# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2012

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2012-05-09
- Accepted by EDGAR: May 9, 2012, 21:27 ET
- Period: 2012-03-31
- Accession: 0001104659-12-035294
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000110465912035294/a12-8798_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000110465912035294/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2012-01-01 to 2012-03-31 | $1.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-01-01 to 2012-03-31 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-01-01 to 2012-03-31 | $2.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2012-01-01 to 2012-03-31 | $0.35 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2012-01-01 to 2012-03-31 | $4.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2012-01-01 to 2012-03-31 | $692.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2012-01-01 to 2012-03-31 | $1.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-03-31 | $24.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2012-03-31 | $1.39bn | us-gaap:Assets |
| Total liabilities | at 2012-03-31 | $1.28bn | us-gaap:Liabilities |
| Shareholders' equity | at 2012-03-31 | $110.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 74,187 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,” “estimated,” “assumes,” “likely,” and variation of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title abstract subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For this presentation, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines, changes in real estate values; a failure to realize or an unexpected delay in realizing, the growth opportunities and cost savings anticipated from the Hamptons State Bank merger; an unexpected increase in operating costs, customer losses and business disruptions following the Hamptons State Bank merger; expanded regulatory requirements as a result of the Dodd-Frank Act, which could adversely affect operating results; 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, 2011 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.

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

The Bank operates twenty branches on eastern Long Island. Federally chartered in 1910, the Bank was founded by local farmers and merchants. For a century, the Bank has maintained its focus on building customer relationships in this market area. The mission of the Company is to grow through the provision of exceptional service to its customers, its employees, and the community. The Company strives to achieve excellence in financial performance and build long term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) home equity loans; (3) construction loans; (4) residential mortgage loans; (5) secured and unsecured commercial and consumer loans; (6) FHLB, FNMA, GNMA, FHLMC and non agency 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 8, 2011, the Company announced a definitive merger agreement under which the Bank would acquire HSB. The HSB transaction closed on May 27, 2011 resulting in the addition of total acquired assets on a fair value basis of $68.9 million, with loans of $38.9 million, investment securities of $24.2 million and deposits of $56.9 million. The transaction augments the Bank’s franchise in eastern Long Island and the combined entity serves customers through a network of 20 branches.

Under the terms of the Agreement, each share of Hamptons State Bank common stock was converted into 0.3434 shares of the Company’s common stock. The Company issued approximately 273,500 shares, with an aggregate value of $5.85 million and recorded goodwill of $2.0 million.

In November 2011, the Company filed a prospectus supplement under which it may from time to time sell up to $10.0 million of its common stock pursuant to an at-the-market equity offering program. During 2011, the Company issued 30,220 shares of common stock and raised $0.6 million in capital under the program. On December 20, 2011, the Company raised $24.1 million in capital from the sale of 1,377,000 shares of common stock to selected institutional and other private investors in a registered direct offering.

#### Quarterly Highlights

- Net income of $2.9 million and $0.35 per diluted share for the first quarter 2012 compared to $2.2 million or $0.34 per diluted share for the first quarter 2011. The Company’s net income and earnings per share for the first quarter 2011 included $0.2 million in acquisition costs, net of tax, associated with the Hamptons State Bank (“HSB”) merger, which closed in May 2011.
- Returns on average assets and equity were 0.88% and 11.52%, respectively.
- Net interest income increased to $11.4 million for the first quarter of 2012 compared to $9.8 million in 2011.
- Net interest margin was 3.70% for the first quarter of 2012 compared to 4.14% for the 2011 period.
- Total loans at March 31, 2012 of $643.2 million, increased $28.7 million or 5% over December 31, 2011 and increased $120.5 million or 23% over March 31, 2011.
- Total assets of $1.39 billion at March 31, 2012, increased $48.9 million or 4% compared to December 31, 2011 and increased $311.4 million or 29% compared to March 31, 2011.
- Deposits of $1.20 billion, increased $14.3 million or 1% over December 31, 2011 and increased $236.5 million or 25% compared to March 31, 2011 levels.
- Allowance for loan losses was 1.76% as of March 31, 2012 compared to 1.77% at December 31, 2011 and 1.72% at March 31, 2011.
- Tier 1 Capital increased $40.0 million or 49.1% to $121.7 million as of March 31, 2012, compared to March 31, 2011.
- A cash dividend of $0.23 per share was declared in April 2012 for the first quarter.

#### Current Environment

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by the President. The Act permanently raised the current standard maximum deposit insurance amount to $250,000. Section 331(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the FDIC to change the definition of the assessment base from which assessment fees are determined. The new definition for the assessment base is the average consolidated total assets of the insured depository institution less the average tangible equity of the insured depository institution. The new methodology became effective on April 1, 2011 and the Company recorded a reduction in its FDIC assessment fees of $0.4 million in 2011. The financial reform legislation, among other things, created a new Consumer Financial Protection Bureau, tightened capital standards and resulted in new 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.

Since the second half of 2007 and continuing through 2010, the financial markets experienced significant volatility resulting from the continued fallout of sub-prime lending and the global liquidity crises. A multitude of government initiatives along with eight rate cuts by the Federal Reserve totaling 500 basis points have been designed to improve liquidity for the distressed financial markets. The ultimate objective of these efforts has been to help the beleaguered consumer, and reduce the potential surge of residential mortgage loan foreclosures and stabilize the banking system. As a result the yield on loans and investment securities has declined. The squeeze between declining asset yields and more slowly declining liability pricing has impacted margins. Effective as of February 19, 2010, the Federal Reserve increased the discount rate 50 basis points to 0.75%. The Federal Reserve stated that this rate change was intended to normalize their lending facility and to step away from emergency lending to banks. From April 2010 through March 2012 the Federal Reserve decided to maintain the federal funds target rate between 0 and 25 basis points due to a continued national depressed housing market, tight credit markets and as an effort to foster employment.

Growth and service strategies have the potential to offset the tighter net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2007, the Bank has opened eight new branches. In 2007, the Bank opened three new branches located in the Village of Southampton, Cutchogue, and Wading River. In April 2009, the Bank opened a new branch in Shirley, New York, and in December 2009, the Bank opened a new full service branch facility in the Village of East Hampton. During 2010, the Bank opened three new branches; Center Moriches in May, Patchogue in September and Deer Park in October. The recent branch openings move the Bank geographically westward and demonstrate its commitment to traditional growth through branch expansion. In May 2011, the Bank acquired Hamptons State Bank which increased the Bank’s presence in an existing market with a branch located in the Village of Southampton. In July 2011, the Bank converted the former HSB customers to the Bank’s core operating system. Management spent considerable time ensuring the transition progressed smoothly for HSB’s former customers and shareholders. Management has demonstrated its ability to successfully integrate the former HSB customers and achieve expected cost savings while continuing to execute its business strategy. In September 2011, the Bank obtained OCC approval for its 21st branch in Ronkonkoma, New York. This location’s proximity to MacArthur Airport complements the Patchogue branch and extends the Bank’s reach into the Bohemia market. Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships.

2011 was another year of milestone achievements and significant change for the Company. The acquisition, organic growth and considerably higher capital demonstrate management’s ability to identify, leverage and efficiently execute on opportunities. Management foresees future opportunities to continue this positive momentum. The Bank’s customers and certain markets in which the Bank operates have been less affected than others by recent economic turmoil. However, the Bank’s customers and the Bank itself are not insulated from the general economic environment and its related impacts. Recognizing this is critical to the Company’s continued ability to execute its strategy. Management must continue to foster relationships with businesses and customers that share the same principles and philosophies for prudent and reasonable fiscal and operational management.

#### Challenges and Opportunities

The current banking environment remains challenging in many respects. The absolute level of interest rates and the potential for them to remain at or near historic lows, for an extended period, creates issues for margin management and heightened risks to the eventuality of higher rates. The omnipresent regulatory environment with its pending new regulations, rules and compliance burdens certainly contributes to uncertainty. The credit environment appears to be improving. However, there is the potential at any moment for a change depending on the impact of world and national events, or more localized issues with municipal budgets and the related fallout. Finally, competition both current and prospective and its potential to profoundly challenge the Company’s current business model may have an impact on the Company’s results. Any one of these factors could affect economic activity and the Bank’s customers’ businesses, creating a domino effect on credit quality.

The prospects of the financial services sector and the Company continue to be impacted by the final outcome of the implementation of the Dodd-Frank Act. This Act includes the repeal of Regulation Q, which prohibited the payment of interest on checking accounts, and the Durbin Amendment, which establishes fixed interchange fees and could impact future revenues and expenses. The Company is awaiting the expected new rules, regulations and related compliance and process changes and will expand its compliance resources appropriately. The Bank continues to collaborate with its primary regulator to ensure compliance with current requirements and interpretations. It is the belief of management that its strong risk management culture is a primary reason for its long term success and management views the current challenges as opportunities to expand its business and deliver the promise of successful community banking to its customers and shareholders. Management must maintain its stringent underwriting standards and diligently monitor credit concentrations and exposures as the Company grows. Management needs to prudently price all products and structure its balance sheet for the eventuality of higher rates. Management seeks new sources of revenue while monitoring expenditures and identifying opportunities to achieve efficiencies. Finally, management must capitalize on current competitors’ dislocations and distractions while investing in infrastructure and technology to be prepared for the evolving competitive landscape.

Corporate objectives for 2012 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. Management remains committed to branch based banking and during the second quarter of 2012, the Company anticipates opening its 21st branch, in Ronkonkoma, near MacArthur Airport, a regional transportation hub in its market place. The Company expects to roll out its new electronic banking platform in the second half of 2012. This will allow the Company to enhance the delivery of current technology, and more importantly, effectively deliver the next generation of products and services to its existing and new customer base. The ability to attract, retain, train and cultivate employees at all levels of the Company

36 remains significant to meeting corporate 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. 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.

Management is proud to again be ranked by SNL as one of the top 100 banks in the country in terms of financial performance. The Bank is ranked 2nd in New York State by SNL in terms of financial performance and is the only bank in the State to be ranked in the top 100 banks in the country for the second consecutive year.

### 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 collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

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

37

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2012, 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.

#### Acquired Loans

Loans that were acquired from the acquisition of Hamptons State Bank on May 27, 2011 are recorded at fair value with no carryover of the related allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Determining fair value of the loans involves estimating the amount and timing of expected principal and interest cash flows to be collected on the loans and discounting those cash flows at a market interest rate. Some of the loans at time of acquisition showed evidence of credit deterioration since origination.

For purchased credit impaired loans, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent increases to the expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount and recognized into interest income over the remaining life of the loan using the interest method. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses.

Purchased credit impaired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.

### Net Income

Net income for the three months ended March 31, 2012 was $2.9 million and $0.35 per diluted share as compared to $2.2 million and $0.34 per diluted share for the same period in 2011. The 36.1% increase reflects growth in net interest income and non interest income partially offset by higher credit costs and increased operating expenses. Changes for the three months ended March 31, 2012 compared to March 31, 2011 include: (i) $1.6 million or 16.5% increase in net interest income as a result of growth in interest earning assets primarily related to loans; (ii) a $0.1 million or 17.9% increase in the provision for loan losses; (iii) $0.5 million or 34.3% increase in total non interest income as a result of net securities gains of $0.3 million and higher service charges and fees for other customer services of $0.2 million; and (iv) $0.8 million or 11.0% increase in total non interest expense due to (1) $0.9 million increase in salaries and employee benefits related to increased staffing levels; (2) $0.2 million of the cost of extinguishment of debt; (3) $0.1 million decrease in FDIC assessment as a result of the new calculation of the deposit insurance assessment; and (4) $0.2 million decline in acquisition costs associated with the HSB merger that was incurred during three months ended March 31, 2011. The effective income tax rate was 31.76% for the quarter ended March 31, 2012 compared to 31.0% for the same period last year.

### Analysis of Net Interest Income

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

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

38

*(In thousands)*

| Interest earning assets: | Three months ended March 31, 2012 Average Balance | Interest | Average Yield/ Cost | 2011 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1) | **$617,718** | **$9,522** | **6.20%** | $502,019 | $7,955 | 6.43% |
| Mortgage-backed securities | **297,193** | **2,019** | **2.73** | 269,668 | 2,316 | 3.48 |
| Tax exempt securities (2) | **140,285** | **1,081** | **3.10** | 110,419 | 1,108 | 4.07 |
| Taxable securities | **186,533** | **1,029** | **2.22** | 83,456 | 586 | 2.85 |
| Deposits with banks | **36,759** | **24** | **0.26** | 30,130 | 18 | 0.24 |
| Total interest earning assets | **1,278,488** | **13,675** | **4.30** | 995,692 | 11,983 | 4.88 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **21,032** |  |  | 16,244 |  |  |
| Other assets | **48,016** |  |  | 41,807 |  |  |
| Total assets | **$1,347,536** |  |  | $1,053,743 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$719,364** | **$946** | **0.53%** | $578,582 | $966 | 0.68% |
| Certificates of deposit of $100,000 or more | **137,890** | **386** | **1.13** | 89,030 | 243 | 1.11 |
| Other time deposits | **42,119** | **114** | **1.09** | 41,474 | 127 | 1.24 |
| Federal funds purchased and repurchase agreements | **16,308** | **111** | **2.74** | 17,144 | 134 | 3.17 |
| Junior Subordinated Debentures | **16,002** | **341** | **8.57** | 16,002 | 342 | 8.67 |
| Total interest bearing liabilities | **931,683** | **1,898** | **0.82** | 742,232 | 1,812 | 0.99 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **306,543** |  |  | 242,406 |  |  |
| Other liabilities | **6,661** |  |  | 4,895 |  |  |
| Total liabilities | **1,244,887** |  |  | 989,533 |  |  |
| Stockholders’ equity | **102,649** |  |  | 64,210 |  |  |
| Total liabilities and stockholders’ equity | **$1,347,536** |  |  | $1,053,743 |  |  |
| Net interest income/interest rate spread (3) |  | **11,777** | **3.48%** |  | 10,171 | 3.89% |
| Net interest earning assets/net interest margin (4) | **$346,805** |  | **3.70%** | $253,460 |  | 4.14% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **137.22%** |  |  | 134.15% |
| Less: Tax equivalent adjustment |  | **(377)** |  |  | (387) |  |
| Net interest income |  | **$11,400** |  |  | $9,784 |  |

(1) Amounts are net of deferred origination costs/ (fees) and the allowance for loan loss.

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

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

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

39

### 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 March 31, 2012 Over 2011 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: |
| Loans, net (1) | $3,357 | $(1,790) | $1,567 |
| Mortgage-backed securities | 1,203 | (1,500) | (297) |
| Tax exempt securities (2) | 1,125 | (1,152) | (27) |
| Taxable securities | 1,269 | (826) | 443 |
| Deposits with banks | 4 | 2 | 6 |
| Total interest earning assets | 6,958 | (5,266) | 1,692 |
| Interest expense on interest bearing liabilities: |  |  |  |
| Savings, NOW and money market deposits | 903 | (923) | (20) |
| Certificates of deposit of $100,000 or more | 139 | 4 | 143 |
| Other time deposits | 13 | (26) | (13) |
| Federal funds purchased and repurchase agreements | (6) | (17) | (23) |
| Junior subordinated debentures | — | (1) | (1) |
| Total interest bearing liabilities | 1,049 | (963) | 86 |
| Net interest income | $5,909 | $(4,303) | $1,606 |

(1) Amounts are net of deferred origination costs/ (fees) and the allowance for loan loss.

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

### Analysis of Net Interest Income for the Three Months ended March 31, 2012 and March 31, 2011

Net interest income was $11.4 million for the three months ended March 31, 2012 compared to $9.8 million for the same period in 2011, an increase of $1.6 million or 16.5%. Net interest margin declined to 3.70% for the quarter ended March 31, 2012, as compared to 4.14% for the quarter ended March 31, 2011 as a result of the historically low market interest rates on repricing assets and liabilities offsetting strong deposit growth and higher loan demand. The total average interest earning assets increased $282.8 million or 28.4%, yielding 4.30% and the overall funding cost was 0.62%, including demand deposits. The yield on interest earning assets decreased approximately 58 basis points which was partly offset by the cost of interest bearing liabilities, which decreased approximately 17 basis points during the first quarter of 2012 compared to 2011. The increase in average total deposits of $254.4 million primarily funded lower yielding securities, which grew $160.5 million, while average net loans increased $115.7 million from the comparable 2011 quarter.

For the three months ended March 31, 2012, average net loans grew by $115.7 million or 23.1% to $617.7 million as compared to $502.0 million for the same period in 2011, driven by growth in commercial real estate mortgage loans, commercial, financial and agricultural loans, multi-family mortgage loans, and real estate construction and land loans. The Bank remains committed to growing loans with prudent underwriting, sensible pricing and limited credit and extension risk.

For the three months ended March 31, 2012, average total securities increased by $160.5 million or 34.6% to $624.0 million as compared to $463.5 million for the three months ended March 31, 2011. There were no federal funds sold for the three month ended March 31, 2012 or 2011. The average interest earning cash increased by $6.7 million to $36.8 million for the three months ended March 31, 2012 as compared to $30.1 million for the same period in 2011.

40

Average total interest bearing liabilities were $931.7 million for the three months ended March 31, 2012 compared to $742.2 million for the same period in 2011. The Bank grew deposits as a result of opening three new branches during 2010 as well as building new relationships in existing markets and the HSB merger. The Bank continues to reduce interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates resulted in a decrease in the cost of interest bearing liabilities to 0.82% for the three months ended March 31, 2012 from 0.99% for the same period in 2011. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, an increase in short term interest rates initially results in a decrease in net interest income. Additionally, the large percentages of deposits in money market accounts reprice at short term market rates making the balance sheet more liability sensitive.

For the three months ended March 31, 2012, average total deposits increased by $254.4 million or 26.7% to $1.2 billion from $951.5 million from the for the same period in 2011. Components of this increase include an increase in average balances in savings, NOW and money market accounts of $140.8 million or 24.3% to $719.4 million for the three months ended March 31, 2012 compared to $578.6 million for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits increased $49.5 million or 37.9% to $180.0 million for 2012 as compared to $130.5 million for the same period last year. Average balances in demand deposits increased $64.1 million or 26.5% to $306.5 million for 2012 as compared to $242.4 million for the same period last year. Average public fund deposits comprised 20.3% of total average deposits during the three months ended March 31, 2012 and 22.1% of total average deposits for the same period in 2011. Average federal funds purchased and repurchase agreements decreased $0.8 million or 4.9% to $16.3 million for the three months ended March 31, 2012 as compared to $17.1 million for the same period in the prior year. For the three months ended March 31, 2012 and for the same period in 2011 there were no FHLB term advances.

Total interest income increased $1.7 million or 14.7% to $13.3 million for the three months ended March 31, 2012 from $11.6 million for the same period in 2011. Interest income on loans increased $1.5 million or 19.7% to $9.5 million for the three months ended March 31, 2012 from $8.0 million for the same period in 2011. The yield on average loans was 6.2% for 2012 as compared to 6.4% in 2011.

Interest income on investments in mortgage-backed, taxable and tax exempt securities increased $0.1 million to $3.7 million for the three months ended March 31, 2012 compared to $3.6 million for the same period in 2011. Interest income on securities included net amortization of premium of $1.0 million in the 2012 compared to net amortization of premium of $0.6 million for the same period in 2011. The tax adjusted average yield on total securities was 2.7% for 2012 as compared to 3.5% in 2011.

Interest expense increased $0.1 million to $1.9 million for the three months ended March 31, 2012 compared to $1.8 million for the same period in 2011. The interest expense in 2012 and 2011 reflects $0.3 million of interest paid related to $16.0 million of junior subordinated debentures which was partly offset by a reduction in interest rates on deposit products through prudent management of deposit pricing.

### Provision and Allowance for Loan Losses

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

Loans of approximately $56.9 million or 8.8% of total loans at March 31, 2012 were categorized as classified loans compared to $57.7 million or 9.4% at December 31, 2011 and $44.3 million or 8.5% at March 31, 2011. Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified 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 2012 and 2011 levels of classified loans reflects the growth of the portfolio, the current economic environment, as well as management’s decision during 2010 to enhance the asset and credit quality review process of the loan portfolio. This process includes the early identification of potential problem loans, a more stringent assessment of potential credit weaknesses and expanding the scope and depth of individual credit reviews. Additionally, higher classified loans as of March 31, 2012 and December 31, 2011 include acquired classified loans from the HSB merger.

At March 31, 2012, approximately $35.7 million of these loans were commercial real estate (“CRE”) loans which were well secured with real estate as collateral. Of the $35.7 million of CRE loans, $34.8 million were current and $.9 million were past due. In addition, all but $2.1 million of the CRE loans have personal guarantees. At March 31, 2012, approximately $4.7 million of classified loans

41 were residential real estate loans with $1.7 million current and $3.0 million past due. Commercial, financial, and agricultural loans represented $11.7 million of classified loans and $11.1 million was current and $0.6 million was past due. Approximately $4.6 million of classified loans represented real estate construction and land loans and $4.3 million was current and $0.3 million was past due. All real estate construction and land loans are well secured with collateral. The remaining $0.3 million in classified loans are consumer loans that are unsecured and demonstrate sufficient cash flow to pay the loans. Of the $0.3 million of consumer loans, $11,000 were past due with the remaining loans current. Due to the structure and nature of the credits, we do not expect to sustain a material loss on these relationships.

CRE loans, including multi-family loans, represented $326.8 million or 50.8% of the total loan portfolio at March 31, 2012 compared to $305.3 million or 49.9% at December 31, 2011 and $251.0 million or 48.1% at March 31, 2011. The Bank’s underwriting standards for CRE loans requires an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, the Bank’s underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios less than or equal to 75%. The Bank considers charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on commercial real estate values when evaluating the appropriate level of the allowance for loan losses. Real estate values in our geographic markets increased significantly from 2000 through 2007. Commencing in 2008, following the financial crisis and significant downturn in the economy, real estate values began to decline. This decline continued into 2009 and appears to have stabilized in 2010. The estimated decline in residential and commercial real estate values range from 15-20% from the 2007 levels, depending on the nature and location of the real estate.

As of March 31, 2012 and December 31, 2011, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $8.7 million and $9.0 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. 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. These methods of fair value measurement for impaired loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

Impaired loans on nonaccrual decreased $0.8 million to $3.3 million or 0.52% of total loans at March 31, 2012 from $4.1 million or 0.67% of total loans at December 31, 2011. Approximately $1.3 million of the nonaccrual loans at March 31, 2012 and $2.0 million at December 31, 2011, represent troubled debt restructured loans. As of March 31, 2012, one of the borrowers with loans totaling $0.2 million are complying with the modified terms of the loans and are currently making payments. Another borrower with loans totaling $1.1 million is past due but is making payments. The decrease in nonaccrual troubled debt restructured loans at March 31, 2012 was due to one loan totaling $0.3 million where the borrower has made six months of consecutive payments in line with the restructured terms and is now a performing trouble debt restructure, and one loan totaling $0.2 million was charged off during the quarter. Total nonaccrual troubled debt restructured loans are secured with collateral that has an appraised value of $1.2 million. Approximately $2.0 million of the nonaccrual loans at December 31, 2011 represented troubled debt restructured loans where the borrowers were complying with the modified terms of the loans and were currently making payments. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

In addition, the Company has nine borrowers with performing TDR loans of $5.4 million at March 31, 2012 that are current and secured with collateral that has an appraised value of approximately $15.1 million. At December 31, 2011, the Company had four borrowers with TDR loans of $4.9 million that was current and secured with collateral that had an appraised value of approximately $11.5 million as well as personal guarantees. 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 these debtors.

The Bank had no foreclosed real estate at March 31, 2012, December 31, 2011 and March 31, 2011, respectively.

42

The following table sets forth impaired loans by loan type:

*(In thousands)*

| Nonaccrual Loans: | March 31, 2012 | December 31, 2011 |
| --- | ---: | ---: |
| Commercial real estate mortgage loans | **$449** | $449 |
| Multi-family mortgage loans | **—** | — |
| Residential real estate mortgage loans | **1,040** | 1,156 |
| Commercial, financial and agricultural loans | **253** | 260 |
| Real estate construction and land loans | **250** | 250 |
| Installment/consumer loans | **—** | — |
| Total | **1,992** | 2,115 |
| Restructured Loans - Nonaccrual: |  |  |
| Commercial real estate mortgage loans | **—** | — |
| Multi—family mortgage loans | **—** | — |
| Residential real estate mortgage loans | **1,131** | 1,786 |
| Commercial, financial and agricultural loans | **209** | 218 |
| Real estate construction and land loans | **—** | — |
| Installment/consumer loans | **—** | — |
| Total | **1,340** | 2,004 |
| Restructured Loans - Performing: |  |  |
| Commercial real estate mortgage loans | **4,793** | 4,630 |
| Multi-family mortgage loans | **—** | — |
| Residential real estate mortgage loans | **342** | — |
| Commercial, financial and agricultural loans | **272** | 274 |
| Real estate construction and land loans | **—** | — |
| Installment/consumer loans | **—** | — |
| Total | **5,407** | 4,904 |
| Total Impaired Loans | **$8,739** | $9,023 |

Restructured loans totaled $6.7 million and $6.9 million as of March 31, 2012 and December 31, 2011, respectively.

Net charge-offs were $0.3 million for the quarter ended March 31, 2012 compared to $1.6 for the year ended December 31, 2011 and $0.2 million for the quarter ended March 31, 2011. The ratio of allowance for loan losses to nonaccrual loans was 335%, 260% and 121%, at March 31, 2012, December 31, 2011, and March 31, 2011, respectively.

Based on our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, a provision for loan losses of $0.8 million was recorded during the three months ended March 31, 2012 compared to a provision for loan loss of $0.7 million that was recorded during the same period in 2011. The allowance for loan losses increased to $11.3 million at March 31, 2012 as compared to $10.8 million at December 31, 2011 and $9.0 million at March 31, 2011. As a percentage of total loans, the allowance was 1.76% at March 31, 2012 compared to 1.77% at December 31, 2011 and 1.72% at March 31, 2011. In accordance with current accounting guidance, the acquired HSB loans are recorded at fair value, effectively netting estimated future losses against the loan balances. The allowance as a percentage of the Bank’s originated loans was 1.85% at March 31, 2012. Management continues to carefully monitor the loan portfolio as well as real estate trends in Suffolk County and eastern Long Island. 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.

43

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

*(Dollars in thousands)*

|  | For the Three Months Ended March 31, 2012 | For the Year Ended December 31, 2011 |
| --- | ---: | ---: |
| Allowance for loan losses balance at beginning of period | **$10,837** | $8,497 |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **—** | — |
| Multi-family mortgage loans | **—** | — |
| Residential real estate mortgage loans | **300** | 258 |
| Commercial, financial and agricultural loans | **75** | 372 |
| Installment/consumer loans | **5** | 187 |
| Real estate construction and land loans | **—** | 864 |
| Total | **380** | 1,681 |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **—** | — |
| Multi-family mortgage loans | **—** | — |
| Residential real estate mortgage loans | **2** | 6 |
| Commercial, financial and agricultural loans | **29** | 96 |
| Installment/consumer loans | **3** | 19 |
| Real estate construction and land loans | **—** | — |
| Total | **34** | 121 |
| Net charge-offs | **(346)** | (1,560) |
| Provision for loan losses charged to operations | **825** | 3,900 |
| Balance at end of period | **$11,316** | $10,837 |
| Ratio of annualized net charge-offs during the period to average loans outstanding | **(0.06)%** | (0.28)% |

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

*(Dollars in thousands)*

|  | March 31, 2012 Amount | Percentage of Loans to Total Loans | December 31, 2011 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$3,422** | **44.3%** | $3,530 | 46.4% |
| Multi-family mortgage loans | **750** | **6.6** | 395 | 3.5 |
| Residential real estate mortgage loans | **2,288** | **22.1** | 2,280 | 23.1 |
| Commercial, financial and agricultural loans | **3,181** | **19.0** | 2,895 | 19.0 |
| Real estate construction and land loans | **1,435** | **6.6** | 1,465 | 6.6 |
| Installment/consumer loans | **240** | **1.4** | 272 | 1.4 |
| Total | **$11,316** | **100.0%** | $10,837 | 100.0% |

### Non Interest Income

Total non interest income increased $0.5 million or 34.3% to $2.0 million for the three months ended March 31, 2012 compared to $1.5 million for the same period in 2011. The increase was primarily the result of a $0.2 million increase in service charges on deposit accounts and fees for other customer services related to higher electronic banking and investment services income. As of March 31, 2012 the company recognized gains of $0.3 million as a result of $3.1 million in securities sold with proceeds used to prepay higher rate borrowings including $0.2 million in costs associated with the extinguishment of debt. Title fee income related to Bridge Abstract remained the same at $0.2 million for the three months ended March 31, 2012 as compared to the three months ending March 31, 2011.

44

### Non Interest Expense

Total non interest expense increased $0.8 million or 11.0% to $8.2 million during the three months ended March 31, 2012 compared to $7.4 million over the same period in 2011. Salaries and employees benefits increased $0.9 million or 22.4% to $5.1 million for the three months ended March 31, 2012 from $4.2 million for the same period in 2011. The increase reflects additional positions to support the Company’s expanding infrastructure and larger loan portfolio. As of March 31, 2012 the Company incurred $0.2 million in cost of extinguishment of debt due to the prepayment of a $5.0 million repurchase agreement. Other operating expenses increased $0.1 million to $1.7 million as of March 31, 2012 as compared to $1.6 million for the same period last year. Net occupancy expense remained the same at $0.8 million at March 31, 2012 and March 31, 2011. Furniture and fixture expense remained the same at $0.3 million for both periods ending March 31, 2012 and March 31, 2011. FDIC assessments decreased $0.1 million or 44.2% to $0.2 million for the three months ended March 31, 2012 compared to $0.3 million for the same period last year. Non interest expense for the three months ended March 31, 2011, also included acquisition costs of $0.2 million in connection with the HSB merger.

### Income Taxes

The provision for income taxes increased $0.4 million or 41.0% to $1.4 million for the three months ended March 31, 2012 compared to $1.0 million for the three months ended March 31, 2011 due to higher pretax income. The effective tax rate for the three months ended March 31, 2012 increased to 31.8% from 31.0% for the same period last year. The increase in the effective rate was a result of a lower percentage of interest income from tax exempt securities.

### Financial Condition

Total assets grew to $1.386 billion, a 29.0% increase over the March 31, 2011 level of $1.075 billion and 3.7% over the December 31, 2011 level of $1.337 billion with all growth funded by deposits, borrowings and capital. This increase reflects strong organic growth in new and existing markets and to a lesser extent the impact of the HSB acquisition, in May 2011, which added total assets on a fair value basis of $68.9 million, with loans of $38.9 million and deposits of $56.9 million.

Cash and due from banks decreased $7.5 million and interest earning deposits with banks decreased $48.0 million compared to December 31, 2011 as management invested excess capital and liquidity and continues to evaluate prudent strategies to deploy these funds to maximize returns while managing interest rate risk. Total securities increased $74.7 million or 12.2% to $685.3 million and net loans increased $30.6 million or 5.1% to $631.9 million compared to December 31, 2011 levels. The ability to grow the investment and loan portfolios, while minimizing interest rate risk sensitivity and maintaining credit quality, remains a strong focus of management. Total deposits grew $14.3 million to $1.202 billion at March 31, 2012 compared to $1.188 billion at December 31, 2011. Demand deposits decreased $3.0 million to $318.5 million as of March 31, 2012 compared to $321.5 million at December 31, 2011. Savings, NOW and money market deposits increased $22.3 million to $706.2 million at March 31, 2012 from $683.9 million at December 31, 2011. Certificates of deposit of $100,000 or more decreased $5.1 million to $135.5 million at March 31, 2012, from $140.6 million at December 31, 2011. Other time deposits remained at $42.2 million for both periods ending March 31, 2012 and December 31, 2011. Federal funds purchased and Federal Home Loan Bank overnight borrowings were $36.0 million as of March 31, 2012. There were no Federal funds purchased and Federal Home Loan Bank overnight borrowings as of December 31, 2011. Repurchase agreements decreased $5.4 million to $11.5 million at March 31, 2012 compared to $16.9 million as of December 31, 2011 predominately due to the prepayment of a $5.0 million Repurchase agreement in February 2012. Junior subordinated debenture remained at $16.0 million as of March 31, 2012 compared to December 31, 2011. Other liabilities and accrued expenses increased $1.0 million to $10.1 million as of March 31, 2012 from $9.1 million as of December 31, 2011 due to securities purchased in March 2012 which settled in April 2012 and increases in accrued and deferred taxes. Stockholders’ equity was $110.0 million at March 31, 2012, an increase of $3.0 million or 2.8% from December 31, 2011, reflecting the proceeds from the issuance of shares of common stock under the Dividend Reinvestment Plan of $2.1 million, net income of $2.9 million, and $0.3 million related to stock based compensation plans, partially offset by $1.9 million in declared cash dividends and a decrease in the net unrealized gains in securities of $0.4 million. In April 2012, the Company declared a quarterly dividend of $0.23 per share and continues its long term trend of uninterrupted dividends.

### 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 Company’s principal sources of liquidity included cash and cash equivalents of $12.6 million as of March 31, 2012, and dividends from the Bank. Cash available for distribution of dividends to shareholders of the Company is primarily derived from

45 dividends paid by the Bank to the Company. For the three months ended March 31, 2012, the Bank did not pay a cash dividend 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. At March 31, 2012, the Bank had $28.7 million of retained net income available for dividends to the Company. 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.

The Bank’s most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent upon the Bank’s operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the Federal Home Loan Bank and Federal Reserve Bank, growth in core deposits and sources of wholesale funding such as brokered certificates of deposit. 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 full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

The Bank’s Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. At March 31, 2012, the Bank had aggregate lines of credit of $227.0 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $257.0 million is available on an unsecured basis. The Bank also has the ability, as a member of the Federal Home Loan Bank (“FHLB”) system, to borrow against unencumbered residential and commercial mortgages owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As of March 31, 2012, the Bank had $36.0 million in overnight borrowings. As of December 31, 2011, the Bank did not have any overnight borrowings outstanding under these lines. As of March 31, 2012, the Bank had $10.0 million of securities sold under agreements to repurchase outstanding with brokers and $1.5 million outstanding with customers. The Bank had $15.0 million of securities sold under agreements to repurchase outstanding as of December 31, 2011 with brokers and $1.9 million outstanding with customers. In addition, the Bank has an approved broker relationship for the purpose of issuing brokered certificates of deposit. As of March 31, 2012 and December 31, 2011, the Bank had no brokered certificates of deposits.

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 $3.9 million at the Federal Reserve as of March 31, 2012, $39.9 million as of March 31, 2011 and $52.6 million as of December 31, 2011. The Bank did not have overnight federal funds sold as of March 31, 2012, March 31, 2011 or December 31, 2011.

### Capital Resources

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes as of March 31, 2012, the Company and the Bank met all capital adequacy requirements. Since 2009, the Company has actively managed its capital position in response to its growth. During this period, the Company has raised capital through the following initiatives:

- In April 2009, the Company implemented 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

46 the twelve months ended December 31, 2011 and 2010, was $4.6 million and $1.4 million, respectively. Since the inception of the DRP Plan in April 2009 through March 31, 2012, the Company has issued 418,237 shares of common stock and raised $8.4 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 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 TPS have a liquidation amount of $1,000 per security and the TPS shares are convertible into our common stock, at an effective conversion price of $31 per share. The TPS mature in 30 years but are callable by the Company at par any time after September 30, 2014. The Company issued $16.0 million of Junior Subordinated Debentures (the “Debentures”) to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability. The Debentures bear interest at a fixed rate equal to 8.50% and mature on December 31, 2039. Consistent with regulatory requirements, the interest payments may be deferred for up to 5 years, and are cumulative. The Debentures have the same prepayment provisions as the TPS. The Debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
- On May 27, 2011, the Company issued 273,479 shares of common stock, increasing capital by $5.8 million, in connection with the acquisition of Hamptons State Bank.
- In November 2011, the Company filed a prospectus supplement under which it may from time to time sell up to $10.0 million of its common stock pursuant to an at-the-market equity offering program. During 2011 the Company issued 30,220 shares of common stock and raised $0.6 million in capital under this program.
- On December 20, 2011, the Company raised $24.1 million in capital from the sale of 1,377,000 shares of common stock to selected institutional and other private investors in a registered direct offering.

Management believes that the current capital levels along with future retained earnings will allow the Bank to maintain a position exceeding required capital levels and which is sufficient to support Company growth. Additionally, the Company has the ability to issue additional common stock and/or preferred stock should the need arise.

At March 31, 2012 and December 31, 2011, 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 March 31, | 2012 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | --- | --- |
| **Total Capital (to risk weighted assets)** | **$132,235** | **15.7%** | **$67,252** | **8.0%** | **n/a** | **n/a** |
| **Tier 1 Capital (to risk weighted assets)** | **121,717** | **14.5%** | **33,626** | **4.0%** | **n/a** | **n/a** |
| **Tier 1 Capital (to average assets)** | **121,717** | **9.1%** | **53,774** | **4.0%** | **n/a** | **n/a** |

*(Dollars in thousands)*

| As of December 31, | 2011 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | --- | --- |
| Total Capital (to risk weighted assets) | $128,226 | 16.2% | $63,228 | 8.0% | n/a | n/a |
| Tier 1 Capital (to risk weighted assets) | 118,334 | 15.0% | 31,614 | 4.0% | n/a | n/a |
| Tier 1 Capital (to average assets) | 118,334 | 9.3% | 51,010 | 4.0% | n/a | n/a |

47

*(Dollars in thousands)*

| Bridgehampton National Bank As of March 31, | 2012 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Total Capital (to risk weighted assets)** | **$119,569** | **14.2%** | **$67,235** | **8.0%** | **$84,044** | **10.0%** |
| **Tier 1 Capital (to risk weighted assets)** | **109,053** | **13.0%** | **33,618** | **4.0%** | **50,426** | **6.0%** |
| **Tier 1 Capital (to average assets)** | **109,053** | **8.1%** | **53,765** | **4.0%** | **67,206** | **5.0%** |

*(Dollars in thousands)*

| As of December 31, | 2011 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total Capital (to risk weighted assets) | $115,383 | 14.6% | $63,213 | 8.0% | $79,016 | 10.0% |
| Tier 1 Capital (to risk weighted assets) | 105,494 | 13.4% | 31,616 | 4.0% | 47,410 | 6.0% |
| Tier 1 Capital (to average assets) | 105,494 | 8.3% | 51,001 | 4.0% | 63,751 | 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 the Company’s 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

Refer to Note 12. “Recent Accounting Pronouncements”, of the Notes to the Consolidated Financial Statements for details related to recent regulatory and accounting developments.

## Market risk

As filed, 6,320 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

48 model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.

At March 31, 2012, $637.3 million or 92.7% of the Company’s securities had fixed interest rates. Changes in interest rates affect the value of the Company’s interest earning assets and in particular its securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. Increases in interest rates could result in decreases in the market value of interest earning assets, which could adversely affect the Company’s stockholders’ equity and its results of operations if sold. The Company is also subject to reinvestment risk associated with changes in interest rates. Changes in market interest rates could also affect the type (fixed-rate or adjustable-rate) and the amount of loans originated by the Company and the average life of loans and securities, which can impact the yields earned on the Company’s loans and securities. Changes in interest rates may affect the average life of loans and mortgage related securities. In periods of decreasing interest rates, the average life of loans and securities held by the Company may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets. Under these circumstances the Company is subject to reinvestment risk to the extent that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and make it more difficult for borrowers to repay adjustable rate loans.

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

The following reflects the Company’s net interest income sensitivity analysis at March 31, 2012:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | March 31, 2012 Potential Change in Net Interest Income $ Change | % Change | December 31, 2011 Potential Change in Net Interest Income $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | **$(2,855)** | **(6.02)%** | $(1,968) | (4.32)% |
| 100 | **$(1,252)** | **(2.64)%** | $(926) | (2.03)% |
| Static | **—** | **—** | **—** | — |
| (100) | **$254** | **0.54%** | $(16) | (0.04)% |

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 March 31, 2012. 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

49 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, 169 characters.

There have been no material changes to the factors disclosed in Item 1A., Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Filed May 9, 2012.
Source: SEC EDGAR, the filing index for accession 0001104659-12-035294. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.