# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2013

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2013-05-09
- Accepted by EDGAR: May 9, 2013, 20:56 ET
- Period: 2013-03-31
- Accession: 0001104659-13-039646
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000110465913039646/a13-8558_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000110465913039646/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2013-01-01 to 2013-03-31 | $1.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-01-01 to 2013-03-31 | $1.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-01-01 to 2013-03-31 | $3.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.35 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.35 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-01-01 to 2013-03-31 | 8,747,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2013-01-01 to 2013-03-31 | $4.0m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2013-01-01 to 2013-03-31 | $1.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2013-03-31 | $25.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2013-03-31 | $1.58bn | us-gaap:Assets |
| Total liabilities | at 2013-03-31 | $1.46bn | us-gaap:Liabilities |
| Shareholders' equity | at 2013-03-31 | $121.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,101 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, involve risk and uncertainties, and 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; 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 and factors set forth under Item 1A., Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2012, 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. These reclassifications did not have an impact on net income or total stockholders’ equity.

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

The Bank operates twenty two 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) multi-family loans; (3) home equity loans; (4) construction loans; (5) residential mortgage loans; (6) secured and unsecured commercial and consumer loans; (7) FHLB, FNMA, GNMA and FHLMC and non agency mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8) New York State and local municipal obligations; and (9) 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 and mobile 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.

#### Quarterly Highlights

- Net income of $3.1 million and $0.35 per diluted share for the first quarter 2013 compared to $2.9 million or $0.35 per diluted share for the first quarter of 2012.
- Returns on average assets and equity were 0.80% and 10.71%, respectively.
- Net interest income increased to $11.9 million for the first quarter of 2013 compared to $11.4 million in 2012.
- Net interest margin was 3.29% for the first quarter of 2013 compared to 3.70% for the 2012 period.
- Loans held for investments at March 31, 2013 of $862.1 million increased $63.7 million or 8.0% over December 31, 2012.
- Total assets of $1.58 billion at March 31, 2013, decreased $48.1 million or 3.0% compared to December 31, 2012.
- Deposits of $1.37 billion at March 31, 2013, decreased $35.1 million or 2.5% over December 31, 2012.
- Allowance for loan losses was 1.73% of total loans at March 31, 2013 compared to 1.81% at December 31, 2012.
- Tier 1 Capital increased $3.3 million or 2.5% to $136.2 million at March 31, 2013, compared to December 31, 2012.
- A cash dividend of $0.23 per share was declared in April 2013 for the first quarter.

#### Current Environment

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank 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 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 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.

On June 12, 2012, the OCC, the Federal Reserve and the FDIC issued proposed rules that would revise capital calculations and requirements. More specifically, the agencies are proposing to revise the risk based and leverage capital requirements consistent with the Basel Committee on Banking Supervision (“Basel III”), implement a new common equity Tier 1 minimum capital requirement, increase the minimum Tier 1 capital requirement, implement a new supplementary leverage ratio, apply limits on capital distributions and certain discretionary incentive payments if the Bank does not hold a specified buffer of common equity Tier 1 capital in addition to the minimum risk based capital requirements, revise the advanced approaches risk based capital rules consistent with Basel III and revise the calculation of risk weighted assets to enhance risk sensitivity.

Since April 2010 the Federal Reserve has maintained 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. These actions have resulted in a prolonged low interest rate environment reducing yields on interest earning assets and compressing the Company’s net interest margin. The FOMC anticipates maintaining federal funds target rate at least through mid-2015 in order to support economic and job growth.

Growth and service strategies have the potential to offset the compression on net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2008, the Bank has opened eight new branches, including the most recent branch opening in March 2013 in Rocky Point, New York. 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 HSB which increased the Bank’s presence in an existing market with a branch located in the Village of Southampton. After careful consideration, management decided to close its existing branch on County Road 39 in Southampton, New

York, effective in April 2013. Management has demonstrated its ability to successfully integrate the former HSB customers and achieve expected cost savings while continuing to execute its business strategy. 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.

#### Challenges and Opportunities

Despite fiscal and monetary policy initiatives implemented to combat the recession, the Company continues operating in an unsettled economic environment. Five years after the financial crisis, the Banking environment remains uncertain with the fallout from both regulatory activity and the economic impact of decisions made during and subsequent to the crisis. The costs, in terms of compliance and greater capitalization, continue impacting shareholders expectations and returns.

While recent news on employment appears positive, issues still linger regarding the recovery’s strength and sustainability. Job creation remains a primary focus of the government, and the Federal Reserve Board’s (the “FRB”) recent announcements regarding continued quantitative easing is an attempt, through monetary policy, to increase economic activity and create jobs. Locally, the economy appears stronger than other parts of New York and the nation. The credit environment appears to be stabilizing and our Company and many of our customers avoided significant damage from the effects of Hurricane Sandy. However, the continued confidence of consumers and businesses remains critical to future economic activity.

The FRB’s activities have heightened the challenges for the banking industry. Lower rates, while beneficial for certain segments of the economy, pose issues for others. Customers who rely on their savings to provide income have been impacted, and industry wide banks are seeing the returns on their loans and investments decline. The eventuality of rising rates is one of the industry’s greatest challenges and threats, creating margin pressures and ultimately impacting credit, as businesses adjust and manage with potentially higher borrowing costs. These circumstances warrant proactive management to mitigate interest rate and credit risk and maintain overall profitability. During the twelve months ended December 31, 2012,and the three months ended March 31, 2013, the Company repositioned its balance sheet, as the continuing low rate environment presented opportunities to exit certain positions in the bond portfolio. A portion of the sales proceeds were used to repay borrowings with the balance available to fund future loan growth. Management believes this strategy was appropriate and prudent given current market indicators. Management is cautious managing the types of loans it originates and investment it makes, while remaining prepared to deal with the eventuality of higher rates. Additionally, although asset quality measures remain strong, management continues to prudently assess its reserves in light of continued weakness in the overall economy.

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. The Company expects new rules, regulations and related compliance and process changes and will increase its compliance resources appropriately. The proposed changes to calculating capital under Basel III may increase the complexity and level of capital requirements. 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.

The key to delivering on the Company’s mission is combining its expanding branch network, improving technology, and experienced professionals with the critical element of local decision making. The successful expansion of the franchise’s geographic reach continues to deliver the desired results: increasing core deposits and loans, and generating higher levels of revenue and income.

Corporate objectives for 2013 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 believes there remain opportunities to grow its franchise and continued investments to generate core funding, quality loans and new sources of revenue, remain keys to continue creating long term shareholder value. Management remains committed to branch based banking and in March 2013, the Company opened a new branch in Rocky Point, New York. The Bank also received regulatory approval to open two additional branches in Shelter Island, New York and Bay Shore, New York. The Company expects to open the Shelter Island location during the first half of 2013 and the Bay Shore location in the second half of 2013. The Company began to pilot its new electronic banking platform in the first quarter of 2013. 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 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.

### 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 loan analyses are periodically performed on specific loans considered impaired. For collateral dependent impaired loans, appraisals are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Credit Administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources, such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of collateral that has been sold, based on these independent sources, as well as recent appraisals associated with current loan origination activity, to the most recent appraised value to determine if additional adjustments should be made to the appraisal value to arrive at fair value. Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. 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 and trends in current values, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

The Credit Risk Committee is comprised of members of both management and the Board of Directors. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Committee, based on its risk assessment of the entire portfolio. Based on the Credit Risk Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at March 31, 2013, 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 March 31, 2013 was $3.1 million and $0.35 per diluted share as compared to $2.9 million and $0.35 per diluted share for the same period in 2012. The 5.9% increase in net income reflects growth in net interest income, non interest income and lower credit costs, partially offset by increased operating expenses. Changes for the three months ended March 31, 2013 compared to March 31, 2012 include: (i) a $0.5 million or 4.6% increase in net interest income as a result of growth in interest earning assets primarily related to loans; (ii) a $0.3 million or 33.3% decrease in the provision for loan losses; (iii) a $0.2 million or 7.7% increase in total non interest income as a result of increased net securities gains of $0.07 million, a $0.07 million or 28.3% increase in title fee income, and higher fees for other customer services of $0.05 million; and (iv) an $0.7 million or 8.4% increase in total non interest expense due to a $0.3 million increase in salaries and employee benefits related to increased staffing levels, an increase of $0.2 million of occupancy and equipment expense, an increase of $0.09 million in marketing and advertising, partially offset by a decrease in cost of extinguishment of debt of $0.2 million due to the prepayment of a $5 million repurchase agreement in February 2012. The effective income tax rate was 31.9% for the quarter ended March 31, 2013 compared to 31.8% 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 March 31, 2013 Average Balance | Interest | Average Yield/ Cost | 2012 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1) | **$810,358** | **$10,668** | **5.34%** | $617,718 | $9,522 | 6.20% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **349,293** | **1,443** | **1.68** | 297,193 | 2,019 | 2.73 |
| Taxable securities | **205,503** | **1,009** | **1.99** | 186,533 | 1,029 | 2.22 |
| Tax exempt securities (2) | **138,519** | **931** | **2.73** | 140,285 | 1,081 | 3.10 |
| Deposits with banks | **8,271** | **5** | **0.25** | 36,759 | 24 | 0.26 |
| Total interest earning assets | **1,511,944** | **14,056** | **3.77** | 1,278,488 | 13,675 | 4.30 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **23,284** |  |  | 21,032 |  |  |
| Other assets | **46,905** |  |  | 48,016 |  |  |
| Total assets | **$1,582,133** |  |  | $1,347,536 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$775,884** | **$884** | **0.46%** | $719,364 | $946 | 0.53% |
| Certificates of deposit of $100,000 or more | **118,246** | **329** | **1.13** | 137,890 | 386 | 1.13 |
| Other time deposits | **39,259** | **85** | **0.88** | 42,119 | 114 | 1.09 |
| Federal funds purchased and repurchase agreements | **57,455** | **124** | **0.88** | 16,308 | 111 | 2.74 |
| Federal Home Loan Bank term advances | **15,000** | **40** | **1.08** | — | — | — |
| Junior Subordinated Debentures | **16,002** | **341** | **8.64** | 16,002 | 341 | 8.57 |
| Total interest bearing liabilities | **1,021,846** | **1,803** | **0.72** | 931,683 | 1,898 | 0.82 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **436,027** |  |  | 306,543 |  |  |
| Other liabilities | **6,393** |  |  | 6,661 |  |  |
| Total liabilities | **1,464,266** |  |  | 1,244,887 |  |  |
| Stockholders’ equity | **117,867** |  |  | 102,649 |  |  |
| Total liabilities and stockholders’ equity | **$1,582,133** |  |  | $1,347,536 |  |  |
| Net interest income/interest rate spread (3) |  | **12,253** | **3.05%** |  | 11,777 | 3.48% |
| Net interest earning assets/net interest margin (4) | **$490,098** |  | **3.29%** | $346,805 |  | 3.70% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **147.96%** |  |  | 137.22% |
| Less: Tax equivalent adjustment |  | **(325)** |  |  | (377) |  |
| Net interest income |  | **$11,928** |  |  | $11,400 |  |

(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.

### 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, 2013 Over 2012 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: |
| Loans, net (1) | $8,147 | $(7,001) | $1,146 |
| Mortgage-backed securities, CMOs and other asset-backed securities | 1,774 | (2,350) | (576) |
| Taxable securities | 415 | (435) | (20) |
| Tax exempt securities (2) | (14) | (136) | (150) |
| Federal funds sold | — | — | — |
| Deposits with banks | (18) | (1) | (19) |
| Total interest earning assets | 10,304 | (9,923) | 381 |
| Interest expense on interest bearing liabilities: |  |  |  |
| Savings, NOW and money market deposits | 353 | (415) | (62) |
| Certificates of deposit of $100,000 or more | (53) | (4) | (57) |
| Other time deposits | (8) | (21) | (29) |
| Federal funds purchased and repurchase agreements | 488 | (475) | 13 |
| Federal Home Loan Bank Advances | 40 | — | 40 |
| Junior subordinated debentures | — | — | — |
| Total interest bearing liabilities | 820 | (915) | (95) |
| Net interest income | $9,484 | $(9,008) | $476 |

(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, 2013 and March 31, 2012

Net interest income was $11.9 million for the three months ended March 31, 2013 compared to $11.4 million for the same period in 2012, an increase of $0.5 million or 4.6%. Net interest margin declined to 3.29% for the quarter ended March 31, 2013, compared to 3.70% for the quarter ended March 31, 2012 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 $233.4 million or 18.3%, yielding 3.77% and the overall funding cost was 0.50%, including demand deposits. The yield on interest earning assets decreased approximately 53 basis points which was partly offset by the cost of interest bearing liabilities, which decreased approximately 10 basis points during the first quarter of 2013 compared to 2012. The increase in average total deposits of $163.5 million funded lower yielding securities, which grew $69.3 million, and average net loans increased $192.6 million from the comparable 2012 quarter.

For the three months ended March 31 2013, average net loans grew by $192.6 million or 31.2% to $810.3 million as compared to $617.7 million for the same period in 2012, driven by growth in commercial real estate mortgage loans, commercial, financial and agricultural loans, and multi-family mortgage 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, 2013, average total securities increased by $69.3 million or 11.1% to $693.3 million as compared to $624.0 million for the three months ended March 31, 2012. There were no federal funds sold for the three months ended

March 31, 2013 and 2012. The average interest earning cash decreased by $28.5 million to $8.3 million for the three months ended March 31, 2013 as compared to $36.8 million for the same period in 2012.

Average total interest bearing liabilities were $1.0 billion for the three months ended March 31, 2013 compared to $931.7 million for the same period in 2012. The Bank grew deposits as a result of opening two new branches during 2012 as well as building new relationships in existing markets. The Bank continues to reduce interest rates on deposit products through prudent management of deposit pricing. The reduction in deposit rates and the lower average balance of higher cost CDs, resulted in a decrease in the cost of interest bearing liabilities to 0.72% for the three months ended March 31, 2013 from 0.82% for the same period in 2012. 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 would initially result 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, 2013, average total deposits increased by $163.5 million or 13.6% to $1.4 billion from $1.2 billion from the same period in 2012. Components of this increase include an increase in average balances in savings, NOW and money market accounts of $56.5 million or 7.9% to $775.9 million for the three months ended March 31, 2013 compared to $719.4 million for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits decreased $22.5 million or 12.5% to $157.5 million for 2013 as compared to $180.0 million for the same period last year. Average balances in demand deposits increased $129.5 million or 42.2% to $436.0 million for 2013 as compared to $306.5 million for the same period last year. Average public fund deposits comprised 18.0% of total average deposits during the three months ended March 31, 2013 and 18.8% of total average deposits for the same period in 2012. Average federal funds purchased and repurchase agreements increased $41.1 million or 252.3% to $57.4 million for the three months ended March 31, 2013 compared to $16.3 million for the same period in the prior year. For the three months ended March 31, 2013 there was an average balance of $15.0 million in FHLB term advances, compared to a zero balance for the same period last year.

Total interest income increased $0.4 million or 3.3% to $13.7 million, net of the tax equivalent adjustment on tax exempt securities interest income, for the three months ended March 31, 2013 from $13.3 million for the same period in 2012. Interest income on loans increased $1.1 million or 12.0% to $10.7 million for the three months ended March 31, 2013 from $9.5 million for the same period in 2012. The yield on average loans was 5.34% for 2013 as compared to 6.20% in 2012.

Interest income on investments in mortgage-backed, taxable and tax exempt securities decreased $0.7 million to $3.1 million for the three months ended March 31, 2013 compared to $3.8 million for the same period in 2012. Interest income on securities included net amortization of premium of $1.5 million and a tax equivalent adjustment of $0.3 million in the 2013 compared to net amortization of premium of $1.0 million and tax equivalent adjustment of $0.4 million for the same period in 2012. The tax adjusted average yield on total securities was 1.98% for 2013 as compared to 2.66% in 2012.

Interest expense was $1.8 million for the three months ended March 31, 2013 compared to $1.9 million for the same period last year.

### 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.

Fiscal and monetary policy initiatives implemented to combat the recession, maybe showing signs towards slight economic improvement. The recovery has been tepid with a continuing overhang of foreclosed homes and a marked lack of job creation. During 2013, there was a positive change in the perception of the domestic economy with the U.S. stock markets increasing. The 10 year Treasury interest rates increased during the first quarter of 2013 as well. However, the budgetary problems that continue in Europe and other parts of the world have contributed to economic uncertainty. Locally, Suffolk county sales tax revenue has increased during the first quarter of 2013 signaling an improvement in the economy. Increased sales should benefit the Bank’s customers. Although the asset quality measures for the Bank remain strong, management continually assesses the allowance for loan losses in order to reasonably reserve against continued weakness in the overall economy.

Based on our continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio, net charge-offs, and macroeconomic factors, a provision for loan losses of $0.6 million was recorded during the three months ended March 31, 2013 compared to a provision for loan loss of $0.8 million that was recorded during the same period in 2012. Net charge-offs were $0.1 million for the quarter ended March 31, 2013 compared to $1.4 million for the year ended December 31, 2012 and $0.3 million for the quarter ended March 31, 2012. The ratio of allowance for loan losses to nonaccrual loans was 432%, 408% and 335%, at March 31, 2013, December 31, 2012, and March 31, 2012, respectively. The allowance for loan losses increased to $14.9 million at March 31, 2013 as compared to $14.4 million at December 31, 2012 and $11.3 million at March 31, 2012. As a percentage of total loans, the allowance was 1.73% at March 31, 2013 compared to 1.81% at December 31, 2012 and 1.76% at March 31, 2012. In accordance with current accounting guidance, the acquired HSB loans were recorded at fair value, effectively netting estimated future losses against the loan balances. 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.

Loans of approximately $53.3 million or 6.2% of total loans at March 31, 2013 were categorized as classified loans compared to $53.6 million or 6.7% at December 31, 2012 and $56.9 million or 8.8% at March 31, 2012. 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.

At March 31, 2013, approximately $34.2 million of classified loans were commercial real estate (“CRE”) loans which were well secured with real estate as collateral. Of the $34.2 million of CRE loans, $33.2 million were current and $1.0 million were past due. In addition, all but $2.1 million of the CRE loans have personal guarantees. At March 31, 2013, approximately $6.1 million of classified loans were residential real estate loans with $3.5 million current and $2.6 million past due. Commercial, financial, and agricultural loans represented $9.4 million of classified loans, of which $8.8 million was current and $0.6 million was past due. Approximately $3.4 million of classified loans represented real estate construction and land loans, which were all current. All real estate construction and land loans are well secured with collateral. The remaining $0.1 million in classified loans are consumer loans that are unsecured and demonstrate sufficient cash flow to pay the loans. There were no multi-family loans that were categorized as classified loans as of March 31, 2013 or December 31, 2012.

CRE loans, including multi-family loans, represented $442.7 million or 51.4% of the total loan portfolio at March 31, 2013 compared to $398.9 million or 50.0% at December 31, 2012 and $326.8 million or 50.8% at March 31, 2012. 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 stabilized in 2010. Since 2010, there appears to be an increase in residential and commercial real estate values but not back to the same levels as in 2007. The estimated decline in residential and commercial real estate values range from 10-15% from the 2007 levels, depending on the nature and location of the real estate.

As of March 31, 2013 and December 31, 2012, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $8.8 million and $8.2 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 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 decreased $0.1 million to $3.2 million or 0.37% of total loans at March 31, 2013 from $3.3 million or 0.41% of total loans at December 31, 2012. Approximately $1.0 million of the nonaccrual loans at March 31, 2013 and December 31, 2012, respectively, were troubled debt restructured loans. As of March 31, 2013, two of the borrowers with loans totaling $0.3 million are complying with the modified terms of the loans and is currently making payments. The remaining borrower with loans totaling $0.7 million is currently in default and foreclosure proceedings have been initiated. In addition, there were no charge-offs related to TDRs during the first quarter 2013. Total nonaccrual TDR loans are secured with collateral that has an appraised value of $2.7 million. Furthermore, the Bank has no commitment to lend additional funds to these debtors. Approximately $1.0 million of the nonaccrual loans at December 31, 2012 represented troubled debt restructured loans where two of the borrowers were complying with the modified terms of the loans and were currently making payments and another borrower is currently in default and foreclosure proceedings have been initiated. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

In addition, the Company had nine borrowers with performing TDR loans of $5.7 million at March 31, 2013 that are secured with collateral that has an appraised value of approximately $12.9 million. As of March 31, 2013, all loans are current and paying according to their terms. At December 31, 2013, the Company had six borrowers with TDR loans of $5.0 million that were 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 $0.3 million foreclosed real estate at March 31, 2013 and December 31, 2012 and none for March 31, 2012, respectively.

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

*(Dollars in thousands)*

|  | For the Three Months Ended March 31, 2013 | For the Year Ended December 31, 2012 |
| --- | ---: | ---: |
| Allowance for loan losses balance at beginning of period | **$14,439** | **$10,837** |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **—** | **—** |
| Multi-family mortgage loans | **—** | **—** |
| Residential real estate mortgage loans | **101** | **1,210** |
| Commercial, financial and agricultural loans | **—** | **285** |
| Real estate construction and land loans | **22** | **—** |
| Installment/consumer loans | **—** | **15** |
| Total | **123** | **1,510** |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **—** | **—** |
| Multi-family mortgage loans | **—** | **—** |
| Residential real estate mortgage loans | **2** | **7** |
| Commercial, financial and agricultural loans | **55** | **83** |
| Real estate construction and land loans | **—** | **—** |
| Installment/consumer loans | **1** | **22** |
| Total | **58** | **112** |
| Net charge-offs | **(65)** | **(1,398)** |
| Provision for loan losses charged to operations | **550** | **5,000** |
| Balance at end of period | **$14,924** | **$14,439** |
| Ratio of annualized net charge-offs during the period to average loans outstanding | **(0.01)%** | **(0.21)%** |

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

*(Dollars in thousands)*

|  | March 31, 2013 Amount | Percentage of Loans to Total Loans | December 31, 2012 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$4,643** | **42.1%** | $4,445 | 41.7% |
| Multi-family loans | **1,436** | **9.3** | 1,239 | 8.3 |
| Residential real estate mortgage loans | **2,673** | **17.0** | 2,803 | 18.0 |
| Commercial, financial & agricultural loans | **4,387** | **24.3** | 4,349 | 24.7 |
| Real estate construction and land loans | **1,598** | **6.2** | 1,375 | 6.1 |
| Installment/consumer loans | **187** | **1.1** | 228 | 1.2 |
| Total | **$14,924** | **100.0%** | $14,439 | 100.0% |

43

### Non Interest Income

Total non interest income increased $0.1 million or 7.7% to $2.1 million for the three months ended March 31, 2013 compared to $2.0 million for the same period in 2012. The increase was the result of higher net securities gains of $66,000, a $63,000 increase in title fee income related to Bridge Abstract, and a $40,000 net increase in service charges on deposit accounts and fees for other customer services related to higher electronic banking and investment services income.

### Non Interest Expense

Total non interest expense increased $0.7 million or 8.4% to $8.9 million during the three months ended March 31, 2013 compared to $8.2 million over the same period in 2012. Salaries and employees benefits increased $0.3 million or 5.5% to $5.4 million for the three months ended March 31, 2013 from $5.1 million for the same period in 2012. The increase reflects additional positions to support the Company’s expanding infrastructure, new branches and a larger loan portfolio. Occupancy and equipment expense increased $0.2 million to $1.2 million as of March 31, 2013 as compared to $1.0 million for the same period last year. Other operating expenses increased $0.1 million to $0.9 million as of March 31, 2013 as compared to $0.7 million for the same period last year. Marketing and advertising expense increased $0.09 million to $0.3 million as of March 31, 2013 compared to the same period last year. FDIC assessments increased $0.04 million or 25.6% to $0.2 million for the three months ended March 31, 2013 compared to $0.2 million for the same period last year. These increases were partly offset by a decrease in the cost of extinguishment of debt of $0.2 million due to the prepayment of a $5.0 million repurchase agreement in February 2012.

### Income Taxes

The provision for income taxes increased $0.1 million or 6.8% to $1.5 million for the three months ended March 31, 2013 compared to $1.4 million for the three months ended March 31, 2012 primarily due to higher pretax income. The effective tax rate for the three months ended March 31, 2013 increased to 31.9% from 31.8% 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 and a higher federal statutory rate.

### Financial Condition

Total assets grew to $1.58 billion, a 13.7% increase over the March 31, 2012 level of $1.39 billion and decreased 3.0% over the December 31, 2012 level of $1.63 billion. The growth from March 31, 2012 was funded by deposits, borrowings and capital. This increase reflects strong organic growth in new and existing markets. The decline in assets compared to December 31, 2012 was a result of a decrease in public funds and borrowings with a corresponding decline in the investment portfolio.

Cash and due from banks decreased $28.5 million and interest earning deposits with banks increased $2.6 million compared to December 31, 2012. Total securities decreased $88.0 million or 11.9% to $651.8 million and net loans increased $63.2 million or 8.1% to $847.2 million compared to December 31, 2012 levels. The ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality, remains a strong focus of management. Total deposits decreased $35.1 million to $1.374 billion at March 31, 2013 compared to $1.409 billion at December 31, 2012. Demand deposits decreased $118.6 million to $410.6 million as of March 31, 2013 compared to $529.2 million at December 31, 2012. Savings, NOW and money market deposits increased $81.5 million to $804.4 million at March 31, 2013 from $722.9 million at December 31, 2012. Certificates of deposit of $100,000 or more increased $2.1 million to $120.8 million at March 31, 2013, from $118.7 million at December 31, 2012. Other time deposits decreased $0.1 million to $38.4 million at March 31, 2013, from $38.5 million at December 31, 2012. Federal Home Loan Bank term advances were $15.0 million as of March 31, 2013 and December 31, 2012. Federal funds purchased and Federal Home Loan Bank overnight borrowings were $29.0 million as of March 31, 2013 compared to $44.5 million at December 31, 2012. Repurchase agreements increased $0.4 million to $12.8 million at March 31, 2013 compared to $12.4 million as of December 31, 2012. Junior subordinated debenture remained at $16.0 million as of March 31, 2013 compared to December 31, 2012. Other liabilities and accrued expenses decreased $0.6 million to $8.0 million as of March 31, 2013 from $8.7 million as of December 31, 2012. Stockholders’ equity was $121.4 million at March 31, 2013, an increase of $2.7 million or 2.3% from December 31, 2012, reflecting net income of $3.1 million and $0.3 million related to stock based compensation plans, partially offset by a decrease in the net unrealized gains in securities of $0.6 million. In April 2013, 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 $4.8 million as of March 31, 2013, 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. For the three months ended March 31, 2013, 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, 2013, the Bank had $28.4 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, 2013, the Bank had aggregate lines of credit of $282.5 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $262.5 million is available on an unsecured basis. As of March 31, 2013, the Bank had $29.0 million outstanding in overnight borrowings. As of December 31, 2012, the Bank had $44.5 million outstanding in overnight borrowings. 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, 2013 and December 31, 2012, the Bank did not have any overnight borrowings outstanding under these lines. As of March 31, 2013 and December 31, 2012, the Bank had $15.0 million outstanding in FHLB advances. As of March 31, 2013, the Bank had $10.0 million of securities sold under agreements to repurchase outstanding with brokers and $2.8 million outstanding with customers. The Bank had $10.0 million of securities sold under agreements to repurchase outstanding as of December 31, 2012 with brokers and $2.4 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, 2013 and December 31, 2012, 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 $4.8 million at the Federal Reserve as of March 31, 2013, $2.6 million as of December 31, 2012, and $3.9 million as of March 31, 2012. The Bank did not have overnight federal funds sold as of March 31, 2013, December 31, 2012, or March 31, 2012.

### 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, 2013, the Company and the Bank met all capital adequacy requirements.

On December 21, 2012, the Company filed a shelf registration statement on Form S-3 to register up to $75 million of securities and a prospectus and prospectus supplement, replacing the previously expired shelf registration statement on Form S-3 filed in June 2009.

The Company has the ability to issue additional common stock and/or preferred stock should the need arise.

At March 31, 2013 and December 31, 2012, actual capital levels and minimum required levels for the Company and the Bank were as follows:

### Bridge Bancorp, Inc. (Consolidated)

*(Dollars in thousands)*

| As of March 31, | 2013 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)** | **$149,552** | **14.0%** | **$85,271** | **8.0%** | **n/a** | **n/a** |
| **Tier 1 Capital (to risk weighted assets)** | **136,208** | **12.8%** | **42,635** | **4.0%** | **n/a** | **n/a** |
| **Tier 1 Capital (to average assets)** | **136,208** | **8.6%** | **63,181** | **4.0%** | **n/a** | **n/a** |

*(Dollars in thousands)*

| As of December 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) | $145,765 | 14.2% | $82,171 | 8.0% | n/a | n/a |
| Tier 1 Capital (to risk weighted assets) | 132,906 | 12.9% | 41,085 | 4.0% | n/a | n/a |
| Tier 1 Capital (to average assets) | 132,906 | 8.4% | 63,136 | 4.0% | n/a | n/a |

### Bridgehampton National Bank

*(Dollars in thousands)*

| As of March 31, | 2013 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)** | **$144,667** | **13.6%** | **$85,253** | **8.0%** | **$106,566** | **10.0%** |
| **Tier 1 Capital (to risk weighted assets)** | **131,326** | **12.3%** | **42,626** | **4.0%** | **63,939** | **6.0%** |
| **Tier 1 Capital (to average assets)** | **131,326** | **8.3%** | **63,177** | **4.0%** | **78,972** | **5.0%** |

*(Dollars in thousands)*

| As of December 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) | $140,487 | 13.7% | $82,155 | 8.0% | $102,693 | 10.0% |
| Tier 1 Capital (to risk weighted assets) | 127,630 | 12.4% | 41,077 | 4.0% | 61,616 | 6.0% |
| Tier 1 Capital (to average assets) | 127,630 | 8.1% | 63,132 | 4.0% | 78,915 | 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 14. “Recent Accounting Pronouncements”, of the Notes to the Consolidated Financial Statements for details related to recent regulatory and accounting developments.

## Market risk

As filed, 6,144 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 Board of Directors at least annually. The economic environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.

At March 31, 2013, $616.3 million or 94.1% 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 of 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, 2013:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | March 31, 2013 Potential Change in Net Interest Income $ Change | % Change |
| ---: | ---: | ---: |
| 200 | **$(1,959)** | **(3.95)%** |
| 100 | **$12** | **0.02%** |
| Static | **—** | **—** |
| (100) | **$(447)** | **(0.90)%** |

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, 881 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, 2013. 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, 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, 2012.

Filed May 9, 2013.
Source: SEC EDGAR, the filing index for accession 0001104659-13-039646. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.