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EX-31.2 - EX-31.2 - Dime Community Bancshares, Inc. /NY/a11-10862_1ex31d2.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 


 

Commission file number 001-34096

 


 

BRIDGE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

NEW YORK

 

11-2934195

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification Number)

 

 

 

2200 MONTAUK HIGHWAY, BRIDGEHAMPTON, NEW YORK

 

11932

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (631) 537-1000

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [ ] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer [  ]

 

Accelerated filer [X]

 

 

 

Non-accelerated filer [  ] (Do not check if a smaller reporting company)

 

Smaller reporting company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

There were 6,458,587 shares of common stock outstanding as of April 30, 2011.

 

 



Table of Contents

 

 

BRIDGE BANCORP, INC.

 

PART I -

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010

1

 

 

 

 

Consolidated Statements of Income for the Three Ended March 31, 2011 and 2010

2

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2011 and 2010

3

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010

4

 

 

 

 

Condensed Notes to Consolidated Financial Statements

5

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

38

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 3.

Defaults Upon Senior Securities

38

 

 

 

Item 4.

[Removed and Reserved]

38

 

 

 

Item 5.

Other Information

38

 

 

 

Item 6.

Exhibits

38

 

 

 

Signatures

 

39

 

 

 

Exhibit 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)

Exhibit 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

 

 



Table of Contents

 

 

Item 1. Financial Statements

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(In thousands, except share and per share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

14,320

 

$

21,598

 

Interest earning deposits with banks

 

40,351

 

1,320

 

Total cash and cash equivalents

 

54,671

 

22,918

 

 

 

 

 

 

 

Securities available for sale, at fair value

 

325,964

 

323,539

 

Securities held to maturity (fair value of $141,791 and $148,144, respectively)

 

141,348

 

147,965

 

Total securities

 

467,312

 

471,504

 

 

 

 

 

 

 

Securities, restricted

 

1,284

 

1,284

 

 

 

 

 

 

 

Loans

 

522,674

 

504,060

 

Allowance for loan losses

 

(9,015

)

(8,497

)

Loans, net

 

513,659

 

495,563

 

 

 

 

 

 

 

Premises and equipment, net

 

23,457

 

23,683

 

Accrued interest receivable

 

4,409

 

4,153

 

Other assets

 

10,115

 

9,351

 

Total Assets

 

$

1,074,907

 

$

1,028,456

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Demand deposits

 

$

247,949

 

$

239,314

 

Savings, NOW and money market deposits

 

586,539

 

544,470

 

Certificates of deposit of $100,000 or more

 

91,116

 

90,574

 

Other time deposits

 

40,342

 

42,635

 

Total deposits

 

965,946

 

916,993

 

 

 

 

 

 

 

Federal funds purchased and Federal Home Loan Bank overnight borrowings

 

 

5,000

 

Repurchase agreements

 

16,332

 

16,370

 

Junior subordinated debentures

 

16,002

 

16,002

 

Accrued interest payable

 

367

 

433

 

Other liabilities and accrued expenses

 

9,331

 

7,938

 

Total Liabilities

 

1,007,978

 

962,736

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share (2,000,000 shares authorized; none issued)

 

 

 

Common stock, par value $.01 per share:

 

 

 

 

 

Authorized: 20,000,000 shares; 6,492,676 and 6,456,742 shares issued, respectively; 6,411,490 and 6,364,656 shares outstanding, respectively

 

65

 

64

 

Surplus

 

21,710

 

20,946

 

Retained earnings

 

47,146

 

46,463

 

Less: Treasury Stock at cost, 81,186 and 92,086 shares, respectively

 

(3,243

)

(3,520

)

 

 

65,678

 

63,953

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Net unrealized gain on securities, net of deferred income taxes of ($1,983) and ($2,336), respectively

 

3,012

 

3,549

 

Pension liability, net of deferred income taxes of $1,188 and $1,202, respectively

 

(1,761

)

(1,782

)

Total Stockholders’ Equity

 

66,929

 

65,720

 

Total Liabilities and Stockholders’ Equity

 

$

1,074,907

 

$

1,028,456

 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

1

 



Table of Contents

 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)

 

Three months ended March 31,

 

2011

 

2010

 

Interest income:

 

 

 

 

 

Loans (including fee income)

 

$

7,955

 

$

7,282

 

Mortgage-backed securities and collateralized mortgage obligations

 

2,316

 

2,529

 

State and municipal obligations

 

721

 

570

 

U.S. GSE securities

 

399

 

403

 

Corporate Bonds

 

187

 

 

Federal funds sold

 

 

5

 

Deposits with banks

 

18

 

9

 

Total interest income

 

11,596

 

10,798

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Savings, NOW and money market deposits

 

966

 

874

 

Certificates of deposit of $100,000 or more

 

243

 

394

 

Other time deposits

 

127

 

250

 

Federal funds purchased and repurchase agreements

 

134

 

108

 

Junior Subordinated Debentures

 

342

 

341

 

Total interest expense

 

1,812

 

1,967

 

 

 

 

 

 

 

Net interest income

 

9,784

 

8,831

 

Provision for loan losses

 

700

 

1,300

 

Net interest income after provision for loan losses

 

9,084

 

7,531

 

 

 

 

 

 

 

Non interest income:

 

 

 

 

 

Service charges on deposit accounts

 

733

 

622

 

Fees for other customer services

 

480

 

376

 

Title fee income

 

204

 

255

 

Net securities gains

 

 

891

 

Other operating income

 

37

 

58

 

Total non interest income

 

1,454

 

2,202

 

 

 

 

 

 

 

Non interest expense:

 

 

 

 

 

Salaries and employee benefits

 

4,175

 

3,837

 

Net occupancy expense

 

762

 

693

 

Furniture and fixture expense

 

306

 

283

 

FDIC assessments

 

308

 

295

 

Acquisition costs

 

233

 

 

Other operating expenses

 

1,624

 

1,493

 

Total non interest expense

 

7,408

 

6,601

 

 

 

 

 

 

 

Income before income taxes

 

3,130

 

3,132

 

Income tax expense

 

970

 

1,002

 

Net income

 

$

2,160

 

$

2,130

 

Basic earnings per share

 

$

0.34

 

$

0.34

 

Diluted earnings per share

 

$

0.34

 

$

0.34

 

Comprehensive Income

 

$

1,644

 

$

1,875

 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

2

 



Table of Contents

 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)

(In thousands, except per share amounts)

 

 

 

Common
Stock

 

Surplus

 

Comprehensive
Income

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Balance at January 1, 2011

 

$

64

 

$

20,946

 

 

 

$

46,463

 

$

(3,520

)

$

1,767

 

$

65,720

 

Net income

 

 

 

 

 

$

2,160

 

2,160

 

 

 

 

 

2,160

 

Proceeds from issuance of common stock

 

1

 

842

 

 

 

 

 

2

 

 

 

845

 

Stock awards granted

 

 

 

(336

)

 

 

 

 

336

 

 

 

 

Vesting of stock awards

 

 

 

(1

)

 

 

 

 

(61

)

 

 

(62

)

Share based compensation expense

 

 

 

259

 

 

 

 

 

 

 

 

 

259

 

Cash dividend declared, $0.23 per share

 

 

 

 

 

 

 

(1,477

)

 

 

 

 

(1,477

)

Other comprehensive income, net of deferred taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized net gains in securities available for sale, net of deferred tax effects

 

 

 

 

 

(537

)

 

 

 

 

(537

)

(537

)

Adjustment to pension liability, net of deferred taxes

 

 

 

 

 

21

 

 

 

 

 

21

 

21

 

Comprehensive Income

 

 

 

 

 

$

1,644

 

 

 

 

 

 

 

 

 

Balance at March 31, 2011

 

$

65

 

$

21,710

 

 

 

$

47,146

 

$

(3,243

)

$

1,251

 

$

66,929

 

 

 

 

Common
Stock

 

Surplus

 

Comprehensive
Income

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
Other
Comprehensive
Income

 

Total

 

Balance at January 1, 2010

 

$

64

 

$

19,950

 

 

 

$

43,110

 

$

(4,791

)

$

3,522

 

$

61,855

 

Net income

 

 

 

 

 

$

2,130

 

2,130

 

 

 

 

 

2,130

 

Proceeds from issuance of common stock

 

 

 

139

 

 

 

 

 

1

 

 

 

140

 

Stock awards granted

 

 

 

(414

)

 

 

 

 

414

 

 

 

 

Vesting of stock awards

 

 

 

(1

)

 

 

 

 

(5

)

 

 

(6

)

Exercise of stock options, including tax benefit

 

 

 

(5

)

 

 

 

 

28

 

 

 

23

 

Share based compensation expense

 

 

 

208

 

 

 

 

 

 

 

 

 

208

 

Cash dividend declared, $0.23 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,446

)

Other comprehensive income, net of deferred taxes:

 

 

 

 

 

 

 

(1,446

)

 

 

 

 

 

 

Change in unrealized net gains in securities available for sale, net of deferred tax effects

 

 

 

 

 

(276

)

 

 

 

 

(276

)

(276

)

Adjustment to pension liability, net of deferred taxes

 

 

 

 

 

21

 

 

 

 

 

21

 

21

 

Comprehensive Income

 

 

 

 

 

$

1,875

 

 

 

 

 

 

 

 

 

Balance at March 31, 2010

 

$

64

 

$

19,877

 

 

 

$

43,794

 

$

(4,353

)

$

3,267

 

$

62,649

 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

3

 



Table of Contents

 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

Three months ended March 31,

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net Income

 

$

2,160

 

$

2,130

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

700

 

1,300

 

Depreciation and amortization

 

451

 

413

 

Net amortization on securities

 

564

 

284

 

Share based compensation expense

 

259

 

208

 

Tax expense from the vesting of restricted stock awards

 

1

 

1

 

Tax benefit from exercise of stock options

 

 

(6

)

SERP expense

 

54

 

51

 

Net securities gains

 

 

(891

)

Increase in accrued interest receivable

 

(256

)

(617

)

(Increase) decrease in other assets

 

(764

)

1,424

 

Increase in accrued expenses and other liabilities

 

886

 

1,029

 

Net cash provided by operating activities

 

4,055

 

5,326

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of securities available for sale

 

(27,664

)

(39,580

)

Purchases of securities held to maturity

 

(6,178

)

(47,007

)

Proceeds from sales of securities available for sale

 

 

22,051

 

Maturities and calls of securities available for sale

 

5,710

 

6,090

 

Maturities and calls of securities held to maturity

 

10,125

 

430

 

Principal payments on securities

 

21,495

 

20,892

 

Net increase in loans

 

(18,796

)

(8,237

)

Purchase of premises and equipment

 

(225

)

(940

)

Net cash used in investing activities

 

(15,533

)

(46,301

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

48,953

 

13,680

 

Net (decrease) increase in federal funds purchased and FHLB overnight borrowings

 

(5,000

)

9,000

 

Net (decrease) increase in repurchase agreements

 

(38

)

1,535

 

Net proceeds from exercise of stock options

 

 

23

 

Net proceeds from issuance of common stock

 

845

 

140

 

Repurchase of surrendered stock from exercise of stock options and vesting of restricted stock awards

 

(62

)

(6

)

Cash dividends paid

 

(1,467

)

(1,441

)

Net cash provided by financing activities

 

43,231

 

22,931

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

31,753

 

(18,044

)

Cash and cash equivalents at beginning of period

 

22,918

 

34,147

 

Cash and cash equivalents at end of period

 

$

54,671

 

$

16,103

 

 

 

 

 

 

 

Supplemental Information-Cash Flows:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

1,878

 

$

2,009

 

Income tax

 

$

 

$

1,150

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

Securities which settled in the subsequent period

 

$

750

 

$

2,080

 

Dividends declared and unpaid at end of period

 

$

1,477

 

$

1,446

 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

4

 



Table of Contents

 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. BASIS OF PRESENTATION

 

Bridge Bancorp, Inc. (the “Company”) is incorporated under the laws of the State of New York as a bank holding company.  The Company’s business currently consists of the operations of its wholly-owned subsidiary, The Bridgehampton National Bank (the “Bank”).  The Bank’s operations include its real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”) and a financial title insurance subsidiary, Bridge Abstract LLC (“Bridge Abstract”).  In addition to the Bank, the Company has another subsidiary Bridge Statutory Capital Trust II which was formed in 2009. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements.

 

The accompanying Unaudited Consolidated Financial Statements, which include the accounts of the Company and its wholly-owned subsidiary, the Bank, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The Unaudited Consolidated Financial Statements included herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  In preparing the interim financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods.  Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified.  Actual future results could differ significantly from those estimates.  The annualized results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year.  Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain reclassifications have been made to prior year amounts, and the related discussion and analysis, to conform to the current year presentation.  These reclassifications did not have an impact on net income or stockholders’ equity. The Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

2. EARNINGS PER SHARE

 

FASB ASC 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”).  The restricted stock awards and restricted stock units granted by the Company contain nonforfeitable rights to dividends and therefore are considered participating securities.  The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.

 

The computation of EPS for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Three months ended,

 

 

 

March 31,

 

 

 

2011

 

2010

 

(In thousands, except per share data)

 

 

 

 

 

Net Income

 

$

2,160

 

$

2,130

 

Less: Dividends paid on and earnings allocated to participating securities

 

(65

)

(53

)

Income attributable to common stock

 

$

2,095

 

$

2,077

 

 

 

 

 

 

 

Weighted average common shares outstanding, including participating securities

 

6,413

 

6,282

 

Less: weighted average participating securities

 

(191

)

(163

)

Weighted average common shares outstanding

 

6,222

 

6,119

 

Basic earnings per common share

 

$

0.34

 

$

0.34

 

 

 

 

 

 

 

Income attributable to common stock

 

$

2,095

 

$

2,077

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

6,222

 

6,119

 

Weighted average common equivalent shares outstanding

 

1

 

1

 

Weighted average common and equivalent shares outstanding

 

6,223

 

6,120

 

Diluted earnings per common share

 

$

0.34

 

$

0.34

 

 

5

 



Table of Contents

 

 

There were 54,275 and 55,259 options outstanding at March 31, 2011 and March 31, 2010, respectively, that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive. The $16.0 million in convertible trust preferred securities outstanding at March 31, 2011, were not included in the computation of diluted earnings per share because the assumed conversion of the trust preferred securities was antidilutive.

 

3. STOCK REPURCHASE PROGRAM

 

The Company’s Board of Directors approved a stock repurchase program that authorized the repurchase of up to 309,000 shares of its common stock.  These shares can be purchased from time to time in the open market or through private purchases, depending on market conditions, availability of stock, the trading price of the stock, alternative uses for capital, and the Company’s financial performance.  Repurchased shares are held in the Company’s treasury account and may be utilized for general corporate purposes.

 

For the three months ended March 31, 2011 and March 31, 2010, the Company did not repurchase any of its common shares.  At March 31, 2011, 167,041 shares were available for repurchase under the Board approved program.

 

4. STOCK BASED COMPENSATION PLANS

 

The Compensation Committee of the Board of Directors determines stock options and restricted stock awarded under the Bridge Bancorp, Inc. Equity Incentive Plan (“Plan”) and the Company accounts for this Plan under the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 718 and 505.

 

No new grants of stock options were awarded during the three months ended March 31, 2011 and March 31, 2010.  There was no compensation expense attributable to stock options for the three months ended March 31, 2011 because all stock options were vested. Compensation expense attributable to stock options was $10,000 for the three months ended March 31, 2010.

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date.  No stock options were exercised during the first quarter of 2011. The intrinsic value of options exercised during the first quarter of 2010 was $16,000. The intrinsic value of options outstanding and exercisable at March 31, 2011 and March 31, 2010 was $14,000 and $17,000, respectively.

 

A summary of the status of the Company’s stock options as of and for the three months ended March 31, 2011 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

Number

 

Average

 

Remaining

 

Aggregate

 

 

 

of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Options

 

Price

 

Life

 

Value

 

Outstanding, December 31, 2010

 

56,375

 

$

25.06

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

Outstanding, March 31, 2011

 

56,375

 

$

25.06

 

5.08 years

 

$

14,497

 

Vested and Exercisable, March 31, 2011

 

56,375

 

$

25.06

 

5.08 years

 

$

14,497

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Exercise

 

 

 

 

 

Range of Exercise Prices

 

Options

 

Price

 

 

 

 

 

 

 

2,100

 

$

15.47

 

 

 

 

 

 

 

5,659

 

$

24.00

 

 

 

 

 

 

 

43,213

 

$

25.25

 

 

 

 

 

 

 

3,000

 

$

26.55

 

 

 

 

 

 

 

2,403

 

$

30.60

 

 

 

 

 

 

 

56,375

 

 

 

 

 

 

 

 

6

 



Table of Contents

 

 

During the three months ended March 31, 2011, restricted stock awards of 13,188 shares were granted. These awards vest over approximately five years with a third vesting after years three, four and five. During the three months ended March 31, 2010, restricted stock awards of 15,500 shares were granted. Of the 15,500 shares granted, 11,070 shares vest over five years with a third vesting after years three, four and five. The remaining 4,430 shares vest ratably over approximately five years. Compensation expense attributable to restricted stock awards was $227,000 and $177,000 for the three months ended March 31, 2011, and 2010, respectively.

 

A summary of the status of the Company’s unvested restricted stock as of and for the three months ended March 31, 2011 is as follows:

 

 

 

 

 

Weighted

 

 

 

 

 

Average Grant-Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2010

 

181,588

 

$

21.96

 

Granted

 

13,188

 

$

22.82

 

Vested

 

(14,984

)

$

22.07

 

Forfeited

 

 

 

Unvested, March 31, 2011

 

179,792

 

$

22.02

 

 

In April 2009, the Company adopted a Directors Deferred Compensation Plan. Under the Plan, independent directors may elect to defer all or a portion of their annual retainer fee in the form of restricted stock units. In addition, Directors receive a non-election retainer in the form of restricted stock units.  These restricted stock units vest ratably over one year and have dividend rights but no voting rights. In connection with this Plan, the Company recorded expenses of approximately $32,000 and $21,000 for the three months ended March 31, 2011 and 2010, respectively.

 

5. SECURITIES

 

The following table summarizes the amortized cost and fair value of the available for sale and held to maturity investment securities portfolio at March 31, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein:

 

 

 

March 31, 2011

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

36,037

 

$

148

 

$

(568

)

$

35,617

 

State and municipal obligations

 

46,386

 

1,044

 

(348

)

47,082

 

U.S. GSE residential mortgage-backed securities

 

82,676

 

3,222

 

(159

)

85,739

 

U.S. GSE residential collateralized mortgage obligations

 

155,869

 

2,321

 

(664

)

157,526

 

Total available for sale

 

320,968

 

6,735

 

(1,739

)

325,964

 

 

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

19,975

 

110

 

(170

)

19,915

 

State and municipal obligations

 

60,275

 

423

 

(762

)

59,936

 

U.S. GSE residential collateralized mortgage obligations

 

43,098

 

999

 

 

44,097

 

Corporate Bonds

 

18,000

 

 

(157

)

17,843

 

Total held to maturity

 

141,348

 

1,532

 

(1,089

)

141,791

 

Total securities

 

$

462,316

 

$

8,267

 

$

(2,828

)

$

467,755

 

 

7

 



Table of Contents

 

 

 

 

December 31, 2010

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(In thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Available for sale:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

41,463

 

$

213

 

$

(343

)

$

41,333

 

State and municipal obligations

 

47,175

 

1,173

 

(283

)

48,065

 

U.S. GSE residential mortgage-backed securities

 

76,814

 

3,481

 

(124

)

80,171

 

U.S. GSE residential collateralized mortgage obligations

 

152,202

 

2,618

 

(850

)

153,970

 

Total available for sale

 

317,654

 

7,485

 

(1,600

)

323,539

 

 

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

24,973

 

118

 

(199

)

24,892

 

State and municipal obligations

 

64,728

 

439

 

(922

)

64,245

 

U.S. GSE residential collateralized mortgage obligations

 

40,264

 

954

 

(53

)

41,165

 

Corporate Bonds

 

18,000

 

 

(158

)

17,842

 

Total held to maturity

 

147,965

 

1,511

 

(1,332

)

148,144

 

Total securities

 

$

465,619

 

$

8,996

 

$

(2,932

)

$

471,683

 

 

The following table summarizes the amortized cost, fair value and maturities of the available for sale and held to maturity investment securities portfolio at March 31, 2011. 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.

 

 

 

March 31, 2011

 

 

 

Amortized

 

Fair

 

(In thousands)

 

Cost

 

Value

 

Maturity

 

 

 

 

 

Available for sale:

 

 

 

 

 

Within one year

 

$

11,024

 

$

11,105

 

One to five years

 

42,537

 

42,848

 

Five to ten years

 

58,772

 

59,665

 

Beyond ten years

 

208,635

 

212,346

 

Total

 

$

320,968

 

$

325,964

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

Within one year

 

$

14,647

 

$

14,682

 

One to five years

 

41,381

 

40,277

 

Five to ten years

 

21,154

 

22,318

 

Beyond ten years

 

64,166

 

64,514

 

Total

 

$

141,348

 

$

141,791

 

 

Securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

 

 

Less than 12 months

 

Greater than 12 months

 

March 31, 2011

 

 

 

Unrealized

 

 

 

Unrealized

 

(In thousands)

 

Fair Value

 

losses

 

Fair Value

 

losses

 

Available for sale:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

24,921

 

$

568

 

$

 

$

 

State and municipal obligations

 

10,813

 

348

 

 

 

U.S. GSE residential mortgage-backed securities

 

7,330

 

159

 

 

 

U.S. GSE residential collateralized mortgage obligations

 

54,157

 

664

 

 

 

Total available for sale

 

$

97,221

 

$

1,739

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

9,829

 

$

170

 

$

 

$

 

State and municipal obligations

 

27,066

 

762

 

 

 

Corporate Bonds

 

17,843

 

157

 

 

 

Total held to maturity

 

$

54,738

 

$

1,089

 

$

 

$

 

 

8

 



Table of Contents

 

 

 

 

Less than 12 months

 

Greater than 12 months

 

December 31, 2010

 

 

 

Unrealized

 

 

 

Unrealized

 

(In thousands)

 

Fair Value

 

losses

 

Fair Value

 

losses

 

Available for sale:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

25,145

 

$

343

 

$

 

$

 

State and municipal obligations

 

11,927

 

283

 

 

 

U.S. GSE residential mortgage-backed securities

 

7,591

 

124

 

 

 

U.S. GSE residential collateralized mortgage obligations

 

55,906

 

850

 

 

 

Total available for sale

 

$

100,569

 

$

1,600

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Held to maturity:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

9,800

 

$

199

 

$

 

$

 

State and municipal obligations

 

27,416

 

922

 

 

 

U.S. GSE residential collateralized mortgage obligations

 

4,952

 

53

 

 

 

Corporate Bonds

 

17,842

 

158

 

 

 

Total held to maturity

 

$

60,010

 

$

1,332

 

$

 

$

 

 

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320, Accounting for Certain Investments in Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

At March 31, 2011, the majority of unrealized losses on available for sale securities are related to the Company’s residential collateralized mortgage obligations and U.S. GSE securities and the majority of unrealized losses on held to maturity securities are related to State and municipal obligations.  The decline in fair value is attributable to changes in interest rates and not credit quality, and the Company does not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011.

 

There were no proceeds from sales of securities available for sale for the three months ended March 31, 2011 and $22.1 million for the three months ended March 31, 2010.  There were no securities gains or losses during the three months ended March 31, 2011 and gross gains of $0.9 million were realized on the sales during the three months ended March 31, 2010.  Proceeds from calls of securities available for sale were $10.0 million and $5.0 million for the three months ended March 31, 2011 and 2010, respectively.

 

Securities having a fair value of approximately $238.2 million and $277.9 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and Federal Home Loan Bank and Federal Reserve Bank overnight borrowings.  The Bank did not hold any trading securities during the three months ended March 31, 2011 or the year ended December 31, 2010.

 

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York.  Members are required to own a particular amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  The Bank is a member of the Atlantic Central Banker’s Bank (“ACBB”) is required to own ACBB stock. The Bank is also a member of the Federal Reserve Bank (“FRB”) system and required to own FRB stock.  FHLB, ACBB and FRB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.  The Bank owned approximately $1.3 million in FHLB, ACBB and FRB stock at March 31, 2011 and December 31, 2010.  These amounts were reported as restricted securities in the consolidated balance sheets.

 

9

 


 


Table of Contents

 

 

6. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

 

FASB ASC No. 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

Assets and liabilities measured on a recurring basis:

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

March 31, 2011 Using:

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices In

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

35,617

 

 

 

$

35,617

 

 

 

State and municipal obligations

 

47,082

 

 

 

47,082

 

 

 

U.S. GSE residential mortgage-backed securities

 

85,739

 

 

 

85,739

 

 

 

U.S. GSE residential collateralized mortgage obligations

 

157,526

 

 

 

157,526

 

 

 

Total available for sale

 

$

325,964

 

 

 

$

325,964

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2010 Using:

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices In

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

U.S. GSE securities

 

$

 41,333

 

 

 

$

 41,333

 

 

 

State and municipal obligations

 

48,065

 

 

 

48,065

 

 

 

U.S. GSE residential mortgage-backed securities

 

80,171

 

 

 

80,171

 

 

 

U.S. GSE residential collateralized mortgage obligations

 

153,970

 

 

 

153,970

 

 

 

Total available for sale

 

$

 323,539

 

 

 

$

 323,539

 

 

 

 

10

 



Table of Contents

 

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

March 31, 2011 Using:

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices In

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans

 

$

 

 

 

 

 

 

$

 —

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

December 31, 2010 Using:

 

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

Quoted Prices In

 

Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

Carrying

 

Identical Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans

 

$

 693

 

 

 

 

 

$

 693

 

 

For impaired and TDR loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance.  For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. These methods of fair value measurement for impaired and TDR loans are considered level 3 within the fair value hierarchy described in current accounting guidance. There were no impaired or TDR loans with an allocated allowance for loan losses at March 31, 2011. Impaired loans with allocated allowance for loan losses at December 31, 2010, had a carrying amount of $693,000, which is made up of the outstanding balance of $700,000, net of a valuation allowance of $7,000. This resulted in an additional provision for loan losses of $7,000 that is included in the amount reported on the income statement as of December 31, 2010.

 

The Company used the following method and assumptions in estimating the fair value of its financial instruments:

 

Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities.

 

Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

 

Restricted Stock: It is not practicable to determine the fair value of FHLB, Atlantic Central Banker’s Bank and FRB stock due to restrictions placed on its transferability.

 

Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that use available market benchmarks when establishing discount factors for the types of loans. All nonaccrual loans are carried at their current fair value. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be discounted straight to their rate index plus or minus an appropriate spread.

 

Deposits: The estimated fair value of certificates of deposits are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificates of deposits maturities. Stated value is fair value for all other deposits.

 

Borrowed Funds: The estimated fair value of borrowed funds are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities.

 

Junior Subordinated Debentures: The estimated fair value is based on estimates using market data for similarly risk weighted items taking into consideration the convertible features of the debentures into common stock of the Company.

 

11

 



Table of Contents

 

 

Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value.

 

Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of March 31, 2011 and December 31, 2010.

 

Fair value estimates are made at specific points 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 Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

 

The estimated fair values and recorded carrying values of the Bank’s financial instruments are as follows:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(In thousands)

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

 14,320

 

$

 14,320

 

$

 21,598

 

$

 21,598

 

Interest bearing deposits with banks

 

40,351

 

40,351

 

1,320

 

1,320

 

Securities available for sale

 

325,964

 

325,964

 

323,539

 

323,539

 

Securities restricted

 

1,284

 

n/a

 

1,284

 

n/a

 

Securities held to maturity

 

141,348

 

141,791

 

147,965

 

148,144

 

Loans, net

 

513,659

 

528,988

 

495,563

 

513,344

 

Accrued interest receivable

 

4,409

 

4,409

 

4,153

 

4,153

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Demand and other deposits

 

965,946

 

966,685

 

916,993

 

917,786

 

Federal funds purchased and Federal Home Loan Bank overnight borrowings

 

 

 

5,000

 

5,000

 

Repurchase agreements

 

16,332

 

17,362

 

16,370

 

17,383

 

Junior Subordinated Debentures

 

16,002

 

14,547

 

16,002

 

14,783

 

Accrued interest payable

 

367

 

367

 

433

 

433

 

 

7. LOANS

 

The following table sets forth the major classifications of loans:

 

(In thousands)

 

March 31, 2011

 

December 31, 2010

Commercial real estate mortgage loans

 

$

 251,019

 

$

 245,265

Residential real estate mortgage loans

 

147,261

 

140,986

Commercial, financial, and agricultural loans

 

98,209

 

97,663

Installment/consumer loans

 

10,104

 

9,659

Real estate construction and land loans

 

15,651

 

9,928

Total loans

 

522,244

 

503,501

Net deferred loan costs and fees

 

430

 

559

 

 

522,674

 

504,060

Allowance for loan losses

 

(9,015)

 

(8,497)

Net loans

 

$

 513,659

 

$

 495,563

 

12

 



Table of Contents

 

 

Lending Risk

 

The principal business of the Bank is lending, primarily in commercial real estate mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial and industrial loans, land loans and consumer loans. The Bank considers its primary lending area to be eastern Long Island in Suffolk County, New York, and a substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectability of such a loan portfolio is susceptible to changes in market and economic conditions in this region.

 

Credit Quality Indicators

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt including repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. The Company uses the following definitions for risk rating grades:

 

Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which exhibit certain risk factors that require greater than usual monitoring by management.

 

Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank’s credit position at some future date.

 

Substandard: Loans classified as substandard have a well defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

 

The following table represents loans by class categorized by internally assigned risk grades as of March 31, 2011 and December 31, 2010:

 

 

 

Grades:

 

March 31, 2011

 

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 119,446

 

$

 5,517

 

$

 3,656

 

$

 —

 

$

 128,619

 

Non-owner occupied

 

106,926

 

6,955

 

8,519

 

 

122,400

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

First lien

 

80,622

 

 

714

 

1,254

 

82,590

 

Home equity

 

62,347

 

 

2,029

 

295

 

64,671

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

47,659

 

1,816

 

2,996

 

 

52,471

 

Unsecured

 

43,235

 

1,429

 

1,074

 

 

45,738

 

Installment/consumer loans

 

9,929

 

175

 

 

 

10,104

 

Real estate construction and land loans

 

7,816

 

701

 

6,884

 

250

 

15,651

 

Total loans

 

$

 477,980

 

$

 16,593

 

$

 25,872

 

$

 1,799

 

$

 522,244

 

 

13

 



Table of Contents

 

 

 

 

Grades:

 

December 31, 2010

 

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 110,395

 

$

 4,892

 

$

 4,298

 

$

 —

 

$

 119,585

 

Non-owner occupied

 

107,095

 

7,652

 

10,683

 

250

 

125,680

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

First lien

 

71,686

 

 

1,194

 

1,269

 

74,149

 

Home equity

 

64,708

 

 

1,834

 

295

 

66,837

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

49,146

 

1,949

 

3,212

 

 

54,307

 

Unsecured

 

41,058

 

1,072

 

1,226

 

 

43,356

 

Installment/consumer loans

 

9,484

 

175

 

 

 

9,659

 

Real estate construction and land loans

 

6,020

 

223

 

3,685

 

 

9,928

 

Total loans

 

$

 459,592

 

$

 15,963

 

$

 26,132

 

$

 1,814

 

$

 503,501

 

 

Past Due and Nonaccrual Loans

 

The following table represents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by class of loans, as defined by ASC 310-10:

 

March 31, 2011

 

30-59 Days
Past Due

 

60-89
Days Past
Due

 

Nonaccrual
Including 90
Days or More
Past Due

 

Total Past
Due and
Nonaccrual

 

Current

 

Total
Loans

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 —

 

$

 —

 

$

 495

 

$

 495

 

$

 128,124

 

$

 128,619

 

Non-owner occupied

 

3,343

 

 

228

 

3,571

 

118,829

 

122,400

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

First lien

 

 

 

1,254

 

1,254

 

81,336

 

82,590

 

Home equity

 

764

 

263

 

1,906

 

2,933

 

61,738

 

64,671

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

52,471

 

52,471

 

Unsecured

 

55

 

295

 

163

 

513

 

45,225

 

45,738

 

Installment/consumer loans

 

2

 

 

11

 

13

 

10,091

 

10,104

 

Real estate construction and land loans

 

204

 

 

3,414

 

3,618

 

12,033

 

15,651

 

Total loans

 

$

 4,368

 

$

 558

 

$

 7,471

 

$

 12,397

 

$

 509,847

 

$

 522,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

30-59 Days
Past Due

 

60-89
Days Past
Due

 

Nonaccrual
Including 90
Days or More
Past Due

 

Total Past
Due and
Nonaccrual

 

Current

 

Total
Loans

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

 —

 

$

 511

 

$

 —

 

$

 511

 

$

 119,074

 

$

 119,585

 

Non-owner occupied

 

 

 

478

 

478

 

125,202

 

125,680

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

First lien

 

151

 

165

 

1,747

 

2,063

 

72,086

 

74,149

 

Home equity

 

782

 

298

 

1,696

 

2,776

 

64,061

 

66,837

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

10

 

 

 

10

 

54,297

 

54,307

 

Unsecured

 

105

 

 

32

 

137

 

43,219

 

43,356

 

Installment/consumer loans

 

10

 

5

 

86

 

101

 

9,558

 

9,659

 

Real estate construction and land loans

 

 

 

2,686

 

2,686

 

7,242

 

9,928

 

Total loans

 

$

 1,058

 

$

 979

 

$

 6,725

 

$

 8,762

 

$

 494,739

 

$

 503,501

 

 

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Table of Contents

 

 

There were no loans 90 days or more past due that were still accruing interest at March 31, 2011 and December 31, 2010.

 

Impaired Loans

 

As of March 31, 2011 and December 31, 2010, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $10.7 million and $9.9 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Additionally management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured (“TDR”) loans. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22.  Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

 

Nonaccrual loans were $7.5 million or 1.43% of total loans at March 31, 2011 and were $6.7 million or 1.34% of total loans at December 31, 2010. Approximately $4.7 million of the nonaccrual loans at March 31, 2011 and at December 31, 2010, represent troubled debt restructured loans. As of March 31, 2011 one of the borrowers with loans totaling $1.5 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $3.2 million is past due and the Bank has initiated the foreclosure process. Total troubled debt restructured loans are secured with collateral that has a fair value of $7.2 million. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

 

In addition, the Company has one borrower with TDR loans of $3.2 million at March 31, 2011 and December 31, 2010, that are current and are secured with collateral that has a fair value of approximately $5.4 million as well as personal guarantors. Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income on an accrual basis. In addition, the Bank has no commitment to lend additional funds to this debtor. The loans were determined to be impaired during the third quarter of 2008 and since that determination $0.3 million of interest income has been recognized.

 

The following table represents impaired loans by class at March 31, 2011 and December 31, 2010:

 

March 31, 2011

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allocated
Allowance

 

Average
Recorded
Investment

 

Interest
Income
Recognized

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

3,681

 

$

3,693

 

$

 

$

3,732

 

$

312

 

Non-owner occupied

 

228

 

228

 

 

228

 

 

Residential real estate:

 

 

 

 

 

 

 

 

 

 

 

First lien

 

1,254

 

1,329

 

 

1,262

 

 

Home equity

 

1,906

 

1,993

 

 

1,979

 

 

Commercial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

 

 

 

 

Unsecured

 

163

 

163

 

 

165

 

 

Installment/consumer loans

 

11

 

12

 

 

12

 

 

Real estate construction and land loans

 

3,414

 

3,671

 

 

3,414

 

 

Total with no related allowance recorded

 

$

10,657

 

$

11,089

 

$

 

$

10,792

 

$

312

 

 

15

 



Table of Contents

 

 

December 31, 2010

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Related
Allocated
Allowance

 

(In thousands)

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied

 

$

 3,219

 

$

 3,219

 

$

 —

 

Non-owner occupied

 

478

 

599

 

 

Residential real estate:

 

 

 

 

 

 

 

First lien

 

1,747

 

1,829

 

 

Home equity

 

996

 

996

 

 

Commercial:

 

 

 

 

 

 

 

Secured

 

 

 

 

Unsecured

 

32

 

35

 

 

Installment/consumer loans

 

86

 

86

 

 

Real estate construction and land loans

 

2,686

 

2,800

 

 

Total with no related allowance recorded

 

$

 9,244

 

$

 9,564

 

$

 —

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Residential real estate - Home equity

 

$

 700

 

$

 700

 

$

 7

 

Total with an allowance recorded:

 

$

 700

 

$

 700

 

$

 7

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Owner occupied

 

$

 3,219

 

$

 3,219

 

$

 —

 

Non-owner occupied

 

478

 

599

 

 

Residential real estate:

 

 

 

 

 

 

 

First lien

 

1,747

 

1,829

 

 

Home equity

 

1,696

 

1,696

 

7

 

Commercial:

 

 

 

 

 

 

 

Secured

 

 

 

 

Unsecured

 

32

 

35

 

 

Installment/consumer loans

 

86

 

86

 

 

Real estate construction and land loans

 

2,686

 

2,800

 

 

Total

 

$

 9,944

 

$

 10,264

 

$

 7

 

 

Residential home equity loans represent the only class of impaired loans with a related allowance recorded at December 31, 2010. The average recorded investment in the impaired loans was $10.1 million for the year ended December 31, 2010. At March 31, 2011, each impaired loan was analyzed and written down to its net realizable value if the loan balance was higher than the net realizable value of its associated collateral.

 

The Bank had no foreclosed real estate at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

 

8. ALLOWANCE FOR LOAN LOSSES

 

Management considers the accounting policy on the allowance for loan losses to be the most critical and requires complex management judgment as discussed below. The judgments made regarding the allowance for loan losses can have a material effect on the results of operations of the Company.

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. If the allowance for loan losses is not sufficient to cover actual loan losses, the Company’s earnings could decrease.

 

The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

16

 



Table of Contents

 

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

 

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; residential real estate mortgages, first lien and home equity; commercial loans, secured and unsecured; installment/consumer loans; and real estate construction and land loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures, and concentrations in the portfolio when determining the allowances for each pool. In addition, we evaluate and consider the credit’s risk rating which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2011, December 31, 2010 and March 31, 2010, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

The following table sets forth changes in the allowance for loan losses:

 

 

 

For the Three Months Ended

 

For the Year Ended

 

(In thousands)

 

March 31, 2011

 

March 31, 2010

 

December 31, 2010

 

Beginning balance

 

$

 8,497

 

$

 6,045

 

$

 6,045

 

Provision for loan loss

 

700

 

1,300

 

3,500

 

Net charge-offs

 

(182

)

(313

)

(1,048

)

Ending balance

 

$

 9,015

 

$

 7,032

 

$

 8,497

 

 

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Table of Contents

 

 

The following table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under ASC 310-10, and based on impairment method as of March 31, 2011 and December 31, 2010. The loan segment represents the categories that the Bank develops to determine its allowance for loan losses.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011

 

Commercial
Real Estate
Mortgage
Loans

 

Residential
Real Estate
Mortgage
Loans

 

Commercial,
Financial and
Agricultural
Loans

 

Installment/
Consumer
Loans

 

Real Estate
Construction
and Land
Loans

 

Unallocated

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

3,443

 

$

1,642

 

$

2,804

 

$

423

 

$

185

 

$

 

$

8,497

Charge-offs

 

 

(88

)

(21

)

(90

)

 

 

(199)

Recoveries

 

 

2

 

11

 

4

 

 

 

17

Provision

 

72

 

819

 

(331

)

(43

)

183

 

 

700

Ending Balance

 

$

3,515

 

$

2,375

 

$

2,463

 

$

294

 

$

368

 

$

 

$

9,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated
for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated
for impairment

 

$

3,515

 

$

2,375

 

$

2,463

 

$

294

 

$

368

 

$

 

$

9,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

251,019

 

$

147,261

 

$

98,209

 

$

10,104

 

$

15,651

 

 

 

$

522,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

3,909

 

$

3,157

 

$

105

 

$

 

$

3,414

 

 

 

$

10,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$

247,110

 

$

144,104

 

$

98,104

 

$

10,104

 

$

12,237

 

 

 

$

511,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

Commercial
Real Estate
Mortgage
Loans

 

Residential
Real Estate
Mortgage
Loans

 

Commercial,
Financial and
Agricultural
Loans

 

Installment/
Consumer
Loans

 

Real Estate
Construction
and Land
Loans

 

Unallocated

 

Total

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

$

3,443

 

$

1,642

 

$

2,804

 

$

423

 

$

185

 

$

 

$

8,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

 

$

7

 

$

 

$

 

$

 

$

 

$

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

3,443

 

$

1,635

 

$

2,804

 

$

423

 

$

185

 

$

 

$

8,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

245,265

 

$

140,986

 

$

97,663

 

$

9,659

 

$

9,928

 

 

 

$

503,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

6,197

 

$

3,443

 

$

102

 

$

4

 

$

2,686

 

 

 

$

12,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$

239,068

 

$

137,543

 

$

97,561

 

$

9,655

 

$

7,242

 

 

 

$

491,069

 

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9. EMPLOYEE BENEFITS

 

The Bank maintains a noncontributory pension plan through the New York State Bankers Association Retirement System covering all eligible employees. The Bank uses a December 31st measurement date for this plan in accordance with FASB ASC 715-30 “Compensation – Retirement Benefits – Defined Benefit Plans – Pension”.

 

The Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”) provides benefits to certain employees, as recommended by the Compensation Committee of the Board of Directors and approved by the full 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 and the 401(k) Plan in the absence of such Internal Revenue Code limitations.  The assets of the SERP are held in a rabbi trust to maintain the tax-deferred status of the plan and are subject to the general, unsecured creditors of the Company.  As a result, the assets of the trust are reflected on the Consolidated Balance Sheets of the Company.  The effective date of the SERP was January 1, 2001.

 

The Company made a $227,833 contribution to the pension plan during the three months ended March 31, 2011.  There were no contributions made to the SERP during the three months ended March 31, 2011. In accordance with the SERP, a retired executive received a distribution from the Plan totaling $28,000 during the three months ended March 31, 2011.

 

The Company’s funding policy with respect to its benefit plans is to contribute at least the minimum amounts required by applicable laws and regulations.

 

The following table sets forth the components of net periodic benefit cost and other amounts recognized in Other Comprehensive Income:

 

 

 

Three months ended March 31,

 

 

 

Pension Benefits

 

SERP Benefits

 

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

227

 

$

190

 

$

27

 

$

24

 

Interest cost

 

119

 

107

 

14

 

15

 

Expected return on plan assets

 

(188

)

(168

)

 

 

Amortization of net loss

 

25

 

26

 

 

 

Amortization of unrecognized prior service cost

 

2

 

2

 

 

 

Amortization of unrecognized transition (asset) obligation

 

 

 

7

 

7

 

Net periodic benefit cost

 

$

185

 

$

157

 

$

48

 

$

46

 

 

10.  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

At March 31, 2011, March 31, 2010 and December 31, 2010, securities sold under agreements to repurchase totaled $16.3 million, $16.5 million, and $16.4 million respectively and were secured by U.S. GSE, mortgage-backed securities and collateralized mortgage obligations with a carrying amount of $21.7 million, $21.5 million and $22.3 million, respectively.

 

Securities sold under agreements to repurchase are financing arrangements with $1.3 million maturing during the second quarter 2011, $5.0 million maturing during the first quarter of 2013 and $10.0 million maturing during the first quarter of 2015.  At maturity, the securities underlying the agreements are returned to the Company.  Information concerning the securities sold under agreements to repurchase is summarized as follows:

 

 

 

For the three months ended

 

For the year ended

 

(Dollars in thousands)

 

March 31, 2011

 

March 31, 2010

 

December 31, 2010

 

Average daily balance

 

$

             16,366

 

$

             15,525

 

$

           16,648

 

Average interest rate

 

3.30

%

2.80

%

3.10

%

Maximum month-end balance

 

$

             16,332

 

$

             16,535

 

$

           17,192

 

Weighted average interest rate

 

3.26

%

3.23

%

3.21

%

 

 

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11.  JUNIOR SUBORDINATED DEBENTURES

 

In December 2009, the Company completed the private placement of $16.0 million in aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (the “TPS”), through its wholly-owned subsidiary, Bridge Statutory Capital Trust II. The TPS have a liquidation amount of $1,000 per security and are convertible into our common stock, at an effective conversion price of $31 per share.  The TPS mature in 30 years but are callable by the Company at par any time after September 30, 2014.

 

The Company issued $16.0 million of junior subordinated debentures (the “Debentures”) to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability. The Debentures bear interest at a fixed rate equal to 8.50% and mature on December 31, 2039. Consistent with regulatory requirements, the interest payments may be deferred for up to 5 years, and are cumulative. The Debentures have the same prepayment provisions as the TPS.

 

The Debentures are included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

 

12.  BUSINESS COMBINATIONS

 

On February 8, 2011, the Company announced a definitive merger agreement under which the Bank will acquire Hamptons State Bank. The transaction augments the Bank’s franchise in eastern Long Island and the combined entity will serve customers through a network of 20 branches and have total assets of approximately $1.1 billion and deposits of $1.0 billion.

 

Under the terms of the Agreement, each share of Hamptons State Bank will be converted into 0.3434 shares of the Company’s common stock. The Company will issue approximately 274,000 shares, which will represent 4.1% of the total shares of the Company’s common stock to be outstanding. Based upon the Company’s closing stock price on February 7, 2011, the transaction value is approximately $6.3 million and represents 136% of Hamptons State Bank’s tangible book value as of December 31, 2010, and a 4.4% premium on core deposits.

 

The acquisition, which has been unanimously approved by the boards of directors of the Company and Hamptons State Bank, is subject to the approval of Hamptons State Bank shareholders and the approval of bank regulatory authorities, as well as other customary conditions.  On April 25, 2011, the Company received notification of regulatory approval from its primary regulator, the Office of the Comptroller of the Currency. The transaction is expected to close in the second quarter of 2011.

 

13.  RECENT ACCOUNTING PRONOUNCEMENTS

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-2, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-2”).  ASU 2011-2 clarifies the guidance for determining whether a loan restructuring constitutes a troubled debt restructuring (“TDR”) outlined in Accounting Standards Codification (“ASC”) No. 310-40, “Receivables—Troubled Debt Restructurings by Creditors,” by providing additional guidance to a creditor in making the following required assessments needed to determine whether a restructuring is a TDR: (i) whether or not a concession has been granted in a debt restructuring; (ii) whether a temporary or permanent increase in the contractual interest rate precludes the restructuring from being a TDR; (iii) whether a restructuring results in an insignificant delay in payment; (iv) whether a borrower that is not currently in payment default is experiencing financial difficulties; and (v) whether a creditor can use the effective interest rate test outlined in debtor’s guidance on restructuring of payables (ASC Topic No. 470-60-55-10) when evaluating whether or not a restructuring constitutes a TDR.  This update is effective the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Adoption of ASU 2011-2 is not expected to have a material effect.

 

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”).  ASU 2010-20 requires companies to provide a greater level of disaggregated information regarding: (1) the credit quality of their financing receivables; and (2) their allowance for credit losses. ASU 2010-20 further requires companies to disclose credit quality indicators, past due information, and modifications of their financing receivables. For public companies, ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. ASU 2010-20 encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption.  Adoption of ASU 2010-20 did not have a material impact on the Company.

 

 

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In January 2010, FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-6”).  ASU 2010-6 required new disclosures related to transfers in and out of fair value hierarchy Levels 1 and 2, as well as certain activities for assets whose fair value is measured under the Level 3 hierarchy. ASU 2010-6 also provided amendments clarifying the level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of ASU 2010-6 has not had, and is not expected to have, a material impact on the Company.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

This report may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).  Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company.  Words such as “expects, “ “believes,”  “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variation of such similar expressions are intended to identify such forward-looking statements.  Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company and Hamptons State Bank, including earnings growth; revenue growth in retail banking lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title abstract subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies.  For this presentation, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

 

Factors that could cause future results to vary from current management expectations include, but are not limited to,   changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines, changes in real estate values; the growth opportunities and cost savings anticipated from the Hamptons State Bank merger may not be fully realized or may take longer than expected; operating costs, customer losses and business disruptions may occur following the Hamptons State Bank merger; and other factors discussed elsewhere in this report, factors set forth under Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2010 and in other reports filed by the Company with the Securities and Exchange Commission.   The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

 

Overview

 

Who We Are and How We Generate Income

 

Bridge Bancorp, Inc. (“the Company”), a New York corporation, is a bank holding company formed in 1989.  On a parent-only basis, the Company has had minimal results of operations.  The Company is dependent on dividends from its wholly owned subsidiary, The Bridgehampton National Bank (“the Bank”), its own earnings, additional capital raised, and borrowings as sources of funds.  The information in this report reflects principally the financial condition and results of operations of the Bank.  The Bank’s results of operations are primarily dependent on its net interest income, which is mainly the difference between interest income on loans and investments and interest expense on deposits and borrowings.  The Bank also generates non interest income, such as fee income on deposit accounts, merchant credit and debit card processing programs, investment services, income from its title abstract subsidiary, and net gains on sales of securities and loans.  The level of its non interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from its title insurance subsidiary, and income tax expense, further affects the Bank’s net income.  Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation.

 

 

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Quarterly Highlights

 

·                  Net income of $2.2 million or $0.34 per diluted share, including $0.2 million in acquisition costs, net of tax, associated with the proposed Hamptons State Bank (“HSB”) merger announced on February 8, 2011. Net income excluding the impact of acquisition costs, net of tax, of $0.2 million was $2.3 million or $0.36 per diluted share for the quarter ended March 31, 2011 as compared to net income of $2.1 million or $0.34 per diluted share for the first quarter 2010. (a)

 

·                  Returns on average assets and equity were 0.83% and 13.64%, respectively. Returns on average assets and equity, excluding the impact of acquisition costs, net of tax, of $0.2 million were 0.89% and 14.65%, respectively. (a)

 

·                  Net interest income increased to $9.8 million for the first quarter of 2011 compared to $8.8 million in 2010.

 

·                  Net interest margin was 4.14% for the first quarter of 2011 compared to 4.34% for the 2010 period.

 

·                  Total loans at March 31, 2011 of $522.7 million, increased $18.6 million or 3.7% over December 31, 2010 and increased $66.7 million or 14.6% over March 31, 2010.

 

·                  Total assets of $1.07 billion at March 31, 2011, increased $46.5 million or 4.5% compared to December 31, 2010 and increased $151.8 million or 16.4% compared to March 31, 2010.

 

·                  Deposits of $965.9 million, increased $49.0 million or 5.3% over December 31, 2010 and increased $158.7 million or 19.7% compared to March 31, 2010 levels.

 

·                  Allowance for loan losses increased as a percentage to Loans to 1.72% as of March 31, 2011compared to 1.69% at December 31, 2010 and 1.54% at March 31, 2010.

 

·                  Tier 1 Capital increased $6.3 million to $81.7 million as of March 31, 2011, compared to March 31, 2010.

 

·                  A cash dividend of $0.23 per share was declared for the first quarter of 2011.

 

(a)              Net income, returns on average assets and equity excluding the impact of acquisition costs, net of tax, of $0.2 million is a non-GAAP financial measure that management believes provides investors with information that is useful in understanding the Bank’s financial performance. These financial measures should not be considered in isolation or as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP financial measures which may be presented by other bank holding companies.

 

Principal Products and Services and Locations of Operations

 

The Bank operates nineteen branches on eastern Long Island. Federally chartered in 1910, the Bank was founded by local farmers and merchants. For a century, the Bank has maintained its focus on building customer relationships in this market area. The mission of the Company is to grow through the provision of exceptional service to its customers, its employees, and the community. The Company strives to achieve excellence in financial performance and build long term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) home equity loans; (3) construction loans; (4) residential mortgage loans; (5) secured and unsecured commercial and consumer loans; (6) FHLB, FNMA, GNMA and FHLMC mortgage-backed securities and collateralized mortgage obligations; (7) New York State and local municipal obligations; and (8) U.S government sponsored entity (“U.S. GSE”) securities. The Bank also offers the CDARS program, providing up to $50.0 million of FDIC insurance to its customers. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, individual retirement accounts and investment services through Bridge Investment Services, offering a full range of investment products and services through a third party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. The Bank’s customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

 

 

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Significant Events

 

On February 8, 2011, the Company announced a definitive merger agreement under which the Bank will acquire Hamptons State Bank. The transaction augments the Bank’s franchise in eastern Long Island and the combined entity will serve customers through a network of 20 branches and have total assets of approximately $1.1 billion and deposits of $1.0 billion.

 

Under the terms of the Agreement, each share of Hamptons State Bank will be converted into 0.3434 shares of the Company’s common stock. The Company will issue approximately 274,000 shares, which will represent 4.1% of the total shares of the Company’s common stock to be outstanding. Based upon the Company’s closing stock price on February 7, 2011, the transaction value is approximately $6.3 million and represents 136% of Hamptons State Bank’s tangible book value as of December 31, 2010, and a 4.4% premium on core deposits.

 

The acquisition, which has been unanimously approved by the boards of directors of the Company and Hamptons State Bank, is subject to the approval of Hamptons State Bank shareholders and the approval of bank regulatory authorities, as well as other customary conditions.  On April 25, 2011, the Company received notification of regulatory approval from its primary regulator, the Office of the Comptroller of the Currency. The transaction is expected to close in the second quarter of 2011.

 

Current Environment

 

On February 27, 2009, the FDIC issued a final rule, effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk and to set new assessment rates beginning with the second quarter of 2009. In May 2009, the FDIC issued a final rule to impose an emergency special assessment of 5 basis points on all banks based on their total assets less tier one capital as of June 30, 2009.  The special assessment was payable on September 30, 2009. During the second quarter of 2009, the Company recorded an expense of $0.4 million related to the FDIC special assessment. In November 2009, the FDIC issued a final rule that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform 3 basis point increase in assessment rates effective on January 1, 2011. The Company’s prepayment of FDIC assessments for 2010, 2011 and 2012 was made on December 31, 2009 totaling $3.8 million which will be amortized to expense over three years.

 

On April 13, 2010, the FDIC approved an interim rule that extends the Transaction Account Guarantee Program which offers unlimited deposit insurance on non-interest bearing accounts until December 31, 2012.

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by the President. The Act permanently raised the current standard maximum deposit insurance amount to $250,000. Section 331(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the FDIC to change the definition of the assessment base from which assessment fees are determined. The new definition for the assessment base is the average consolidated total assets of the insured depository institution less the average tangible equity of the insured depository institution. A reduction in the assessment rate is anticipated since the assessment base will increase for many institutions. The new methodology becomes effective on April 1, 2011 and the Company anticipates a reduction in its FDIC assessment fees of approximately $0.3 million in 2011. The new financial reform legislation will, among other things, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase the cost of operations. Refer to Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2010 for more detailed information related to this new regulation.

 

Opportunities and Challenges

 

Since the second half of 2007 and continuing through 2010, the financial markets experienced significant volatility resulting from the continued fallout of sub-prime lending and the global liquidity crises. A multitude of government initiatives along with eight rate cuts by the Federal Reserve totaling 500 basis points have been designed to improve liquidity for the distressed financial markets. The ultimate objective of these efforts has been to help the beleaguered consumer, and reduce the potential surge of residential mortgage loan foreclosures and stabilize the banking system. As a result the yield on loans and investment securities has declined. The squeeze between declining asset yields and more slowly declining liability pricing has impacted margins.  Effective as of February 19, 2010, the Federal Reserve increased the discount rate 50 basis points to 0.75%. The Federal Reserve stated that this rate change was intended to normalize their lending facility and to step away from emergency lending to banks. From April 2010 through April 2011 the Federal Reserve decided to maintain the federal funds target rate between 0 and 25 basis points due to a continued national depressed housing market and tight credit markets.

 

 

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Growth and service strategies have the potential to offset the tighter net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2007, the Bank has opened eight new branches. In 2007, the Bank opened three new branches located in the Village of Southampton, Cutchogue, and Wading River. In April 2009, the Bank opened a new branch in Shirley, New York, and in December 2009, the Bank opened a new full service branch facility in the Village of East Hampton. During 2010, the Bank opened three new branches; Center Moriches in May, Patchogue in September and Deer Park in October. The recent branch openings move the Bank geographically westward and demonstrate its commitment to traditional growth through branch expansion. Controlling funding costs yet protecting the deposit base along with focusing on profitable growth, presents a unique set of challenges in this operating environment.

 

The Bank routinely adds to its menu of products and services, continually meeting the needs of consumers and businesses. We believe positive outcomes in the future will result from the expansion of our geographic footprint, investments in infrastructure and technology, such as BridgeNEXUS, our remote deposit capture product, lockbox processing, and continued focus on placing our customers first. In January 2009, the Bank launched Bridge Investment Services, offering a full range of investment products and services through a third party broker dealer. The Bank rolled out its new commercial online bill paying service during the first quarter of 2010, and continues to explore mobile banking products to offer customers.

 

As the Bank approaches the closing of its first acquisition and the opportunities it brings, management looks forward to delivering its community banking model to the Hamptons State Bank customers and to all customers in the Bank’s expanded branch network. The Bank offers competitive products and services delivered by local bankers who have the expertise and authority to make prudent decisions for the Bank and the customer. Management’s execution of this community banking model continues to be successful as evidenced by the Bank’s profitable growth.

 

Market opportunities are not without certain challenges, risks and concerns. Management operates its business within the larger backdrop of the national, regional and local economies and, depending how the local economy is defined, the differences can be striking. Management must also navigate an ever-changing, but increasingly restrictive regulatory landscape.  Although the economy generally appears to be improving, concerns remain about the depth and breadth of the improvement. The closely monitored statistics and indicators show mixed signals; employment is gradually improving, while unemployment remains at elevated levels; the housing recovery seems to have slowed, as some activity was artificially moved forward by tax incentives. Additionally, inflation as measured by food and energy, critical costs for most consumers, is high. Locally, the state and local budget realities could lead to possible increases in taxes and use fees, further burdening consumers and small business owners.  Finally, on a very local level, certain aspects of the economy appear to be doing better than others. These mixed signals impact management’s strategic approach. Management remains cautious in its real estate valuations and diligent in its underwriting. However, the Bank continues to seek opportunities to expand its customer base by adding well run businesses that have demonstrated their ability to navigate in turbulent economic times.

 

The regulatory process continues to evolve and the Dodd-Frank legislation is beginning to deliver the expected myriad of new rules, regulations and related compliance and process changes. This is not unexpected, but it will be costly in time, talent and resources. Management will continue to collaborate with its primary regulator to ensure compliance with current requirements and interpretations. Ultimately, the Bank must maintain its strong risk management culture and adhere to the core principles that have served this organization since 1910.

 

Corporate objectives for 2011 include: leveraging our expanding branch network to build customer relationships and grow loans and deposits; successfully integrating the customers and operations of Hamptons State Bank; focusing on opportunities and processes that continue to enhance the customer experience at the Bank; improving operational efficiencies and prudent management of non-interest expense; and maximizing non-interest income through Bridge Abstract as well as other lines of business. The ability to attract, retain, train and cultivate employees at all levels of the Company remains significant to meeting these objectives. The Company has made great progress toward the achievement of these objectives, and avoided many of the problems facing other financial institutions as a result of maintaining discipline in its underwriting, expansion strategies, investing and general business practices. This strategy has not changed over the 100 years of our existence and will continue to be true. The Company has capitalized on opportunities presented by the market and diligently seeks opportunities for growth and to strengthen the franchise. The Company recognizes the potential risks of the current economic environment and will monitor the impact of market events as we consider growth initiatives and evaluate loans and investments. Management and the Board have built a solid foundation for growth and the Company is positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

 

 

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Critical Accounting Policies

 

Allowance for Loan Losses

 

Management considers the accounting policy on the allowance for loan losses to be the most critical and requires complex management judgment as discussed below. The judgments made regarding the allowance for loan losses can have a material effect on the results of operations of the Company.

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. If the allowance for loan losses is not sufficient to cover actual loan losses, the Company’s earnings could decrease.

 

The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectability in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectability of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

 

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; residential real estate mortgages, first lien and home equity; commercial loans, secured and unsecured; installment/consumer loans; and real estate construction and land loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures, and concentrations in the portfolio when determining the allowances for each pool. In addition, we evaluate and consider the credit’s risk rating which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2011, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

 

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Net Income

 

Net income for the three months ended March 31, 2011 was $2.2 million or $0.34 per diluted share as compared to $2.1 million or $0.34 per diluted share for the same period in 2010.  Changes for the three months ended March 31, 2011 compared to March 31, 2010 include: (i) $1.0 million or 10.8% increase in net interest income; (ii) a $0.6 million or 46.2% decrease in the provision for loan losses; (iii) $0.7 million or 34.0% decrease in total non interest income as a result of net securities gains of $0.9 million recognized in March 2010, lower title insurance revenue and lower other operating income. Conversely, the Company recognized higher service charges of $0.1 million and higher fees for other customer services of $0.1 million; (iv) $0.8 million or 12.2% increase in total non interest expenses due to a $0.3 million increase in salaries and employee benefits related to increased staffing and related benefits, a $0.1 million increase in net occupancy expense and furniture and fixtures related to new branches, and a $0.4 million increase in other operating expenses primarily due to the acquisition costs of $0.2 million associated with the proposed merger with Hampton State Bank, higher professional fees, and the establishment of an allowance for off balance sheet commitments.  The provision for loan losses of $0.7 million was recorded during the quarter and resulted in increased reserve coverage levels.  The coverage ratio of the allowance for loan losses to loans increased to 1.72%. The level of the provision for 2011 takes into consideration the continued growth and composition of the loan portfolio, the overall industry trends as well as the current economic environment. The effective income tax rate was 31.0% for the quarter ended March 31, 2011 compared to 32.0% for the same period last year.

 

Analysis of Net Interest Income

 

Net interest income, the primary contributor to earnings, represents the difference between income on interest earning assets and expenses on interest bearing liabilities. Net interest income depends upon the volume of interest earning assets and interest bearing liabilities and the interest rates earned or paid on them.

 

The following tables set forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the periods indicated and reflect the average yield on assets and average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances are derived from daily average balances and include nonaccrual loans.  The yields and costs include fees, which are considered adjustments to yields.  Interest on nonaccrual loans has been included only to the extent reflected in the consolidated statements of income.  For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

 

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Three months ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

Average

 

 

 

Yield/

 

Average

 

 

 

Yield/

 

(In thousands)

 

Balance

 

Interest

 

Cost

 

Balance

 

Interest

 

Cost

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, net (including loan fee income)

 

$

502,019

 

$

7,955

 

6.43

%

$

446,147

 

$

7,282

 

6.62

%

Mortgage-backed securities

 

269,668

 

2,316

 

3.48

 

231,851

 

2,529

 

4.42

 

Tax exempt securities (1)

 

110,419

 

1,108

 

4.07

 

94,648

 

876

 

3.75

 

Taxable securities

 

83,456

 

586

 

2.85

 

61,116

 

403

 

2.67

 

Federal funds sold

 

 

 

 

7,059

 

5

 

0.29

 

Deposits with banks

 

30,130

 

18

 

0.24

 

13,118

 

9

 

0.28

 

Total interest earning assets

 

995,692

 

11,983

 

4.88

 

853,939

 

11,104

 

5.27

 

Non interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

16,244

 

 

 

 

 

15,066

 

 

 

 

 

Other assets

 

41,807

 

 

 

 

 

35,701

 

 

 

 

 

Total assets

 

$

1,053,743

 

 

 

 

 

$

 904,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

$

578,582

 

$

 966

 

0.68

%

$

 455,711

 

$

 874

 

0.78

%

Certificates of deposit of $100,000 or more

 

89,030

 

243

 

1.11

 

85,345

 

394

 

1.87

 

Other time deposits

 

41,474

 

127

 

1.24

 

52,825

 

250

 

1.92

 

Federal funds purchased and repurchase agreements

 

17,144

 

134

 

3.17

 

16,314

 

108

 

2.68

 

Junior Subordinated Debentures

 

16,002

 

342

 

8.67

 

16,002

 

341

 

8.64

 

Total interest bearing liabilities

 

742,232

 

1,812

 

0.99

 

626,197

 

1,967

 

1.27

 

Non interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

242,406

 

 

 

 

 

214,629

 

 

 

 

 

Other liabilities

 

4,895

 

 

 

 

 

6,154

 

 

 

 

 

Total liabilities

 

989,533

 

 

 

 

 

846,980

 

 

 

 

 

Stockholders’ equity

 

64,210

 

 

 

 

 

57,726

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,053,743

 

 

 

 

 

$

 904,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income/interest rate spread (2)

 

 

 

10,171

 

3.89

%

 

 

9,137

 

4.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest earning assets/net interest margin (3)

 

$

253,460

 

 

 

4.14

%

$

 227,742

 

 

 

4.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest earning assets to interest bearing liabilities

 

 

 

 

 

134.15

%

 

 

 

 

136.37

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Tax equivalent adjustment

 

 

 

(387

)

 

 

 

 

(306

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

 9,784

 

 

 

 

 

$

 8,831

 

 

 

 

(1)  The above table is presented on a tax equivalent basis.

(2)  Net interest rate spread represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.

(3)  Net interest margin represents net interest income divided by average interest earning assets.

 

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Rate/Volume Analysis

 

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The following table illustrates the extent to which changes in interest rates and in the volume of average interest earning assets and interest bearing liabilities have affected the Bank’s interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes.  For purposes of this table, changes which are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate.  Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates.  In addition, average earning assets include nonaccrual loans.

 

 

 

Three months ended March 31,

 

 

 

2011 Over 2010

 

 

 

Changes Due To

 

(In thousands)

 

Volume

 

Rate

 

Net Change

 

Interest income on interest earning assets:

 

 

 

 

 

 

 

Loans, net (including loan fee income)

 

$

1,946

 

$

(1,273

)

$

673

 

Mortgage-backed securities

 

1,797

 

(2,010

)

(213

)

Tax exempt securities (1)

 

154

 

78

 

232

 

Taxable securities

 

155

 

28

 

183

 

Federal funds sold

 

(3

)

(2

)

(5

)

Deposits with banks

 

17

 

(8

)

9

 

Total interest earning assets

 

4,066

 

(3,187

)

879

 

 

 

 

 

 

 

 

 

Interest expense on interest bearing liabilities:

 

 

 

 

 

 

 

Savings, NOW and money market deposits

 

691

 

(599

)

92

 

Certificates of deposit of $100,000 or more

 

110

 

(261

)

(151

)

Other time deposits

 

(47

)

(76

)

(123

)

Federal funds purchased and repurchase agreements

 

6

 

20

 

26

 

Junior subordinated debentures

 

 

1

 

1

 

Total interest bearing liabilities

 

760

 

(915

)

(155

)

Net interest income

 

$

3,306

 

$

(2,272

)

$

1,034

 

 

(1) The above table is presented on a tax equivalent basis.

 

Analysis of Net Interest Income for the Three Months ended March 31, 2011 and March 31, 2010

 

Net interest income was $9.8 million for the three months ended March 31, 2011 compared to $8.8 million for the same period in 2010, an increase of $1.0 million or 10.8%. Net interest margin was 4.14%, lower as compared to 4.34% for the quarter ended March 31, 2010 but still above peer levels with earning assets yielding 4.88%, and an overall funding cost of .75%, including demand deposits. This decrease was primary due to lower yields on loans, mortgage-backed securities and collateralized mortgage obligations.  The yield on interest earning assets decreased approximately 39 basis points which was partly offset by the cost of interest bearing liabilities, which decreased approximately 28 basis points during the first quarter of 2011 compared to 2010. The increase in average total deposits of $143.0 million primarily funded lower yielding securities, which grew $75.9 million, while average net loans increased $55.9 million from the comparable 2010 quarter.

 

For the three months ended March 31, 2011, average loans grew by $55.9 million or 12.5% to $502.0 million as compared to $446.1 million for the same period in 2010.  Real estate mortgage loans primarily contributed to the growth.  The Bank remains committed to growing loans with prudent underwriting, sensible pricing and limited credit and extension risk.

 

For the three months ended March 31, 2011, average total securities increased by $75.9 million or 19.6% to $463.5 million as compared to $387.6 million for the three months ended March 31, 2010. There were no federal funds sold for the three month ended March 31, 2011. Average federal funds sold were $7.1 million for the three months ended March 31, 2010. The decrease in the average federal funds sold for the three months ended March 31, 2011 was offset by the growth in average interest earning cash of $17.0 million for the three months ended March 31, 2011 from $13.1 million in 2010 to $30.1 million in 2011.

 

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Average total interest bearing liabilities were $742.2 billion for the three months ended March 31, 2011 compared to $626.2 million for the same period in 2010.  The Bank grew deposits as a result of opening three new branches during 2010 as well as building new relationships in existing markets. Since the fourth quarter of 2009, the Bank reduced interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates resulted in a decrease in the cost of interest bearing liabilities to 0.99% for the three months ended March 31, 2011 from 1.27% for the same period in 2010.  Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, an increase in short term interest rates initially results in a decrease in net interest income.  Additionally, the large percentages of deposits in money market accounts reprice at short term market rates making the balance sheet more liability sensitive.

 

For the three months ended March 31, 2011, average total deposits increased by $143.0 million or 17.7% to $951.5 million from $808.5 million from the for the same period in 2010.  Components of this increase include an increase in average balances in savings, NOW and money market accounts of $122.9 million or 27.0% to $578.6 million for the three months ended March 31, 2011 compared to $455.7 million for the same period last year.  Average balances in certificates of deposit of $100,000 or more and other time deposits decreased $7.7 million or 5.5% to $130.5 million for 2011 as compared to $138.2 million for the same period last year.  Average balances in demand deposits increased $27.8 million or 12.9% to $242.4 million for 2011 as compared to $214.6 million for the same period last year. Average public fund deposits comprised 22.06% of total average deposits during the three months ended March 31, 2011 and 21.8% of total average deposits for the same period in 2010.  Average federal funds purchased and repurchase agreements increased $0.8 million or 5.1% to $17.1 million for the three months ended March 31, 2011 as compared to $16.3 million for the same period in the prior year.

 

Total interest income increased $0.8 million or 7.4% to $11.6 million for the three months ended March 31, 2011 from $10.8 million for the same period in 2010.  Interest income on loans increased $0.7 million or 9.2% to $8.0 million for the three months ended March 31, 2011 from $7.3 million for the same period in 2010. The yield on average loans was 6.4% for 2011 as compared to 6.6% in 2010.

 

Interest income on investments in mortgage-backed, taxable and tax exempt securities increased $0.1 million to $3.6 million for the three months ended March 31, 2011 compared to $3.5 million for the same period in 2010.  Interest income on securities included net amortization of premium of $0.6 million in the 2011 compared to net amortization of premium of $0.3 million for the same period in 2010.  The tax adjusted average yield on total securities decreased to 3.5% in 2011 from 4.0% in 2010.

 

Interest expense decreased $0.2 million to $1.8 million for the three months ended March 31, 2011 compared to $2.0 million for the same period in 2010. The interest expense in 2011 and 2010 reflects $0.3 million of interest paid related to $16.0 million of junior subordinated debentures which was partly offset by a reduction in interest rates on deposit products through prudent management of deposit pricing.

 

Provision and Allowance for Loan Losses

 

The Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending area of Suffolk County which is located on the eastern portion of Long Island. The interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by its competitors, the Bank’s relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.

 

Loans of approximately $44.3 million or 8.5% of total loans at March 31, 2011 were classified as potential problem loans compared to $43.9 million or 8.7% at December 31, 2010 and $39.0 million or 8.6% at March 31, 2010. Potential problem loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are classified as potential problem loans as management has information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis.

 

At March 31, 2011, approximately $24.6 million of these loans were commercial real estate (“CRE”) loans which were well secured with real estate as collateral. Of the $24.6 million of CRE loans, $23.9 million were current and $0.7 million were past due. In addition, all but $2.1 million of the CRE loans have personal guarantees.  At March 31, 2011, approximately $4.3 million of classified loans were residential real estate loans with $2.7 million current and $1.6 million past due. Commercial, financial, and agricultural loans represented $7.3 million of classified loans and $6.8 million was current and $0.5 million was past due. Approximately $7.8 million of classified loans represented real estate construction and land loans with $4.2 million current and $3.6 million past due. All real estate construction and land loans were well secured with collateral. The remaining $0.2 million in classified loans are consumer

 

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loans that are unsecured and current, have personal guarantees and demonstrate sufficient cash flow to pay the loans. Due to the structure and nature of the credits, we do not expect to sustain a material loss on these relationships.

 

CRE loans represented $251.0 million or 48.1% of the total loan portfolio at March 31, 2011 compared to $245.3 million or 48.7% at December 31, 2010. The Bank’s underwriting standards for CRE loans requires an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, the Bank’s underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios less than or equal to 75%.  The Bank considers charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on commercial real estate values when evaluating the appropriate level of the allowance for loan losses.  Real estate values in our geographic markets increased significantly from 2000 through 2007. Commencing in 2008, following the financial crisis and significant downturn in the economy, real estate values began to decline. This decline continued into 2009 and appears to have stabilized during 2010. The estimated decline in residential and commercial real estate values range from 15-20% from the 2007 levels, depending on the nature and location of the real estate.

 

As of March 31, 2011 and December 31, 2010, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $10.7 million and $9.9 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Additionally management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured (“TDR”) loans. For impaired and TDR loans, the Bank evaluates the fair value of the loan in accordance with FASB ASC 310-10-35-22.  For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. For unsecured loans, the fair value is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. These methods of fair value measurement for impaired and TDR loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

 

Nonaccrual loans increased $0.8 million to $7.5 million or 1.43% of total loans at March 31, 2011 from $6.7 million or 1.34% of total loans at December 31, 2010. Approximately $4.7 million of the nonaccrual loans at March 31, 2011 represent troubled debt restructured loans. As of March 31, 2011 one of the borrowers with loans totaling $1.5 million is complying with the modified terms of the loans and is currently making payments. Another borrower with loans totaling $3.2 million is past due and the Bank has initiated the foreclosure process. Total troubled debt restructured loans are secured with collateral that has a fair value of $7.2 million. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

 

In addition, the Company has one borrower with TDR loans of $3.2 million at March 31, 2011 and December 31, 2010, that are current and are secured with collateral that has a fair value of approximately $5.4 million as well as personal guarantors. Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income on an accrual basis. In addition, the Bank has no commitment to lend additional funds to this debtor. The loans were determined to be impaired during the third quarter of 2008 and since that determination $0.3 million of interest income has been recognized.

 

The average recorded investment in the impaired loans during the three months ended March 31, 2011was $10.8 million and was $10.1 million for the year ended December 31, 2010. At March 31, 2011, each impaired loan was analyzed and written down to its net realizable value if the loan balance was higher than the net realizable value of its associated collateral. There was not an allocation of the allowance for loan losses allocated to impaired loans as of March 31, 2011. The amount of the allowance for loan losses allocated to impaired loans as of December 31, 2010 was $7,000.

 

The Bank had no foreclosed real estate at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

 

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The following table sets forth impaired loans by loan type:

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2011

 

2010

 

Nonaccrual Loans:

 

 

 

 

 

Commercial real estate mortgage loans

 

$

 723

 

$

 478

 

Residential real estate mortgage loans

 

1,611

 

1,401

 

Commercial, financial and agricultural loans

 

163

 

32

 

Installment/consumer loans

 

11

 

86

 

Real estate construction and land loans

 

250

 

 

Total

 

2,758

 

1,997

 

 

 

 

 

 

 

Restructured Loans:

 

 

 

 

 

Commercial real estate mortgage loans

 

3,186

 

3,219

 

Residential real estate mortgage loans

 

1,549

 

2,042

 

Commercial, financial and agricultural loans

 

 

 

Installment/consumer loans

 

 

 

Real estate construction and land loans

 

3,164

 

2,686

 

Total

 

7,899

 

7,947

 

 

 

 

 

 

 

Total Impaired Loans

 

$

 10,657

 

$

 9,944

 

 

Restructured loans totaled $7.9 million as of March 31, 2011, of which $4.7 million of the restructured loans were nonaccrual as of March 31, 2011.

 

Based on our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in our loan portfolio, and the net charge-offs, a provision for loan losses of $0.7 million was recorded during the three months ended March 31, 2011 compared to a provision for loan loss of $1.3 million that was recorded during the same period in 2010. The Bank recognized net charge-offs in the amount of $0.2 million for the three months ended March 31, 2011 as compared to $0.3 million for the same period in 2010. The allowance for loan losses increased to $9.0 million at March 31, 2011, as compared to $8.8 million at December 31, 2010 and $7.0 million at March 31, 2010.  As a percentage of total loans, the allowance increased to 1.72% at March 31, 2011 compared to 1.69% at December 31, 2010 and 1.54% at March 31, 2010.  Management continues to carefully monitor the loan portfolio as well as local real estate trends. The Bank’s consistent and rigorous underwriting standards preclude sub prime lending, and management remains cautious about the potential for an indirect impact on the local economy and real estate values in the future.

 

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The following table sets forth changes in the allowance for loan losses:

 

 

 

For the

 

For the

 

 

 

Three Months Ended

 

Year Ended

 

(Dollars in thousands)

 

March 31, 2011

 

December 31, 2010

 

Allowance for loan losses balance at beginning of period

 

$

8,497

 

$

6,045

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

Commercial real estate mortgage loans

 

 

73

 

Residential real estate mortgage loans

 

88

 

20

 

Commercial, financial and agricultural loans

 

21

 

879

 

Installment/consumer loans

 

90

 

148

 

Real estate construction and land loans

 

 

 

Total

 

199

 

1,120

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

Commercial real estate mortgage loans

 

 

 

Residential real estate mortgage loans

 

2

 

4

 

Commercial, financial and agricultural loans

 

11

 

56

 

Installment/consumer loans

 

4

 

12

 

Real estate construction and land loans

 

 

 

Total

 

17

 

72

 

 

 

 

 

 

 

Net charge-offs

 

(182

)

(1,048

)

Provision for loan losses charged to operations

 

700

 

3,500

 

Balance at end of period

 

$

9,015

 

$

8,497

 

 

 

 

 

 

 

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

 

(0.14

)%

(0.23

)%

 

The following table sets forth the allocation of the total allowance for loan losses by loan type:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

Percentage

 

 

 

Percentage

 

 

 

 

 

of Loans

 

 

 

of Loans

 

 

 

 

 

to Total

 

 

 

to Total

 

(Dollars in thousands)

 

Amount

 

Loans

 

Amount

 

Loans

 

Commercial real estate mortgage loans

 

$

3,515

 

48.1

%

$

3,443

 

48.7

%

Residential real estate mortgage loans

 

2,375

 

28.2

 

1,642

 

28.0

 

Commercial, financial and agricultural loans

 

2,463

 

18.8

 

2,804

 

19.4

 

Installment/consumer loans

 

294

 

1.9

 

423

 

1.9

 

Real estate construction and land loans

 

368

 

3.0

 

185

 

2.0

 

Total

 

$

9,015

 

100.0

%

$

8,497

 

100.0

%

 

Non Interest Income

 

Total non interest income decreased $0.7 million or 34.0% to $1.5 million for the three months ended March 31, 2011 compared to $2.2 million for the same period in 2010.  The decline was primarily the result of net securities gains of $0.9 million recognized in March 2010.  Title fee income related to Bridge Abstract decreased $0.1 million or 20.0% to $0.2 million for the three months ended March 31, 2011 compared to $0.3 million for the same period in 2010. The decrease was attributable to lower volume in the number of transactions processed. Service charges on deposit accounts increased $0.1 million or 17.9% to $0.7 million for the three months ended March 31, 2011 from $0.6 million for the same period in 2010. Fees for other customer services were $0.5 million and represented an increase of $0.1 million or 27.7% from $0.4 million for the same period last year primarily related to higher electronic banking and investment services income.

 

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Non Interest Expense

 

Total non interest expense increased $0.8 million or 12.2% to $7.4 million during the three months ended March 31, 2011 from $6.6 million over the same period in 2010.  The primary components of these increases were higher salaries and employee benefits, net occupancy expense, furniture and fixture expenses, FDIC assessments and other operating expenses. Salary and benefit expense increased $0.4 million or 8.8% to $4.2 million for the three months ended March 31, 2011 from $3.8 million for the same period in 2010. The increase reflects filling vacant positions, hiring new employees to support the Company’s expanding infrastructure and new branch offices, and related employee benefit costs.  Net occupancy expense increased $0.1 million or 10.0% to $0.8 million for the three months ended March 31, 2011 from $0.7 million for the same period in 2010. Higher net occupancy expenses were due to increases in maintenance and supplies, and rent expense related to the new branch offices in 2011 as well as annual rent increases in other branch locations. Other operating expenses increased $0.1 million or 8.8% to $1.6 million for the three months ended March 31, 2011 compared to $1.5 million for the same period in 2010 primarily due to increased professional fees and the establishment of an allowance for off balance sheet commitments. Acquisition costs of $0.2 million relate to the proposed merger with Hamptons State Bank.

 

Income Taxes

 

The provision for income taxes remained the same at $1.0 million during the three months ended March 31, 2011 and 2010. The effective tax rate for the three months ended March 31, 2011 decreased to 31.0% from 32.0% for the same period last year. The reduction in the effective tax rate was a result of a higher percentage of interest income from tax exempt securities.

 

Financial Condition

 

Assets totaled $1.07 billion at March 31, 2011, an increase of $46.5 million or 4.5% from $1.03 billion at December 31, 2010.  This change is primarily a result of an increase in total cash and cash equivalents of $31.8 million or 138.6%, an increase in net loans of $18.1 million or 3.7% as well as an increase in accrued interest receivable and other assets partially offset by a decrease of $4.2 million or 0.9% in total securities. Cash and due from banks decreased $7.3 million or 33.7% and interest earnings deposits with banks increased $39.0 million or 2956.9%. Total deposits grew $48.9 million to $965.9 million at March 31, 2011 compared to $917.0 million at December 31, 2010. Demand deposits increased $8.7 million to $248.0 million as of March 31, 2011 compared to $239.3 million at December 31, 2010. Savings, NOW and money market deposits increased $42.0 million to $586.5 million at March 31, 2011 from $544.5 million at December 31, 2010.  Certificates of deposit of $100,000 or more increased $0.5 million or 0.6% to $91.1 million as of March 31, 2011 compared to $90.6 million at December 31, 2010. Other time deposits decreased $2.3 million to $40.3 million from $42.6 million. There were no federal funds purchased as of March 31, 2011 as compared to $5.0 million at December 31, 2010. Repurchase agreements decrease $0.1 million or 0.23% to $16.3 million as of March 31, 2011 compared to $16.4 million at December 31, 2010. Junior subordinated debentures remained at $16.0 million at March 31, 2011 and December 31, 2010. Accrued interest payable remained at $0.4 million at March 31, 2011 and December 31, 2010. Other liabilities and accrued expenses increased $1.4 million to $9.3 million at March 31, 2011 from $7.9 million at December 31, 2010. Total stockholders’ equity was $66.9 million at March 31, 2011, an increase of $1.2 million or 1.8% from December 31, 2010, primarily due to net income of $2.2 million, proceeds from the issuance of common stock under the Dividend Reinvestment Plan of $0.8 million and stock based compensation expense of $0.3 million which was partially offset by the declaration of dividends totaling $1.5 million and the change in unrealized net gains in securities available for sale of $0.5 million.

 

Liquidity

 

The objective of liquidity management is to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated earnings enhancement opportunities for Company growth.  Liquidity management addresses the ability of the Company to meet financial obligations that arise in the normal course of business.  Liquidity is primarily needed to meet customer borrowing commitments, deposit withdrawals either on demand or contractual maturity, to repay other borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.

 

The Holding Company’s principal sources of liquidity included cash and cash equivalents of $2.3 million as of March 31, 2011, and dividends from the Bank. Cash available for distribution of dividends to shareholders of the Company is primarily derived from dividends paid by the Bank to the Company. During the three months ended March 31, 2011, the Bank did not pay a cash dividend to the Company. As of March 31, 2011, the Bank had $19.8 million of retained net income available for dividends to the Company. Prior regulatory approval 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. In the event that 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. In December 2009, the Company completed a private placement of $16.0 million aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (the “TPS”) through a newly-formed

 

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subsidiary, Bridge Statutory Capital Trust II, a wholly-owned Delaware statutory trust (the “Trust”).  The net proceeds will be used for general corporate purposes, primarily to provide additional capital to the Bank.

 

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 principal repayments and maturities of loan and investment securities, lines of credit with other financial institutions including the Federal Home Loan Bank and the Federal Reserve Bank, growth in core deposits and sources of wholesale funding such as brokered certificates of deposits.  While scheduled loan amortization, maturing securities and short term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities 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 seasonal deposit outflows, loans, and asset and liability management objectives.  Historically, the Bank has relied on its deposit base, drawn through its branches that serve its market area and local municipal deposits, as its principal source of funding.  The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

 

The Bank’s Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets.  At March 31, 2011, the Bank had aggregate lines of credit of $227.0 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements.  Of these aggregate lines of credit, $207.0 million 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 unencumbered residential and commercial mortgages owned by the Bank.  The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity.  In addition, the Bank has an approved broker relationship for the purpose of issuing brokered certificates of deposit.  As of March 31, 2011 and December 31, 2010, the Bank had no brokered certificates of deposit.  There were no overnight borrowings as of March 31, 2011 and $5 million in overnight borrowings as of December 31, 2010. The Bank had $16.3 million of securities sold under agreements to repurchase outstanding as of March 31, 2011 and $16.4 million of securities sold under agreements to repurchase outstanding as of December 31, 2010.  There were no advances outstanding as of March 31, 2011 and December 31, 2010 with the FHLB.

 

Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of our operating requirements.  Based on the objectives determined by the Asset and Liability Committee, the Bank’s liquidity levels may be affected by the use of short term and wholesale borrowings, and the amount of public funds in the deposit mix.  The Asset and Liability Committee is comprised of members of senior management and the Board.  Excess short term liquidity is invested overnight at the highest rate available at the Federal Reserve or in federal funds sold.  The Bank invested $39.9 million at the Federal Reserve as of March 31, 2011 and $0.9 million as of December 31, 2010. The Bank did not have overnight federal funds sold as of March 31, 2011 or December 31, 2010.

 

Capital Resources

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and 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 March 31, 2011, the Company and the Bank met all capital adequacy requirements. In April 2009, the Company announced that its Board of Directors approved and adopted a Dividend Reinvestment Plan (“DRP Plan”) and filed a registration statement on Form S-3 to register 600,000 shares of common stock with the Securities and Exchange Commission (“SEC”) pursuant to the DRP Plan. In April 2010, the Company increased the discount from 3% to 5%, and raised the quarterly optional cash purchase amount to $50,000 under the DRP Plan. Proceeds from the issuance of common stock related to the DRP Plan for the three months ended March 31, 2011, was $0.8 million. Since the inception of the DRP Plan in April 2009 through March 31, 2011, the Company has issued 106,370 shares of common stock and raised $2.5 million in capital. In June 2009, the Company filed a shelf registration statement on Form S-3 to register up to $50 million of securities with the SEC. In December 2009, the Company completed a private placement of $16.0 million aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (the “TPS”) through a newly-formed subsidiary, Bridge Statutory Capital Trust II, a wholly-owned Delaware statutory trust (the “Trust”).  The TPS mature in 30 years, and carry a fixed distribution rate of 8.50%.  The TPS have a liquidation amount of $1,000 per security.  The Company has the right to redeem the TPS

 

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at par (plus any accrued but unpaid distributions) at any time after September 30, 2014.  Holders of the TPS may convert the TPS into shares of the Company’s common stock at a conversion price equal to $31.00 per share, which represents 125% of the average closing price of the Company’s common stock over the 20 trading days ended on October 14, 2009.  Each $1,000 in liquidation amount of the TPS is convertible into 32.2581 shares of the Company’s common stock. As provided in the regulations, TPS are included in holding company Tier 1 capital (up to a limit of 25% of Tier 1 capital).

 

At March 31, 2011 and December 31, 2010, actual capital levels and minimum required levels for the Company and the Bank were as follows:

 

Bridge Bancorp, Inc. (Consolidated)

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31,

 

2011

 

(Dollars 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)

 

$

89,963

 

13.6

%

$

52,962

 

8.0

%

n/a

 

n/a

 

Tier 1 Capital (to risk weighted assets)

 

81,678

 

12.3

%

26,481

 

4.0

%

n/a

 

n/a

 

Tier 1 Capital (to average assets)

 

81,678

 

7.8

%

42,126

 

4.0

%

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

2010

 

(Dollars 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)

 

$

88,006

 

13.7

%

$

51,504

 

8.0

%

n/a

 

n/a

 

Tier 1 Capital (to risk weighted assets)

 

79,953

 

12.4

%

25,752

 

4.0

%

n/a

 

n/a

 

Tier 1 Capital (to average assets)

 

79,953

 

7.9

%

40,667

 

4.0

%

n/a

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bridgehampton National Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31,

 

2011

 

(Dollars 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)

 

$

88,407

 

13.4

%

$

52,891

 

8.0

%

$

66,113

 

10.0

%

Tier 1 Capital (to risk weighted assets)

 

80,133

 

12.1

%

26,445

 

4.0

%

39,668

 

6.0

%

Tier 1 Capital (to average assets)

 

80,133

 

7.6

%

42,093

 

4.0

%

52,616

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

2010

 

(Dollars 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)

 

$

85,514

 

13.3

%

$

51,444

 

8.0

%

$

64,304

 

10.0

%

Tier 1 Capital (to risk weighted assets)

 

77,470

 

12.1

%

25,722

 

4.0

%

38,583

 

6.0

%

Tier 1 Capital (to average assets)

 

77,470

 

7.6

%

40,639

 

4.0

%

50,799

 

5.0

%

 

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Impact of Inflation and Changing Prices

 

The Unaudited Consolidated Financial Statements and notes thereto presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.  The primary effect of inflation on the operations of the Company is reflected in increased operating costs.  Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices.  Changes in interest rates could adversely affect our results of operations and financial condition.  Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of goods and services.  Interest rates are highly sensitive to many factors, which are beyond the control of the Company, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Bank.

 

Recent Regulatory and Accounting Developments

 

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-2, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-2”).  ASU 2011-2 clarifies the guidance for determining whether a loan restructuring constitutes a troubled debt restructuring (“TDR”) outlined in Accounting Standards Codification (“ASC”) No. 310-40, “Receivables—Troubled Debt Restructurings by Creditors,” by providing additional guidance to a creditor in making the following required assessments needed to determine whether a restructuring is a TDR: (i) whether or not a concession has been granted in a debt restructuring; (ii) whether a temporary or permanent increase in the contractual interest rate precludes the restructuring from being a TDR; (iii) whether a restructuring results in an insignificant delay in payment; (iv) whether a borrower that is not currently in payment default is experiencing financial difficulties; and (v) whether a creditor can use the effective interest rate test outlined in debtor’s guidance on restructuring of payables (ASC Topic No. 470-60-55-10) when evaluating whether or not a restructuring constitutes a TDR.  This update is effective the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Adoption of ASU 2011-2 is not expected to have a material effect.

 

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”).  ASU 2010-20 requires companies to provide a greater level of disaggregated information regarding: (1) the credit quality of their financing receivables; and (2) their allowance for credit losses. ASU 2010-20 further requires companies to disclose credit quality indicators, past due information, and modifications of their financing receivables. For public companies, ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. ASU 2010-20 encourages, but does not require, comparative disclosures for earlier reporting periods that ended before initial adoption.  Adoption of ASU 2010-20 did not have a material impact on the Company.

 

In January 2010, FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-6”).  ASU 2010-6 required new disclosures related to transfers in and out of fair value hierarchy Levels 1 and 2, as well as certain activities for assets whose fair value is measured under the Level 3 hierarchy. ASU 2010-6 also provided amendments clarifying the level of disaggregation and disclosures about inputs and valuation techniques along with conforming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of ASU 2010-6 has not had, and is not expected to have, a material impact on the Company.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Asset/Liability Management

 

Management considers interest rate risk to be the most significant market risk for the Company.  Market risk is the risk of loss from adverse changes in market prices and rates.  Interest rate risk is the exposure to adverse changes in the net income of the Company as a result of changes in interest rates.

 

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 liabilities, and the credit quality of earning assets.  The Company’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates.

 

The Company’s Asset and Liability Committee evaluates periodically, but at least four times a year, 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 at least annually.  The economic environment continually presents uncertainties as to future interest rate trends.  The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.

 

At March 31, 2011, $414.6 million or 88.5% of the Company’s securities had fixed interest rates.  Changes in interest rates affect the value of the Company’s interest earning assets and in particular its securities portfolio.  Generally, the value of securities fluctuates inversely with changes in interest rates.  Increases in interest rates could result in decreases in the market value of interest earning assets, which could adversely affect the Company’s stockholders’ equity and its results of operations if sold.  The Company is also subject to reinvestment risk associated with changes in interest rates.  Changes in market interest rates could also affect the type (fixed-rate or adjustable-rate) and the amount of loans originated by the Company and the average life of loans and securities, which can impact the yields earned on the Company’s loans and securities. Changes in interest rates may affect the average life of loans and mortgage related securities.  In periods of decreasing interest rates, the average life of loans and securities held by the Company may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets.  Under these circumstances the Company is subject to reinvestment risk to the extent that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.  Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans, (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and make it more difficult for borrowers to repay adjustable rate loans.

 

The Company utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure to net interest income to sustained interest rate changes.  Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon.  The simulation model captures the seasonality of the Company’s deposit flows and the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on the Company’s consolidated balance sheet.  This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon given a 100 and 200 basis point upward shift in interest rates and a 100 basis point downward shift in interest rates.  A parallel and pro rata shift in rates over a twelve-month period is assumed.

 

The following reflects the Company’s net interest income sensitivity analysis at March 31, 2011:

 

 

 

March 31, 2011

 

December 31, 2010

 

Change in Interest

 

Potential Change

 

Potential Change

 

Rates in Basis Points

 

in Net

 

in Net

 

(Dollars in thousands)

 

Interest Income

 

Interest Income

 

 

 

$ Change

 

% Change

 

$ Change

 

% Change

 

200

 

$

(1,649

)

(4.11

%)

$

(2,022

)

(5.13

%)

100

 

$

(686

)

(1.71

%)

$

(872

)

(2.21

%)

Static

 

 

 

 

 

(100)

 

$

282

 

0.70

%

$

183

 

0.46

%

 

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Table of Contents

 

 

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results.  These hypothetical estimates are based upon numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows.  While assumptions are developed based upon perceived current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change.

 

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, prepayment penalties and product preference changes and other internal and external variables.  Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to, or anticipating changes in interest rates and market conditions.

 

Item 4. Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2011.  Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.  There has been no change in the Company’s internal control over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

There have been no material changes to the factors disclosed in Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)                                  Not applicable.

(b)                                 Not applicable.

(c)                                  Not applicable.

 

Item 3. Defaults upon Senior Securities

 

Not applicable.

 

Item 4. Removed and Reserved

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits and Reports on Form 8-K

 

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

 

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SIGNATURES

 

In accordance with the requirement of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

BRIDGE BANCORP, INC.

 

Registrant

 

 

 

 

May 5, 2011

/s/ Kevin M. O’Connor

 

Kevin M. O’Connor

 

President and Chief Executive Officer

 

 

May 5, 2011

/s/ Howard H. Nolan

 

Howard H. Nolan

 

Senior Executive Vice President, Chief Financial Officer

 

39