operating activities 11,702 7,485 7,134
Investing activities:
Purchases of securities available for sale (99,930) (44,952) (49,602)
Purchases of securities held to maturity (12,946) (16,469) (11,314)
Proceeds from sales of securities available for sale - 9,747 15,541
Proceeds from maturing securities available for sale 10,385 3,455 1,085
Proceeds from maturing securities held to maturity 17,859 11,314 12,290
Proceeds from principal payments on mortgage-backed
securities 36,534 21,831 6,562
Net increase in loans (33,201) (14,345) (30,198)
Purchases of banking premises and equipment, net of
retirements (2,028) (500) (1,583)
Net cash used by investing activities (83,327) (29,919) (57,219)
Financing activities:
Net increase in deposits 49,254 43,776 39,057
Increase (decrease) in other borrowings 12,300 (9,700) 9,700
Payment for the purchase of treasury stock (1,067) (1,264) (653)
Net proceeds from exercise of stock options
issued pursuant to equity incentive plan 62 173 -
Cash dividends paid (2,480) (2,232) (1,996)
Net cash provided by financing activities 58,069 30,753 46,108
(Decrease) increase in cash and cash equivalents (13,556) 8,319 (3,977)
Cash and cash equivalents beginning of period 24,363 16,044 20,021
Cash and cash equivalents end of period $10,807 $24,363 $16,044
Supplemental Information-Cash Flows:
Cash paid for:
Interest $ 3,973 $ 8,029 $ 8,728
Income taxes $ 3,526 $ 3,425 $ 2,290
Noncash investing and financing activities:
Dividends declared and unpaid $ 659 $ 631 $ 548
See accompanying notes to the Consolidated Financial
Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bridge Bancorp, Inc. (the “Company”) is chartered by the State of New York as a single bank holding company. The Company’s business currently consists of the operations of its wholly-owned subsidiary, The Bridgehampton National Bank (the “Bank”). The Bank includes its real estate investment trust subsidiary, Bridgehampton Community, Inc. and a financial subsidiary, Bridgehampton Abstract Holding, LLC, which has a majority investment in Bridge Abstract, LLC. The accounting and reporting policies of the Bank conform to accounting principles generally accepted in the United States of America and to general practices within the financial institution industry. The following is a description of the significant accounting policies that the Company follows in preparing its Consolidated Financial Statements.
a) Basis of Financial Statement Presentation
The accompanying Consolidated Financial Statements are prepared on the accrual basis of accounting and include the accounts of the Company and its wholly-owned subsidiary, the Bank. All material intercompany transactions and balances have been eliminated.
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of each consolidated statement of condition and the related consolidated statement of income for the years then ended. Future results could differ from those estimates. The allowance for loan losses, fair values of financial instruments, and stock options are particularly subject to change.
b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold, which mature overnight.
c) Investment in Debt and Equity Securities
The Company is required to report readily-marketable equity and debt securities in one of the following categories: (i) “held-to-maturity” (management has a positive intent and ability to hold to maturity) which are to be reported at amortized cost; (ii) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) “available for sale” (all other debt and marketable equity securities), which are to be reported at fair value, with unrealized gains and losses reported net of tax, as accumulated other comprehensive income, a separate component of stockholders’ equity.
Premiums and discounts on investment in debt and equity securities are amortized to expense and accreted to income over the estimated life of the respective securities using the interest method. Gains and losses on the sales of securities are recognized upon realization based on the specific identification method.
d) Loans and Loan Interest Income Recognition
Loans are stated at unpaid principal balances, less net deferred origination and commitment fees. Loan origination and commitment fees and certain direct costs incurred in connection with loan originations are deferred and amortized to income over the life of the related loans as an adjustment to yield. When a loan prepays, the remaining unamortized fee is taken into income. Interest on loans is credited to income based on the principal outstanding during the period. Loans that are 90 days past due are placed on a nonaccrual basis. Exceptions to this policy are loans that are fully and adequately secured and are in the process of collection.
e) Allowance for Loan Losses
The Bank monitors its portfolio on a regular basis, with consideration given to the detailed analysis of classified loans, delinquency trends, probable incurred losses, past loss experience, current economic conditions, concentrations of credit, and input from the Bank’s outside loan review consultants. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance. Based on management’s and the Loan Classification Committee’s determination of the condition of the portfolio, the overall level of reserves is periodically adjusted to account for the inherent and specific risks within the entire portfolio. At a minimum, the adequacy of these reserves are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the Loan Classification Committee’s review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2002, management believes the allowance for loan losses is adequate.
A valuation allowance is established on impaired loans to reflect the difference, if any, between face amount of the loan and the present value of expected future cash flow discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral.
While management uses available information to recognize losses on loans, future adjustments to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments pertaining to information available to them at the time of their examination.
f) Banking Premises and Equipment
Banking premises and equipment are recorded at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (fifty years for buildings and two to ten years for equipment, furniture and fixtures) on a straight-line basis. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
Improvements and major repairs are capitalized, while the cost of ordinary maintenance, repairs and minor improvements is charged to operations.
g) Other Real Estate Owned
Other real estate owned consists of real estate acquired by foreclosure or deed in lieu of foreclosure and is recorded at the lower of the net unpaid principal balance at the foreclosure date plus acquisition costs or fair value. Subsequent valuation adjustments are made if fair value less estimated costs to sell the property falls below the carrying amount. At December 31, 2002 and 2001, the Company carried no other real estate owned.
h) Income Taxes
The Company follows the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. It is management’s position, as currently supported by the facts and circumstances, that no valuation allowance is necessary against any of the Company’s deferred tax assets.
i) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in, first out method.
j) Earnings Per Share
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and if stock awards were fully vested and resulted in the issuance of common stock that then shared in the earnings of the Company, is computed by dividing net income by the weighted average number of common shares and common stock equivalents.
k) Dividends
Cash available for dividend distribution to shareholders of the Company must initially come from dividends paid by the Bank to the Company. The approval of the Regional Administrator of National Banks is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank’s net income of that year combined with its retained net income of the preceding two years. The Bank had approximately $11,656,000 available as of December 31, 2002, which may be paid to the Company as a dividend.
l) Segment Reporting
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires public companies to report certain financial information about significant revenue producing segments of the business for which such information is available and utilized by the chief operating decision maker. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. As a community-oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company’s only operating segment for financial reporting purposes under SFAS No. 131.
m) Stock Based Compensation Plans
SFAS No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”
Had compensation cost for these stock options been determined consistent with SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:
For the Year Ended 2002 2001 2000
(In thousands)
Net Income: As Reported: $8,517 $6,747 $5,636
Pro Forma: 8,441 6,711 5,575
Diluted EPS: As Reported: $2.05 $1.60 $1.32
Pro Forma: 2.03 1.59 1.31
Basic EPS: As Reported: $2.07 $1.61 $1.33
Pro Forma: 2.05 1.60 1.32
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for the following years:
For the Year Ended 2002 2001 2000 Risk free interest rate 4.85% 4.18% 6.68% Expected dividend yield 3.24% 3.71% 1.27% Expected volatility 45.6% 33.3% 32.0%
n) Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Company includes unrealized holding gains or losses on available for sale securities and the minimum pension liability. Such gains or losses are net of reclassification adjustments for realized gains (losses) on sales of available for sale securities.
o) New Accounting Pronouncements
In January 2003, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in the financials statements about the effects of stock-based compensation. The transitional guidance and annual disclosure provisions of this Statement is effective for the October 31, 2003 financial statements. The interim reporting disclosure requirements will be effective for the Company’s March 31, 2003 Form 10-Q. The Company is currently reviewing the transitional guidance of SFAS No. 148 to determine the effect on the financial statements.
p) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2. INVESTMENT IN DEBT AND EQUITY SECURITIES
The Bank did not hold any trading securities during the years ended December 31, 2002 and 2001. A summary of the amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of securities is as follows:
December 31, 2002 2001
(In thousands)
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ - $ - $ - $ - $ - $ - $ - $ -
Oblig. of U.S. Government agencies 55,683 2,282 - 57,965 17,073 235 (8) 17,300
Oblig. of NY State & pol. subs. 33,235 1,751 (3) 34,983 25,900 884 (9) 26,775
Mortgage-backed securities 84,716 3,136 - 87,852 79,264 2,370 (56) 81,634
Nonmarketable equity securities:
Federal Reserve Bank Stock 36 - - 36 36 - - 36
Federal Home Loan Bank Stock 1,580 - - 1,580 1,357 - - 1,357
Total available for sale 175,250 7,169 (3) 182,416 126,630 3,489 (17) 127,102
Held to maturity:
Oblig. of NY State & pol. subs. 11,023 9 - 11,032 16,159 59 - 16,218
Total held to maturity 11,023 9 - 11,032 16,159 59 - 16,218
Total debt and equity securities $186,273 $7,178 $ (3) $193,448 $139,789 $3,548 $ (17) $143,320
The following table sets forth the fair value, amortized cost, maturities and approximated weighted average yield (based on the estimated annual income divided by the average book value) at December 31, 2002. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax-exempt obligations have been computed on a tax-equivalent basis.
Principal Maturing
(In thousands) Within After One But After Five But After No
One Year Within Five Years Within Ten Years Ten Years Maturity
Total Total
Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized
Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost
Amount Amount Yield Amount Amount Yield Amount Amount Yield Amount Amount Yield Amount Amount Yield Amount Amount
Available for sale:
U.S. Agency
securities $ 8,113 $ 8,080 2.21% $49,852 $47,603 4.03% $ - $ - - $ - $ - - $ - $ - - $57,965 $55,683
Mortgage-backed
securities - - - - - - - - - 87,852 84,716 5.62% - - - 87,852 84,716
Oblig. of state and
pol. subs. 4,844 4,754 7.40% 21,389 19,911 6.82% 3,869 3,823 5.03% 4,881 4,747 6.85% - - - 34,983 33,235
Nonmarketable
equity securities:
Federal Reserve
Bank Stock - - - - - - - - - - - - 36 36 3.00% 36 36
Federal Home Loan
Bank Stock - - - - - - - - - - - - 1,580 1,580 4.21% 1,580 1,580
Total available for
sale 12,957 12,834 4.13% 71,241 67,514 4.85% 3,869 3,823 5.03% 92,733 89,463 5.69% 1,616 1,616 4.18% 182,416 175,250
Held to maturity:
Oblig. of state and
pol. subs. 11,032 11,023 2.70% - - - - - - - - - - - - 11,032 11,023
Total held to
maturity 11,032 11,023 2.70% - - - - - - - - - - - - 11,032 11,023
Total debt and
equity securities $23,989 $23,857 3.47% $71,241 $67,514 4.85% $3,869 $3,823 5.03% $92,733 $89,463 5.69% $1,616 $1,616 4.18% $193,448 $186,273
There were no sales of available for sale securities in 2002. Proceeds from sales of available for sale securities were approximately $9,747,000 and $15,541,000 in 2001 and 2000, respectively. Gross gains of approximately $81,000 and $24,000 were realized on sales of available for sale securities during 2001 and 2000, respectively. Gross losses of approximately $3,000 and $279,000 were realized on sales of available for sale securities during 2001 and 2000, respectively. There were no sales of held to maturity securities during 2002, 2001 and 2000.
Securities having an amortized cost of approximately $88,682,000, $86,078,000 and $49,601,000 at December 31, 2002, 2001 and 2000, respectively, were pledged to secure public deposits.
There were no investments in debt and equity securities, which exceeded 10% of stockholders’ equity for any one issuer.
3. LOANS
The following table sets forth the major classifications of loans:
December 31, 2002 2001
(In thousands)
Real estate mortgage loans $189,226 $172,214
Commercial, financial, and
agricultural loans 38,692 28,281
Installment/consumer loans 8,011 6,149
Real estate construction loans 12,520 8,784
Total loans 248,449 215,428
Unearned income (61) (66)
248,388 215,362
Allowance for loan losses (2,294) (2,249)
Net loans $246,094 $213,113
Lending Risk.
The principal business of the Bank is lending, primarily in commercial real estate loans, construction loans, home equity loans, land loans, consumer loans, residential mortgages and commercial loans. The Bank considers its primary lending area as the eastern end of Long Island in Suffolk County, New York; therefore, the loan portfolio as a whole is dependent on the economic conditions of the geographic region.
Allowance for Loan Losses.
The following table sets forth changes in the allowance for loan losses.
December 31, 2002 2001 2000
(In thousands)
Allowance for loan losses
balance at beginning of period $2,249 $2,100 $1,971
Total Charge-offs 238 167 107
Total Recoveries 83 92 131
Net charge-offs (recoveries) 155 75 (24)
Provision for loan losses
charged to operations 220 323 105
Balance before reclass to other
liabilities 2,314 2,348 2,100
Net change in other liabilities portion
allocated to off balance sheet items (20) (99) -
Balance at end of period $2,294 $2,249 $2,100
Past Due, Nonaccrual and Restructured Loans.
Nonaccrual loans at December 31, 2002 and 2001 were $200,000 and $532,000, respectively. There were no loans 90 days or more past due that were still accruing or any restructured loans at December 31, 2002 and 2001. Gross interest income on nonaccrual loans that would have been recorded under original terms during the year ended December 31, 2002 and 2001 were $13,000 and $66,000, respectively. Gross interest income recorded during the year ended December 31, 2002 and 2001 were $4,000 and $17,000, respectively.
As of December 31, 2002 and 2001, the Bank did not have any impaired loans as defined in SFAS No. 114.
Related Party Loans.
Certain directors and related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2002 and 2001.
The following table sets forth selected information about related party loans at December 31, 2002.
Commitment Balance Available
Amount Outstanding Credit
(In thousands)
Balance at December 31, 2001 $500 $ 470 $265
New loans - - -
Effective change in related 3,928 3,575 355
parties
Advances - 50 50
Repayments - (14) (4)
Balance at December 31, 2002 $4,428 $4,081 $666
4. DEPOSITS
Time Deposits.
The following table sets forth the remaining maturities of the Bank’s time deposits at December 31, 2002.
Less than $100,000
$100,000 or Greater Total
(In thousands)
3 months or less $12,918 $14,972 $27,890
Over 3 thru 6 months 6,651 5,079 11,730
Over 6 thru 12 months 8,086 3,769 11,855
Over 12 months 3,050 724 3,774
Over 24 months 1,247 3,857 5,104
Over 36 months 937 1,305 2,242
Over 48 months 138 100 238
Over 60 months - - -
Total $33,027 $29,806 $62,833
5. BANKING PREMISES AND EQUIPMENT
Banking premises and equipment consist of:
December 31, 2002 2001
(In thousands)
Land $2,707 $1,496
Building and improvements 5,741 5,735
Furniture and fixtures 5,168 4,759
Leasehold improvements 1,165 955
14,781 12,945
Less: accumulated
depreciation and
amortization (4,954) (4,164)
$9,827 $8,781
6. INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended December 31, 2002 2001 2000
(In thousands)
Current:
Federal $3,778 $2,803 $2,070
State 923 622 422
4,701 3,425 2,492
Deferred:
Federal 7 (107) 5
State 14 (26) (33)
21 (133) (28)
Total $4,722 $3,292 $2,464
The reconciliation of the expected Federal income tax expense at the statutory tax rate to the actual provision follows:
Year Ended December 31, 2002 2001 2000
(In thousands) Percentage Percentage Percentage
of Pre-tax of Pre-tax of Pre-tax
Amount Earnings Amount Earnings Amount Earnings
Federal income tax expense computed by
applyingthe statutory rate to income
before income taxes $4,502 34% $3,414 34% $2,754 34%
Tax exempt interest (563) (4) (574) (6) (626) (8)
State taxes, net of Federal income tax
benefit 655 5 393 4 257 3
Interest disallowed 30 - 52 1 71 1
Other 98 1 7 - 8 -
Provision for income taxes $4,722 36% $3,292 33% $2,464 30%
Deferred tax assets and liabilities are comprised of the following:
December 31, 2002 2001 (In thousands) Deferred tax assets: Allowance for loan losses $ 890 $ 849 Other - 47 Total 890 896 Deferred tax liabilities: Pension expense (30) (79) Other (16) - Depreciation (97) (50) Securities available for sale (2,835) (1,387) Total (2,978) (1,516) Net deferred tax (liability) asset $ (2,088) $ (620)
7. EMPLOYEE BENEFITS
a) Pension Plan and Supplemental Executive Retirement Plan
The Bank maintains a non-contributory pension plan through the New York State Bankers Association Retirement System covering all eligible employees.
During 2001, the Bank adopted the Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”). The SERP provides benefits to certain employees, designated by the Compensation Committee of the Board of Directors, whose benefits under the Pension Plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension Plan in the absence of such Internal Revenue Code limitations. The effective date of the SERP was January 1, 2001. SERP expense was $107,000 in 2002 and $97,000 in 2001.
The following table sets forth the plan’s funded status projected to September 30, 2002 and 2001 (measurement dates).
At December 31,
Pension Benefits SERP Benefits
2002 2001 2002 2001
(In thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of
year $2,252 $1,907 $600 $ -
Service cost 201 185 45 38
Expenses (28) (27) - -
Interest cost 150 132 35 31
Benefits paid (75) (56) - -
Additional prior service cost - 188 - -
Assumption changes and other 347 (77) 256 531
Projected benefit obligation at end of year $2,847 $2,252 $936 $600
Change in plan assets
Fair value of plan assets at beginning of year $2,260 $2,430 - -
Actual return on plan assets (136) (200) - -
Employer contribution 145 113 - -
Benefit paid (75) (56) - -
Expenses (28) (27) - -
Fair value of plan assets at end of year $2,166 $2,260 - -
Funded status $ (681) $ 8 $(936) $(600)
Unrecognized net actuarial loss (gain) 819 141 251 (6)
Unrecognized prior service cost 164 173 - -
Unrecognized transition asset (29) (38) 481 509
Minimum additional pension liability (282) - (124) (87)
Prepaid (accrued) benefit cost $ (9) $284 $(328) $(184)
At December 31,
Pension Benefits SERP Benefits
Components of net periodic benefit cost 2002 2001 2000 2002 2001 2000
Service cost $201 $185 $156 $ 45 $38 $ -
Interest cost 150 132 113 35 31 -
Expected return on plan assets (196) (206) (184) - - -
Amortization of net (gain) loss - - - 27 28 -
Amortization of unrecognized prior service
cost 9 (2) (2) - - -
Amortization of unrecognized transition asset (9) (9) (9) - - -
Net periodic benefit cost $155 $100 $ 74 $107 $97 $ -
At December 31, 2002, 2001, and 2000, a rate of increase in future compensation levels of 4.0%, and a weighted average discount rate of 6.25%, 6.75%, and 7.00%, respectively, were used in determining the actuarial present value of the projected benefit obligation. The expected long-term rate of return on assets was 8.5% at December 31, 2002, 2001 and 2000.
b) Equity Incentive Plan
During 1996, the Bridge Bancorp, Inc. Equity Incentive Plan was approved by the shareholders to provide for the grant of options to purchase up to a total of 432,000 shares of common stock of the Company and for the award of shares of common stock as a bonus. During 2001, a plan amendment to cover non-employee directors was adopted by the shareholders. During the years ended December 31, 2002 and 2001, the Company granted restricted stock awards of 4,950 and 5,553 shares, respectively. These awards vest over three years on the anniversary date of the awards. Such shares are subject to restrictions based on continued service as employees of the Company or subsidiaries of the Company. Compensation expense attributable to these awards was approximately $89,000, $51,000 and $35,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The Compensation Committee of the Board of Directors determines options awarded under the plan. The Company accounts for this plan under APB Opinion No. 25, under which no compensation cost has been recognized for stock options granted. Stock options are immediately exercisable.
For the Year Ended December 31, 2002 2001 2000
(In thousands)
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding, beginning of the year 97,650 $17.21 106,950 $16.35 92,100 $15.80
Granted 16,900 $18.80 15,425 $16.50 14,850 $19.75
Exercised (5,500) - (17,475) - - -
Forfeited - - (7,250) - - -
Outstanding and exercisable, end of
the year 109,050 $17.73 97,650 $17.21 106,950 $16.35
Weighted average fair value of options
granted $7.68 $4.09 $7.04
Weighted average remaining contractual
life 7 1/2years
Range of Exercise Prices Number of Price
Shares
8,300 $6.78
24,000 $14.67
45,500 $16.50 to
$19.75
31,250 $22.00
8. EARNINGS PER SHARE
Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and stock awards were fully vested thereby resulting in the issuance of common stock entitled to share in the earnings of the Company, is computed by dividing net income by the weighted average number of common shares and common stock equivalents.
For the Year Ended December 31, 2002 2001 2000
(In thousands, except per share data)
Net Income $8,517 $6,747 $5,636
Common Equivalent Shares:
Weighted Average Common Shares Outstanding 4,122 4,201 4,237
Weighted Average Common Equivalent Shares 29 22 22
Weighted Average Common and Common Equivalent
Shares 4,151 4,223 4,259
Basic earnings per share $2.07 $1.61 $1.33
Diluted earnings per share $2.05 $1.60 $1.32
9. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
a) Leases
The Company is obligated to make minimum annual rental payments under non-cancelable operating leases on its premises. Projected minimum rentals under existing leases are as follows:
December 31, 2002
(In thousands)
2003 $500
2004 395
2005 185
2006 143
2007 102
Thereafter 328
Total minimum rentals $1,653
Certain leases contain renewal options and rent escalation clauses. In addition, certain leases provide for additional payments based upon real estate taxes, interest and other charges. Rental expenses under these leases for the years ended December 31, 2002, 2001 and 2000 approximated $434,000, $376,000, and $354,000, respectively.
b) In the normal course of business, there are various outstanding commitments and contingent liabilities, such as minimum annual rental payments under non-cancelable operating leases, guarantees and commitments to extend credit, which are not reflected in the accompanying financial statements. No material losses are anticipated as a result of these transactions.
The following represents commitments outstanding:
December 31, 2002 2001 (In thousands) Standby letters of credit $ 2,817 $1,235 Loan commitments outstanding 4,720 20,371 Unused equity lines 27,312 21,302 Unused construction lines 4,211 3,946 Unused lines of credit 18,105 15,761 Unused overdraft lines 8,059 8,338 Total commitments outstanding $65,224 $70,953
c) Other
During 2002, the Bank was required to maintain certain cash balances with the Federal Reserve Bank of New York for reserve and clearing requirements. These balances averaged $1,314,000 in 2002.
During 2002, 2001 and 2000, the Bank maintained an overnight line of credit with the Federal Home Loan Bank of New York (“FHLB”). The Bank has the ability to borrow against its unencumbered residential mortgages and investment securities owned by the Bank. At December 31, 2002, there was $8,000,000 outstanding, while there were no amounts outstanding at December 31, 2001. At December 31, 2002, the Bank had aggregate lines of credit of $37,000,000 with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $17,000,000 is available on an unsecured basis; as of December 31, 2002, the Bank had $4,300,000 in such borrowings outstanding.
In March 2001, the Bank entered into a Master Repurchase Agreement with the FHLB whereby the FHLB agrees to purchase securities from the Bank, upon the Bank’s request, with the simultaneous agreement to sell the same or similar securities back to the Bank at a future date. Securities are limited, under the agreement, to government securities, securities issued, guaranteed or collateralized by any agency or instrumentality of the US Government or any government sponsored enterprise, and non-Agency AA and AAA rated mortgage-backed securities. At December 31, 2002, there was $21,988,000 available for transactions under this agreement. There were no balances outstanding at year-end.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time and are based on existing on and off balance sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific
financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.
The Company used the following method and assumptions in estimating the fair value of its financial instruments:
Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities.
Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations and quoted market prices.
Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that apply available market benchmarks when establishing discount factors for the types of loans. All nonaccrual loans are carried at their current fair value.
Deposits: The estimated fair value of deposits are based on discounted cash flow calculations that apply interest rates currently being offered by the Bank for deposits with similar remaining maturities to a schedule of aggregated expected monthly maturities.
Borrowings: The estimated fair value of borrowed funds is based on the discounted value of contractual cash flows using interest rates currently in effect for borrowings with similar maturities and collateral requirements.
Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value.
The estimated fair values and recorded carrying values of the Bank's financial instruments are as follows:
December 31, 2002 2001
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and due from banks $ 10,706 $ 10,706 $ 10,813 $ 10,813
Interest bearing deposits with banks 101 101 50 50
Federal funds sold - - 13,500 13,500
Securities available for sale 182,416 182,416 127,102 127,102
Securities held to maturity 11,023 11,032 16,159 16,218
Loans 246,094 251,716 213,113 207,530
Accrued interest receivable 2,608 2,608 2,153 2,153
Financial Liabilities:
Demand and other deposits 406,409 407,499 357,155 358,227
Overnight borrowings 12,300 12,300 - -
Accrued interest payable 1,142 1,142 625 625
11. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Bank’s capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that the Bank meets all capital adequacy requirements to which it must comply.
As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. Since that notification, there are no conditions or events that management believes have changed the institution’s category.
The Company and the Bank’s actual capital amounts and ratios are presented in the following table:
Bridge Bancorp, Inc.
(Consolidated)
As of December 31, 2002
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted
assets) $38,227 12.7% $24,042 >8.0% $30,052 >10.0%
Tier 1 Capital (to risk
weighted assets) 35,933 12.0% 12,021 >4.0% 18,031 > 6.0%
Tier 1 Capital (to average
assets) 35,933 7.7% 18,697 >4.0% 23,372 > 5.0%
As of December 31, 2001
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted
assets) $33,177 13.2% $20,064 >8.0% $25,080 >10.0%
Tier 1 Capital (to risk
weighted assets) 30,829 12.3% 10,032 >4.0% 15,048 > 6.0%
Tier 1 Capital (to average
assets) 30,829 8.0% 15,490 >4.0% 19,363 > 5.0%
Bridgehampton National Bank
as of December 31, 2002
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted
assets) $37,786 12.6% $24,057 >8.0% $30,072 >10.0%
Tier 1 Capital (to risk
weighted assets) 35,492 11.8% 12,029 >4.0% 18,043 > 6.0%
Tier 1 Capital (to average
assets) 35,492 7.6% 18,697 >4.0% 23,372 > 5.0%
As of December 31, 2001
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted
assets) $33,152 13.2% $20,064 >8.0% $25,080 >10.0%
Tier 1 Capital (to risk
weighted assets) 30,804 12.3% 10,032 >4.0% 15,048 > 6.0%
Tier 1 Capital (to average
assets) 30,804 8.0% 15,490 >4.0% 19,363 > 5.0%
12. BRIDGE BANCORP, INC. (PARENT COMPANY ONLY)
Condensed Statements of Financial Condition
December 31, 2002 2001
(In thousands)
Assets
Cash and cash equivalents $ 134 $ 13
Dividend receivable 669 631
Other assets 12 12
Investment in the Bank 39,825 32,836
Total Assets $40,640 $33,492
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 658 $ 625
Other liabilities 11 6
Total Liabilities 669 631
Stockholders' Equity 42,495 34,469
Treasury stock at cost, 139,611 and 91,333 shares at 12/31/02 and
12/31/01, respectively (2,524) (1,608)
Total Stockholders' Equity 39,971 32,861
Total Liabilities and Stockholders' Equity $40,640 $33,492
Condensed Statements of Income Year Ended December 31, 2002 2001 2000 (In thousands) Dividend income from the Bank $3,585 $3,251 $2,409 Other operating expenses 1 2 1 Income before income taxes and equity in undistributed earnings of the Bank 3,584 3,249 2,408 Income tax provision - - - Income before equity in undistributed earnings of the Bank 3,584 3,249 2,408 Equity in undistributed earnings of the Bank 4,933 3,498 3,228 Net income $8,517 $6,747 $5,636
Condensed Statements of Cash Flows
Year Ended December 31, 2002 2001 2000
(In thousands)
Operating Activities:
Net income $8,517 $6,747 $5,636
Adjustments to reconcile net income to net cash used by operating
activities:
Equity in undistributed earnings of the Bank (4,933) (3,498) (3,228)
Income tax benefit from exercise of employee stock options - 12 -
(Increase) decrease in other assets - (12) 130
Decrease in other liabilities (38) (80) (84)
Net cash provided by operating activities 3,546 3,169 2,454
Cash flows used by financing activities:
Net proceeds from issuance of common stock upon exercise of stock options 122 202 -
Payment for the purchase of treasury stock (1,067) (1,264) (653)
Dividends paid (2,480) (2,231) (1,993)
Net cash used by financing activities (3,425) (3,293) (2,646)
Net increase (decrease) in cash and cash equivalents 121 (124) (192)
Cash and cash equivalents at beginning of year 13 137 329
Cash and cash equivalents at end of year $ 134 $ 13 $ 137
13. QUARTERLY FINANCIAL DATA (Unaudited)
Selected Consolidated Quarterly Financial Data
2002 Quarter Ended, March 31, June 30, September 30, December 31, (In thousands, except per share amounts) Interest income $6,424 $6,413 $6,931 $6,718 Interest expense 1,181 1,143 1,230 936 Net interest income 5,243 5,270 5,701 5,782 Provision for loan losses 60 60 60 40 Net interest income after provision for loan losses 5,183 5,210 5,641 5,742 Other income 685 839 1,011 870 Other expenses 2,832 2,847 3,046 3,217 Income before income taxes 3,036 3,202 3,606 3,395 Provision for income taxes 1,029 1,088 1,351 1,254 Net income $2,007 $2,114 $2,255 $2,141 Basic earnings per share $0.49 $0.51 $0.55 $0.52 Diluted earnings per share $0.48 $0.51 $0.54 $0.52
2001 Quarter Ended, March 31, June 30, September 30, December 31, (In thousands, except per share amounts) Interest income $6,726 $6,872 $6,796 $6,615 Interest expense 2,381 2,173 1,917 1,397 Net interest income 4,345 4,699 4,879 5,218 Provision for loan losses 85 85 60 93 Net interest income after provision for 4,260 4,614 4,819 5,125 loan losses Other income 584 626 631 578 Other expenses 2,735 2,756 2,741 2,966 Income before income taxes 2,109 2,484 2,709 2,737 Provision for income taxes 652 808 914 918 Net income $1,457 $1,676 $1,795 $1,819 Basic earnings per share $0.35 $0.40 $0.42 $0.44 Diluted earnings per share $0.34 $0.40 $0.42 $0.44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
and StockholdersBridge
Bancorp, Inc.:
We have audited the accompanying consolidated statement of condition of Bridge Bancorp, Inc. and subsidiary as of December 31, 2002, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated statement of condition of Bridge Bancorp, Inc. and subsidiary as of December 31, 2001, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the two year period ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 18, 2002.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Bridge Bancorp, Inc. and subsidiary as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
Oak Brook, IllinoisJanuary
14, 2003
The following Report of Independent Public Accountants dated January 18, 2002 is a copy of the previously issued report. Arthur Andersen, LLP has not reissued the report.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
and StockholdersBridge
Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Bridge Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bridge Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Arthur Anderson LLP
New York, New YorkJanuary
18, 2002
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
See Form 8K filed on June 7, 2002.
PART III
Item 10. Directors and Executive Officers of the Registrant
“Nominees for Director and Directors Continuing in Office,” “Shares Beneficially Owned by other Executive Officers and All Directors” and “Compliance with Section 16 (a) of the Exchange Act” set forth in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated herein by reference.
Item 11. Executive Compensation
“Compensation of Directors,” “Compensation of Executive Officers,” and “Employment Contracts and Severance Agreements” set forth in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
“Beneficial Ownership” and “Nominees for Director and Directors Continuing in Office” set forth in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
“Certain Relationships and Related Transactions” set forth in the Registrant’s Proxy Statement for the 2003 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation, with the participation of other members of management, as they deemed appropriate, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as contemplated by Exchange Act Rule 13a-14. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports that the Company is required to file and submit to the SEC under the Exchange Act.
There were no significant changes to the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date the Company carried out its evaluation of its internal controls. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following Consolidated Financial Statements, including notes thereto, and financial schedules of the Company, required in response to this item are included in Part II, Item 8.
1. Financial Statements Page No.
Consolidated Statements of Condition 20
Consolidated Statements of Income 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Report of Independent Public Accountants 40
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto under Item 8, "Financial Statements and Supplementary
Data."
3. Exhibits.
See Index of Exhibits on page 44.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGE BANCORP, INC.
Registrant
March 17, 2003 /s/ Thomas J. Tobin
Thomas J. Tobin
President and Chief Executive Officer
March 17, 2003 /s/ Janet T. Verneuille
Janet T. Verneuille,
Senior Vice President, Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 17, 2003 /s/ Raymond Wesnofske ,Director
Raymond Wesnofske
March 17, 2003 /s/ Thomas J. Tobin ,Director
Thomas J. Tobin
March 17, 2003 /s/ Thomas E. Halsey ,Director
Thomas E. Halsey
March 17, 2003 /s/ Marcia Z. Hefter ,Director
Marcia Z. Hefter
March 17, 2003 /s/ R. Timothy Maran ,Director
R. Timothy Maran
March 17, 2003 /s/ Charles I. Massoud ,Director
Charles I. Massoud
March 17, 2003 /s/ Walter A. Preische, Jr. ,Director
Walter A. Preische, Jr.
March 17, 2003 /s/ L.H. Strickland ,Director
L.H. Strickland
March 17, 2003 /s/ Dennis A. Suskind ,Director
Dennis A. Suskind
EXHIBIT INDEX
Exhibit Number Description of Exhibit Exhibit
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to Registrant's amended Form 10, File No. 0-18546, filed October 15, 1990) *
3.1(i) Certificate of Amendment of the Certificate of Incorporation of the
Registrant (incorporated by reference to Registrant's Form 10,
File No. 0-18546, filed August 13, 1999) *
3.2 By-laws of the Registrant (incorporated by reference to Registrant's
amended Form 10, File No. 0-18546, filed October 15, 1990) *
10.1 Employment Contract - Thomas J. Tobin (incorporated by reference to
Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
10.2 Employment Contract - Janet T. Verneuille (incorporated by reference to
Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
10.5 Equity Incentive Plan (incorporated by reference to Registrant's Form 14A,
File No. 0-18546, filed March 9, 2001) *
10.6 Employment Contract - Christopher Becker (incorporated by reference
to Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's Chief Executive Officer (attached as an exhibit and
incorporated herein by reference.)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's Executive Vice President (attached as an exhibit and
incorporated herein by reference.)
* Denotes incorporated by reference
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Thomas J. Tobin, President and Chief Executive Officer, certify that:
| 1) | I have reviewed this annual report on Form 10-K of Bridge Bancorp, Inc.; |
| 2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6) | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 17, 2003
/s/ Thomas J. Tobin
Thomas J. Tobin
President and Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Janet T. Verneuille, Senior Vice President, Chief Financial Officer and Treasurer, certify that:
| 1) | I have reviewed this annual report on Form 10-K of Bridge Bancorp, Inc.; |
| 2) | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| 4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and |
| c) | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6) | The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: March 17, 2003
/s/ Janet T. Verneuille
Janet T. Verneuille
Senior Vice President ,
Chief Financial Officer and
Treasurer