SECURITIES
AND EXCHANGE COMMISSION
|
BRIDGE BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Statements of Condition as of June 30, 2003
and December 31, 2002
Unaudited Consolidated Statements of Income for the Three Months and Six
Months Ended June 30, 2003 and 2002
Unaudited Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 2003
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
32.2 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
Signatures
BRIDGE BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Condition
(In thousands, except share and per share amounts) June 30, December 31,
2003 2002
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ASSETS
Cash and due from banks $20,690 $10,706
Interest earning deposits with banks 113 101
Total cash and cash equivalents 20,803 10,807
Securities available for sale 205,029 182,416
Securities held to maturity (fair value of $6,728 and $11,032
at June 30, 2003 and December 31, 2002, respectively) 6,713 11,023
-----------------------------------
Total securities, net 211,742 193,439
Loans 262,724 248,388
Allowance for loan losses (2,175) (2,294)
-----------------------------------
Loans, net 260,549 246,094
Banking premises and equipment, net 9,519 9,827
Accrued interest receivable 2,521 2,608
Other assets 2,570 1,211
-----------------------------------
Total Assets $507,704 $463,986
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $146,090 $125,560
Savings, N.O.W. and money market deposits 242,931 218,016
Certificates of deposit of $100,000 or more 28,057 29,806
Other time deposits 32,733 33,027
-----------------------------------
Total deposits 449,811 406,409
Overnight borrowings 10,500 12,300
Accrued interest on depositors' accounts 321 1,142
Other liabilities and accrued expenses 3,563 4,164
-----------------------------------
Total Liabilities 464,195 424,015
-----------------------------------
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized: 20,000,000 shares; 4,257,597 issued; 4,133,608
and 4,117,986 shares outstanding at June 30, 2003
and December 31, 2002, respectively 43 43
Surplus 21,171 21,125
Undivided profits 20,803 17,239
Less: Treasury Stock at cost, 123,989 and 139,611 shares at
June 30, 2003 and December 31, 2002, respectively (2,187) (2,524)
Unearned stock awards (101) -
-----------------------------------
39,729 35,883
Accumulated other comprehensive income:
Net unrealized gain on securities, net of taxes of
$2,633,000 and $2,834,000 at June 30, 2003
and December 31, 2002, respectively 4,025 4,333
Net minimum pension liability, net of taxes of $160,000 at
June 30, 2003 and December 31,2002 (245) (245)
-----------------------------------
Total Stockholders' Equity 43,509 39,971
-----------------------------------
Total Liabilities and Stockholders' Equity $507,704 $463,986
===================================
See accompanying notes to the Unaudited Consolidated Financial Statements.
BRIDGE BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Income
(In thousands, except per share amounts)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------
Interest income:
Loans (including fee income) $4,421 $4,215 $8,950 $8,403
Mortgage-backed securities 854 1,277 1,925 2,676
State and municipal obligations 390 453 795 868
U.S. Treasury and government agency
securities 519 400 1,018 701
Federal funds sold 16 52 56 158
Other securities 22 15 45 30
Deposits with banks - 1 1 1
---------------------------------------------------------------------
Total interest income 6,222 6,413 12,790 12,837
Interest expense:
Savings, N.O.W. and money market
deposits 427 754 874 1,499
Certificates of deposit of $100,000 or
more 121 166 264 350
Other time deposits 156 217 327 468
Federal funds purchased 11 2 15 3
Other borrowed money - 4 4 4
---------------------------------------------------------------------
Total interest expense 715 1,143 1,484 2,324
---------------------------------------------------------------------
Net interest income 5,507 5,270 11,306 10,513
Provision for loan losses - 60 - 120
---------------------------------------------------------------------
Net interest income after provision for
loan losses 5,507 5,210 11,306 10,393
---------------------------------------------------------------------
Other income:
Service charges on deposit accounts 614 557 1,164 980
Net securities gains 566 - 1,200 -
Fees for other customer services 255 265 457 501
Other operating income 102 17 198 43
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Total other income 1,537 839 3,019 1,524
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Other expenses:
Salaries and employee benefits 1,712 1,558 3,526 3,184
Net occupancy expense 304 260 633 520
Furniture and fixture expense 250 237 514 468
Other operating expenses 881 792 1,763 1,507
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Total other expenses 3,147 2,847 6,436 5,679
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Income before provision for income taxes 3,897 3,202 7,889 6,238
Provision for income taxes 1,422 1,088 2,876 2,117
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Net income $2,475 $2,114 $5,013 $4,121
=====================================================================
Basic earnings per share $0.60 $0.51 $1.22 $1.00
=====================================================================
Diluted earnings per share $0.60 $0.50 $1.21 $0.98
=====================================================================
Comprehensive income $2,887 $3,443 $4,705 $5,001
=====================================================================
See accompanying notes to the Unaudited Consolidated Financial Statements.
BRIDGE BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Stockholders' Equity
(In thousands, except share and per share amounts)
Accumulated
Common Stock Unearned Other
Shares Comprehensive Undivided Treasury Stock Comprehensive
Outstanding Amount Surplus Income Profits Stock Awards Income Total
----------------------------------------------------------------------------------------
Balance at December 31, 2002 4,117,986 $43 $21,125 $17,239 ($2,524) $4,088 $39,971
Net income $5,013 5,013 5,013
Stock awards vested 4,872 42 81 123
Stock awards granted 34 87 ($101) 20
Exercise of stock options 10,750 (30) 169 139
Cash dividends declared, $0.35 per share (1,449) (1,449)
Other comprehensive income, net of tax
Unrealized gains in securities
available for sale, net (308) (308) (308)
-------------
Comprehensive Income $4,705
--------------------------=============----------------------------------------------------
Balance at June 30, 2003 4,133,608 $43 $21,171 $20,803 ($2,187) ($101) $3,780 $43,509
=========================== ====================================================
See accompanying notes to the Unaudited Consolidated Financial Statements.
BRIDGE BANCORP, INC. AND SUBSIDIARY
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six months ended June 30, 2003 2002
---------------------------------------------------------------------------------------
Operating activities:
Net Income $5,013 $ 4,121
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses - 120
Depreciation and amortization 477 470
Accretion of discounts (135) (162)
Amortization of premiums 1,170 349
Earned or allocated expense of restricted
stock awards 50 45
Net securities gains (1,200) -
Decrease (increase) in accrued interest
receivable 87 (256)
(Increase) decrease in other assets (1,359) 244
Decrease in accrued and other liabilities (1,727) (188)
-----------------------------------
Net cash provided by operating activities 2,376 4,743
-----------------------------------
Investing activities:
Purchases of securities available for sale (97,401) (44,471)
Purchases of securities held to maturity (2,845) (7,493)
Proceeds from sales of securities available for
sale 42,614 -
Proceeds from maturing securities available for
sale 3,535 5,410
Proceeds from maturing securities held to maturity 7,155 13,670
Proceeds from principal payments on
mortgage-backed securities 28,804 15,972
Net increase in loans (14,455) (17,437)
Purchases of banking premises and equipment, net
of disposals (169) (380)
-----------------------------------
Net cash used by investing activities (32,762) (34,729)
-----------------------------------
Financing activities:
Net increase in deposits 43,402 42,989
Decrease in other borrowings (1,800) -
Payment for the purchase of treasury stock - (942)
Net proceeds from exercise of stock options
issued pursuant to equity incentive plan 139 45
Cash dividends paid (1,359) (1,245)
-----------------------------------
Net cash provided by financing activities 40,382 40,847
-----------------------------------
Increase (decrease) in cash and cash equivalents 9,996 10,861
Cash and cash equivalents beginning of period 10,807 24,363
-----------------------------------
Cash and cash equivalents end of period $20,803 $35,224
===================================
Supplemental Information-Cash Flows:
Cash paid for:
Interest $2,305 $2,458
===================================
Income taxes $3,181 $1,896
===================================
Noncash investing and financing activities:
Dividends declared and unpaid $744 $618
===================================
See accompanying notes to the Unaudited Consolidated Financial Statements.
Unaudited Computation of Per Share Income Three months ended Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------
Net Income $2,475,000 $2,114,000 $5,013,000 $4,121,000
Common Equivalent Shares:
Weighted Average Common Shares Outstanding 4,124,227 4,119,959 4,123,136 4,128,753
Weighted Average Common Equivalent Shares 31,675 36,455 29,187 29,599
----------------------------------------------------
Weighted Average Common and Common Equivalent
Shares 4,155,902 4,156,414 4,152,323 4,158,352
----------------------------------------------------
Basic earnings per share $0.60 $0.51 $1.22 $1.00
----------------------------------------------------
Diluted earnings per share $0.60 $0.50 $1.21 $0.98
----------------------------------------------------
3. Repurchased Stock
In February 2002, the Company reapproved its stock repurchase plan allowing the repurchase of up to 5% of its current outstanding shares. In February 2003, the Company reaffirmed its stock repurchase program. The total number of shares purchased and held as treasury shares at June 30, 2003 was 123,989, or 3.0% of the total number of outstanding common shares of 4,133,608. No shares were repurchased during 2003 and at June 30, 2003, 82,691 shares remain to be repurchased under the current approved stock repurchase program.
4. Stock Based Compensation Plans
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” requires pro forma disclosures for companies not adopting the fair value method. The transitional guidance and annual disclosure provisions of this SFAS was effective for the December 31, 2002 financial statements. 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:
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net Income: As Reported: $2,475 $2,114 $5,013 $4,121
Pro Forma: $2,406 $2,028 $4,944 $4,035
Basic EPS: As Reported: $0.60 $0.51 $1.22 $1.00
Pro Forma: $0.58 $0.49 $1.20 $0.98
Diluted EPS: As Reported: $0.60 $0.50 $1.21 $0.98
Pro Forma: $0.58 $0.49 $1.19 $0.96
5. Securities
A summary of the amortized cost and estimated fair value of securities is as follows:
June 30, 2003 December 31, 2002
-------------------------------------------------------------------------------------------------
(In thousands) Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
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Available for sale:
U.S. Treasury securities $11,167 $11,064 $ - $ -
Oblig. of U.S. Government
agencies 49,676 52,546 55,683 57,965
State and municipal
obligations 33,021 35,272 33,235 34,983
Mortgage-backed securities 102,865 104,505 84,716 87,852
Nonmarketable equity securities:
Federal Reserve Bank Stock 36 36 36 36
Federal Home Loan Bank Stock 1,606 1,606 1,580 1,580
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Total available for sale 198,371 205,029 175,250 182,416
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Held to maturity:
State and municipal
obligations 6,713 6,728 11,023 11,032
-----------------------------------------------------------------
Total held to maturity 6,713 6,728 11,023 11,032
-----------------------------------------------------------------
Total debt and equity securities $205,084 $211,757 $186,273 $193,448
=================================================================
Securities having an amortized cost of approximately $150,746,000 and $88,682,000 at June 30, 2003 and December 31, 2002, respectively, were pledged to secure public deposits.
6. Loans
Loans are summarized as follows:
June 30, 2003 December 31,
2002
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(In thousands)
Real estate mortgage loans $202,146 $189,226
Commercial, financial, and agricultural loans 39,556 38,692
Installment/consumer loans 6,093 8,011
Real estate construction loans 14,984 12,520
-----------------------------------
Total loans 262,779 248,449
Unearned income (55) (61)
-----------------------------------
262,724 248,388
Allowance for loan losses (2,175) (2,294)
-----------------------------------
Net loans $260,549 $246,094
===================================
The Bank’s loans primarily consist of 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 this geographic region.
Nonaccrual loans at June 30, 2003 and December 31, 2002 were $948,000 and $200,000, respectively. There were no loans 90 days or more past due that were still accruing or any restructured loans at June 30, 2003 and December 31, 2002.
7. Allowance for Loan Losses
The Bank monitors its portfolio on a regular basis, with consideration given to detailed analysis of probable incurred losses, classified loans, delinquency trends, past loss experience, current economic conditions, concentrations of credit, input from the Bank’s outside loan review consultants and regulatory agencies, and other pertinent factors. 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 is adjusted quarterly, to a level deemed appropriate by management based on its 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 quarter ended June 30, 2003, management believes the allowance for 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 or charge offs against the allowance based on their judgment about information available to them at the time of their examination.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. 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. The Bank also generates other income, such as fee income on deposit accounts and merchant credit card services, debit card processing programs, and net gains on sales of securities and loans. The level of its other expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, and income tax expense, further affects the Bank’s net income. This discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements, the notes thereto, and other financial information included in the Company’s 2002 Form 10-K and this filing.
During the second quarter of 2003, the net interest margin compression affected earnings as operations continued in a historically low interest rate environment. The net interest margin declined to 5.3% for the six-month period ended June 30, 2003 from 5.5 (PER ARS-5.5)% doesn’t agree to table for the year ended December 31, 2002. Accelerated prepayments on the mortgage-backed securities and loans predominately contributed to the net interest margin compression as these cash flows were reinvested at current lower market yields. Cash flows resulting from sales of securities during the first half of 2003 were primarily reinvested in mortgage-backed securities and US Government treasuries. Sales of these available for sale securities afforded the opportunity to dispose of some of the higher coupon mortgage-backed securities in our investment portfolio that were rapidly repaying principal. Since the Bank’s balance sheet tends to be slightly asset sensitive, it is expected that earnings pressure will persist in the near term. The Bank continues to experience strong growth in its core business with increases in total loans and deposits of 12.9% and 12.4%, respectively, over June 30, 2002. However, management remains cognizant of growth levels and the long-term effects of adding assets to the balance sheet in the current rate environment. Management’s intent is to remain focused on strategies without taking undue risks by extending asset maturities to chase yield, or by compromising credit quality to record higher yielding assets. Maintaining efficiency remains a priority while continuing to grow markets and product offerings.
Financial Condition
The assets of the Company totaled $507,704,000 at June 30, 2003, an increase of $43,718,000 or 9.42% from year-end. This results from increased cash and cash equivalents of $9,996,000 or 92.5% and an increase in net loans of $14,455,000 or 5.9%. Investment in securities increased 9.5% to $211,742,000 as compared to December 31, 2002. The primary source of funds for the increase in assets derived from increased demand, savings, N.O.W. and money market deposits of $45,445,000 or 13.2% while other time deposits and certificates of deposit of $100,000 or more decreased by $2,043,000 or 3.3%. This net increase is primarily attributed to increases in public fund accounts and individual, partnership and corporate accounts. The secondary source of funds was an increase in principal repayments on loans and mortgage-backed securities primarily due to the historically low current interest rate environment. The sales of securities were a tertiary source of funds.
Total stockholders’ equity was $43,509,000 at June 30, 2003, an increase of 8.9% over December 31, 2002. The increase of $3,538,000 was primarily the result of: net income for the six month period ended June 30, 2003 of $5,013,000; plus stock award vesting and stock option exercises of $282,000; less cash dividends declared of $1,449,000; and less the net decrease in other comprehensive income, net of tax, of $308,000. Total capital, before the decrease in accumulated other comprehensive income, increased by $3,846,000 or 10.7%.
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 Unaudited Consolidated Statements of Financial Condition and its Unaudited Consolidated Statements of Income for the six and three month periods ended June 30, 2003 and 2002, respectively, and reflects the average yields on assets and average costs of liabilities for the six and three month periods ended June 30, 2003 and 2002, respectively. Dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown derives such yields and costs. 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 nonaccruing loans has been included only to the extent reflected in the Unaudited 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.
Three months ended June 30, 2003 2002
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(In thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------------------------------------------
Assets:
Interest earning assets:
Loans, net (including fee income) $256,237 $4,421 6.8% $226,013 $4,215 7.5%
Mortgage-backed securities 93,869 854 3.6 77,174 1,277 6.6
Tax exempt securities (1) 40,960 614 6.0 46,724 685 5.9
Taxable securities 51.924 519 4.0 32,923 400 4.9
Federal funds sold 5,227 16 1.2 12,081 52 1.7
Other securities 1,641 22 5.4 1,616 15 3.7
Deposits with banks 105 - - 63 1 6.4
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Total interest earning
assets 449,963 6,446 5.7 396,594 6,645 6.7
--------------------------------------------------------------------------------
Non interest earning assets:
Cash and due from banks 16,137 16,592
Other assets 13,847 13,202
------------- -----------
Total assets $479,947 $426,388
============= ===========
Liabilities and Stockholders'
Equity:
Interest bearing liabilities:
Savings, N.O.W. and
money market deposits $244,251 $427 0.7% $216,077 $754 1.4%
Certificates of deposit of
$100,000 or more 28,263 121 1.7 21,924 166 3.0
Other time deposits 33,047 156 1.9 32,671 217 2.7
Federal funds purchased 2,691 11 1.6 346 2 2.3
Other borrowings - - - 934 4 1.7
-------------------------------------------------------------------------
Total interest bearing
liabilities 308,252 715 0.9 271,952 1,143 1.7
Non interest bearing liabilities:
Demand deposits 132,082 120,722
Other liabilities 922 1,767
------------- -----------
Total liabilities 441,256 394,441
Stockholders' equity 38,691 31,947
------------- -----------
Total liabilities and
stockholders' equity $479,947 $426,388
============= ===========
Net interest income/interest rate 5,731 4.8 5,502 5.0
spread (2) ----------------- ------------------
Net interest earning assets/net
interest margin (3) $141,711 5.1% $124,642 5.6%
------------- --------- ----------- ---------
Ratio of interest earning assets to
interest bearing liabilities 146.0% 145.8%
--------- ---------
Less: Tax equivalent adjustment (224) (232)
------------ -----------
Net interest income $5,507 $5,270
============ ===========
| (1) | The above table is presented on a tax equivalent basis. |
| (2) | Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
| (3) | Net interest margin represents net interest income divided by average interest-earning assets. |
Six months ended June 30, 2003 2002
---------------------------------------------------------------------------------------------------------
(In thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------------------------
Assets:
Interest earning assets:
Loans, net (including fee income) $252,086 $8,950 7.0% $221,469 $8,403 7.7%
Mortgage-backed securities 88,561 1,925 4.4 80,404 2,676 6.7
Tax exempt securities (1) 42,371 1,251 5.9 44,398 1,314 6.0
Taxable securities 50,846 1,018 4.0 27,550 701 5.1
Federal funds sold 14,187 56 1.2 18,270 158 1.7
Other securities 1,628 45 5.5 1,513 30 4.0
Deposits with banks 106 1 1.9 73 1 2.8
----------------------------------------------------------------------
Total interest earning
assets 449,785 13,246 5.9 393,677 13,283 6.8
----------------------------------------------------------------------
Non interest earning assets:
Cash and due from banks 15,959 15,965
Other assets 13,717 12,800
------------- -------------
Total assets $479,461 $422,442
============= =============
Liabilities and Stockholders'
Equity:
Interest bearing liabilities:
Savings, N.O.W. and
money market deposits $244,330 $874 0.7% $215,478 $1,499 1.4%
Certificates of deposit of
$100,000 or more 28,330 264 1.9 22,629 350 3.1
Other time deposits 33,180 327 2.0 33,321 468 2.8
Federal funds purchased 1,917 15 1.6 174 3 3.5
Other borrowings 606 4 1.3 550 4 1.5
-----------------------------------------------------------------------
Total interest bearing
liabilities 308,363 1,484 1.0 272,152 2,324 1.7
Non interest bearing liabilities:
Demand deposits 127,603 117,399
Other liabilities 5,646 1,464
-------------- -------------
Total liabilities 441.612 391,015
Stockholders' equity 37,849 31,427
------------- -------------
Total liabilities and
stockholders' equity $479,461 $422,442
============= =============
Net interest income/interest rate
spread (2) 11,762 5.0 10,959 5.1
------------------------ ----------------------
Net interest earning assets/net
interest margin (3) $141,422 5.3% $121,525 5.6%
-------------- ------------- ---------- ------------
Ratio of interest earning assets to
interest bearing liabilities 144.4% 144.7%
------------- -----------
Less: Tax equivalent adjustment (456) (413)
----------- -----------
Net interest income $11,306 $10,546
============ ============
| (1) | The above table is presented on a tax equivalent basis. |
| (2) | Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities. |
| (3) | Net interest margin represents net interest income divided by average interest-earning assets. |
Rate/Volume Analysis
Net interest income can also 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) the 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.
Three months ended Six months ended
2003 Over 2002 2003 Over 2002
------------------------------------------------------------------
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) $1,906 ($1,700) $206 $2,031 ($1,484) $547
Mortgage-backed securities 1,361 (1,784) (423) 682 (1,433) (751)
Tax exempt securities (1) (132) 61 (71) (52) (11) (63)
Taxable securities 526 (407) 119 734 (417) 317
Federal funds sold (24) (12) (36) (59) (43) (102)
Other securities - 7 7 3 12 15
Deposits with banks 3 (4) (1) 1 (1) -
------------------------------------------------------------------
Total interest earning assets 3,641 (3,840) (199) 3,339 (3,376) (37)
------------------------------------------------------------------
Interest expense on interest
bearing liabilities
Savings, N.O.W. and money market
deposits 558 (885) (327) 500 (1,125) (625)
Certificates of deposit of $100,000
or more 252 (297) (45) 184 (270) (86)
Other time deposits 17 (78) (61) (2) (139) (141)
Federal funds purchased 13 (4) 9 17 (5) 12
Other borrowings (2) (2) (4) 1 (1) -
-----------------------------------------------------------------
Total interest bearing
liabilities 838 (1,266) (428) 700 (1,540) (840)
-----------------------------------------------------------------
Net interest income $2,803 ($2,574) $229 $2,639 (1,836) $803
=================================================================
(1) The above table is presented on a tax equivalent basis.
Capital
The Bank is subject to various regulatory capital requirements mandated by the federal banking agencies. Failure to meet minimum capital requirements can cause initiation of 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 are also subject to qualitative judgments by the regulators about classification, 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 table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of June 30, 2003, that the Bank met all regulatory capital adequacy requirements.
The Company’s only activity is the ownership of the Bank, and therefore, its capital, capital ratios, and minimum required levels of capital are substantially the same as the Bank’s. At June 30, 2003 and December 31, 2002, actual capital levels and minimum required levels for the Bank were:
As of June 30, 2003
-----------------------------------------------------------------------------------------------------
(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 $41,350 12.9% $25,585 >8.0% $31,981 >10.0%
assets)
Tier 1 Capital (to risk weighted 39,056 12.2 12,792 >4.0 19,188 >6.0
assets)
Tier 1 Capital (to average assets) 39,056 8.0 19,468 >4.0 24,335 >5.0
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 $37,786 12.6% $24,057 >8.0% $30,072 >10.0%
assets)
Tier 1 Capital (to risk weighted 35,492 11.8 12,029 >4.0 18,043 >6.0
assets)
Tier 1 Capital (to average assets) 35,492 7.6 18,697 >4.0 23,372 >5.0
Net income for the three-month period ended June 30, 2003 totaled $2,475,000 or $0.60 per diluted share as compared to $2,114,000 or $0.50 per diluted share for the same period in 2002. During the six month period ended June 30, 2003, the Company earned net income of $5,013,000 or $1.21 per diluted share as compared with $4,121,000 or $0.98 per diluted share for the same period in 2002. Highlights for the three months ended June 30, 2003 include: (i) $237,000 or 4.5% increase in net interest income; (ii) $698,000 or 83.2% increase in total other income; and (iii) $300,000 or 10.5% increase in total other expenses, over the same period in 2002. The effective income tax rate increased to 36.49% from 33.96% for the same period last year. Highlights for the six months ended June 30, 2003 include: (i) a $793,000 or 7.5% increase in net interest income; (ii) a $1,495,000 or 98.1% increase in total other income; and (iii) a $757,000 or 13.3% increase in total other expenses over the same period in 2002. The effective income tax rate increased to 36.46% from 33.93% for the same period last year.
Net income for the first six months of 2003 reflects annualized returns of 26.71% on average total stockholders’ equity and 2.11% on average total assets as compared to 25.93% on average total stockholders’ equity and 1.93% on average total assets for the preceding calendar year. For purposes of these calculations, average stockholders’ equity excludes the effects of changes in other comprehensive income, net of taxes.
The increase in net interest income of $237,000 or 4.5% for the current three month period over the same period last year resulted from a 13.5% increase in average total interest earning assets to $449,963,000 from $396,594,000 for the comparable period in 2002. Average interest bearing liabilities increased 13.3% to $308,252,000 in 2003 from $271,952,000 for the same period last year. The yield on average interest earning assets for the three-month period ended June 30, 2003 decreased to 5.7% from 6.7% during the same period in 2002. The cost of average interest bearing liabilities decreased to 0.9% from 1.7% during the same period in 2002. The tax adjusted net yield on average earning assets decreased to 5.1% from 5.6% from the same period in 2002.
Net interest income increased by $793,000 or 7.5% for the current six-month period over the same period last year. The increase primarily resulted from an increase in average total interest earning assets to $449,785,000 in 2003 from $393,677,000 for the comparable period in 2002, a 14.3% increase. Average interest bearing liabilities increased 13.3% to $308,363,000 in 2003 from $272,152,000 for the same period last year. The yield on average interest earning assets for the six-month period ended June 30, 2003 decreased to 5.9% from 6.8% during the same period in 2002. The cost of average interest bearing liabilities decreased to 1.0% from 1.7% during the same period in 2002. The net yield on average earning assets decreased to 5.3% from 5.6% during the same period.
The decrease in the net interest margin is principally an outcome of the continued low interest rate environment, resulting in interest earning assets repricing at historically low yields. Additionally, yields and income were impacted by prepayment activity, which has shortened the anticipated life of loans and mortgage-backed securities and accelerated premium amortization on the mortgage-backed securities. The yield on the average interest earning assets has decreased at a faster rate than the decrease in the cost of average interest bearing liabilities resulting in a negative impact on the net interest margin.
Average loans grew by $30,617,000 or 13.8% when compared to the same six-month period in 2002. Each component of the loan portfolio contributed to the growth; however, real estate loans at June 30, 2003 increased $36,284,000 or 20.1% over June 30, 2002. Growth in real estate loans is partially attributed to an increase in commercial mortgages. Fixed rate loans represented 16.7% of total loans at June 30, 2003 and 12.4% of total loans at June 30, 2002. While the Bank has been successful in growing the loan portfolio, while maintaining prudent underwriting standards, the sustained low interest rate environment has mitigated the benefit to the net interest income and margin.
Average investments increased $29,426,000 or 19.3% compared to the same six-month period in 2002. Average mortgage-backed securities increased when compared to the same six-month period in 2002, while average taxable securities grew 84.6% to $50,846,000 from $27,550,000. Average federal funds sold decreased $4,083,000 or 22.3% over the prior year. The net increase is partially due to deposit growth outpacing loan growth. Excess funds from increased deposits and increased cash flows from principal repayments on loans and securities, were deployed primarily into U.S. Treasury and U.S. Government bullet agency securities and mortgage-backed securities.
Average deposits grew by $44,616,000 or 11.5% over the same six-month period last year. Components of this growth include an increase in average demand deposits of $10,204,000 or 8.7% and an increase in average savings, NOW and money market deposits of $28,852,000 or 13.4%. Average public fund deposits were 20.9% of total average deposits at June 30, 2003 and 21.3% of total average deposits at June 30, 2002.
The increase in total deposits reflects the Bank’s continued emphasis on attracting individual, partnership and corporate deposits as well as expanding public fund relationships in the marketplace. Over the past two years, the Bank opened branches in Hampton Bays, NY and at Peconic Landing in Greenport, NY. The Bank’s branch expansion strategy coupled with business development efforts continue to support deposit growth.
The Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending area. The interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by its competitors, the Bank’s relationship with the customer and related risks. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.
The credit-worthiness of the loan portfolio continued to be strong for the quarter ended June 30, 2003. Since December 31, 2002, nonaccrual loans increased by $748,000 to $948,000 from $200,000, representing 0.3 % of loans, net, at June 30, 2003. Total nonaccrual loans represented 0.08% of net loans at December 31, 2002. The Bank had no foreclosed real estate at June 30, 2003 and June 30, 2002. Through adherence to consistently disciplined underwriting standards, the Bank incurred net losses from impaired loans with net charge-offs of $148,000 for the six months ended June 30, 2003 as compared to $15,000 for the same period last year.
Based on management’s continuing review of the overall loan portfolio and of the current asset quality of the portfolio, no provision for loan losses was recorded during the first six months of 2003. The allowance for loan losses decreased to $2,175,000 at June 30, 2003, as compared to $2,294,000 at December 31, 2002. As a percentage of loans, the allowance was 0.83% at June 30, 2003 and 0.92% at December 31, 2002.
Loans of approximately $11,883,000 or 4.5% of total loans at June 30, 2003 were classified as potential problem loans. This was an increase of $3,466,000 from $8,400,000 at December 31, 2002, but a decrease of $2,017,000 from $13,900,000 at March 31, 2003. These are loans for which management has information that 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. Due to the structure and nature of the credits, management currently believes that the likelihood of sustaining a loss on these relationships is remote.
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. Management evaluates the adequacy of our allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances.
The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.
Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under 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 valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. Assumptions and judgments also are used to determine the estimates of the fair value of the underlying collateral and the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.
Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Our pool evaluations are broken down as follows. First, loans with homogenous characteristics are pooled by loan type and include home equities, residential mortgages, land loans and consumer loans. Then all remaining loans are segregated into pools based upon the risk rating of each credit. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider the growth in the portfolio as well as our credit administration and asset management philosophies and procedures when determining the allowances for each pool. 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; 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 is adjusted quarterly, to a level deemed appropriate by management, based on its 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 June 30, 2003, management believes the allowance for loan losses has been established and maintained at levels adequate to reflect the probable incurred losses 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.
Total other income increased during the three-month period ended June 30, 2003 by $698,000 or 83.2% over the same period last year. For the six-month period ended June 30, 2003 total other income increased $1,495,000 or 98.1% over the same period last year. The significant increase was primarily due to net gains on sales of securities during both the first and second quarters of 2003 for a total of $1,200,000. There were no net securities gains for the three or six-month periods ended June 30, 2002. Service charges on deposit accounts for the three-month period ended June 30, 2003 totaled $614,000, an increase of $57,000 or 10.2% over the same period last year. Service charges on deposit accounts for the six-month period ended June 30, 2003 totaled $1,164,000, an increase of $184,000 or 18.8% over the same period last year. Fees for other customer services for the three-month period ended June 30, 2003 totaled $255,000, a decrease of $10,000 or 3.8% over the same period last year. Fees for other customer services for the six-month period ended June 30, 2003 totaled $457,000, a decrease of $44,000 or 8.8% over the same period in 2002.
Other operating income for the three-month period ended June 30, 2003 totaled $102,000, an increase of $85,000 or 500% over the same period last year. For the six-month period ended June 30, 2003 other operating income totaled $198,000, an increase of $155,000 or 360.0% over the same period last year. This increase is primarily due to revenue generated through the Bank’s majority investment in its title insurance subsidiary, Bridge Abstract Holding LLC.
Total other expenses increased during the three-month period ended June 30, 2003 by $300,000 or 10.5% over the same period last year. For the six-month period ended June 30, 2003 total other expenses increased by $757,000 or 13.3% over the same period last year. Compensation and benefit expense increased $154,000 or 9.9% for the three-month period ended June 30, 2003 over the same period last year. For the six-month period ended June 30, 2003, compensation and benefits expense increased $342,000 or 10.7% over the same period last year. The increase in compensation expense is attributed to increased costs of employee benefits and salaries as well as the additional employees for the new branches opened subsequent to the first quarter of 2002. Net occupancy expenses increased $44,000 or 16.9% during the three-month period ended June 30, 2003. For the six-month period ended June 30, 2003, net occupancy expenses increased $113,000 or 21.7% over the same period last year. Furniture and fixture expense for the three-month period ended June 30, 2003 increased $13,000 or 5.5% over the same period last year. For the six month period ended June 30, 2003, furniture and fixture expense increased $46,000 or 9.8% over the same period last year. These increases are partially attributed to the two additional branch offices opened subsequent to March 31, 2002.
Total other operating expenses for the three-month period ended June 30, 2003 totaled $881,000, an increase of $89,000 or 11.2% over the same period last year. Total other operating expense for the six-month period ended June 30, 2003 totaled $1,763,000, an increase of $256,000 or 17.0% over the same period last year. The increase was due primarily to the expenses of the Bank’s title insurance subsidiary.
The provision for income taxes increased during the three-month period ended June 30, 2003 by $334,000 or 30.7% over the same period last year. The effective tax rate for the three-month period ended June 30, 2003 increased to 36.48% as compared to 34.4% for the same period last year. The provision for income tax increased during the six-month period ended June 30, 2003 by $759,000 or 35.9% over the same period last year. The effective tax rate for the six-month period ended June 30, 2003 increased to 36.46% as compared to 33.93% for the same period last year. This increase primarily results from lower yields on tax-exempt securities, a reduction in the consolidated real estate investment trust subsidiary’s income as a percentage of total income, and a portion of the Company’s projected taxable income being taxed at a higher incremental rate.
Asset/Liability Management
The Company’s net interest income 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/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, maintain adequate liquidity, and manage the vulnerability of its operations to changes in interest rates.
The Company’s Asset/Liability Committee, comprised of members of senior management and the Board of Directors, meets periodically 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 are established by senior management that are reviewed and approved by the full Board of Directors.
The economic environment continually presents uncertainties as to future interest rate trends. The Asset/Liability Committee regularly monitors the cumulative gap position, in addition to utilizing 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 by adjusting the gap position.
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 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, lines of credit with other financial institutions including the Federal Home Loan Bank, and growth in the core deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds; deposit flows and early loan 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/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 eleven full service offices, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of the funds needed to finance its strategies. At June 30, 2003, the Bank had aggregate lines of credit of $42,000,000 with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $22,000,000 is available on an unsecured basis. 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. The Bank also has a master repurchase agreement with the FHLB, which increases 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.
Impact of Inflation, Changing Prices, and Monetary Policies
The financial statements and related financial data concerning the Company have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of the Company, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the FRB.
Recent Regulatory and Accounting Developments
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 America and better protect investors from corporate wrongdoing. The Sarbanes-Oxley Act’s principal legislation includes:
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.
The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities, and Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, Management determined that, upon adopting the new standards the new accounting standards will not materially effect the Company’s operating results or financial condition.
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 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, worldwide political and social occurrences, including acts of war, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 April 30, 2003. 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 April 30, 2003 and December 31, 2002:
Change in Interest 2003 2002
Rates in Basis Potential Change Potential Change
Points in Net in Net
(RATE SHOCK) Interest Income Interest Income
- -----------------------------------------------------------------------
----------------------------------------------------
$ Change % Change $ Change % Change
----------------------------------------------------
200 $(369,000) (1.69)% $(921,000) (4.04)%
Static - - - -
(100) $ 103,000 0.47% $ 421,000 1.85 %
(200) - - - -
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.
At June 30, 2003, management believes that there has been no material change in market risk from April 30, 2003.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1034, as amended) as of June 30, 2003. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held at The Bridgehampton National Bank, 2200 Montauk Highway, Bridgehampton, New York 11932 on April 21, 2003. Three Class A directors were elected for a term of three years and one Class C director was elected for a term of two years.
Against or
Nominees for Director For Withheld
- ----------------------------------------- ---------------- --------------
Class A (three year term):
R. Timothy Maran 2,923,518 23,577
Walter A. Preische, Jr. 2,923,518 23,577
Dennis A. Suskind 2,911,867 35,228
Class C (two year term):
Charles I. Massoud 2,886,564 60,531
Directors Continuing in Office
Class B (one year term):
Thomas E. Halsey
Marcia Z. Hefter
Class C (two year term):
Raymond Wesnofske
Thomas J. Tobin
Item 5. Other Information
Not applicable.
Item 6. Exhibits and
Reports on Form 8-K
a. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b)
and 18 U.S.C. Section 1350
b. Reports on Form 8-K
(i) Current Report on Form 8-K (Item 5), filed on May 21, 2003; (ii) Current Report on Form 8-K (Item 5), filed on June 17, 2003; and (iii) Current Report on Form 8-K (Item 7), filed on July 16, 2003.
SIGNATURES
In accordance with the requirement of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGE BANCORP, INC.
Registrant
August 12, 2003 /s/ Thomas J. Tobin
Thomas J. Tobin
President and Chief Executive Officer
August 12, 2003 /s/ Janet T. Verneuille
Janet T. Verneuille,
Senior Vice President, Chief Financial Officer
and Treasurer