U.S. Securities and Exchange CommissionWashington, DC 20549 FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the Transition period from ____________________ to _____________________ Commission file Number 0-18546 BRIDGE BANCORP, INC
(Exact name of registrant as specified in its charter) NEW YORK 11-2934195
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 2200 Montauk Highway, Bridgehampton, New York 11932
(Address of principal executive office) (Zip Code) Issuer's telephone number, including area code (631) 537-1000
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None Securities registered under Section 12 (g) of the Exchange Act: Common Stock, Par Value of $0.01 Per Share, (Title of Class) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405) of this chapter is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock owned by non-affiliates of the Registrant as of February 19, 2002 was $77,642,886.
TABLE OF CONTENTS
PART I
Item 1 Business 1
Item 2 Properties 2
Item 3 Legal Proceedings 2
Item 4 Submission of Matters to a Vote of Security Holders 2
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 3
Item 6 Selected Financial Data 4
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation 5
Item 7A Market Risk 15
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37
PART III
Item 10 Directors and Executive Officers of the Registrant 37
Item 11 Executive Compensation 37
Item 12 Security Ownership of Certain Beneficial Owners and Management 37
Item 13 Certain Relationships and Related Transactions 38
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8K 38
SIGNATURES 39
EXHIBIT INDEX 40
PART I
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 15, 2002, dated March 8, 2002, are incorporated by reference into Part III.
Item 1. Business
Bridge Bancorp, Inc. (the “Registrant” or “Company”) is a registered bank holding company, the sole subsidiary of which is The Bridgehampton National Bank (the “Bank”). The Registrant was organized as a New York business corporation and incorporated under the laws of the State of New York in 1988, at the direction of the Board of Directors of the Bank for the purpose of becoming a bank holding company pursuant to a plan of reorganization; under the plan the former stockholders of the Bank became the stockholders of the Company. Since commencing business in March 1989, after the reorganization, the Registrant has functioned primarily as the holder of all of the Bank’s common stock. In May 1999, the Bank established a real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”). The assets transferred to BCI are viewed by the regulators as part of the Bank’s assets in consolidation. The establishment of BCI provides an additional vehicle for access by the Company to the capital markets for future investment purposes.
At present, the Registrant does not own or lease any property and has no paid employees. The Registrant uses the Bank's space and employees without separate payment.
The Bank was established in 1910 as a national banking association and is under the supervision of the Office of the Comptroller of the Currency (the “O.C.C.”). Its headquarters are located at 2200 Montauk Highway, Bridgehampton, New York 11932.
The Bank, a community-oriented financial institution, engages in full service commercial and consumer banking and limited trust business, including accepting time and demand deposits from the areas surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in (1) commercial real estate loans, secured and unsecured commercial loans, and consumer loans such as home equity loans and residential mortgages; (2) mortgage loan surrogates such as mortgage backed securities; (3) obligations of New York State and local political subdivisions; and (4) U.S. government agency and treasury securities. To a lesser extent, the Bank originates certain other loans, such as auto, personal, home improvement, commercial construction and S.B.A. guaranteed loans. In addition, the Bank offers merchant credit and debit card processing, wealth management services, automated teller machines, cash management services, online banking services, safe deposit boxes and individual retirement accounts.
As part of the Company’s strategy to find ways to best utilize its available capital, during 2001 the Company instituted a stock repurchase program repurchasing 65,590 shares of its common stock under the plan. In January 2001, prior to instituting the stock repurchase plan, the Company repurchased 5,000 shares of its common stock, bringing the total number of treasury shares, at December 31, 2001 to 91,333 and the total number of outstanding common shares to 4,166,264. At December 31, 2001, 145,040 shares remain to be repurchased under the current stock repurchase program.
The Bank employs 118 people on a full-time and part-time basis. The Bank provides a variety of employment benefits and considers its relationship with its employees to be positive.
All phases of the Bank’s business are highly competitive. The Bank faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide or regional presence, and in some cases, a national presence. Most of these competitors are significantly larger than the Bank, and therefore have greater financial and marketing resources than those of the Bank. The Bank considers its major competition to be local commercial banks as well as other commercial banks with branches in the Bank’s market area. The Bank’s market is primarily the trade areas of the North and South Forks of Eastern Suffolk County, with concentrations in the Bridgehampton, East Hampton, Greenport, Mattituck, Montauk, Sag Harbor, Southampton, and Southold, New York areas. In December 2001 the Bank received approval from its regulator to open a branch in Hampton Bays, New York.
The Company is subject to the regulation and supervision of the Federal Reserve Board and the Securities and Exchange Commission. The primary banking agency responsible for regulating the Bank is the Comptroller of the Currency. The Bank is also subject to regulation and supervision by the Federal Reserve Board and the Federal Deposit Insurance Corporation.
Financial Modernization Legislation: In November 1999, financial modernization legislation, entitled the Gramm Leach Bliley Act (“GLBA”), was enacted that eliminated certain legal barriers separating the conduct of various types of financial services businesses, such as commercial banking, investment banking and insurance. In addition, GLBA substantially revamped the regulatory scheme
Page -1-
within which financial institutions such as the Bank operate. While certain provisions of GLBA became effective upon enactment, many major provisions did not become effective until May 2001. As a result, while certain of the provisions of GLBA are expected to affect operations, the overall impact of GLBA on the Bank cannot be predicted at this time.
Under GLBA, subject to certain conditions imposed by the OCC, national banks will be permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting these subsidiaries to engage in certain activities that were previously impermissible. In order to insulate the parent bank from the risk of these new financial activities, GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the Bank’s equity investment in any financial subsidiary must be deducted from the Bank’s assets and tangible equity for purposes of calculating the Bank’s capital adequacy. In addition, GLBA imposes new restrictions on transactions between banks and their financial subsidiaries similar to restrictions currently applicable to transactions between banks and their nonbank affiliates. During 2001, the Bank received regulatory approval to organize a financial subsidiary to be a joint venture partner in a title insurance agency. The Bank’s investment in such financial subsidiary is not expected to be more than $100,000 in 2002.
Item 2. Properties
Facilities of the Registrant are located at 2200 Montauk Highway, Bridgehampton, New York in the Bank's Main Office building. As such, the Registrant itself has no physical properties.
The Bank’s Main Office is owned in fee. The Bank also owns the building which houses its Southold Branch located at 54790 Main Road, Southold, New York. The Bank leases eight additional properties as branch locations at 425 County Road 39A, Southampton, New York; 26 Park Place, East Hampton, New York; Mattituck Plaza, Main Road, Mattituck, New York; 218 Front Street, Greenport, New York; 94 Main Street, Southampton, New York; 2 Bay Street, Sag Harbor, New York; Montauk Highway, Hampton Bays, New York; and 1 The Plaza, Montauk, New York. The Bank leases additional space at 184 Old Country Road, Riverhead, New York formerly used as a residential mortgage center. The Bank is currently subletting this space.
Item 3. Legal Proceedings
The Bank, two present executive officers and one former executive officer, have been named as defendants in a lawsuit that was filed on February 18, 1999 by two former employees in Suffolk County Supreme Court. The plaintiffs assert causes of action in connection with their employment, conduct of loan and banking transactions, and subsequent termination or resignation. The plaintiffs seek compensatory and punitive damages. In the opinion of management at the present time, after consultation with legal counsel, the lawsuit is without merit and the ultimate outcome of this matter is not expected to have a material adverse effect on the Company’s results of operations, business operations or consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the shareholders during the fourth quarter of the fiscal year covered by this report.
Page -2-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
COMMON STOCK INFORMATION
The Company’s common stock is traded on the NASDAQ over the counter bulletin board market under the symbol “BDGE”. The following table details the quarterly high and low prices of the Company’s common stock and the dividends declared for such periods.
At December 31, 2001 the Company had approximately 713 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various banks and brokers.
COMMON STOCK INFORMATION
Stock Prices Dividends
High Low Declared
By Quarter 2001
First $17.500 $15.375 $0.13
Second $19.000 $17.000 $0.13
Third $20.000 $17.500 $0.14
Fourth $18.650 $17.500 $0.15
Stock Prices Dividends
High Low Declared
By Quarter 2000
First $20.000 $15.000 $0.12
Second $17.000 $15.500 $0.12
Third $17.125 $16.000 $0.12
Fourth $17.250 $16.000 $0.13
Page -3-
Item 6. Selected Financial Data
Five Year Summary of Operations
(In thousands, except per share data and financial ratios)
Set forth below are selected consolidated financial and other data of the Company. The Company’s business is primarily the business of the Bank. This financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company.
December 31, 2001 2000 1999 1998 1997
Selected Financial Data:
Securities available for sale $125,709 $114,454 $ 84,596 $ 69,443 $ 60,190
Securities held to maturity/for investment 17,552 12,397 13,373 5,052 11,812
Loans, net 213,014 198,992 168,899 166,983 137,243
Total assets 393,424 354,642 300,044 266,951 233,112
Total deposits 357,155 313,379 274,322 241,531 203,697
Total stockholders' equity (4) 32,861 28,788 23,672 22,232 19,451
Year Ended December 31,
Selected Operating Data:
Total interest income (including fee income) $ 27,009 $ 25,458 $ 21,056 $ 19,019 $ 17,224
Total interest expense 7,868 8,753 6,135 5,978 5,543
Net interest income 19,141 16,705 14,921 13,041 11,681
Provision for loan losses 323 105 420 425 410
Net interest income after provision
for loan losses 18,818 16,600 14,501 12,616 11,271
Total other income 2,419 1,734 2,264 2,671 4,028(2)
Total other expenses 11,198 10,234 9,611 9,303 8,772
Income before income taxes 10,039 8,100 7,154 5,984 6,527(2)
Provision for income taxes 3,292 2,464 2,387 2,089 2,332
Net income $ 6,747 $ 5,636 $ 4,767 $ 3,895 $ 4,195(2)
December 31,
Selected Financial Ratios and Other Data:
Return on average equity (1) 23.13% 21.86% 21.00% 19.19% 23.08%(2)
Return on average assets (1) 1.74% 1.62% 1.59% 1.51% 1.86%(2)
Equity to assets (1) 7.88% 7.77% 8.15% 8.00% 8.00%
Dividend payout ratio 34.27% 36.83% 37.47% 38.05% 47.00%(2)
Diluted earnings per share (3) $1.60 $1.32 $1.11 $0.91 $0.99(2)
Basic earnings per share (3) $1.61 $1.33 $1.12 $0.92 $0.99(2)
Cash dividends declared per common share (3) $0.55 $0.49 $0.42 $0.35 $0.47(2)
(1) For purposes of these calculations, average stockholders' equity and average assets exclude the effect of changes in other comprehensive income, net of taxes.
(2) On June 17, 1997, the Bank sold its former headquarters building resulting in a gain, net of taxes, of approximately $829,000. Return on average equity excluding this gain, net of taxes, was 18.52%. Return on average assets excluding this gain, net of taxes, was 1.49%. On December 15, 1997 the Bank declared a one time special dividend of approximately $845,000, or $.20 per share, paying out this gain to the shareholders.
(3) On July 20, 1998, the Board of Directors declared a three-for-one stock split in the form of a stock dividend payable August 31, 1998, to stockholders of record as of August 19, 1998. As a result, $14,439,990 was transferred from Undivided Profits and Capital Surplus at August 19, 1998 to reflect the issuance. On April 15, 1997, the Board of Directors declared a three-for-one stock split in the form of a stock dividend payable on May 30, 1997 to stockholders of record as of May 1, 1997. As a result, $4,801,000 was transferred from Undivided Profits and Capital Surplus at May 1, 1997 to reflect the issuance. All per share amounts have been adjusted to reflect the effects of these splits.
Page -4-
(4) The equity section of the balance sheet also reflects the decrease in the par value of the Company’s Common Stock from a par value of Five Dollars ($5.00) per share to a par value of One Cent ($0.01) per share. This change was authorized by the Board of Directors and adopted by the Shareholders at the Company’s April 19, 1999 annual meeting. The change was effectuated during the second quarter of 1999 by filing an amendment to the Company’s certificate of incorporation. Such reduction in par value permitted the Company to decrease its stated capital by approximately $21,203,000. Capital surplus increased by approximately $21,203,000, thereby providing the Company with the ability to allow payments of dividends from surplus if deemed advisable or necessary by the Board of Directors. Capital surplus has not been restated for prior periods. It should be realized, however, that as a practical matter the Company would only have the ability to pay out a moderate proportion of the aggregate increase in capital surplus as dividends since there are regulatory restrictions on the payment of dividends.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
Bridge Bancorp, Inc. (“the Company”), a New York corporation, is a one-bank holding company formed effective March 31, 1989, and on a parent only basis, had minimal results of operations for 2001, 2000 and 1999. In the event the Company subsequently expands its current operations, it will be dependent on dividends from its wholly-owned subsidiary, The Bridgehampton National Bank (“the Bank”), its own earnings, additional capital raised and borrowings as sources of funds. The information below reflects principally the financial condition and results of operations of the Bank. The Bank’s results of operations are primarily dependent on its net interest income, which is mainly the difference between interest income on loans and investments and interest expense on deposits and borrowings. Interest income on loans and investments is a function of the average balances outstanding and the average rates earned during a period. Interest expense is a function of the average amount of interest bearing deposits and the average rates paid on such deposits during a period. The Bank also generates other income, such as fee income on deposit accounts and merchant credit and debit card processing programs, and net gains and losses on sales of securities and loans. The Bank’s net income is further affected by the level of its other expenses, such as employees’ salaries and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. This discussion and analysis should be read in conjunction with the Audited Consolidated Financial Statements, the notes thereto and the other financial information included elsewhere in this filing. Certain reclassifications have been made to prior year amounts, and the related discussion and analysis, to conform to the current year presentation.
FINANCIAL CONDITION
The assets of the Company totaled $393,424,000 at December 31, 2001, an increase of $38,782,000 or 10.9% from the previous year end. This increase mainly results from an increase in cash and cash equivalents of $8,319,000 or 51.9%, an increase in debt and equity securities of $16,410,000 or 12.9%, and an increase in gross loans of $14,270,000 or 7.1%.
Total loans grew $14,270,000 or 7.1% since fiscal year end 2000. Average loans grew by $28,780,000 or 15.8% when compared to the prior year. Each component of the loan portfolio contributed to the growth; however, real estate loans increased $15,106,000 or 9.1% while all other loans decreased $880,000 or 2.5% since December 31, 2000. Growth in real estate loans is partially attributed to a change in holding strategy whereby originated residential mortgages are held in portfolio instead of being sold on the secondary market; a marketing campaign promoting equity loans; and increased business development resulting from branch expansion.
The performance of the loan portfolio continued to be strong for the twelve months ended December 31, 2001. Since December 31, 2000 non-performing loans decreased 44.6% from $769,000 to $532,000, representing 0.25 % of loans, net, at December 31, 2001. The Company had no foreclosed real estate at 12/31/01. Total non-performing assets represented 0.14% of total assets at the corresponding date.
Total investment securities increased from $126,851,000 at December 31, 2000 to $143,261,000 at December 31, 2001. The available for sale investment portfolio increased 9.8% to $125,709,000 primarily as a result of increased holdings of mortgage backed securities. Securities held as available for sale may be sold in response to, or in anticipation of, changes in interest rates and resulting prepayment risk, or other factors. During the first quarter of 2001, management sold municipal securities in the available for sale investment portfolio and reinvested these funds in mortgage backed securities earning higher market rates of return. Average mortgage backed securities grew by $20,966,000 or 35.6% when compared to the prior year. This increase is partially due to deposit growth outpacing loan growth and the repositioning of the investment portfolio. Investing in mortgage backed securities generally provides stable cash flows, which may be reinvested at current market rates. The weighted average life of the mortgage backed securities portfolio was 2.97 years at December 31, 2001.
Page -5-
The source of funds for the increase in assets was derived from increased deposits of $43,776,000 or 14.0%. The increase in deposits is offset by a decrease in overnight borrowings of $9,700,000 or 100% from the prior year-end. Demand deposits increased $15,087,000 or 15.1%. This increase is attributed to growth in deposits associated with business development efforts in new and existing markets. Savings, N.O.W. and money market deposits increased $25,357,000 or 16.0%. This increase is primarily attributed to increased money market deposits both in public fund accounts and individual, partnership and corporate accounts. Certificates of deposit of $100,000 or more and other time deposits increased $3,332,000 or 6.1% over December 31, 2000.
Total stockholders’ equity was $32,861,000 at December 31, 2001, an increase of 14.2% over December 31, 2000. The increase of $4,073,000 was the result of net income for the year ended December 31, 2001of $6,747,000; plus the proceeds of $173,000 from the exercise of incentive stock options pursuant to the equity incentive plan; plus the related tax benefit of $12,000 from the disqualifying disposition relating to the sale of incentive stock options issued pursuant to the equity incentive plan; plus $29,000 for the issuance of vested stock awards from treasury; less cash dividends declared of $2,312,000; less the purchase price of 70,590 shares of common stock which was acquired and is now held as treasury stock at a cost of $1,264,000; and plus the net increase in other comprehensive income, net of tax, of $688,000. Changes in market conditions were the primary reason for the net increase in unrealized appreciation in securities available for sale, which increased other comprehensive income.
ASSET/LIABILITY MANAGEMENT
The Company’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits, and the credit quality of earning assets. Management’s asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, maintain adequate liquidity, and reduce vulnerability of its operations to changes in interest rates.
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.
As measured by the Interest Sensitivity Gap Table, the Company’s estimated one year cumulative interest sensitivity gap (the difference between assets and liabilities that reprice or mature within such period) was a negative $36,458,000, or (9.27)% of total assets. A gap is considered negative when interest rate sensitive liabilities maturing or repricing within a specified time period exceed the amount of interest rate sensitive assets repricing or maturing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing within a specified time frame exceeds the amount of interest rate sensitive liabilities repricing or maturing within that same time period. In a rising rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a greater increase in the costs of its liabilities relative to the yields of its assets and thus a decrease in the institution’s net interest income, whereas an institution with a positive gap would generally be expected to experience the opposite results. Conversely, during a period of falling rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.
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.
Page -6-
INTEREST RATE SENSITIVITY ANALYSIS
The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at December 31, 2001, which are anticipated by the Bank, using certain assumptions based on historical experience and other data available to management, to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or contractual maturity of the asset or liability. This table does not necessarily indicate the impact of general interest rate movements on the Bank’s net interest income because actual repricing of various assets and liabilities is subject to customer discretion and competitive and other pressures and, therefore, actual experience may vary from that indicated.
Over Three Over Six Over One
Three Months Months Year
Year Ended Months Through Through Through Over
December 31, 2001 or Less Six Months One Year Five Years Five Years Total
(In thousands, except financial ratios)
Interest earning assets:
Investment in debt and equity securities (1) $ 8,864 $ 21,070 $ 18,384 $ 69,477 $ 20,677 $ 138,472
Federal funds sold 13,500 - - - - 13,500
Total loans (2) 84,520 14,859 33,104 72,994 8,676 214,153
Total Interest Earning Assets $ 106,884 $ 35,929 $ 51,488 $ 142,471 $ 29,353 $ 366,125
Interest bearing liabilities:
Savings, N.O.W. and money market accounts $ 184,240 $ - $ - $ - $ - $ 184,240
Certificates of deposit 26,630 9,319 10,570 11,319 - 57,838
Total Interest Bearing Liabilities $ 210,870 $ 9,319 $ 10,570 $ 11,319 $ - $ 242,078
Interest Sensitivity Gap Per Period $ (103,986) $ 26,610 $ 40,918 $ 131,152 $ 29,353 $ 124,047
Cumulative Interest Sensitivity Gap $ (103,986) $ (77,376) $ (36,458) $ 94,694 $ 124,047
Gap to Total Assets (29.43)% (19.67)% (9.27)% 24.07% 31.53%
(1) Investment in debt and equity securities is shown excluding the fair value appreciation of $3,472,000, before tax, due to the application of SFAS No. 115. Investment in debt and equity securities includes interest earning deposits with banks of $50,000.
(2) For the purpose of this table, nonaccrual loans of approximately $532,000 have been included.
Certain shortcomings are inherent in the method of analysis presented. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. The table reflects the estimates of management as to periods to repricing at particular points in time. Among the factors considered, management monitors both current trends and its historical repricing experience with respect to particular or similar products. For example, the Bank has a number of deposit accounts, including passbook savings, N.O.W. accounts and money market accounts which may be withdrawn at any time. The Bank, based on historical experience, assumes that while all customers in these account categories could withdraw their funds on any given day, they will not do so, even if the market interest rates were to change. As a result, different assumptions may be used at different points in time.
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.
Page -7-
The following table sets forth certain information relating to the Bank’s average consolidated statements of financial condition and its consolidated statements of income for the years indicated and reflects the average yield on assets and average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years shown. Average balances are derived from daily average balances and include non-performing loans. The yields and costs include fees which are considered adjustments to yields. Interest on nonaccruing loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investment in debt and equity securities exclude unrealized appreciation/depreciation due to the application of SFAS No. 115.
Twelve months Ended December 31, 2001 2000 1999
(In thousands) Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Interest earning assets:
Loans (including fee income) $211,458 $18,188 8.6% $182,678 $17,012 9.3% $166,904 $15,113 9.1%
Mortgage backed securities 79,800 5,729 7.2% 58,834 4,242 7.2% 43,794 2,936 6.7%
Tax exempt investment securities (1) 38,672 2,517 6.5% 41,631 2,647 6.4% 31,058 2,009 6.5%
Taxable investment securities 12,693 793 6.2% 16,866 1,099 6.5% 13,351 852 6.4%
Federal funds sold 15,025 498 3.3% 14,944 948 6.3% 12,934 641 5.0%
Other securities 1,321 77 5.8% 1,083 75 6.9% 1,083 73 6.7%
Deposits with banks 826 32 3.9% 3,751 240 6.4% 1,955 95 4.9%
Total interest earning assets $359,795 $27,834 7.7% $319,787 $26,263 8.2% $271,079 $21,719 8.0%
Non interest earning assets:
Cash and due from banks 14,176 13,196 13,291
Other assets 13,283 14,792 15,441
Total assets $387,254 $347,775 $299,811
Interest bearing liabilities:
Savings, N.O.W. and
money market deposits $186,011 $ 5,201 2.8% $155,680 $ 5,449 3.5% $122,118 $ 2,986 2.4%
Certificates of deposit of $100,000
or more 25,296 1,181 4.7% 29,779 1,665 5.6% 28,493 1,392 4.9%
Other time deposits 33,692 1,464 4.3% 33,832 1,582 4.7% 38,823 1,754 4.5%
Federal funds purchased 479 19 4.0% 859 57 6.6% 44 3 6.8%
Other borrowings 68 3 4.4% - - - - - -
Total interest bearing liabilities $245,546 $ 7,868 3.2% $220,150 $ 8,753 4.0% $189,478 $ 6,135 3.2%
Non interest bearing liabilities:
Demand deposits 111,038 99,969 85,893
Other liabilities 1,498 1,870 1,683
Total liabilities 358,082 321,989 277,054
Stockholders' equity 29,172 25,786 22,757
Total liabilities and stockholders' equity $387,254 $347,775 $299,811
Net interest income/interest
rate spread (1) $19,966 4.5% $17,510 4.2% $15,584 4.8%
Net earning assets/net yield on
average interest earnings assets (2) $114,249 5.6% $ 99,637 5.5% $ 81,601 5.7%
Ratio of interest earning assets to
interest bearing liabilities 146.5% 145.3% 143.1%
Less: Tax equivalent adjustment $ (825) $ (805) $ (663)
Net interest income $19,141 $16,705 $14,921
(1) The above table is presented on a tax equivalent basis. Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(2) Net interest margin represents net interest income divided by average interest-earning assets.
Page -8-
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing rates and changing volumes. The following table describes 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.
Year Ended December 31, 2001 Over 2000 2000 Over 1999
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) $ 2,527 $(1,351) $ 1,176 $ 1,537 $ 362 $ 1,899
Mortgage-backed securities 1,487 - 1,487 1,073 233 1,306
Tax exempt investment securities (1) (175) 45 (130) 670 (32) 638
Taxable investment securities (258) (48) (306) 233 14 247
Federal funds sold 5 (455) (450) 115 192 307
Other securities 15 (13) 2 - 2 2
Deposits with banks (138) (70) (208) 109 36 145
Total interest earning assets $ 3,463 $(1,892) $ 1,571 $ 3,737 $ 807 $ 4,544
Interest expense on interest
bearing liabilities:
Savings, N.O.W. and money market deposits 953 (1,201) (248) 923 1,540 2,463
Certificates of deposits of $100,000 or more (234) (250) (484) 66 207 273
Other time deposits (17) (101) (118) (244) 72 (172)
Federal funds purchased (20) (18) (38) 54 - 54
Other borrowings 3 - 3 - - -
Total interest bearing liabilities $ 685 $(1,570) $ (885) $ 799 $ 1,819 $ 2,618
Net interest income $ 2,778 $ (322) $ 2,456 $ 2,938 $(1,012) $ 1,926
(1) The above table is presented on a tax equivalent basis.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General.
Net income for 2001 totaled $6,747,000, or $1.60 per share, as compared to net income of $5,636,000 or $1.32 per share for the year ended December 31, 2000. Net income for 2001 increased $1,111,000 or 19.7%, over 2000. Highlights include: (i) a $2,436,000 or 14.6% increase in net interest income; (ii) an increase in the provision for loan losses of $218,000; (iii) a $685,000 or 39.5% increase in total other income; and (iv) a $964,000 or 9.4% increase in total other expenses over the same period in 2000. The provision for income taxes increased $828,000 or 33.6%.
Net Interest Income.
Net interest income increased from $16,705,000 in 2000 to $19,141,000 in 2001. The increase of 14.6% reflects an increase in average interest earning assets from $319,787,000 in 2000 to $359,795,000 in 2001 or 12.5%. Average interest bearing liabilities increased from $220,150,000 in 2000 to $245,546,000 in 2001or 11.5%. The tax adjusted net yield on average interest earning assets for 2001 increased to 5.6% from 5.5% for 2000.
Interest Income.
Total interest income increased from $25,458,000 in 2000 to $27,009,000 in 2001, an increase of 6.1%. The tax adjusted yield on average interest earning assets for 2001 decreased to 7.7% from 8.2% for 2000.
Page -9-
Interest income on loans (including fee income) increased $1,176,000 during 2001 the result of an increase in average loans of 15.8% from $182,678,000 in 2000 to $211,458,000 in 2001. The yield on average loans for 2001 decreased to 8.6% from 9.3% for 2000. Interest on investment in debt and equity securities increased $1,033,000 or 14.2% over 2000. The increase resulted from an increase in average investment in debt and equity securities of 11.9% from $118,414,000 in 2000 to $132,486,000 in 2001. The tax adjusted average yield on debt and equity securities increased from 6.8% in 2000 to 6.9% in 2001.
Interest Expense.
Interest expense decreased $885,000 to $7,868,000 in 2001 from $8,753,000 in 2000. The decrease of 10.1% in interest expense was caused by the cost of average interest bearing liabilities decreasing to 3.2% during 2001 from 4.0% during 2000.
Provision for Loan Losses.
The Bank’s loan portfolio consists primarily of real estate loans secured by commercial real estate properties and residential properties located in the Bank’s principal lending area. The interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by its competitors. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Total loans grew $14,270,000 or 7.1% since fiscal year end 2000. Average loans grew by $28,780,000 or 15.8% when compared to the prior year. Each component of the loan portfolio contributed to the growth, however, real estate loans increased $15,106,000 or 9.1% while all other loans decreased $880,000 or 2.5% over December 31, 2000. Growth in real estate loans is partially attributed to a change in holding strategy whereby originated variable rate residential mortgages are held in portfolio instead of being sold on the secondary market, and a marketing campaign promoting home equity loans.
The performance of the loan portfolio continued to be strong for the twelve months ended December 31, 2001. Since December 31, 2000 non-performing loans decreased 44.6% from $769,000 to $532,000, representing 0.25 % of loans, net, at December 31, 2001. The Company had no foreclosed real estate at 12/31/01. Total non-performing assets represented 0.14% of total assets at the corresponding date.
By adherence to its disciplined underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge offs of $75,000 for the year ended December 31, 2001, as opposed to net recoveries of $24,000 for the year ended December 31, 2000. The Bank has maintained the strength of its loan portfolio, as evidenced by its ratio of allowance for loan losses to nonperforming loans of 441.4% and 273.1% at December 31, 2001and 2000, respectively.
Loans of approximately $4,282,000 at December 31, 2001 were classified as potential problem loans. These are loans for which management has information which indicates the borrower may not be able to comply with the present payment terms. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis.
Based on management’s continuing review of the overall loan portfolio and the current asset quality of the portfolio, a provision for loan losses of $323,000 was recorded in 2001. A $105,000 provision for loan losses was made for fiscal year end 2000. The allowance for loan losses increased to $2,348,000 at December 31, 2001, as compared to $2,100,000 at December 31, 2000. As a percentage of loans, the allowance was 1.09% at December 31, 2001 and 1.04% at December 31, 2000.
The Bank seeks to maintain its loans in performing status through, among other things, consistent monitoring of nonperforming assets in an effort to return them to current status. The Bank also monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, delinquency trends, probable losses, past loss experience, current economic conditions, concentrations of credit and other pertinent factors. Weight is also given to input from the Bank’s outside loan review consultants. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance. Based on management’s and the loan classification committee’s determination of the condition of the portfolio, the overall level of reserves is periodically adjusted to account for the inherent and specific risks within the entire portfolio. At minimum, the adequacy of these reserves are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee’s review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2001, management believes the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgements of the information available to them at the time of their examination.
Page -10-
Other Income.
Other income increased by $685,000 or 39.5% to $2,419,000 in 2001 compared to $1,734,000 in 2000. Service charges on deposit accounts for the year ended December 31, 2001 totaled $1,362,000, an increase of $305,000 or 28.9% over 2000. This increase is attributed to a change, in January of 2001, in the process of charging fees for checks drawn on non-sufficient funds and returned checks. Net gains on securities of $78,000 were recognized in 2001 compared to net losses of $255,000 in 2000, an increase of $333,000 or 130.6%. These fluctuations in the net gains and losses in securities sales result from management selling a portion of the lowest yielding securities in the available for sale investment portfolio during the second quarter of 2000 and the first quarter of 2001 and reinvesting the funds in securities earning current market rates of return.
Fees for other customer services for the year ended December 31, 2001 totaled $875,000 an increase of $100,000 or 12.9% over 2000. This increase is attributed to an increase in merchant processing income due to an increase in the volume of merchant sales during 2001 and fees received through the continued marketing of a new debit card product introduced during the third quarter of 1999.
Other operating income for the year ended December 31, 2001 totaled $104,000, a decrease of $53,000 or 33.8% over the last year. This decrease is primarily due to a decrease in income from the gain on the sale of mortgages of $106,000 or 89.7% partially offset by an insurance recovery resulting from a prior year loss totaling approximately $51,000 that was recognized during the second quarter of 2001. During the prior year, the Bank continued to sell mortgages into the secondary market as they converted from the construction phase to permanent mortgages. As these loans run off, the Bank instituted a change in strategy whereby originated variable rate residential mortgages are held in portfolio instead of being sold on the secondary market.
Other Expenses.
Other expenses increased by $964,000 or 9.4% to $11,198,000 in 2001 from $10,234,000 in 2000. The components of this change included an increase in salaries and employee benefits of $749,000 or 13.9% reflecting salary and benefit increases and increased staffing, primarily for the new branch office in Sag Harbor that the Bank opened in the first quarter of 2001; an increase in net occupancy expense of $143,000 or 16.1%; and an increase in fixed asset expense of $67,000 or 8.2%. Increased net occupancy expense resulted from the leasing of space for the new branch office in Sag Harbor. The increase in furniture and fixture expense is attributed to the depreciation of item processing assets located at the main office and fixed assets for the new branch offices in Greenport, opened during the second quarter of 2000, and Sag Harbor, opened in the first quarter of 2001.
Total other operating expenses for the year ended December 31, 2001 totaled $3,141,000 an increase of $5,000 or 0.2% over the prior year. During the second half of 2001, the Bank wrote off approximately $160,000 resulting from charge back losses on one merchant processing vendor. At this time, the Bank does not foresee further losses relative to this merchant as materially affecting earnings. During the first quarter of 2000, the Company had incurred nonrecurring set up costs to bring the item processing function in house. Expenses paid to a former vendor of these services remained high during the transition period. With more item processing transactions now being conducted in house, the fees paid to this vendor, as well as the item processing printing costs, are steadily declining. Item processing fees paid to an outside vendor decreased $75,000 or 93.2 % to $6,000 in 2001 from $81,000 in 2000.
Provision for Income Taxes.
The provision for income taxes increased to $3,292,000 for 2001 from $2,464,000 for 2000. This increase was due to income before income taxes increasing from $8,100,000 in 2000 to $10,039,000 in 2001. The effective tax rate for the year ended December 31, 2001 was 33% as compared to the prior year rate of 30%. This increase primarily results from the Bank holding less tax exempt securities, and a reduction in the consolidated subsidiary’s income as a percentage of total income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
General.
Net income for 2000 totaled $5,636,000 or $1.32 per share, as compared to net income of $4,767,000 or $1.11 per share for the year ended December 31, 1999. Net income for 2000 increased $869,000 or 18.2% over 1999. Highlights include: (i) a $1,784,000 or 12.0% increase in net interest income; (ii) a reduction in the provision for loan losses of $315,000; (iii) a $530,000 or 23.4% decrease in total other income; and (iv) a $623,000 or 6.5% increase in total other expenses over the same period in 1999. The provision for income taxes increased $77,000 or 3.2%.
Net Interest Income.
Net interest income increased from $14,921,000 in 1999 to $16,705,000 in 2000. The increase of 12.0% reflects an increase in average interest earning assets from $271,079,000 in 1999 to $319,787,000 or 18.0% in 2000. Average interest bearing liabilities increased from $189,478,000 in 1999 to $220,150,000 or 16.2% in 2000. The tax adjusted net yield on average earning assets for 2000 decreased to 5.5% from 5.7% for 1999.
Page -11-
Interest Income.
Total interest income increased from $21,056,000 in 1999 to $25,458,000 in 2000, an increase of 20.9%. The tax adjusted yield on average interest earning assets for 2000 increased to 8.2% from 8.0% for 1999.
Interest income on loans (including fee income) increased $1,899,000 during 2000, the result of an increase in average loans of 9.5% from $168,807,000 in 1999 to $184,758,000 in 2000. The yield on average loans for 2000 increased to 9.3% from 9.1% for 1999. Interest on investment in debt and equity securities increased $2,051,000 or 39.4% over 1999. The increase resulted from an increase in average investment in debt and equity securities from $89,286,000 in 1999 to $118,414,000 in 2000. The tax adjusted average yield on debt and equity securities increased from 6.6% in 1999 to 6.8% in 2000.
Interest Expense.
Interest expense increased $2,618,000 to $8,753,000 in 2000 from $6,135,000 in 1999. The increase of 42.7% in interest expense was caused by an increase in average interest bearing liabilities of 16.2% from $189,478,000 in 1999 to $220,150,000 in 2000 and the cost of average interest bearing liabilities increasing to 4.0% during 2000 from 3.2% during 1999.
Provision for Loan Losses.
The Bank’s loan portfolio consists primarily of real estate loans secured by commercial real estate properties and residential properties located in the Bank’s principal lending area. The interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by its competitors. These factors are, in turn, affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.
Total loans grew $30,093,000 or 17.8% since fiscal year end 1999. Each component of the loan portfolio contributed to the growth, however, real estate loans increased $24,410,000 or 17.3% and unsecured business and personal loans increased $5,422,000 or 19.5%. 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. Unsecured business and personal loans increased as a result of business development efforts.
The performance of the loan portfolio continued to be strong through December 31, 2000 with net recoveries of $24,000. Since December 31, 1999 non-performing loans decreased $197,000 from $966,000 to $769,000, representing 0.39% of loans, net, at December 31, 2000. The Company had no foreclosed real estate at year end. Total non-performing assets represented 0.22% of total assets at the corresponding date.
Based on management’s continuing review of the overall loan portfolio and the current asset quality of the portfolio, a provision for loan losses of $105,000 was recorded in 2000. A $420,000 provision for loan losses was made for fiscal year end 1999. The allowance for loan losses increased to $2,100,000 at December 31, 2000, as compared to $1,971,000 at December 31, 1999. As a percentage of loans, the allowance was 1.04% at December 31, 2000 and 1.15% at December 31, 1999.
Loans of approximately $4,726,000 at December 31, 2000 were classified as potential problem loans. These are loans for which management has information which indicated the borrower may not be able to comply with the present payment terms. These loans are subject to constant management attention and their classification is reviewed on at least a quarterly basis.
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 minimum, the adequacy of these reserves are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee’s review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2000, 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 judgements of the information available to them at the time of their examination.
Page -12-
Other Income.
Other income decreased by $530,000 or 23.4% to $1,734,000 in 2000 compared to $2,264,000 in 1999. Service charges on deposit accounts for the year ended December 31, 2000 totaled $1,057,000, an increase of $77,000 or 7.9% over 1999. This increase primarily resulted from increased deposits and an increase in fees charged on certain deposit accounts during the second quarter of 1999 and the Bank recognizing the effect of a full year of these fees during 2000. During the second quarter of 2000, management sold a portion of the lowest yielding securities in the available for sale investment portfolio and reinvested these funds in securities earning then current market rates of return. The net loss recognized on securities sales was $255,000 as compared to net gains on securities of $1,000 in 1999. Fees for other customer services for the year ended December 31, 2000 totaled $775,000 a decrease of $53,000 or 6.4% over 1999. The decrease is due to a decrease in fees collected on residential mortgage loans of $149,000 or 79.2% to $39,000 in 2000 compared to $188,000 in 1999 due to a reduction in the number of residential mortgages sold into the secondary market. The decrease was partially offset by an increase in merchant processing fees resulting from a change in the pricing structure made in the second quarter of 1999 and an increase in the volume of merchant sales during 2000. Decreases in other income were partially offset by fees received through the new debit card product introduced during the third quarter of 1999, and fee income recognized as a result of a referral relationship with another institution to provide wealth management services to the Bank’s customers.
Other operating income for the year ended December 31, 2000 totaled $157,000, a decrease of $298,000 or 65.5% over the last year. The decrease primarily resulted from a decrease in income from the gain on the sale of mortgages of $273,000 or 70.6% to $113,000 in 2000 compared to $386,000 in 1999. Increased competition within the Bank’s market has decreased the return on residential mortgages; therefore the Bank decided to focus less attention on these products. A portion of originated residential mortgages are held in portfolio instead of being sold on the secondary market. While revenue from mortgage banking operations was down, corresponding expense reductions offset such decline.
Other Expenses.
Other expenses increased by $623,000 or 6.5% to $10,234,000 in 2000 from $9,611,000 in 1999. The components of this change included an increase in salaries and employee benefits of $534,000 or 11.0% reflecting salary and benefit increases and increased staffing primarily for the item processing department that the Bank moved in house in the first quarter of 2000 and for the Greenport branch office opened in the spring of 2000; and an increase in net occupancy expense of $136,000 or 18.1%. Increased net occupancy expenses primarily resulted from increased rental expenses relative to the leasing of space for the new branch offices in Greenport and Sag Harbor. Renovation of the Sag Harbor branch office was substantially complete at year end and the office opened during the first quarter of 2001.
Total other operating expenses for the year ended December 31, 2000 totaled $3,136,000 a decrease of $76,000 or 2.4% over the prior year. The decrease is partially due to the elimination of item processing fees paid to a former vendor of these services. Large one time expenses related to the implementation of in house item processing, statement rendering and check imaging, partially offset these decreased costs. A change in the processing of the merchant credit card program during the first quarter of 2000, as well as increased marketing and business development costs attributed to the opening of two new branches contributed to increases in this category. A new branch office was opened in Greenport in April 2000 and the scheduled fourth quarter opening of the Sag Harbor office was postponed to the first quarter of 2001 because of delays in the leasehold improvements. Additionally, during the first half of 1999, the Bank incurred non recurring expenses relative to the development of training programs and other one time expenses due to the formation of a subsidiary. The Bank operates this subsidiary as a Real Estate Investment Trust. These nonrecurring expenses were not repeated in the current year, thereby partially offsetting the current year’s increases in other categories of operating expenses.
Provision for Income Taxes.
The provision for income taxes increased to $2,464,000 for 2000 from $2,387,000 for 1999. This increase was due to income before income taxes increasing from $7,154,000 in 1999 to $8,100,000 in 2000. The effective tax rate for the year ended December 31, 2000 was 30% as compared to the prior year rate of 33%. This reduction is primarily due to the implementation of the Bank’s tax planning strategies including holding additional tax exempt securities.
LIQUIDITY
The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments. Liquidity management addresses the ability to meet deposit withdrawals either on demand or contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise.
The Company’s principal source of liquidity is dividends from the Bank. Due to regulatory restrictions (see note 1k to the Consolidated Financial Statements), dividends from the Bank to the Company at December 31, 2001 were limited to $9,704,000 which represents the Bank’s 2001 retained net income and the net undivided profits from the previous two years. The dividends received from the Bank are used primarily for dividends to the shareholders. In the event the Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs.
Page -13-
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 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 loan to capital ratios. Historically, the Bank has relied on its deposit base, drawn from its market area through its nine full service offices, as its principal source of funding. Although the Bank seeks to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to its customers, the Bank also strives to manage the overall cost of the funds needed to finance its strategies. At December 31, 2001, the Bank had aggregate lines of credit of $37,000,000 with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $17,000,000 is available on an unsecured basis. The Bank also has the ability, as a member of the Federal Home Loan Bank (“FHLB”) system, to borrow against its unencumbered residential mortgages owned by the Bank. At December 31, 2001 the Bank had no such borrowings outstanding. During the first quarter of 2001, the Bank also executed a master repurchase agreement with the FHLB which increased its 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. Excess short term liquidity is invested in overnight federal funds sold. Management believes the Company has sufficient liquidity to meet its operating requirements.
CAPITAL RESOURCES
As a result of undistributed net income, plus the change in net unrealized appreciation in securities available for sale, net of tax, and the issuance of shares of common stock pursuant to the equity incentive plan, the Company’s stockholders’ equity increased to $32,861,000 at December 31, 2001 from $28,788,000 at December 31, 2000. The ratio of stockholders’ equity to total assets increased to 8.35% at year end 2001 from 8.12% at year end 2000.
Loan commitments outstanding as of December 31, 2001 totaled approximately $70,953,000. The funding of such commitments is derived from the primary sources of liquidity stated previously. See note 9b to the Consolidated Financial Statements for a discussion of loan commitments.
The Company exceeds the risk-based capital adequacy ratio levels required by the regulatory agencies (see note 11 to the Consolidated Financial Statements). Management believes that the current capital levels along with future retained earnings will allow the Bank to maintain a position exceeding required levels which will be more than adequate to meet the growth of the Bank or any higher ratios required by the discretionary authority of the regulators. The Company is prepared to issue additional common stock should the need arise.
The Company had return on average equity of 23.13%, 21.86%, and 21.00% and return on average assets of 1.74%, 1.62%, and 1.59% for the years ended December 31, 2001, 2000 and 1999, respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles (“GAAP”), which require the measurements of financial position and operating results in historical dollars, or current value, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Company’s operations. Unlike industrial companies, nearly all the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or, to the same extent, as the price of goods or services.
IMPACT OF PROSPECTIVE ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to Note 1o of Notes to Consolidated Financial Statements.
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
Page -14-
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.
Item 7A. Market Risk
Significant increases in the level of market interest rates also may adversely affect the fair value of securities and other interest earning assets. At December 31, 2001, $143,261,000 or 100% of the Company’s securities had fixed interest rates. Generally, the value of fixed rate instruments fluctuates inversely with the changes in interest rates. As a result, increases in interest rates could result in decreases in the market value of interest earning assets which could adversely affect the Company’s results of operations if sold or, in the case of interest earning assets classified as available for sale, the Company’s stockholders’ equity if retained. Increases in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans originated by the Company and the average life of loans and securities, which can adversely impact the yields earned on the Company’s loans and securities. In periods of decreasing interest rates, the average life of loans held by the Company may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investing of funds from such prepayments in lower yielding assets.
The Company’s interest rate sensitivity is monitored by management through the use of a quarterly interest rate risk analysis model which evaluates the potential change in the net interest income over the succeeding four quarter period which would result from an instantaneous and sustained interest rate change of plus or minus 200 basis points, in 100 basis point increments.
At December 31, 2001, net interest income over the succeeding four quarter periods would be affected as follows, given an instantaneous and sustained interest rate change of:
Potential Change in
Change in Interest Potential Change Net Economic Value of
Rates in Basis Points in Net Equity as a Percentage
(RATE SHOCK) Interest Income of Total Assets
$ Change % Change $ Change % Change
200 $ 197,000 1.05% $ (2,634,000) (6.42)%
100 $ 110,000 0.59% $ (1,443,000) (3.51)%
Static - - - -
(100) $ (442,000) (2.36)% $ 1,028,000 2.51 %
(200) $(1,312,000) (6.99)% $ 3,351,000 8.16 %
As in the case of the gap table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling potential changes in the net interest income require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the model presented assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income models provide an indication of the Company’s interest rate exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Company’s net interest income and will differ from actual results.
Page -15-
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share amounts)
December 31, December 31,
2001 2000
ASSETS
Cash and due from banks $ 10,813 $ 16,005
Interest earning deposits with banks 50 39
Federal funds sold 13,500 -
Total cash and cash equivalents 24,363 16,044
Investment in debt and equity securities, net:
Securities available for sale, at fair value 125,709 114,454
Securities held to maturity (fair value of $17,611 and $12,414, respectively) 17,552 12,397
Total investment in debt and equity securities, net 143,261 126,851
Loans 215,362 201,092
Less:
Allowance for loan losses (2,348) (2,100)
Loans, net 213,014 198,992
Banking premises and equipment, net 8,781 9,210
Accrued interest receivable 2,153 2,165
Other assets 1,852 1,380
Total Assets $393,424 $354,642
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $115,066 $ 99,979
Savings, N.O.W. and money market deposits 184,261 158,904
Certificates of deposit of $100,000 or more 22,993 21,892
Other time deposits 34,835 32,604
Total deposits 357,155 313,379
Overnight borrowings - 9,700
Accrued interest on depositors' accounts 625 786
Other liabilities and accrued expenses 2,783 1,989
Total Liabilities 360,563 325,854
Stockholders' equity:
Common stock, par value $.01 per share:
Authorized:20,000,000 shares; 4,257,597 issued; 4,166,264 and 4,217,597 shares
outstanding at 12/31/01 and 12/31/00, respectively 43 43
Surplus 21,154 21,261
Undivided profits 11,240 6,793
Less: Treasury Stock at cost, 91,333 and 40,000 shares at 12/31/01 and 12/31/00, respectively (1,608) (653)
30,829 27,444
Accumulated other comprehensive income(loss):
Net unrealized gain on securities, net of taxes of $1,387,000 and $907,000 at 12/31/01 and 12/31/00, respectively 2,085 1,344
Net minimum pension liability, net of taxes of $35,000 at 12/31/01 (53) -
Total Stockholders' Equity 32,861 28,788
Commitments and contingencies (Note 9)
Total Liabilities and Stockholders' Equity $393,424 $354,642
See the accompanying notes to the Consolidated Financial Statements.
Page -16-
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31, 2001 2000 1999
Interest income:
Loans (including fee income) $18,188 $17,012 $15,113
Mortgage-backed securities 5,729 4,242 2,936
State and municipal obligations 1,692 1,842 1,346
U.S. Treasury and government agency securities 793 1,099 852
Federal funds sold 498 948 641
Deposits with banks 32 240 95
Other securities 77 75 73
Total interest income 27,009 25,458 21,056
Interest expense:
Savings, N.O.W. and money market deposits 5,201 5,449 2,986
Other time deposits 1,464 1,582 1,754
Certificates of deposit of $100,000 or more 1,181 1,665 1,392
Other borrowed money 22 57 3
Total interest expense 7,868 8,753 6,135
Net interest income 19,141 16,705 14,921
Provision for loan losses 323 105 420
Net interest income after provision for loan losses 18,818 16,600 14,501
Other income:
Service charges on deposit accounts 1,362 1,057 980
Fees for other customer services 875 775 828
Net securities gains/(losses) 78 (255) 1
Other operating income 104 157 455
Total other income 2,419 1,734 2,264
Other expenses:
Salaries and employee benefits 6,145 5,396 4,862
Net occupancy expense 1,029 886 750
Furniture and fixture expense 883 816 787
Other operating expenses 3,141 3,136 3,212
Total other expenses 11,198 10,234 9,611
Income before provision for income taxes 10,039 8,100 7,154
Provision for income taxes 3,292 2,464 2,387
Net income $ 6,747 $ 5,636 $ 4,767
Basic earnings per share $ 1.61 $ 1.33 $ 1.12
Diluted earnings per share $ 1.60 $ 1.32 $ 1.11
See accompanying notes to the Consolidated Financial Statements.
Page -17-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts) Accumulated
Other
Comprehensive
Common Stock Comprehensive Undivided Treasury Income
Shares Amount Surplus Income Profits Stock (Loss) Total
Balance at December 31, 1998 4,234,797 $ $ 51 $ 180 $ (621) $ 962 $22,232
2
Net income - - - $4,767 4,767 - - 4,767
Exercise of stock options 22,800 72 142 72 286
Retirement of treasury stock - (486) (135) 621 -
Reduction in par value from $5.00 to $.01 - (21,203) 21,203 -
Cash dividends declared, $.42 per share (1,786) (1,786)
Net change in unrealized (depreciation) in securities available
for sale, net of tax - - - (1,827) - - (1,827) (1,827)
Comprehensive Income - - - $2,940 - - - -
Balance at December 31, 1999 4,257,597 43 21,261 3,233 0 (865) 23,672
Net income - - - $5,636 5,636 - - 5,636
Purchase of treasury stock - - - (653) (653)
Cash dividends declared, $.49 per share (2,076) (2,076)
Net change in unrealized appreciation in securities available
for sale, net of tax - - - 2,209 - - 2,209 2,209
Comprehensive Income - - - $7,845 - - - -
Balance at December 31, 2000 4,257,597 43 21,261 6,793 (653) 1,344 28,788
Net income - - - $6,747 6,747 - - 6,747
Purchase of treasury stock - - - (1,264) (1,264)
Issuance of vested stock awards from treasury 29 29
Exercise of stock options, and related tax benefit (107) 12 280 185
Cash dividends declared, $.55 per share (2,312) (2,312)
Other comprehensive income, net of tax
Net change in unrealized appreciation in securities available for sale - - - 741 - - 741 741
Minimum pension liability adjustment - - - (53) - - (53) (53)
Comprehensive Income - - - $7,435 - - - -
Balance at December 31, 2001 4,257,597 $ 43 $21,154 $11,240 $ (1,608) $ 2,032 $32,861
(1) Disclosure of reclassification amount:
December 31, 2001 2000 1999
Comprehensive Income Items
Unrealized gain/(loss) arising during the period 788 2,057 (1,826)
Less: reclassification adjustment for gains/(losses) included in income (47) 152 (1)
741 2,209 (1,827)
See accompanying notes to the Consolidated Financial Statements.
Page -18-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2001 2000 1999
Operating activities:
Net Income $ 6,747 $ 5,636 $ 4,767
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for possible loan losses 323 105 420
Depreciation and amortization 923 838 756
Accretion of discounts (275) (134) (104)
Amortization of premiums 239 152 170
Earned or allocated expense of restricted stock awards 58 35 -
SERP funding 97 - -
Loss on the sale of assets 6 - -
Net securities (gains) losses (78) 255 (1)
Decrease (increase) in accrued interest receivable 12 (308) (332)
(Provision) Benefit for deferred income taxes (133) 76 (135)
(Increase) decrease in other assets (460) 141 (437)
Increase (decrease) in accrued and other liabilities 26 338 (456)
Net cash provided by operating activities 7,485 7,134 4,648
Investing activities:
Purchases of securities available for sale (44,952) (49,602) (54,371)
Purchases of securities held to maturity (16,469) (11,314) (12,290)
Proceeds from sales of securities available for sale 9,747 15,541 25,100
Proceeds from maturing securities available for sale 3,455 1,085 125
Proceeds from maturing securities held to maturity 11,314 12,290 3,969
Proceeds from principal payments on mortgage-backed securities 21,831 6,562 10,833
Net (increase) in loans (14,345) (30,198) (2,336)
Purchases of banking premises and equipment, net of retirements (500) (1,583) (639)
Net cash used by investing activities (29,919) (57,219) (29,609)
Financing activities:
Net increase in deposits 43,776 39,057 32,791
Increase (decrease) in other borrowings (9,700) 9,700 0
Payment for the purchase of treasury stock (1,264) (653)
Net proceeds from exercise of stock options
issued pursuant to equity incentive plan 173 - 286
Cash dividends paid (2,232) (1,996) (2,377)
Net cash provided by financing activities 30,753 46,108 30,700
Increase (decrease) in cash and cash equivalents 8,319 (3,977) 5,739
Cash and cash equivalents beginning of period 16,044 20,021 14,282
Cash and cash equivalents end of period $24,363 $16,044 $20,021
Supplemental information-Cash Flows:
Cash paid for:
Interest $ 8,029 $ 8,728 $ 6,813
Income taxes $ 3,425 $ 2,290 $ 2,606
Noncash investing and financing activities:
Dividends declared and unpaid $ 631 $ 548 $ 468
See accompanying notes to the Consolidated Financial Statements.
Page -19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bridge Bancorp, Inc. (the "Company") is chartered by the State of New York as a single bank holding company. The Company's business currently consists of the operations of its wholly-owned subsidiary, The Bridgehampton National Bank (the "Bank"). The accounting andreporting policies of the Bank conform to generally accepted accounting principles and to general practices within the financial institutionindustry. The following is a description of the more significant accounting policies that the Company follows in preparing its Consolidated Financial Statements.
a) Basis of Financial Statement Presentation
The accompanying Consolidated Financial Statements are prepared on the accrual basis of accounting and include the accounts of the Company and its wholly-owned subsidiary, the Bank. All material intercompany transactions and balances have been eliminated.
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of each consolidated statement of condition and the related consolidated statement of income for the year then ended. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold which mature overnight.
c) Investment in Debt and Equity Securities
The Company follows Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Under SFAS No. 115, the Company is required to report readily-marketable equity and debt securities in one of the following categories: (i) “held-to-maturity” (management has a positive intent and ability to hold to maturity) which are to be reported at amortized cost; (ii) “trading” (held for current resale) which are to be reported at fair value, with unrealized gains and losses included in earnings; and (iii) “available for sale” (all other debt and marketable equity securities) which are to be reported at fair value, with unrealized gains and losses reported net of tax, as accumulated other comprehensive income, a separate component of stockholders’ equity.
Included in investment securities are mortgage-backed securities that have been categorized as available for sale and as such represent participating interests in pools of long term mortgage loans originated and serviced by the issuers of the securities. These securities are carried at fair value.
Premiums and discounts on investment in debt and equity securities are amortized to expense and accreted to income over the estimated life of the respective securities using the interest method. Gains and losses on the sales of securities are recognized upon realization based on the specific identification method. Unrealized gains and losses on securities available for sale are excluded from earnings and reported as accumulated other comprehensive income, net of taxes.
d) Loans and Loan Interest Income Recognition
Loans are stated at unpaid principal balances, less unearned discounts and net deferred origination and commitment fees. Loan origination and commitment fees and certain direct costs incurred in connection with loan originations are deferred and amortized to income over the life of the related loans as an adjustment to yield. When a loan prepays, the remaining unamortized fee is taken into income. Interest on loans is credited to income based on the principal outstanding during the period. Loans that are 90 days past due are placed on a nonaccrual basis. Exceptions to this policy are loans that are fully and adequately secured and are in the process of collection.
All of the Bank’s nonaccruing loans are considered impaired under SFAS No. 114 “Accounting by Creditors for Impairment of a Loan.” In accordance with SFAS No. 114, a valuation allowance is established on impaired loans to reflect the difference, if any, between face amount of the loan and the present value of expected future cash flow discounted at the loan’s effective interest rate, or as a practical expedient, at the loan’s observable market price or the fair value of the collateral.
Page -20-
e) Allowance for Loan Losses
The Bank monitors its portfolio on a regular basis, with consideration given to the detailed analysis of classified loans, delinquency trends, probable losses, past loss experience, current economic conditions, concentrations of credit, input from the Bank's outside loan review consultants, 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 are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee's review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2001, management believes the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
f) Banking Premises and Equipment
Banking premises and equipment are recorded at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (fifty years for buildings and two to ten years for equipment, furniture and fixtures) on a straight-line basis. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
Expenditures for improvements and major renewals are capitalized, while the cost of ordinary maintenance, repairs and minor improvements is charged to operations.
g) Other Real Estate Owned
Other real estate owned consists of real estate acquired by foreclosure or deed in lieu of foreclosure and is recorded at the lower of the net unpaid principal balance at the foreclosure date plus acquisition costs or fair value. Subsequent valuation adjustments are made if fair value less estimated costs to sell the property falls below the carrying amount. At December 31, 2001 and 2000, the Company carried no other real estate owned.
h) Income Taxes
The Company follows SFAS No. 109, which requires an asset and liability approach for accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Under SFAS No. 109, deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. It is management's position, as currently supported by the facts and circumstances, that no valuation allowance is necessary against any of the Company's deferred tax assets.
i) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in, first out method.
j) Earnings Per Share
For the years ended December 31, 2001, 2000 and 1999, diluted weighted average common stock and common stock equivalent shares outstanding for the diluted earnings per share calculation were 4,222,669, 4,258,709 and 4,277,079, respectively. For the years ended December 31, 2001, 2000 and 1999, the total weighted average number of shares of common stock outstanding for the basic earnings per share calculation were 4,201,305, 4,236,668 and 4,250,823, respectively. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised and resulted in the issuance of common stock that then shared in the earnings of the Company, is computed by dividing net income by the weighted average number of common shares and common stock equivalents.
k) Dividends
Cash available for dividend distribution to shareholders of the Company must initially come from dividends paid by the Bank to the Company. The approval of the Regional Administrator of National Banks is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank’s net income of that year combined with its retained net income of the preceding two years.
Page -21-
The Bank had approximately $9,704,000 available as of December 31, 2001 which may be paid to the Company as a dividend.
l) Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" requires public companies to report certain financial information about significant revenue producing segments of the business for which such information is available and utilized by the chief operating decision maker. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. As a community-oriented financial institution, substantially all of the Company's operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the Company's only operating segment for financial reporting purposes under SFAS No. 131.
m) Stock Based Compensation Plans
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
n) Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Company includes unrealized holding gains or losses on available for sale securities. Such gains or losses are net of reclassification adjustments for realized gains (losses) on sales of available for sale securities.
o) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 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 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 133 is now effective for fiscal quarters of fiscal years beginning after June 2000 and does not require restatement of prior periods. The adoption of SFAS No. 133 and 137 did not have any effect on the Company's Consolidated Financial Statements.
The FASB issued SFAS No. 141 "Business Combinations" ("SFAS No. 141"). This statement addresses the accounting and reporting for business combinations and supersedes APB Opinion No. 16. This statement changes the accounting for business combinations in the following respects: by requiring that all business combinations be accounted for by a single method - the purchase accounting method, by requiring that intangible assets be recognized as assets apart from goodwill if specific criteria is met, and by requiring additional disclosure of the primary reasons for a business combination and the allocation of the purchase price to assets acquired and liabilities assumed. The FASB issued SFAS No. 142 which addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17. This statement addresses how intangible assets that are acquired individually or with a group of other assets should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Specifically it requires that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. In management's opinion the adoption of SFAS No. 141 and 142 will not have a material effect on the Company's Consolidated Financial Statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting For Asset Retirement Obligations" ("SFAS No. 143") and in August 2001 issued SFAS No. 144 "Accounting For The Impairment and Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 144, which supercedes and amends certain existing accounting and reporting pronouncements, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 143 is effective for financial statements issued for fiscal years
Page -22-
beginning after June 15, 2002 and SFAS No. 144 is effective for the financial statements issued for fiscal years beginning after December 15, 2001. Neither of these pronouncements is currently applicable to the Company.
p) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2. INVESTMENT IN DEBT AND EQUITY SECURITIES
The Bank did not hold any trading securities during the years ended December 31, 2001 and 2000. A summary of the amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investment securities is as follows:
December 31, 2001 2000 1999
(In thousands)
Gross Gross Estimated Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $ - $ - $ - $ - $ 2,017 $ 15 $ - $ 2,032 $ 8,078 $ 33 $ - $ 8,111
Oblig. of U.S. Government agencies 17,073 235 (8) 17,300 6,944 106 - 7,050 4,984 - (72) 4,912
Oblig. of NY State & pol. subs. 25,900 884 (9) 26,775 34,318 492 (29) 34,781 28,489 72 (447) 28,114
Mortgage-backed securities 79,264 2,370 - 81,634 68,923 1,724 (56) 70,591 44,511 16 (1,068) 43,459
Total available for sale $122,237 $3,489 $ (17) $125,709 $112,202 $2,337 $ (85) $114,454 $86,062 $121 $(1,587) $84,596
Held to maturity:
Oblig. of NY State & pol. subs. $ 16,159 $ 59 $ - $ 16,218 $ 11,314 $ 17 $ - $ 11,331 $12,290 $ 4 $ (16) $12,278
Nonmarketable equity securities:
Federal Reserve Bank Stock 36 - - 36 36 - - 36 36 - - 36
Federal Home Loan Bank Stock 1,357 - - 1,357 1,047 - - 1,047 1,047 - - 1,047
Total held to maturity $ 17,552 $ 59 - $ 17,611 $ 12,397 $ 17 - $ 12,414 $13,373 $ 4 $ (16) $13,361
Total debt and equity securities $139,789 $3,548 $ (17) $143,320 $124,599 $2,354 $ (85) $126,868 $99,435 $125 $(1,603) $97,957
The following table sets forth the amortized cost, maturities and approximated weighted average yield (based on the estimated annual income divided by the average book value) at December 31, 2001. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax-exempt obligations have been computed on a tax-equivalent basis.
Principal Maturing
(In thousands) Within After One But After Five But After No Stated
One Year Within Five Years Within Ten Years Ten Years Maturity
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Total
Available for sale:
U.S. Agency securities $ 3,975 6.96% $13,098 5.51% - - - - - - $ 17,073
Mortgage-backed securities - - - - - - 79,264 6.81% - - 79,264
Oblig. of state and pol. subs. 3,391 7.12% 15,072 6.87% 7,437 7.23% - - - - 25,900
Total available for sale $ 7,366 7.03% $28,170 6.24% $7,437 7.23% $79,264 6.81% - - $122,237
Held to maturity:
Oblig. of state and pol. subs. $16,159 4.24% - - - - - - - - $ 16,159
16,159 4.24% - - - - - - - - 16,159
Nonmarketable equity securities:
Federal Reserve Bank Stock - - - - - - - - 36 6.00% 36
Federal Home Loan Bank Stock - - - - - - - - 1,357 5.50% 1,357
Total nonmarketable equity securities - - - - - - - - 1,393 5.51% 1,393
Total held to maturity $16,159 4.24% - - - - - - $1,393 5.51% $ 17,552
Total debt and equity securities $23,525 5.11% $28,170 6.24% $7,437 7.23% $79,264 6.81% $1,393 5.51% $139,789
Page -23-
Proceeds from sales of available for sale securities were approximately $9,747,000, $15,541,000 and $25,100,000 in 2001, 2000 and 1999, respectively. Gross gains of approximately $81,000, $24,000 and $184,000 were realized on sales of available for sale securities during 2001, 2000 and 1999, respectively. Gross losses of approximately $3,000, 279,000 and $183,000 were realized on sales of available for sale securities during 2001, 2000 and 1999, respectively. There were no sales of held to maturity securities during 2001, 2000 and 1999.
Investment securities having an amortized cost of approximately $86,078,000 and $49,601,000 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits.
Investments in debt and equity securities which exceeded 10% of stockholders' equity for any one issuer (other than U.S. Government securities) are as follows:
December 31, 2001
(In thousands) Amortized Estimated
Cost Fair Value
FHLMC Pool C90474 $ 6,786 $ 6,795
3. LOANS
The following table sets forth the major classifications of loans:
December 31, 2001 2000 1999 1998 1997
(In thousands)
Real estate loans $180,995 $165,889 $141,479 $141,625 $114,357
Unsecured business and personal loans 33,018 33,291 27,869 23,639 17,638
Secured business and personal loans 693 1,059 1,086 2,534 725
Installment/consumer loans 722 963 675 1,182 5,916
Total loans $215,428 $201,202 $171,109 $168,980 $138,636
Unearned income (66) (110) (239) (284) -
$215,362 $201,092 $170,870 $168,696 $138,636
Allowance for loan losses (2,348) (2,100) (1,971) (1,713) (1,393)
Net loans $213,014 $198,992 $168,899 $166,983 $137,243
Lending Risk.
The principal business of the Bank is lending, primarily in commercial real estate loans, construction loan mortgages, home equity loans, land loans, consumer loans, home advantage loans, residential mortgages and commercial loans. The Bank considers its primary lending area as the two forks of the eastern end of Long Island in Suffolk County, New York, therefore, the loan portfolio as a whole is dependent on the economic conditions of the geographic market served by the Bank.
Allowance for Loan Losses.
The Bank monitors its portfolio on a regular basis, with consideration given to the detailed analysis of classified loans, delinquency trends, probable losses, past loss experience, current economic conditions, concentrations of credit, input from the Bank's outside loan review consultants, 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 are adjusted quarterly, to a level deemed appropriate by management based on their risk assessment of the entire portfolio. Based on the loan classification committee's review of the classified loans and the overall reserve levels as they relate to the entire loan portfolio at the year ended December 31, 2001, management believes the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Page -24-
The following table sets forth changes in the allowance for loan losses.
December 31, 2001 2000 1999 1998 1997
(In thousands)
Allowance for loan losses
balance at beginning of period $2,100 $1,971 $1,713 $1,393 $1,238
Charge-offs:
Real estate loans - 9 170 - -
Unsecured business & personal loans 108 62 39 31 87
Installment/consumer loans 59 36 62 165 229
Total 167 107 271 196 316
Recoveries:
Real estate loans 29 58 - - -
Unsecured business & personal loans 12 1 4 32 6
Installment/consumer loans 51 72 105 59 55
Total 92 131 109 91 61
Net charge-offs (recoveries) 75 (24) 162 105 255
Provision for loan losses
charged to operations 323 105 420 425 410
Balance at end of period $2,348 $2,100 $1,971 $1,713 $1,393
Ratio of net charge-offs during period
to average loans outstanding .03% ( .01%) 0.10% 0.07% 0.20%
Allocation of Allowance for Loan Losses.
The following table sets forth the allocation of the total allowance for loan losses by loan type.
Year Ended December 31, 2001 2000 1999 1998 1997
(In thousands) Percentage Percentage Percentage Percentage Percentage
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Real estate loans $1,563 87.4% $1,335 82.5% $1,196 82.7% $1,122 83.8% $ 868 82.5%
Unsecured business and personal loans 587 9.1% 648 16.6% 639 16.3% 38 14.0% 336 12.7%
Secured business and personal loans 53 1.0% 21 0.5% 28 0.6% 507 1.5% 1 0.5%
Installment/consumer loans 145 2.5% 96 0.4% 108 0.4% 46 0.7% 188 4.3%
Total $2,348 100.0% $2,100 100.0% $1,971 100.0% $1,713 100.0% $1,393 100.0%
Page -25-
Selected Loan Maturity Information.
The following table sets forth the approximate maturities and sensitivity to changes in interest rates of certain loans, exclusive of non-commercial real estate mortgages and consumer loans to individuals as of December 31, 2001.
After One
Within One But Within After
Year Five Years Five Years Total
(In thousands)
Commercial loans $ 5,781 $6,183 $84,362 $ 96,326
Construction loans 5,683 - 270 5,953
Total loans $11,464 $6,183 $84,632 $102,279
Rate provisions:
Amounts with fixed interest rates $ 30 $2,055 $ - $ 2,085
Amounts with variable interest rates 11,434 4,128 84,632 100,194
Total $11,464 $6,183 $84,632 $102,279
Past Due, Nonaccrual and Restructured Loans.
The following table sets forth selected information about past due, nonaccrual and restructured loans.
December 31, 2001 2000 1999 1998 1997
(In thousands)
Loans 90 days or more past due and still accruing $ - $ - $ 1 $ 4 $ 1
Nonaccrual loans 532 769 189 1,208 975
Restructured loans - - 776 - -
Other real estate owned, net - - - - -
Total $532 $769 $966 $1,212 $976
Year Ended December 31,
Gross interest income that would have been recorded
during the year under original terms:
Nonaccrual loans $ 66 $ 97 $ 63 $ 128 $163
Restructured loans - - - - -
Gross interest income recorded during the year:
Nonaccrual loans $ 17 $ 10 $ 4 $ 37 $151
Restructured loans - - - - -
Commitments for additional funds - - - - -
As of December 31, 2001 and 2000, the Bank did not have any impaired loans as defined in SFAS No. 114 except for the restructured and nonaccrual loans noted above. The valuation allowance was $30,000 and $41,000 at December 31, 2001 and 2000, respectively. The average recorded investment in impaired loans for the years ended December 31, 2001 and 2000 was approximately $576,000 and $648,000, respectively.
Page -26-
4. DEPOSITS
The following table sets forth major classifications of average deposits and average rates paid on these deposits for the periods indicated.
Year Ended December 31, 2001 2000 1999
(In thousands)
Average Average Average Average Average Average
Deposits Rates Paid Deposits Rates Paid Deposits Rates Paid
Demand deposits $111,038 - $ 99,969 - $ 87,475 -
Savings, N.O.W. and money market deposits 186,011 2.8% 155,680 3.5% 122,118 2.4%
Certificates of deposit of $100,000 or more 25,296 4.7% 29,779 5.6% 28,493 4.9%
Other time deposits 33,692 4.3% 33,832 4.7% 38,823 4.5%
Total $356,037 2.2% $319,260 2.7% $276,909 2.2%
Time Deposits of $100,000 or More.
The following table sets forth the remaining maturities of the Bank’s time certificates of deposit in amounts of $100,000 or more.
December 31, 2001
(In thousands)
3 months or less $12,992
Over 3 thru 6 months 2,054
Over 6 thru 12 months 2,713
Over 12 months 5,234
Total $22,993
5. BANKING PREMISES AND EQUIPMENT
Banking premises and equipment consist of:
December 31, 2001 2000
(In thousands)
Land $1,496 $1,496
Building and improvements 5,735 5,722
Furniture and fixtures 4,759 4,424
Leasehold improvements 955 836
12,945 12,478
Less accumulated
depreciation and amortization (4,164) (3,268)
$8,781 $9,210
Page -27-
6. INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended December 31, 2001 2000 1999
(In thousands)
Current:
Federal $2,803 $2,070 $1,976
State 622 422 546
3,425 2,492 2,522
Deferred:
Federal (107) 5 (100)
State (26) (33) (35)
(133) (28) (135)
Total $3,292 $2,464 $2,387
The reconciliation of the expected Federal income tax expense at the statutory tax rate to the actual provision follows:
Year Ended December 31, 2001 2000 1999
(In thousands) Percentage Percentage Percentage
of Pre-tax of Pre-tax of Pre-tax
Amount Earnings Amount Earnings Amount Earnings
Federal income tax expense computed by applying
the statutory rate to income before income taxes $3,414 34% $2,754 34% $2,433 34%
Tax exempt interest (574) (6) (626) (8) (436) (6)
State taxes, net of Federal
income tax benefit 393 4 257 3 337 4
Interest disallowed 52 1 71 1 43 1
Other 7 - 8 - 10 -
Provision for income taxes $3,292 33% $2,464 30% $2,387 33%
Deferred tax assets and liabilities are comprised of the following:
December 31, 2001 2000 1999
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 849 $ 754 $ 716
Other 47 83 148
Securities available for sale - 907 600
Total $ 896 $1,744 $1,464
Deferred tax liabilities:
Pension expense $ (79) $ (113) $ (58)
Depreciation (50) (89) (95)
Securities available for sale (1,387) - -
Total $ (1,516) $ (202) $ (153)
Net deferred tax asset (liability) $ (620) $1,542 $1,311
Page -28-
7. EMPLOYEE BENEFITS
a. Pension Plan and Supplemental Executive Retirement Plan
The Bank maintains a non-contributory pension plan through the New York State Bankers Association Retirement System covering all eligible employees.
During 2001the Bank adopted the Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”). The SERP provides benefits to certain employees, designated by the Personnel Committee of the Board of Directors, whose benefits under the Pension Plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension Plan in the absence of such Internal Revenue Code limitations. The effective date of the SERP was January 1, 2001. SERP expense was $97,000 in 2001.
The following table sets forth the plan’s funded status projected to September 30, 2001 and 2000 (measurement dates).
At December 31,
Pension Benefits SERP Benefits
2001 2000 2001 2000
(In thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year $1,907 $1,644 $(184) -
Service cost 185 156 - -
Expenses (27) (29) - -
Interest cost 132 113 - -
Benefits paid (56) (75) - -
Additional prior service cost 188 - - -
Assumption changes and other (77) 98 (416) -
Projected benefit obligation at end of year $2,252 $1,907 $(600) -
Change in plan assets
Fair value of plan assets at beginning of year $2,430 $2,100 - -
Actual return on plan assets (200) 220 - -
Employer contribution 113 214 - -
Benefit paid (56) (75) - -
Expenses (27) (29) - -
Fair value of plan assets at end of year $2,260 $2,430 - -
Funded Status
Plan assets in excess of benefit obligations $ 8 $ 523 - -
Unrecognized net actuarial loss (gain) 141 (188) (6) -
Unrecognized prior service cost 173 (16) - -
Unrecognized transition asset (38) (47) 509 -
Prepaid benefit cost $ 284 $ 272 $ 503 -
At December 31,
Pension Benefits SERP Benefits
Components of net periodic benefit cost 2001 2000 1999 2001 2000 1999
Service cost $185 $156 $146 - - -
Interest cost 132 113 101 - - -
Expected return on plan assets (206) (184) (150) - - -
Amortization of net (gain) loss - - (2) - - -
Amortization of unrecognized prior service cost (2) (2) (1) 97 - -
Amortization of unrecognized transition asset (9) (9) (9) - - -
Net periodic benefit cost $100 $ 74 $ 85 $97 - -
Page -29-
At December 31, 2001, 2000, and 1999 a rate of increase in future compensation levels of 4.0%, and a weighted average discount rate of 6.5%,7.0%, and 7.0% respectively, were used in determining the actuarial present value of the projected benefit obligation. The expected long-term rate of return on assets was 8.5% at September 30, 2001, 2000 and 1999.
b. Equity Incentive Plan
During 1996, the Bridge Bancorp, Inc. Equity Incentive Plan was approved by the stockholders to provide for the grant of options to purchase up to a total of 432,000 shares of common stock of the Company and for the award of shares of common stock as a bonus. During 2001 a plan amendment to cover non-employee directors was adopted by the shareholders. During the years ended December 31, 2001 and 2000, the Company granted restricted stock awards of 5,553 and 5,346 shares, respectively. These awards vest over three years on the anniversary date of the awards. Such shares are subject to restrictions based on continued service as employees of the Company or subsidiaries of the Company. Compensation expense attributable to these awards was approximately $51,000 and $35,000 for the years ended December 31, 2001 and 2000, respectively. Options awarded under the plan are determined by the Incentive Compensation Committee of the Board of Directors. The Company accounts for this plan under APB Opinion No. 25, under which no compensation cost has been recognized for stock options granted. 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:
2001
Net Income: As Reported: $6,747
Pro Forma: 6,711
Diluted EPS: As Reported: $ 1.60
Pro Forma: 1.59
Basic EPS: As Reported: $ 1.61
Pro Forma: 1.60
2000
Net Income: As Reported: $5,636
Pro Forma: 5,575
Diluted EPS: As Reported: $ 1.32
Pro Forma: 1.31
Basic EPS: As Reported: $ 1.33
Pro Forma: 1.32
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2001: a risk-free interest rate of 4.18%; an expected dividend yield of 3.71%; expected lives of five years; and expected volatility of 33.3%.
For the Year Ended, 2001 2000
(In thousands)
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding, beginning of the year 106,950 $16.35 92,100 $15.80
Granted 15,425 $16.50 14,850 $19.75
Exercised (17,475) - - -
Forfeited (7,250) - - -
Outstanding and exercisable, end of the year 97,650 $17.21 106,950 $16.35
Weighted average fair value of options granted $ 4.09 $ 7.04
Page -30-
8. OTHER INCOME AND EXPENSES
a) There were no components of other operating income which exceeded one percent of the aggregate of total interest income and other income at December 31, 2001.
b) Components of other operating expenses which exceed one percent of the aggregate of total interest income and other income are as follows:
December 31, 2001 2000 1999
(In thousands)
Data\Item processing $227 $287 $443
Advertising $343 $345 $281
Consulting $165 $141 $306
9. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
a) Leases
The Company is obligated to make minimum annual rental payments under non-cancellable operating leases on its premises. The projected minimum rentals under existing leases at December 31, 2001 are as follows (in thousands):
2002 $447
2003 $434
2004 $331
2005 $118
2006 $ 72
Thereafter $410
Certain leases contain renewal options and rent escalation clauses. In addition, certain leases provide for additional payments based upon real estate taxes, interest and other charges. Rental expenses under these leases for the years ended December 31, 2001, 2000 and 1999 approximated $376,000, $354,000 and $296,000, respectively.
b) Loans
In the normal course of business, there are various outstanding commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying financial statements. No material losses are anticipated as a result of these transactions.
The following represents commitments outstanding:
December 31, 2001 2000
(In thousands)
Standby letters of credit $ 1,235 $ 1,883
Loan commitments outstanding 20,371 14,044
Unused equity lines 21,302 18,261
Unused construction lines 3,946 10,722
Unused lines of credit 15,761 12,452
Unused overdraft lines 8,338 6,700
Total commitments outstanding $70,953 $64,062
c) Other
During 2001, the Bank was required to maintain certain cash balances with the Federal Reserve Bank of New York for reserve and clearing requirements. These balances averaged $1,357,000 in 2001.
Page -31-
During 2001, 2000, and 1999, the Bank maintained an overnight line of credit with the Federal Home Loan Bank of New York (“FHLB”). The Bank has the ability to borrow against its unencumbered residential mortgages and investment securities owned by the Bank. There were no amounts outstanding at December 31, 2001 and 2000.
In March 2001 the Bank entered into a Master Repurchase Agreement with the FHLB whereby the FHLB agrees to purchase securities from the Bank, upon the Bank's request, with the simultaneous agreement to sell the same or similar securities back to the Bank at a future date.Securities are limited, under the agreement, to government securities, securities issued, guaranteed or collateralized by any agency or instrumentality of the US Government or any government sponsored enterprise, and non-Agency AA and AAA rated mortgage-backed securities (including consolidated mortgage obligations (“CMO’s”) that have readily ascertainable value). At December 31, 2001, there was $19,122,000 available for transactions under this agreement. There were no balances outstanding at year end.
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time and are based on existing on and off balance sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.
The following method and assumptions were used by the Company in estimating the fair value of its financial instruments:
Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities.
Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations and quoted market prices.
Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that apply interest rates currently being offered by the Bank for loans with similar remaining maturities to a schedule of aggregated expected monthly maturities.
Deposits: The estimated fair values of deposits are based on discounted cash flow calculations that apply interest rates currently being offered by the Bank for deposits with similar remaining maturities to a schedule of aggregated expected monthly maturities.
Borrowings: The estimated fair value of borrowed funds is based on the discounted value of contractual cash flows using interest rates currently in effect for borrowings with similar maturities and collateral requirements.
Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value.
The estimated fair values and recorded carrying values of the Bank’s financial instruments are as follows:
December 31, 2001 2000
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets:
Cash and due from banks $ 10,813 $ 10,813 $ 16,005 $ 16,005
Interest bearing deposits with banks 50 50 39 39
Federal funds sold 13,500 13,500 - -
Securities available for sale 125,709 125,709 114,454 114,454
Securities held to maturity 17,552 17,433 12,397 12,414
Loans 213,014 207,530 198,992 188,298
Accrued interest receivable 2,153 2,153 2,165 2,165
Financial Liabilities:
Demand and other deposits 357,155 358,227 313,379 313,503
Federal funds purchased - - 9,700 9,700
Accrued interest payable 678 678 786 786
Page -32-
11. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Bank’s capital amounts and classification 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 following table) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. Since that notification, there are no conditions or events that management believes have changed the institution’s category.
The Company and the Bank’s actual capital amounts and ratios are presented in the following table:
Bridge Bancorp, Inc. (Consolidated)
As of December 31, 2001
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $33,177 13.2% $20,064 >8.0% $25,080 >10.0%
Tier 1 Capital (to risk weighted assets) 30,829 12.3% 10,032 >4.0% 15,048 > 6.0%
Tier 1 Capital (to average assets) 30,829 8.0% 15,490 >4.0% 19,363 > 5.0%
As of December 31, 2000
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $29,544 12.6% $18,799 >8.0% $23,498 >10.0%
Tier 1 Capital (to risk weighted assets) 27,444 11.7% 9,399 >4.0% 14,099 > 6.0%
Tier 1 Capital (to average assets) 27,444 7.9% 13,911 >4.0% 17,389 > 5.0%
Page -33-
Bridgehampton National Bank
As of December 31, 2001
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $33,152 13.2% $20,064 >8.0% $25,080 >10.0%
Tier 1 Capital (to risk weighted assets) 30,804 12.3% 10,032 >4.0% 15,048 > 6.0%
Tier 1 Capital (to average assets) 30,804 8.0% 15,490 >4.0% 19,363 > 5.0%
As of December 31, 2000
(In thousands) To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk weighted assets) $29,407 12.5% $18,799 >8.0% $23,498 >10.0%
Tier 1 Capital (to risk weighted assets) 27,307 11.6% 9,399 >4.0% 14,099 > 6.0%
Tier 1 Capital (to average assets) 27,307 7.9% 13,911 >4.0% 17,389 > 5.0%
12. BRIDGE BANCORP INC. (PARENT COMPANY ONLY)
Condensed Statements of Financial Condition
December 31, 2001 2000
(In thousands)
Assets
Cash and cash equivalents $ 13 $ 137
Dividend receivable 631 551
Other assets 12 -
Investment in the Bank 32,836 28,651
Total Assets $33,492 $29,339
Liabilities
Dividends payable 625 548
Other liabilities 6 3
Total Liabilities $ 631 $ 551
Stockholders' Equity
Stockholders' Equity 34,469 29,441
Treasury stock at cost, 91,333 and
40,000 shares at 12/31/01 and 12/30/00, respectively (1,608) (653)
Total Stockholders' Equity $32,861 $28,788
Total Liabilities and Stockholders' Equity $33,492 $29,339
Page -34-
Condensed Statements of Income
Year Ended December 31, 2001 2000 1999
(In thousands)
Dividend income from the Bank $3,251 $2,409 $1,786
Other operating expenses 2 1 1
Income before income taxes and equity in
undistributed earnings of the Bank 3,249 2,408 1,785
Income tax provision 0 0 0
Income before equity in undistributed
earnings of the Bank 3,249 2,408 1,785
Equity in undistributed earnings of the Bank 3,498 3,228 2,982
Net income $6,747 $5,636 $4,767
Condensed Statements of Cash Flows
Year Ended December 31, 2001 2000 1999
(In thousands)
Cash flows used by operations:
Other operating expenses $ (2) $ 129 $ (1)
Net cash used by operating activities (2) 129 (1)
Cash flows from investing activities:
Payment for the purchase of treasury stock (1,264) (653) -
Dividends received 3,172 2,325 2,377
Net cash provided by investing activities 1,908 1,672 2,377
Cash flows used by financing activities:
Net proceeds from issuance of common stock upon exercise of stock options 202 - 214
Dividends paid (2,232) (1,993) (2,377)
Net cash used by financing activities (2,030) (1,993) (2,163)
Net increase in cash and cash equivalents (124) (192) 213
Cash and cash equivalents at beginning of year 137 329 116
Cash and cash equivalents at end of year $ 13 $ 137 $ 329
Reconciliation of net income to net cash used by operating activities:
Net income $ 6,747 $ 5,636 $ 4,767
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed earnings of the Bank (3,498) (3,228) (2,982)
Dividend income (3,251) (2,409) (1,786)
Income tax benefit from exercise of employee stock options 12 - 72
Increase in other assets (12) 130 (72)
Net cash used by operating activities $ (2) $ 129 $ (1)
Page -35-
13. QUARTERLY FINANCIAL DATA (Unaudited)
Selected Consolidated Quarterly Financial Data
2001 Quarter Ended, March 31, June 30, September 30, December 31,
(In thousands, except per share amounts)
Interest income $6,726 $6,872 $6,796 $6,615
Interest expense 2,381 2,173 1,917 1,397
Net interest income 4,345 4,699 4,879 5,218
Provision for loan losses 85 85 60 93
Net interest income after provision for loan losses 4,260 4,614 4,819 5,125
Other income 584 626 631 578
Other expenses 2,735 2,756 2,741 2,966
Income before income taxes 2,109 2,484 2,709 2,737
Provision for income taxes 652 808 914 918
Net income $1,457 $1,676 $1,795 $1,819
Basic earnings per share $ 0.35 $ 0.40 $ 0.42 $ 0.44
Diluted earnings per share $ 0.34 $ 0.40 $ 0.42 $ 0.44
2000 Quarter Ended, March 31, June 30, September 30, December 31,
(In thousands, except per share amounts)
Interest income $5,621 $6,109 $6,846 $6,882
Interest expense 1,735 1,977 2,509 2,532
Net interest income 3,886 4,132 4,337 4,350
Provision for loan losses 105 - - -
Net interest income after provision for loan losses 3,781 4,132 4,337 4,350
Other income 438 159 574 563
Other expenses 2,513 2,520 2,649 2,552
Income before income taxes 1,706 1,771 2,262 2,361
Provision for income taxes 496 521 709 738
Net income $1,210 $1,250 $1,553 $1,623
Basic earnings per share $ 0.29 $ 0.29 $ 0.37 $ 0.38
Diluted earnings per share $ 0.28 $ 0.29 $ 0.37 $ 0.38
Page -36-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders Bridge Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Bridge Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bridge Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen
New York, New York
January 18, 2002
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
“Nominees for Director and Directors Continuing in Office,” “Shares Beneficially Owned by other Executive Officers and All Directors” and “Compliance with Section 16 (a) of the Exchange Act” set forth in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated herein by reference.
Item 11. Executive Compensation
“Compensation of Directors,” “Compensation of Executive Officers,” and “Employment Contracts and Severance Agreements” set forth in the Registrant’s Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
"Beneficial Ownership" and "Nominees for Director and Directors Continuing in Office" set forth in the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders are incorporated herein by reference.
Page -37-
Item 13. Certain Relationships and Related Transactions
"Certain Relationships and Related Transactions" set forth in the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders is incorporated herein by reference.
Related Party Loans.
Certain directors and related parties, including their immediate families and companies in which they are principal owners, were loan customers of the Bank during 2001 and 2000. Such loans were made in the ordinary course of business on substantially the same terms, including interest rate and security, as those prevailing at the time for comparable transactions with other persons, and do not represent more than normal risk of collection or present other unfavorable features. The aggregate amount of these loans was approximately $402,000 and $429,000 at December 31, 2001 and 2000, respectively. During 2001 no new loans to such persons were made and repayments totaled $27,000. There were no loans to directors which were nonaccruing at December 31, 2001 or 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following Consolidated Financial Statements, including notes thereto, and financial schedules of the Company, required in response to this item are included in Part II, Item 8.
1. Financial Statements Page No.
Consolidated Statements of Condition 16
Consolidated Statements of Income 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Report of Independent Public Accountants 37
2. Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto under Item 8, "Financial Statements and Supplementary
Data."
3. Exhibits.
See Index of Exhibits on page 40.
(b) Reports on Form 8-K.
None
Page -38-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRIDGE BANCORP, INC.
Registrant
March 13, 2002 By /s/ Thomas J. Tobin
Thomas J. Tobin,
President/CEO
March 13, 2002 By /s/ Christopher Becker
Christopher Becker,
Executive Vice President/Treasurer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
March 13, 2002 /s/ Raymond Wesnofske Director
Raymond Wesnofske
March 13, 2002 /s/ Thomas J. Tobin Director
Thomas J. Tobin
March 13, 2002 /s/ Thomas E. Halsey Director
Thomas E. Halsey
March 13, 2002 /s/ Marcia Z. Hefter Director
Marcia Z. Hefter
March 13, 2002 /s/ R. Timothy Maran Director
R. Timothy Maran
March 13, 2002 /s/ Walter A. Preische, Jr. Director
Walter A. Preische, Jr.
March 13, 2002 /s/ L.H. Strickland Director
L.H. Strickland
Page -39-
EXHIBIT INDEX
Exhibit Number Description of Exhibit Exhibit
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to Registrant's amended Form 10, File No. 0-18546, filed October 15, 1990) *
3.1(i) Certificate of Amendment of the Certificate of Incorporation of the
Registrant (incorporated by reference to Registrant's Form 10,
File No. 0-18546, filed August 13, 1999) *
3.2 By-laws of the Registrant (incorporated by reference to Registrant's
amended Form 10, File No. 0-18546, filed October 15, 1990) *
10.1 Employment Contract - Thomas J. Tobin (incorporated by reference to
Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
10.2 Employment Contract - Janet T. Verneuille (incorporated by reference to
Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
10.5 Equity Incentive Plan (incorporated by reference to Registrant's Form 14A,
File No. 0-18546, filed March 9, 2001) *
10.6 Employment Contract - Christopher Becker (incorporated by reference
to Registrant's Form 10-Q, File No. 0-18546, filed November 7, 2001) *
* Denotes incorporated by reference
Page -40-
