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 are also 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 table below) 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 June 30, 2001, that the Bank meets all capital adequacy requirements to which it is subject and is considered well capitalized.
The Bank’s actual capital amounts and ratios are presented in the following table:
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements will change the accounting for business combinations and goodwill in two ways. First, SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Second, SFAS No. 142 changes the accounting for goodwill, including goodwill recorded in past business combinations. The previous accounting principles governing goodwill generated from a business combination will cease upon adoption of SFAS No. 142. The adoption of SFAS Nos. 141 and 142 will not materially effect the Company's statements of financial condition and results of operations. SFAS Nos. 141 and 142 will become effective on July 1, 2001 and January 1, 2002, respectively, for the Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaces SFAS No. 125. SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000, which disclosures have been incorporated into our consolidated financial statements. There was no material impact on the Company's financial condition or results of operations upon adoption of SFAS No. 140.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of a derivative and the resulting designation. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities"- an amendment of FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement amends and supersedes certain paragraphs of SFAS No. 133. The effective date for SFAS No. 138 is for fiscal years beginning after June 15, 2000. SFAS Nos. 138 and 133 apply to quarterly and annual financial statements. There was no material impact on the Company's financial condition or results of operations upon adoption of SFAS Nos. 138 and 133.
Comparison of Operating Results for the Three Months and Six Months Ended June 30, 2001 and 2000
During the three month period ended June 30, 2001, the Registrant earned net income of $1,676,000 or $ .38 per share as compared with $1,250,000 or $.29 per share for the same period in 2000. During the six month period ended June 30, 2001, the Registrant earned net income of $3,133,000 or $ .74 per share as compared with $2,460,000 or $ .57 per share for the same period in 2000. Highlights for the three months ended June 30, 2001 include: (i) a $567,000 or 13.7% increase in net interest income; (ii) a $467,000 or 293.7% increase in total other income; and (iii) a $236,000 or 9.4% increase in total other expenses over the same period in 2000. The effective income tax rate increased to 32.52% from 29.19% for the same period last year. Highlights for the six months ended June 30, 2001 include: (i) a $1,026,000 or 12.8% increase in net interest income; (ii) a $613,000 or 102.7% increase in total other income; and (iii) a $458,000 or 9.1% increase in total other expenses over the same period in 2000. The effective income tax rate increased to 31.78% from 29.21% for the same period last year.
Net income for the first six months of 2001 reflects annualized returns of 22.36% on average total stockholders’ equity and 1.70% on average total assets as compared to the corresponding figures for the preceding calendar year of 21.86% on average total stockholders’ equity and 1.62% on average total assets. For purposes of these calculations, average stockholders’ equity excludes the effects of changes in the unrealized appreciation (depreciation) on securities available for sale, net of taxes.
Net interest income, the primary source of income, increased by $567,000 or 13.7% for the current three month period over the same period last year. The increase primarily resulted from an increase in average total interest earning assets from $309,374,000 in 2000 to $353,588,000 for the comparable period in 2001, a 14.3% increase. Average interest bearing liabilities increased 17.0% to $247,987,000 in 2001 from $211,986,000 for the same period last year. The yield on average interest earning assets at for the three month period ended June 30, 2001 decreased to 8.0% from 8.2% during the same period in 2000. The cost of average interest bearing liabilities decreased to 3.5% from 3.8% during the same period in 2000. The net yield on average earning assets remained constant at 5.6% for the three month periods ended June 30, 2000 and 2001.
Net interest income increased by $1,026,000 or 12.8% 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 from $298,376,000 in 2000 to $344,202,000 for the comparable period in 2001, a 15.4% increase. Average interest bearing liabilities increased 15.3% to $239,276,000 in 2001 from $207,517,000 for the same period last year. The yield on average interest earning assets remained constant at 8.2% for the six month periods ended June 30, 2000 and 2001. The cost of average interest bearing liabilities increased to 3.8% from 3.6% during the same period in 2000. The net yield on average earning assets decreased to 5.5% from 5.6% during the same period last year.
Average mortgage backed securities grew by $25,272,000 or 49.8% when compared to the same six month period in 2000. This increase is partially due to deposit growth outpacing loan growth and a repositioning of the investment portfolio.
Average loans grew by $31,759,000 or 18.0% when compared to the same six month period in 2000. Each component of the loan portfolio contributed to the growth; however, real estate loans increased $17,123,000 or 10.3% since December 31, 2000. Growth in real estate loans is partially attributed to a change in holding strategy whereby a portion of originated residential mortgages are held in portfolio instead of being sold on the secondary market.
The performance of the loan portfolio continued to be strong for the six months ended June 30, 2001. Since December 31, 2000 non-performing loans decreased 43.0% from $769,000 to $438,000, representing 0.20% of loans, net, at June 30, 2001. The Company had no foreclosed real estate at quarter’s end. Total non-performing assets represented 0.11% of total assets at the corresponding date.
The provision for loan losses made during the second quarter of 2001 was $85,000. No provision for loan losses was made for the same period in 2000. A $170,000 provision for loan losses was recorded during the six month period ended June 30, 2001 compared to a $105,000 provision for the same period in 2000. The allowance for loan losses increased to $2,273,000 at June 30, 2001, as compared to $2,100,000 at December 31, 2000. As a percentage of loans, the allowance was 1.04% at June 30, 2001 and December 31, 2000.
The Bank monitors its 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 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 quarter ended June 30, 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 after consideration of the information available to them at the time of their examination.
Total other income increased during the three month period ended June 30, 2001 by $467,000 or 293.7% over the same period last year. For the six month period ended June 30, 2001 total other income increased $613,000 or 102.7% over the same period last year. Service charges on deposit accounts for the three month period ended June 30, 2001 totaled $361,000, an increase of $90,000 or 33.2% over the same period last year. Service charges on deposit accounts for the six month period ended June 30, 2001 totaled $710,000, an increase of $194,000 or 37.6% over the same period last year. 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. There were no net losses on securities for the three month period ended June 30, 2001 as compared to a $266,000 net loss for the same period last year. For the six month period ended June 30, 2001 net gains on securities totaled $78,000 compared to net losses of $266,000, an increase of $344,000 or 129.3% over the same period last year. 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 three month period ended June 30, 2001 totaled $188,000, an increase of $80,000 or 74.1% over the same period last year. Fees for other customer services for the six month period ended June 30, 2001 totaled $339,000, and increase of $91,000 or 36.7% over the same period in 2000. This increase is partially attributed to an increase in merchant processing income due to an increase in fees resulting from an increase in the number of merchants processing credit card sales. This
increase was partially offset by a decrease in fees collected on residential mortgage loans due to a reduction in the number of residential mortgages originated over the same period. Decreases in other income were partially offset by fees received through a new debit card product introduced during the third quarter of 1999.
Other operating income for the three month period ended June 30, 2001 totaled $77,000, an increase of $31,000 or 67.4% over the same period last year. The increase primarily resulted from an insurance recovery resulting from a prior year loss totaling approximately $51,000 that was recognized during the second quarter 2001. For the six month period ended June 30, 2001 other operating income totaled $83,000, a decrease of $16,000 or 16.2% over the same period last year. This decrease is primarily due to a decrease in income from the gain on the sale of mortgages of $64,000 or 84.1% partially offset by the prior mentioned insurance recovery. During the prior year, the Bank continued to sell mortgages into the secondary market as they converted from the construction phase to a permanent mortgage. As these loans run off, the Bank instituted a change in strategy whereby a portion of originated residential mortgages are held in portfolio instead of being sold on the secondary market.
Total other expenses increased during the three month period ended June 30, 2001 by $236,000 or 9.4% over the same period last year. For the six month period ended June 30, 2001 total other expenses increased by $458,000 or 9.1% over the same period last year. Compensation and benefit expense increased $232,000 or 18.0% for the three month period ended June 30, 2001 over the same period last year. For the six month period ended June 30, 2001 compensation and benefit expense increased $465,000 or 17.9% over the same period last year. The increase in compensation expense is attributed to increased staffing, primarily for the new branch office in Sag Harbor that the Bank opened in the first quarter of 2001, and salary increases. Net occupancy expenses increased $22,000 or 9.9% during the three month period ended June 30, 2001. For the six month period ended June 30, 2001 net occupancy expenses increased $76,000 or 17.9% over the same period last year. These increases primarily result from the leasing of space for the new branch office in Sag Harbor, opened during the first quarter. Furniture and fixture expense for the three month period ended June 30, 2001 increased $10,000 or 4.9% over the same period last year. For the six month period ended June 30, 2001 furniture and fixture expense increased $44,000 or 11.6% over the same period last year. The increase in furniture and fixture expense is attributed to the depreciation of item processing assets 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 this year.
Total other operating expenses for the three month period ended June 30, 2001 totaled $775,000, a decrease of $28,000 or 3.5% over the same period last year. Total other operating expenses for the six month period ended June 30, 2001 totaled $1,506,000, a decrease of $127,000 or 7.8% over the same period last year. During the first quarter of 2000, the Company 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 are steadily declining. A decrease in marketing expenses resulted from a reduction in expenditures made for promotional sponsorships.
The provision for income taxes increased during the three month period ended June 30, 2001 by $287,000 or 55.1% over the same period last year. The effective tax rate for the three month period ended June 30, 2001 was 32.52% as compared to the prior year rate of 29.41%. The provision for income taxes increased during the six month period ended June 30, 2001 by $443,000 or 43.6% over the same period last year. The effective tax rate for the six month period ended June 30, 2001 was 31.78% as compared to a rate of 29.24% for the same period last year. These increases are primarily due to the Bank holding less tax exempt securities.
Asset/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 the portfolio. Management’s asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks and to maintain adequate liquidity.
The Company’s Asset/ Liability Committee, comprised of members of senior management and the Board, 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 established by senior management which are reviewed and approved by the full Board of Directors.
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 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 Company’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, the sale of securities from the available for sale portfolio, and growth in the core deposit base. While scheduled loan amortization, maturing securities and short term investments are a relatively predictable source of funds, deposit flows and 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 loans to capital ratios. At June 30, 2001, the Company had aggregate lines of credit of $30,000,000 with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $10,000,000 is availble on an unsecured basis. The Company also has the ability, as a member of the Federal Home Loan Bank (“FHLB”) system, to borrow against investment securities and unencumbered residential mortgages owned by the Bank. At June 30, 2001, the Company had no such borrowings outstanding. During the first quarter of 2001, the Bank also executed a master repurchase agreement with the Federal Home Loan Bank which increased it’s borrowing capacity. The Bank does not anticipate the need to borrow under this agreement 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. Management believes the Company has sufficient liquidity to meet its operating requirements.
Private Securities Litigation Reform Act Safe Harbor Statement
In this report, as well as other written communications made from time to time by the Company or the Bank (including, without limitation, the Company’s 2000 Annual Report to Stockholders) 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”, “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 a generally accepted accounting principles (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 accounting principles, policies or guidelines, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11.0 Statement re: Computation of Per Share Earnings b. Reports on Form 8-K
NoneSIGNATURES
In accordance with the requirement of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGE BANCORP, INC.
Date: August 14,2001 /s/ Thomas J. Tobin
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Thomas J. Tobin
President and Chief Executive Officer
Date: August 14, 2001 /s/ Christopher Becker
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Christopher Becker
Executive Vice President and Treasurer
