# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2010

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2010-11-05
- Accepted by EDGAR: Nov 5, 2010, 20:44 ET
- Period: 2010-09-30
- Accession: 0000950123-10-101755
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000095012310101755/g25125e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000095012310101755/

## Management's discussion and analysis

As filed, 85,894 characters.

### 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,” “estimates,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the Company’s consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the 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: changes in economic conditions including an economic recession that could affect the value of real estate collateral and the ability for borrowers to repay their loans; 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; demand for loan products and other financial services; competition; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines; changes in real estate values and other 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, 2009 and in quarterly and 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.

#### Quarterly Highlights

- Net income of $2.4 million or $.38 per diluted share as compared to net income of $2.3 million or $.37 per diluted share for the third quarter in 2009.
- Returns on average assets and equity of 0.94% and 15.58%, respectively.
- Net interest income increased to $9.4 million for the third quarter of 2010 compared to $8.8 million in 2009.
- A net interest margin of 4.09% for the third quarter of 2010 compared to 4.63% for the 2009 period.
- Total loans at September 30, 2010 of $480.0 million, an increase of $32.0 million or 7.1% over December 31, 2009 and an increase of $40.7 million or 9.3% over September 30, 2009.
- Total assets of $1.04 billion at September 30, 2010, an increase of $139.3 million or 15.5% compared to December 31, 2009 and an increase of $182.0 million or 21.3% compared to September 30, 2009.
- Deposits of $926.2 million, an increase of $132.7 million or 16.7% over December 31, 2009 and an increase of $160.8 million or 21.0% compared to September 30, 2009 levels.
- Increased Allowance for Loan Losses as a percentage to Loans to 1.62% as of September 30, 2010 compared to 1.35% at December 31, 2009 and 1.25% at September 30, 2009.
- Tier 1 Capital increased $20.8 million to $78.0 million as of September 30, 2010, compared to September 30, 2009.
- The Bank opened its 18th branch in Patchogue, New York.
- The declaration of a cash dividend of $0.23 per share for the third quarter of 2010.

#### Principal Products and Services and Locations of Operations

The Bank operates nineteen branches on eastern Long Island, including the new branch in Deer Park, New York which opened in October 2010. Federally chartered in 1910, the Bank was founded by local farmers and merchants. For the past 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.

#### Significant Events

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 raises the current standard maximum deposit insurance amount to $250,000. The standard maximum insurance amount of $100,000 had been temporarily raised to $250,000 until December 31, 2013. 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 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 most institutions. When this change becomes effective, the Company anticipates a reduction in its FDIC assessment fees. 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 for more detailed information related to this new regulation.

#### Opportunities and Challenges

Since the second half of 2007 and continuing through 2009, 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. At their meetings in April, June and September 2010, the Federal Reserve decided to maintain the federal funds target rate between 0 and 25 basis points due to the continued high level of unemployment and tight credit markets.

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 has 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.

In March 2010, the Bank received approval from the Office of the Comptroller of the Currency (“OCC”) to relocate its branch at 26 Park Place, East Hampton, New York to 55 Main Street, East Hampton, New York. The relocation of the East Hampton branch is expected to occur during the fourth quarter of 2010.

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.

Locally many customers, citing great summer weather and renewed optimism, reported improvement in their businesses in 2010. However, more broadly, great uncertainty remains on the breath of economic recovery and its sustainability. Job growth is anemic, and unemployment and under employment remains stubbornly high. The housing market continues down an uncertain path, impacted by foreclosure moratoriums, mortgage availability and uncertainty regarding past and future government initiatives. There is also discussion of new initiatives as well as the use of unconventional stimulus to revive the economy and create the needed jobs. Finally, there is new financial reform legislation representing a framework to be clarified with a myriad of new rules and regulations, not yet completed. Although it is still early, indications are the impacts will be significant and compliance may be costly. The Company will need to devote substantial time and resources to assess the impact and develop a framework for compliance.

The Company’s current performance, despite the myriad of challenges facing the economy and industry, demonstrates the Company’s underlying fundamental strength. However, management remains cautious as it manages through a still weak economy characterized by lackluster job creation, a fragile housing recovery and the consequences, both intended and unintended, of attempts to reverse the country’s course. There is also the specter and undetermined impact financial, and otherwise, of recently passed financial legislation.

The Company balances these global issues, with the realities of the local markets to identify strategic initiatives, provide guidance on capital deployment and determine investment decisions. However, the longer term mission, focusing on the customer and serving its communities, has been successful for over 100 years and transcends these shorter term concerns. This has allowed management to manage through the uncertain, and at times, difficult environment and deliver strong financial results and returns to the shareholders.

Corporate objectives for 2010 include: leveraging our expanding branch network to build customer relationships and grow loans and deposits; 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.

### 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 also are 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 as follows: first, loans with homogenous characteristics are pooled by loan type and include home equity loans, residential mortgages, land loans and consumer loans. Then all remaining loans are segregated into pools based upon the risk rating of each credit. Key factors in determining a credit’s risk rating include management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management. 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. Management considers its own charge-off history, delinquency status, collateral, loan concentrations along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, management evaluates and considers the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, management evaluates and considers 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 September 30, 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.

### Net Income

Net income for the three months ended September 30, 2010 was $2.4 million or $0.38 per diluted share as compared to $2.3 million or $0.37 per diluted share for the same period in 2009. Changes for the three months ended September 30, 2010 compared to September 30, 2009 include: (i) $0.6 million or 7.1% increase in net interest income; (ii) a $0.3 million or 33.3% decrease in the provision for loan losses; (iii) $0.1 million or 6.9% increase in total non interest income as a result of higher fees for other customer services related to electronic banking and investment services and higher title insurance revenues, partly offset by lower service charges on deposit accounts and other operating income; (iv) $1.0 million or 16.4% increase in total non interest expenses, primarily due to a $0.5 million increase in salaries and employee benefits related to increased staffing and related benefits, a $0.1 million increase in net occupancy expenses, $0.4 million increase in other operating expenses primarily related to the new branches and marketing expenses for the 100th year anniversary of the Bank. The provision for loan losses of $0.6 million was recorded this quarter due to the continued growth of our loan portfolio as well as our assessment of risk factors considering the continued weak economic environment and overall industry trends. The coverage ratio of the allowance for loan losses to loans increased to 1.62%. A provision for loan losses of $0.9 million was recorded during the third quarter of 2009, resulting in a coverage ratio of the allowance for loan losses to loans of 1.25%. The effective income tax rate was 31.1% for the quarter ended September 30, 2010 compared to 32.0% for the same period last year.

Net income for the nine months ended September 30, 2010 was $6.8 million or $1.07 per diluted share as compared to $6.6 million or $1.05 per diluted share for the same period in 2009. Changes for the nine months ended September 30, 2010 compared to September 30, 2009 include: (i) $0.4 million or 1.5% increase in net interest income; (ii) a decrease of $0.6 million or 18.8% in the provision for loan losses, (iii) $1.2 million or 26.5% increase in total non interest income as a result of an increase in net securities gains of $0.8 million, higher fees for other customer services primarily related to electronic banking services and investment services and higher title insurance revenues partially offset by lower service charges on deposit accounts; (iv) $2.1 million or 11.0% increase in total non interest expenses, primarily due to a $1.2 million increase in salaries and employee benefits related to increased staffing and related benefits, a $0.3 million increase in net occupancy expenses, a $0.1 million increase in furniture & fixture, and a $0.8 million increase in other operating expenses primarily related to the new branches and marketing expenses for the 100th year anniversary of the Bank. These expenses were partly offset by the decrease in FDIC insurance related to the special assessment of $0.4 million that was recorded during the nine months of 2009. The effective income tax rate decreased to 31.5% from 32.4% 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.”*

*(In thousands)*

| Interest earning assets: | Three months ended September 30, 2010 Average Balance | Interest | Average Yield/ Cost | 2009 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (including loan fee income) | **$466,862** | **$7,660** | **6.51%** | $438,006 | $7,386 | 6.69% |
| Mortgage-backed securities | **246,295** | **2,350** | **3.79** | 214,313 | 2,585 | 4.79 |
| Tax exempt securities (1) | **107,647** | **1,089** | **4.01** | 74,870 | 811 | 4.30 |
| Taxable securities | **89,251** | **635** | **2.82** | 27,958 | 211 | 2.99 |
| Federal funds sold | **—** | **—** | **—** | 20,303 | 13 | 0.25 |
| Deposits with banks | **41,672** | **23** | **0.22** | 3,977 | 4 | 0.40 |
| Total interest earning assets | **951,727** | **11,757** | **4.90** | 779,427 | 11,010 | 5.60 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **16,255** |  |  | 12,630 |  |  |
| Other assets | **41,822** |  |  | 29,555 |  |  |
| Total assets | **$1,009,804** |  |  | $821,612 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$498,576** | **$919** | **0.73%** | $362,947 | $887 | 0.97% |
| Other time deposits | **81,652** | **262** | **1.27** | 73,144 | 420 | 2.28 |
| Certificates of deposit of $100,000 or more | **73,569** | **279** | **1.50** | 85,082 | 519 | 2.42 |
| Federal funds purchased and repurchase agreements | **17,029** | **136** | **3.17** | 16,370 | 90 | 2.18 |
| Federal Home Loan Bank term advances | **—** | **—** | **—** | — | — | — |
| Junior Subordinated Debentures | **16,002** | **341** | **8.45** | — | — | — |
| Total interest bearing liabilities | **686,828** | **1,937** | **1.12** | 537,543 | 1,916 | 1.41 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **255,539** |  |  | 220,143 |  |  |
| Other liabilities | **6,795** |  |  | 6,641 |  |  |
| Total liabilities | **949,162** |  |  | 764,327 |  |  |
| Stockholders’ equity | **60,642** |  |  | 57,285 |  |  |
| Total liabilities and stockholders’ equity | **$1,009,804** |  |  | $821,612 |  |  |
| Net interest income/interest rate spread (2) |  | **9,820** | **3.78%** |  | 9,094 | 4.19% |
| Net interest earning assets/net interest margin (3) | **$264,899** |  | **4.09%** | $241,884 |  | 4.63% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **138.57%** |  |  | 145.00% |
| Less: Tax equivalent adjustment |  | **(380)** |  |  | (283) |  |
| Net interest income |  | **$9,440** |  |  | $8,811 |  |

(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.

22

*(In thousands)*

| Interest earning assets: | Nine months ended September 30, 2010 Average Balance | Interest | Average Yield/ Cost | 2009 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (including loan fee income) | **$454,090** | **$22,248** | **6.55%** | $436,168 | $21,929 | 6.72% |
| Mortgage-backed securities | **235,242** | **7,257** | **4.12** | 227,913 | 8,439 | 4.95 |
| Tax exempt securities (1) | **103,562** | **3,028** | **3.91** | 71,692 | 2,511 | 4.68 |
| Taxable securities | **77,510** | **1,596** | **2.75** | 21,699 | 584 | 3.60 |
| Federal funds sold | **2,339** | **5** | **0.29** | 10,859 | 22 | 0.27 |
| Deposits with banks | **25,829** | **55** | **0.28** | 3,341 | 5 | 0.20 |
| Total interest earning assets | **898,572** | **34,189** | **5.09** | 771,672 | 33,490 | 5.80 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **15,831** |  |  | 13,526 |  |  |
| Other assets | **38,766** |  |  | 29,048 |  |  |
| Total assets | **$953,169** |  |  | $814,246 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$471,955** | **$2,699** | **0.76%** | $368,169 | $2,767 | 1.00% |
| Other time deposits | **73,855** | **857** | **1.55** | 67,462 | 1,175 | 2.33 |
| Certificates of deposit of $100,000 or more | **73,921** | **943** | **1.71** | 82,879 | 1,537 | 2.48 |
| Federal funds purchased and repurchase agreements | **19,338** | **385** | **2.66** | 33,767 | 311 | 1.23 |
| Federal Home Loan Bank term advances | **—** | **—** | **—** | 110 | 1 | 1.22 |
| Junior Subordinated Debentures | **16,002** | **1,023** | **8.55** | — | — | — |
| Total interest bearing liabilities | **655,071** | **5,907** | **1.21** | 552,387 | 5,791 | 1.40 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **233,319** |  |  | 200,091 |  |  |
| Other liabilities | **5,636** |  |  | 5,749 |  |  |
| Total liabilities | **894,026** |  |  | 758,227 |  |  |
| Stockholders’ equity | **59,143** |  |  | 56,019 |  |  |
| Total liabilities and stockholders’ equity | **$953,169** |  |  | $814,246 |  |  |
| Net interest income/interest rate spread (2) |  | **28,282** | **3.88%** |  | 27,699 | 4.40% |
| Net interest earning assets/net interest margin (3) | **$243,501** |  | **4.21%** | $219,285 |  | 4.80% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **137.17%** |  |  | 139.70% |
| Less: Tax equivalent adjustment |  | **(1,057)** |  |  | (876) |  |
| Net interest income |  | **$27,225** |  |  | $26,823 |  |

(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.

23

### 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.

*(In thousands)*

| Interest income on interest earning assets: | Three months ended September 30, 2010 Over 2009 Changes Due To Volume | Rate | Net Change | Nine months ended September 30, 2010 Over 2009 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (including loan fee income) | $1,316 | $(1,042) | $274 | $1,115 | $(796) | $319 |
| Mortgage-backed securities | 1,692 | (1,927) | (235) | 419 | (1,601) | (1,182) |
| Tax exempt securities (1) | 613 | (335) | 278 | 1,183 | (666) | 517 |
| Taxable securities | 505 | (81) | 424 | 1,265 | (253) | 1,012 |
| Federal funds sold | (7) | (6) | (13) | (20) | 3 | (17) |
| Deposits with banks | 32 | (13) | 19 | 47 | 3 | 50 |
| Total interest earning assets | 4,151 | (3,404) | 747 | 4,009 | (3,310) | 699 |
| Interest expense on interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | 1,064 | (1,032) | 32 | 918 | (986) | (68) |
| Certificates of deposit of $100,000 or more | (63) | (177) | (240) | (132) | (462) | (594) |
| Other time deposits | 274 | (432) | (158) | 162 | (480) | (318) |
| Federal funds purchased and repurchase agreements | 4 | 42 | 46 | (240) | 314 | 74 |
| Federal Home Loan Bank Advances | — | — | — | (1) | — | (1) |
| Junior subordinated debentures | 341 | — | 341 | 1,023 | — | 1,023 |
| Total interest bearing liabilities | 1,620 | (1,599) | 21 | 1,730 | (1,614) | 116 |
| Net interest income | $2,531 | $(1,805) | $726 | $2,279 | $(1,696) | $583 |

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

### Analysis of Net Interest Income for the Three Months ended September 30, 2010 and September 30, 2009

Net interest income increased compared to the quarter ended September 30, 2009, although margins were impacted by historically low market rates and a higher concentration of securities holdings. The increase in average deposits of $168.0 million primarily funded lower yielding securities, which grew $126.1 million, while net loans increased only $28.9 million from the comparable 2009 quarter. The net interest margin of 4.09%, was lower than 2009, but still above peer levels with earning assets yielding 4.90%, and an overall funding cost of .82%, including demand deposits. The Bank continues to execute its strategy of cautiously investing core deposit growth and managing the overall balance sheet for the eventuality of higher market interest rates.

Net interest income was $9.4 million for the three months ended September 30, 2010 compared to $8.8 million for the same period in 2009, an increase of $0.6 million or 7.1%. Net interest margin declined to 4.09% for the quarter ended September 30, 2010 as compared to 4.63% for the quarter ended September 30, 2009. This decrease was primarily the result of the decrease in the yield on average total interest earning assets being greater than the decrease in the cost of the average total interest bearing liabilities. The yield on interest earning assets decreased approximately 70 basis points which was partly offset by the cost of interest bearing liabilities decreasing approximately 29 basis points during the third quarter of 2010 compared to 2009.

For the three months ended September 30, 2010, average loans grew by $28.9 million or 6.6% to $466.9 million as compared to $438.0 million for the same period in 2009. Real estate mortgage loans and commercial 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 September 30, 2010, average total securities increased by $126.1 million or 39.7% to $443.2 million as compared to $317.1 million for the three months ended September 30, 2009. During the three months ended September 30, 2010, the Bank purchased corporate bonds with an average balance of $4.5 million. There were no federal funds sold for the three month ended September 30, 2010. Average federal funds sold were $20.3 million for the three months ended September 30, 2009. The decrease in the average federal funds sold for the three months ended September 30, 2010 was offset by the growth in average interest earning cash of $37.7 million for the three months ended September 30, 2010 from $4.0 million in 2009 to $41.7 million in 2010.

Average total interest bearing liabilities totaled $686.8 million for the three months ended September 30, 2010 compared to $537.5 million for the same period in 2009. The Bank grew deposits as a result of opening two branches during 2009 and three new branches during 2010 as well as building new relationships in existing markets. During the fourth quarter of 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 subsidiary, Bridge Statutory Capital Trust II. 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. The junior subordinated debentures bear interest at a fixed rate equal to 8.50% and mature on December 31, 2039. Since September 30, 2009, the Bank reduced interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates, which was partly offset by increased borrowing costs, resulted in a decrease in the cost of interest bearing liabilities from 1.41% for the three months ended September 30, 2009 to 1.12% 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 September 30, 2010, average total deposits increased by $168.0 million or 22.7% to $909.3 million as compared to average total deposits of $741.3 million for the same period in 2009. Components of this increase include an increase in average balances in savings, NOW and money market accounts of $135.6 million or 37.4% to $498.6 million for the three months ended September 30, 2010 compared to $363.0 million for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits decreased $3.0 million or 1.9% to $155.2 million for 2010 as compared to $158.2 million for the same period last year. Average public fund deposits comprised 17.6% of total average deposits during the three months ended September 30, 2010 and 13.9% of total average deposits for the same period in 2009. Average federal funds purchased and repurchase agreements increased $0.6 million or 4.0% to $17.0 million for the three months ended September 30, 2010 as compared to $16.4 million for the same period in the prior year. Average balances in demand deposits increased $35.4 million or 16.1% to $255.5 million for 2010 as compared to $220.1 million for the same period last year.

Total interest income increased $0.7 million or 6.1% to $11.4 million for the three months ended September 30, 2010 from $10.7 million for the same period in 2009. Interest income on loans increased $0.3 million or 3.7% to $7.7 million for the three months ended September 30, 2010 from $7.4 million for the same period in 2009. The yield on average loans was 6.5% for 2010 as compared to 6.7% in 2009.

Interest income on investments in mortgage-backed, taxable and tax exempt securities increased $0.4 million to $3.7 million for the three months ended September 30, 2010 compared to $3.3 million for the same period in 2009. Interest income on securities included net amortization of premium of $0.4 million in the 2010 period compared to $0.1 million for the same period in 2009. The tax adjusted average yield on total securities decreased to 3.7% in 2010 from 4.5% in 2009.

Interest expense remained at $1.9 million for the three months ended September 30, 2010 compared to the same period in 2009. The interest expense in 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.

### Analysis of Net Interest Income for the Nine Months ended September 30, 2010 and September 30, 2009

Net interest income was $27.2 million for the nine months ended September 30, 2010 compared to $26.8 million for the same period in 2009, an increase of $0.4 million or 1.5%. Net interest margin declined to 4.21% for the nine months ended September 30, 2010 as compared to 4.80% for the same period in 2009. This decrease was primarily the result of the decrease in the yield on average total interest earning assets being greater than the decrease in the cost of the average total interest bearing liabilities. The yield on interest earning assets decreased approximately 71 basis points which was partly offset by the cost of interest bearing liabilities decreasing approximately 19 basis points during the nine months ended September 30, 2010 compared to 2009.

For the nine months ended September 30, 2010, average loans grew by $17.9 million or 4.1% to $454.1 million as compared to $436.2 million for the same period in 2009. Real estate mortgage loans and commercial 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 nine months ended September 30, 2010, average total investments increased by $95.0 million or 29.6% to $416.3 million as compared to $321.3 million for the nine months ended September 30, 2009. To position the balance sheet for the future and better manage liquidity and interest rate risk, a portion of the available for sale investment securities portfolio was sold during the nine months ended September 30, 2010 resulting in a net gain of $1.3 million. During the nine months ended September 30, 2010, the Bank purchased corporate bonds with an average balance of $1.5 million. Average federal funds sold decreased $8.6 million to $2.3 million for the nine months ended September 30, 2010 from $10.9 million in 2009. The decrease in the average federal funds sold for the nine months ended September 30, 2010 was offset by the growth in average interest earning cash of $22.5 million for the nine months ended September 30, 2010 from $3.3 million in 2009 to $25.8 million in 2010.

Average total interest bearing liabilities totaled $655.1 million for the nine months ended September 30, 2010 compared to $552.4 million for the same period in 2009. The Bank grew deposits as a result of opening two branches during 2009 and three new branches during 2010 as well as building new relationships in existing markets. Since September 30, 2009, the Bank reduced interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates was partially offset by higher borrowing costs and resulted in a decrease in the cost of interest bearing liabilities from 1.40% for the nine months ended September 30, 2009 to 1.21% 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 nine months ended September 30, 2010, average total deposits increased by $134.5 million or 18.7% to $853.1 million as compared to average total deposits of $718.6 million for the same period in 2009. Components of this increase include an increase in average balances in savings, NOW and money market accounts of $103.8 million or 28.2% to $472.0 million for the nine months ended September 30, 2010 compared to $368.2 million for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits decreased $2.5 million or 1.7% to $147.8 million for 2010 as compared to $150.3 million for the same period in 2009. Average public fund deposits comprised 19.4% of total average deposits during the nine months ended September 30, 2010, and 18.3% of total average deposits for the same period in 2009. Average federal funds purchased and repurchase agreements decreased $14.5 million to $19.3 million for the nine months ended September 30, 2010 as compared to $33.8 million for the same period in the prior year. Federal Home Loan Bank term advances were zero for the nine months ended September 30, 2010 compared to an average balance of $0.1 million for the same period in 2009. Average balances in demand deposits increased $33.2 million or 16.6% to $233.3 million for 2010 as compared to $200.1 million for the same period last year.

Total interest income increased $0.5 million or 1.6% to $33.1 million for the nine months ended September 30, 2010 from $32.6 million for the same period in 2009. Interest income on loans increased $0.3 million or 1.5% to $22.2 million in 2010 compared to $21.9 million in 2009 primarily due to growth in the loan portfolio partially offset by a decrease in yield on average loans. The yield on average loans was 6.6% for 2010 as compared to 6.7% in 2009.

Interest income on investments in mortgage-backed, taxable and tax exempt securities decreased $0.1 million to $10.8 million for the nine months ended September 30, 2010 compared to $10.7 million for the same period in 2009. Interest income on securities included net amortization of premium of $0.9 million in the 2010 period compared to $0.1 million for the same period in 2009. The tax adjusted average yield on total securities decreased to 3.8% in 2010 from 4.8% in 2009.

Interest expense increased $0.1 million or 2.0% to $5.9 million for the nine months ended September 30, 2010 compared to $5.8 million for the same period in 2009. The increase in interest expense in 2010 resulted from the $1.0 million of interest paid related to $16.0 million of junior subordinated debentures which was partly offset by 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 on eastern 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 $45.3 million or 9.4% of total loans at September 30, 2010 were classified as potential problem loans compared to $31.7 million or 7.1% at December 31, 2009 and $28.5 million or 6.5% at September 30, 2009. 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. The increase in the 2010 level of potential problem loans reflects the current economic environment, the early identification of potential problem loans, a stringent assessment of potential credit weaknesses and an in depth review of individual credits. At September 30, 2010, approximately $38.3 million of these loans are commercial real estate (“CRE”) loans which are well secured with real estate as collateral. In addition, all but $2.1 million of the CRE loans have personal guarantees. At September 30, 2010, approximately $4.6 million of potential problem loans are residential real estate loans. The remaining $2.4 million in potential problem loans are unsecured, 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 $224.7 million or 46.9% of the total loan portfolio at September 30, 2010 compared to $204.2 million or 45.6% at December 31, 2009 and $211.2 million or 48.1% at September 30, 2009. 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 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 in the fourth quarter of 2009. 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 September 30, 2010 and December 31, 2009, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $12.1 million and $9.1 million, respectively. The increase primarily relates to one $2.1 million relationship representing loans secured by first mortgage liens on real estate with recently appraised values aggregating $9.3 million, and two home equity loans totaling $1.0 million, each secured by first mortgage liens on residential properties. 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 $8.9 million or 1.86% of total loans at September 30, 2010 and were $5.9 million or 1.31% of total loans at December 31, 2009. There were no loans 90 days or more past due that were still accruing at September 30, 2010 and December 31, 2009. Approximately $4.8 million of the nonaccrual loans at September 30, 2010 and $4.9 million of the nonaccrual loans at December 31, 2009, represent troubled debt restructured loans where the borrowers are complying with the modified terms of the loans and are currently making payments. These 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 September 30, 2010 and December 31, 2009, 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 $269,000 of interest income has been recognized.

The average recorded investment in the impaired loans during the nine months ended September 30, 2010 was $12.3 million and was $7.4 million for the year ended December 31, 2009. At September 30, 2010, 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 amount of the allowance for loan losses allocated to impaired loans as of September 30, 2010 and December 31, 2009 was $7,000 and $50,000, respectively.

The Bank had no foreclosed real estate at September 30, 2010, December 31, 2009 and September 30, 2009, respectively.

The following table sets forth impaired loans by loan type:

*(In thousands)*

| Nonaccrual Loans: | September 30, 2010 | December 31, 2009 |
| --- | ---: | ---: |
| Commercial real estate mortgage loans | **$2,021** | $324 |
| Residential real estate mortgage loans | **1,402** | 511 |
| Commercial, financial & agricultural loans | **725** | 61 |
| Installment/consumer loans | **10** | 105 |
| Real estate construction and land loans | **—** | — |
| Total | **4,158** | 1,001 |
| Restructured Loans: |  |  |
| Commercial real estate mortgage loans | **3,219** | 3,229 |
| Residential real estate mortgage loans | **2,061** | 2,120 |
| Commercial, financial & agricultural loans | **—** | — |
| Installment/consumer loans | **—** | — |
| Real estate construction and land loans | **2,707** | 2,770 |
| Total | **7,987** | 8,119 |
| Total Impaired Loans | **$12,145** | $9,120 |

Restructured loans totaled $8.0 million as of September 30, 2010, of which $4.8 million of the restructured loans were nonaccrual as of September 30, 2010.

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 $0.6 million and $2.6 million was recorded during the three and nine months ended September 30, 2010 compared to a provision for loan loss of $0.9 million and $3.2 million that was recorded during the same periods in 2009. The Bank recognized net charge-offs in the amount of $0.9 million for the nine months ended September 30, 2010 as compared to $1.7 million for the same period in 2009. The allowance for loan losses increased to $7.8 million at September 30, 2010, as compared to $6.0 million at December 31, 2009 and $5.5 million at September 30, 2009. As a percentage of total loans, the allowance increased to 1.62% at September 30, 2010 compared to 1.35% at December 31, 2009 and 1.25% at September 30, 2009. 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.

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

*(Dollars in thousands)*

|  | For the Nine Months Ended September 30, 2010 | For the Year Ended December 31, 2009 |
| --- | ---: | ---: |
| Allowance for loan losses balance at beginning of period | **$6,045** | $3,953 |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **23** | 47 |
| Residential real estate mortgage loans | **20** | 653 |
| Commercial, financial & agricultural loans | **753** | 1,098 |
| Installment/consumer loans | **124** | 55 |
| Real estate construction and land loans | **—** | 240 |
| Total | **920** | 2,093 |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **—** | — |
| Residential real estate mortgage loans | **3** | 6 |
| Commercial, financial & agricultural loans | **43** | 28 |
| Installment/consumer loans | **21** | 1 |
| Real estate construction and land loans | **—** | — |
| Total | **67** | 35 |
| Net charge-offs | (853) | (2,058) |
| Provision for loan losses charged to operations | **2,600** | 4,150 |
| Balance at end of period | **$7,792** | $6,045 |
| Ratio of net charge-offs during period to average loans outstanding | (0.18%) | (0.47%) |

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

*(Dollars in thousands)*

|  | September 30, 2010 Amount | Percentage of Loans to Total Loans | December 31, 2009 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$2,842** | **46.9%** | $2,565 | 45.6% |
| Residential real estate mortgage loans | **1,476** | **27.8** | 1,781 | 27.5 |
| Commercial, financial & agricultural loans | **2,946** | **20.3** | 1,083 | 20.9 |
| Installment/consumer loans | **292** | **1.8** | 270 | 1.7 |
| Real estate construction and land loans | **236** | **3.2** | 346 | 4.3 |
| Total | **$7,792** | **100.0%** | $6,045 | 100.0% |

### Non Interest Income

Total non interest income increased $0.1 million or 6.9% to $1.7 million for the three months ended September, 2010 compared to $1.6 million for the same period in 2009. Service charges on deposit decreased $0.1 million or 7.7% to $0.7 million for the three months ended September 30, 2010 from $0.8 million for the same period in 2009. Fees for other customer services were $0.7 million for the three months ended September 30, 2010 compared to $0.5 million in 2009. The increase was primarily related to higher electronic banking and investment services income. Title fee income related to Bridge Abstract increased $0.02 million or 8.0% to $0.24 million for the three months ended September 30, 2010 compared to $0.22 million for the same period in 2009. The increase was attributable to an increase in the number and value of transactions processed.

Total non interest income increased $1.2 million or 26.5% to $5.9 million during the nine months ended September 30, 2010 compared to $4.7 million from the same period last year. Net securities gains were $1.3 million for the nine months ended September 30, 2010 compared to $0.5 million for the nine months ended September 30, 2009. Service charges on deposit accounts totaled $2.1 million compared to $2.2 million from the same period in 2009. Fees for other customer services increased $0.3 million or 22.9% to $1.6 million for the nine months ended September 30, 2010 compared to $1.3 million from the same period in 2009. The increase was primarily related to higher electronic banking and investment services income. Bridge Abstract, the Bank’s title insurance abstract subsidiary, generated title fee income of $0.8 million during the nine months ended September 30, 2010 compared to $0.6 million for the same period in 2009. The increase was attributable to an increase in the number and value of transactions processed.

### Non Interest Expense

Total non interest expense increased $1.0 million or 16.4% to $7.1 million during the three months ended September 30, 2010 from $6.1 million over the same period in 2009. The primary components of these increases were higher salaries and employee benefits, net occupancy expense, FDIC assessments and other operating expenses partially offset by lower furniture and fixture expense. Salary and benefit expense increased $0.5 million or 13.8% to $4.1 million for the three months ended September 30, 2010 from $3.6 million for the same period in 2009. 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 10.6% to $0.7 million for the three months ended September 30, 2010 from $0.6 million for the same period in 2009. Higher net occupancy expenses were due to increases in maintenance and supplies, and rent expense related to the new branch offices in 2010 as well as annual rent increases in other branch locations. Other operating expenses increased $0.4 million or 32.8% to $1.7 million for the three months ended September 30, 2010 compared to $1.3 million for the same period in 2009 primarily related to increased infrastructure costs and marketing expenses for the new branches and the 100th anniversary of the Bank.

Total non interest expense increased $2.1 million or 11.0% to $20.7 million during the nine months ended September 30, 2010 from $18.6 million for the same period in 2009. The primary components of these increases were higher salaries and employee benefits, net occupancy expense, furniture and fixture expense and other operating expenses offset by lower FDIC assessments. Salary and benefit expense increased $1.2 million or 11.3% to $11.9 million for the nine months ended September 30, 2010 from $10.7 million for the same period in 2009. The increases in salary and benefits reflect base salary increases for staff, filling vacant positions, hiring new employees to support the Company’s expanding infrastructure and new branch offices, and an increase in employee benefit costs, particularly related to pension expense. Net occupancy expense increased $0.3 million or 19.8% to $2.1 million for the nine months ended September 30, 2010 from $1.8 million for the same period in 2009. Higher net occupancy expenses were due to increases in maintenance and supplies, and rent expense related to the new branch offices in 2010 as well as annual rent increases in other branch locations. Furniture and fixture expense increased $0.1 million or 11.2% to $0.8 million for the nine months ended September 30, 2010 from $0.7 million for the same period in 2009. The increase in furniture and fixture expense in 2010 relates primarily to the new branches. FDIC assessments decreased $0.3 million to $0.9 million for the nine months ended September 30, 2010 from $1.2 million for the same period in 2009. During the second quarter of 2009, the Company recorded an expense of $0.4 million related to the FDIC special assessment. Other operating expenses increased $0.8 million or 18.4% to $4.9 million for the nine months ended September 30, 2010 compared to $4.1 million for the same period in 2009 primarily related to increased infrastructure costs and marketing expenses for the new branches and the 100th anniversary of the Bank.

### Income Taxes

The provision for income taxes remained the same at $1.1 million during the three months ended September 30, 2010 and 2009. The effective tax rate for the three months ended September 30, 2010 decreased to 31.1% from 32.0% for the same period last year. For the nine months ended September 30, 2010 and 2009, the provision for income taxes remained at $3.1 million. The effective tax rate for the nine months ended September 30, 2010 decreased to 31.5% from 32.4% for the same period in 2009. 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 $1.04 billion at September 30, 2010, an increase of $139.3 million or 15.5% from $897.3 million at December 31, 2009. This change is primarily a result of an increase in net loans of $30.2 million or 6.8% as well as an increase in total securities of $111.0 million or 28.9% partially offset by a decrease of $7.8 million in total cash and cash equivalents. Cash and due from banks decreased $7.7 million and interest earnings deposits with banks decreased $0.1 million. Total deposits grew $132.7 million to $926.2 million at September 30, 2010 compared to $793.5 million at December 31, 2009. Demand deposits increased $38.5 million to $250.6 million as of September 30, 2010 compared to $212.1 million at December 31, 2009. Savings, NOW and money market deposits increased $87.5 million to $527.9 million at September 30, 2010 from $440.4 million at December 31, 2009. Other time deposits and Certificates of deposit of $100,000 or more increased $6.7 million or 4.8% to $147.7 million as of September 30, 2010 compared to $141.0 million at December 31, 2009. Repurchase agreements increased $2.1 million or 14.0% to $17.1 million as of September 30, 2010 compared to

$15.0 million at December 31, 2009. Junior subordinated debentures remained at $16.0 million as of September 30, 2010 compared to December 31, 2009. Accrued interest payable increased $0.1 million to $0.6 million at September 30, 2010 compared to $0.5 million at December 31, 2009. Other liabilities and accrued expenses increased $0.1 million to $10.4 million at September 30, 2010 from $10.3 million at December 31, 2009. Total stockholders’ equity was $66.2 million at September 30, 2010, an increase of $4.3 million or 7.0% from December 31, 2009, primarily due to net income of $6.8 million, an increase in the unrealized gains in securities of $0.6 million, proceeds from the issuance of common stock under the Dividend Reinvestment Plan of $0.6 million and stock based compensation expense of $0.6 million which was partially offset by the declaration of dividends totaling $4.3 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 $4.4 million as of September 30, 2010, 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 nine months ended September 30, 2010, the Bank paid a cash dividend to the Company in the amount of $1.7 million. At September 30, 2010, the Bank had $16.0 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 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 September 30, 2010, the Bank had aggregate lines of credit of $222.5 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $202.5 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 September 30, 2010 and December 31, 2009, the Bank had no brokered certificates of deposit. There were no overnight borrowings as of September 30, 2010 and December 31, 2009. The Bank had $17.1 million of securities sold under agreements to repurchase outstanding as of September 30, 2010 and $15.0 million of securities sold under agreements to repurchase outstanding as of December 31, 2009. There were no advances outstanding as of September 30, 2010 and December 31, 2009 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 $6.6 million at the Federal Reserve as of September 30, 2010 and $6.9 million as of December 31, 2009. The Bank did not have overnight federal funds sold as of September 30, 2010 or December 31, 2009.

### 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 September 30, 2010, 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 nine months ended September 30, 2010, was $0.6 million. Since the inception of the DRP Plan in April 2009, the Company has raised $0.8 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 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 September 30, 2010 and December 31, 2009, actual capital levels and minimum required levels for the Company and the Bank were as follows:

*(Dollars in thousands)*

| Bridge Bancorp, Inc. (Consolidated) As of September 30, | 2010 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)** | **$85,756** **13.8%** **$49,680** **8.0%** **n/a** **n/a** |
| **Tier 1 Capital (to risk weighted assets)** | **77,993** **12.6%** **24,840** **4.0%** **n/a** **n/a** |
| **Tier 1 Capital (to average assets)** | **77,993** **7.8%** **40,279** **4.0%** **n/a** **n/a** |
| As of December 31, | 2009 |
| (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) | $80,378 14.5% $44,361 8.0% n/a n/a |
| Tier 1 Capital (to risk weighted assets) | 74,333 13.4% 22,180 4.0% n/a n/a |
| Tier 1 Capital (to average assets) | 74,333 8.6% 34,499 4.0% n/a n/a |
| **Bridgehampton National Bank** |  |
| **As of September 30,** | **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)** | **$82,340** **13.3%** **$49,627** **8.0%** **$62,034** **10.0%** |
| **Tier 1 Capital (to risk weighted assets)** | **74,585** **12.0%** **24,814** **4.0%** **37,220** **6.0%** |
| **Tier 1 Capital (to average assets)** | **74,585** **7.4%** **40,256** **4.0%** **50,319** **5.0%** |
| As of December 31, | 2009 |
| (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) | $74,191 13.4% $44,337 8.0% $55,421 10.0% |
| Tier 1 Capital (to risk weighted assets) | 68,146 12.3% 22,168 4.0% 33,253 6.0% |
| Tier 1 Capital (to average assets) | 68,146 7.9% 34,494 4.0% 43,117 5.0% |

### 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 June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-16 “*Accounting for Transfers of Financial Assets”.* This standard improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This Statement must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this Statement should be applied to transfers that occurred both before and after the effective date of this Statement. The adoption of this Statement did not have a significant impact to the Company’s financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “*Measuring Liabilities at Fair Value”*, which is codified as ASC 820, “*Fair Value Measurements and Disclosures”*. This Update provides amendments to Topic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of Topic 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability. The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in this Update is effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this Update did not have a significant impact to the Company’s financial statements.

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, “*Receivables”* that requires companies to provide more information about the credit risks inherent in its loan and lease portfolios and how management considers those credit risks in determining the allowance for credit losses. A company would be required to disclose its accounting policies, the methods it uses to determine the components of the allowance for credit losses, and qualitative and quantitative information about the credit quality of its loan portfolio, such as aging information and credit quality indicators. Both new and existing disclosures would be required either by portfolio segment or class, based on how a company develops its allowance for credit losses and how it manages its credit exposure. The guidance is effective for all financing receivables, including loans and trade accounts receivables. However, short-term trade accounts receivables, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure requirements. For public companies, any period-end disclosure requirements are effective for periods ending on or after December 15, 2010. Any disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. As this guidance affects only disclosures, the adoption of this guidance on December 31, 2010 for period-end disclosures and January 1, 2011 for intra-period activity is not expected to have a significant impact to the Company’s financial statements.

## Market risk

As filed, 6,327 characters.

### 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 September 30, 2010, $436.3 million or 88.0% 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 September 30, 2010:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | September 30, 2010 Potential Change in Net Interest Income $ Change | % Change | December 31, 2009 Potential Change in Net Interest Income $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | **$(1,428)** | **(3.72%)** | $(1,243) | (3.54%) |
| 100 | **$(527)** | **(1.37%)** | $(545) | (1.55%) |
| Static | **—** | **—** | **—** | **—** |
| (100) | **$105** | **0.27%** | $42 | 0.12% |

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.

## Controls and procedures

As filed, 885 characters.

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 September 30, 2010. 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.

## Risk factors

As filed, 5,408 characters.

There is one additional risk factor described below in addition to the factors disclosed in Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2009.

#### Financial Reform Legislation

Financial reform legislation recently enacted 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 our costs of operations.

On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years.

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities (“TPS”). TPS issued before May 19, 2010 by a bank holding company that had total assets of less than $15 billion as of December 31, 2009 are permanently grandfathered.

The new law provides that the Office of Thrift Supervision will cease to exist one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision.

Effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.

The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that allow stockholders to nominate their own candidates using a company’s proxy materials. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives.

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Filed Nov 5, 2010.
Source: SEC EDGAR, the filing index for accession 0000950123-10-101755. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.