Safe. Solid. Secure.
Bridge Bancorp, Inc. 2008 AnnuAl RepoRt
Safe. Solid. Secure.
Bridge Bancorp, Inc. (“the Company”), a New York
corporation (NASDAQ®: BDGE), is a one bank
holding company engaged in commercial banking
and financial services through its wholly owned
subsidiary, The Bridgehampton National Bank
(“the Bank,” “BNB”). With assets of approximately
$800 million, the Bank operates in markets
throughout eastern Long Island. Established
in 1910 by farmers and merchants, the Bank
provides a full range of products and services
to businesses, individuals and municipalities.
As a true community bank, BNB has a steadfast
commitment to enhancing the quality of life in
the markets it serves by supporting programs
and initiatives that promote local business,
protect the environment, focus on the arts and
education, assist with healthcare and social
services and reach out to youth.
The Bridgehampton National Bank provides
deposit and loan products and financial services
through its full service branch network and
electronic delivery channels. Title insurance
services are offered through the Bank’s wholly
owned subsidiary, Bridge Abstract. The Company’s
primary market area includes the South and
North Forks of eastern Long Island, extending
westward to Riverhead Town. BNB currently
operates retail branches in Bridgehampton,
Cutchogue, East Hampton, Greenport, Hampton
Bays, Mattituck, Montauk, Peconic Landing
in Greenport, Sag Harbor, Southampton,
South ampton Village, Southold, Wading River
and Westhampton Beach. In 2009, the Bank
plans to open two new branches in Shirley
and Deer Park, New York.
$800
A nationally chartered
commercial bank with
$800 million in assets
14
14 branches servicing
eastern Long Island
20
One of the top
20 best-performing banks
in the U.S.
175
175 talented employees
Financial Highlights
(in thousands, except per share data and financial ratios)
For the year ended December 31,
2008
2007
EARNINGS
Net income
Return on average equity
Return on average assets
BALANCE SHEET
Assets
Deposits
Loans
Stockholders’ equity
PER SHARE DATA
Diluted earnings per share
Cash dividends declared per common share
Book value
$ 8,750
$ 8,294
16.29%
1.24%
17.47%
1.38%
$ 839,059
$ 659,085
$ 429,683
$ 56,139
$
$
$
1.43
0.92
9.08
$ 607,424
$ 508,909
$ 375,236
$ 51,109
$
$
$
1.36
0.92
8.36
Total Assets
(at December 31, dollars in millions)
Total Deposits
Total Assets
(at December 31, in millions)
Total Deposits
(at December 31, in millions)
Net Income
(in millions)
Return on
Average Equity
Return on
Average Equity
(percentage)
Net Income
(dollars in millions)
$839.1
$659.1
$10.4
$508.9
$504.4
$9.6
$8.8
$8.2
$8.3
$469.3
$468.0
22.82%
20.15%
17.68%
17.47%
16.29%
$607.4
$573.6
$533.4
$547.2
’04
’05
’06
’07
’08
’04
’05
’06
’07
’08
’04
’05
’06
’07
’08
’04
’05
’06
’07
’08
25
20
15
10
5
0
12
10
8
6
4
2
0
Total Loans
Total Loans
(at December 31, dollars in millions)
(at December 31, dollars in millions)
Return on
Average Assets
(percent)
$429.7
1.89%
1.76%
$375.2
$326.0
$296.1
$302.3
1.49%
1.38%
1.24%
Total Deposits
(at December 31, dollars in millions)
Total Deposits
(at December 31, dollars in millions)
800
700
$659.1
Bridge Bancorp, inc. 2008 Annual Report // page 1
600
$508.9
$504.4
$469.3
$468.0
500
400
300
200
100
0
’04
’05
’06
’07
’08
’04
’05
’06
’07
’08
’04
’05
’06
’07
’08
1000
800
600
400
200
0
800
700
600
500
400
300
200
100
0
500
400
300
200
100
0
My Fellow Shareholders,
As I begin my second year at Bridge Bancorp
I want to share with you our achievements
and the successes of the past year. Our
Company surpassed several noteworthy
growth milestones: total assets of $800
million and deposits experiencing another
double digit percentage increase, and peaking
early in the fourth quarter, at over $700 mil-
lion. We also committed to approximately
$100 million in loans for new and existing
customers.These superior results reflect the
cumulative efforts of our dedicated staff,
supported by our customers and community,
many of whom are also our shareholders.
Our success was not limited to financial measures.
Our strong foundation, built over nearly 100 years, pro-
vided a solid backdrop for the smooth transition of leader-
ship from my predecessor, Tom Tobin, who has remained
active as President Emeritus. The organization, in general,
and I specifically, have benefited from his input and coun-
sel throughout the year. We also realigned our organiza-
tion to enhance our mission of providing a superior
customer experience. The Board evolved as well, with the
strong direction and thoughtful oversight of our new chair-
person, Marcia Hefter.
Our Company’s achievements did not go unnoticed
by the investor community. We were named one of only
33 “All Star” banks, out of 8,000 in the United States, by
Sandler O’Neill & Partners, a prominent investment firm
specializing in the banking industry. We were also singled
out for a “Top Performer” ranking as one of the 20 best-
performing banks in the country by Independent Banker
Magazine. In June, we were approved and began trading on
the NASDAQ Global Select Market under our symbol
“BDGE.” Acceptance of Bridge Bancorp by NASDAQ was
an important milestone in the development and future
growth of our Company and we are pleased to have satis-
fied the NASDAQ Global Select Market listing standards.
as a community bank, our focus has always been on the support of
local business, some of whom you will see in this report. We consider ourselves their
financial partners, offering not simply banking products, but a relationship built on years
of trust and service. In the current environment, maintaining and strengthening these
relationships is more critical than ever. Our success is tied to our customers, and in an
economic downturn, the knowledge our lenders have of them, their challenges and their market
niche is truly powerful.
Kevin M. O’Connor
President and Chief Executive Officer
page 2
Our staff is proud to deliver these results to our
customers and shareholders. This, coupled with the rec-
ognition of our achievements, encourages our team of
175 very dedicated and enthusiastic individuals to
continue to strive for success and build on the past
year’s accomplishments.
an UnprecedenTed LandScape
More than in any recent year, our strong performance
and future plans need to be framed in the context of the
events which unfolded over 2008, and the related long-
term effects. In addition to the impact of the economy, we
need to consider world and national events, the political
landscape, public perception and the interplay of all
of these factors, as they relate to our industry and to
our Company. Any discussion of the events of the past
twelve months has to include many descriptive terms,
beginning with unprecedented, mixing in unbelievable and end-
ing with uncertainty.
We have experienced, and continue to live through,
arguably, the most volatile economic cycle since the Great
Depression. Wall to wall media coverage on television and
radio, in print and online has heightened our awareness.
Headlines asking, “Is your money safe?” or “Is this the next
Great Depression?” have most Americans living in fear and
contemplating the very real impact on their lives, finances
and future.
There were no prognosticators who predicted the
extent of the financial tsunami which unfolded over the
past 18 months. No one expected the fall of so many titans
including: Bear Stearns, Lehman Brothers, AIG, Merrill
Lynch, Fannie Mae and Freddie Mac and effectively the
U.S. auto industry. This partial list is long and continues to
grow. Not only have household financial service firms been
lost, there is an argument that the financial services indus-
try, as it has operated in the past, is gone forever.
The fall of these financial intermediaries also coin-
cided with the elimination of many of the capital market
structures, which financed programs supporting much
of the past decade’s economic success. These were
the businesses that offered various forms of mortgages,
created to provide the illusion of affordable home owner-
ship. They also offered the easy credit used by many
consumers and businesses to fuel ill-fated consumption,
acquisition and expansion. These structures used princi-
pally non-bank borrowings to fund asset originations for
sale to the investing public. Financing products, assisted
by rating agencies, gave rise to the alphabet soup of
Total Loans by Type
(at December 31, 2008)
Average Yield of 7.05%
15%
Equity Loans
2%
Consumer Loans
15%
Commercial Loans
3%
Land Loans
4%
Construction Loans
15%
Residential Mortgages
Total Deposits by Type
(at December 31, 2008)
Average Cost of Interest Bearing Deposits of 2.13%
15%
Savings & NOW
37%
Money Markets
46%
Commercial Mortgages
20%
Certificates of Deposit
28%
Demand Deposits
Bridge Bancorp, inc. 2008 Annual Report // page 3
mortgage-backed securities and other assorted vehicles
that represent the toxic assets held by many of our nation’s
financial institutions, pension plans and insurance com-
panies. A common characteristic of this structure was,
in many cases, a separation of the originator, (loan brokers,
mortgage bankers, etc.) from the entity that ultimately
held the risk of the loan being repaid. In short, it created a
circumstance where a borrower’s ability to repay a loan
was not effectively considered before the loan was made.
Community banks defied these practices with a model
that was based on knowing their customers and expecting
them to pay back their loans.
Unfortunately, we’ve also witnessed history making
examples of individuals who betrayed public and personal
trust, including politicians shamed out of office by poor
personal choices, others who attempted to sell their offices
and finally multiple examples of fraud and Ponzi schemes.
These actions were part of the fabric of 2008, contributing
to the negative consciousness of the American public. It
is no surprise, then, that consumer and business confi-
dence are both at all time lows and the future outlook is
certainly guarded.
As a community bank, our focus has always been
on the support of local business, some of whom you will
see in this report. We consider ourselves their financial
partners, offering not simply banking products, but a
relationship built on years of trust and service. In the
current environment, maintaining and strengthening these
relationships is more critical than ever. Our success is
tied to our customers, and in an economic downturn, the
knowledge our lenders have of them, their challenges and
their market niche is truly powerful. Not only does it allow
our assistance to be preemptive, but it may also help
shield us from economic surprises. As an institution, while
we continue to stay focused on our underwriting standards
and policies, we continually let our customers know that
we stand with them.
coMMUniTY BanKing, a SUcceSSFUL ModeL
During 2008, our Company, despite operating in this
tumultuous economic environment, achieved the afore-
mentioned milestones in deposit and loan growth. We
also expanded market share, raised our visibility within
the community and most importantly, delivered solid finan-
cial results. Our net income of $8.8 million was 6% higher
than in 2007. We earned $1.43 per share, and paid out 65%,
or $.92 per share in dividends. Our returns on average
assets and equity of 1.24% and 16.29% reflected the success
At BNB there is no place for the
cookie cutter approach to banking.
From the insurance agent serving
hundreds of small businesses to
the local French bistro, the coffee
company roasting fresh beans to
the beauty salon staying current,
the law firm at a closing or the
ferry shuttling people home, BNB
sees each and every one as an
individual.
Pierre’s Restaurant
Saying you deliver great customer service is easy, but it’s the actions that
count. From our front line staff in the branches, to a dedicated lending
team, BNB customers receive gold level service every day.
page 4
of our strategies and once again placed us near the top of
our industry for performance. In fact, during 2008, only 4
in 10 banks were able to report earnings growth. We are
proud of our achievement, but this statistic exemplifies the
difficulties experienced by the banking industry in general.
Our loan portfolio remains strong, despite the
economic realities, and our asset quality reflects the
performance of conservative underwriting and prudent
application of the basic tenets of lending, including
assessing a borrower’s character, their repayment ability
and, if applicable, collateral value. These fundamentals
are critical to our Company, because unlike many other
financial intermediaries, we own and hold on our balance
sheet all loans we originate, retaining repayment and
credit risk. As a portfolio lender, we did not engage in the
speculative lending practices in vogue over the past sev-
eral years, avoiding the various forms of sub-prime and
no-doc loans responsible for many industry failures. The
strict adherence to these principles and rigorous evalua-
tion of risk has been a hallmark of this organization. Our
Board, charged with monitoring the loan approval process,
relies on an experienced lending team, headed by our
longtime Chief Lending Officer, Kevin Santacroce. Kevin
works with seasoned lending professionals, with extensive
loan experience and an average of 20 years in our markets.
They bring a wealth of local knowledge and market savvy
and work with our branch staff to deliver the high level of
personal service our customers have come to expect and
appreciate.
In 2009, we will continue to rely on the expertise of
our lenders as we monitor the impact of the larger econ-
omy on our local marketplace and customers. It appears
that few people or businesses will escape the fallout, and
it is our responsibility to work closely with our customers
to protect and preserve the value of our assets and rela-
tionships. With careful consideration of all of these fac-
tors, we have increased our reserves heading into 2009,
preparing for the possibility of an even more challenging
business climate ahead.
During 2008, James Manseau joined our organization
as head of retail banking. He brings over twenty years of
branch banking and related experience. Our measured
branch expansion strategy continued with the identifica-
tion of two new markets, Shirley and Deer Park, locations
that are a good fit for our brand of community banking.
Experienced professionals, well-known in these markets,
have already joined our team, developing business and
Company awareness. These early efforts should facilitate a
$800
A nationally chartered commercial
bank with $800 million in assets
20
One of the top 20 best-performing
banks in the U.S.
The strength of our customer relationships has fueled our success
and stability. Customers know that talking directly to top decision
makers is not special treatment, it is the norm. Our lenders live and
work in the markets they serve. They understand the challenges their
customers face and create financing programs that fit each profile.
Hampton Coffee Company
Bridge Bancorp, inc. 2008 Annual Report // page 5
successful entry into these communities. Our new branches
are expected to open in the first half of 2009. We recognize
that an ongoing investment in our branch network is
critical. Branches are the focal point in developing and
expanding full service banking relationships, providing
opportunities to add community based loans funded by
our traditional low cost deposits.
The success of our lending and retail teams is sup-
ported by the expertise of our administrative and technology
staff. This group, partnering with the customer relationship
team, works tirelessly providing products and services
to meet the growing and technologically challenging needs
of our expanding customer base. Last year’s successful
rollout of “Remote Deposit Capture” was followed by
enhancements to business banking offerings and a sophis-
ticated “Lockbox” or payment processing product. We
worked closely with existing customers to develop, enhance
and test the application. Successful implementation was
possible with the support and trust of new customers who
were willing to give their local bank an opportunity.
These partnerships within our Company and more
importantly, between Bridgehampton National Bank and
its customers are the cornerstone of our successful
community banking model. We continue, as we have done
historically, to actively engage with our communities,
enriching our relationships through support of human
services, educational, environmental and local arts orga-
nizations. Working hand in hand, with those who strive to
improve the quality of life in the communities we serve,
is part of our core values. Our involvement and ongoing
participation with these organizations becomes even more
important as the wave of economic trouble begins to
directly impact our area.
Despite the turbulence of the past year, our Company
has remained nimble, identifying opportunities and
situations to grow our business and adding experienced
and productive professionals. We have also recognized
and learned from the failure of some of our less focused
competitors. As a community bank, we must always be
willing to explore and develop opportunities to grow, with
the goal of expanding our deposit and lending franchise.
In 2008, we held a special meeting of shareholders to
authorize preferred shares to facilitate a potential invest-
ment by the U.S. Treasury under the Capital Purchase
Program (CPP). This was part of an overall process to pro-
vide us with the option to access approximately $15 mil-
lion in relatively inexpensive capital. Concurrent with the
shareholder meeting, we applied and were ultimately
approved by the U.S. Treasury to receive these funds.
Management and the Board, after careful deliberation and
Durable, long term customer
relationships are cemented
by a full menu of banking
products and services that
facilitate efficiency. From
commercial and residential
lending to electronic banking
products like Bridge Merchant
Services, Bridge Business
Connect, Bridge e-Pay and
Remote Deposit Capture,
BNB customers are ahead
of the curve.
The power of community banking comes from blending support for local business with compassion
and commitment to the quality of life in each market. BNB provides financial contributions, often
along with a commitment of time and energy to help organizations and events succeed.
page 6
thoughtful review of the relevant issues, determined it was
not in our shareholder’s best interest to participate, and
we declined the U.S. Treasury investment. In assessing the
option, we considered, among many factors, the potential
impact on shareholder dividends and government man-
dated lending requirements. This decision will ultimately
be judged with the benefit of hindsight. Our process
ensured shareholders their options were protected, and an
important capital raising opportunity was very carefully
considered and evaluated.
THe Year aHead
The full story of the current economic crisis has yet to
be written. The initial enthusiasm following the change in
power in Washington has been followed by signs of continu-
ing weakness. There have been further declines in economic
activity, employment and most importantly confidence.
This will not make the year ahead any easier, and it will
remain challenging and difficult. Financial Service firms
have lost the confidence of the American public and must
work hard rebuilding integrity and regaining their respect.
We will be subjected to additional regulation and bear a
burden of substantially higher FDIC insurance costs.
Despite the economic storm that still rages, we believe
in the strength of our Company, the energy of our people
and the vibrancy of our communities. This institution’s
foundation is cemented by strong relationships in every
segment of its business model. We remain close to our
customers and to community leaders and decision mak-
ers. We have the products, services and technology. Our
management team is aware of these challenges and is
focused and poised to lead this organization through these
unprecedented times.
Along with our entire staff, I remain dedicated to this
great Company and look forward to working with this
Board and our customers to build on its achievements. We
thank you for your support as shareholders and for the
opportunity to lead this organization into its 100th year
and beyond.
Please review the Form 10-K to learn more about the
Company and the results of operations for 2008.
Sincerely,
Kevin M. o’connor
President and Chief Executive Officer
175 talented employees
14 branches serving eastern Long Island
The Bank’s strategic focus of careful and conservative growth
based on the foundation of strong customer relationships
has not changed. It has fueled organic growth resulting in
14 branches with 2 new locations scheduled to open in 2009.
With 175 dedicated employees and a clear vision, the Bank is
poised to take on the challenges of the future.
Bridge Bancorp, inc. 2008 Annual Report // page 7
BANKINg OFFICeS
Headquarters
631.537.1000
BridgeHampton
631.537.8834
CutCHogue
631.734.5002
east Hampton
631.324.8480
greenport
631.477.0220
Hampton Bays
631.728.9041
mattituCk
631.298.0190
montauk
631.668.6400
peConiC Landing
(greenport)
631.477.8150
sag HarBor
631.725.6622
soutHampton,
County road 39
631.283.1286
soutHampton ViLLage
631.287.6504
soutHoLd
631.765.1500
Wading riVer
631.929.4250
WestHampton BeaCH
631.288.7756
www.bridgenb.com
Bridge aBstraCt LLC
2200 Montauk Highway
P.O. Box 3031
Bridgehampton, NY 11932
631.537.5750
www.bridgeabstractllc.com
INVeSTOR ReLATIONS
Exchange: NASDAQ®
Symbol: BDGE
Howard H. nolan, cpa
Senior Executive Vice President and
Corporate Secretary
2200 Montauk Highway, P.O. Box 3005
Bridgehampton, NY 11932
631.537.1000
hnolan@bridgenb.com
Shareholders seeking information about the Company may access presen-
tations, press releases and government filings through the Bank’s web
site: www.bridgenb.com.
STOCK TRANSFeR AgeNT AND RegISTRAR
Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016
800.368.5948
www.rtco.com
Shareholders that would like to make changes to the name, address or
ownership of their stock, consolidate accounts, eliminate duplicate mail-
ings, or replace lost certificates or dividend checks, should contact
Registrar and Transfer Co.
SeCURITIeS COUNSeL
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, NW, Suite 400
Washington, DC 20015-2035
NOTICe OF ANNUAL MeeTINg
The Annual Meeting of Shareholders
is scheduled for 11:00 a.m. on Friday,
April 24, 2009 in the Community Room,
Bridgehampton National Bank,
2200 Montauk Highway,
Bridgehampton, NY 11932.
Management Team
PICTUReD FROM LeFT TO RIghT
James J. Manseau
Senior Vice President, Chief Retail Banking Officer
deborah Mcgrory
Senior Vice President, Director of Human Resources
Kevin M. o’connor
President and Chief Executive Officer
Kevin L. Santacroce
Senior Vice President, Chief Lending Officer
Howard H. nolan
Senior Executive Vice President,
Chief Administrative and Financial Officer
Thomas H. Simson
Senior Vice President, Chief Information Officer
page 8
United States
Securities and Exchange Commission
Form 10-K
Bridge Bancorp, Inc. 2008 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:95)(cid:95)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File No. 000-18546
BRIDGE BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
11-2934195
(IRS Employer Identification Number)
2200 MONTAUK HIGHWAY, BRIDGEHAMPTON, NEW YORK
(Address of principal executive offices)
11932
(Zip Code)
Registrant’s telephone number, including area code: (631) 537-1000
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class
Common Stock, Par Value of $0.01 Per Share
Name of each exchange on which registered
The Nasdaq Stock Market, LLC
Securities registered under Section 12 (g) of the Exchange Act:
(Title of Class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134)(cid:3)No (cid:95)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:134)(cid:3)No (cid:95)(cid:3)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:95)(cid:3)No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) of this chapter is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:134)(cid:3)Accelerated filer (cid:95)(cid:3)Non-accelerated filer (cid:134)(cid:3)Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:134)(cid:3)No (cid:95)
The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of
the Common Stock on June 30, 2008, was $121,703,223.
The number of shares of the Registrant’s common stock outstanding on March 6, 2009 was 6,213,161.
Portions of the following documents are incorporated into the Parts of this Report on Form 10-K indicated below:
The Registrant’s definitive Proxy Statement for the 2009 Annual Meeting to be filed pursuant to Regulation 14A on or before April
30, 2009 (Part III).
TABLE OF CONTENTS
PART I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
SIGNATURES
EXHIBIT INDEX
2
7
8
8
9
9
9
11
12
28
30
56
56
56
56
56
57
57
57
57
58
59
PART I
Item 1. Business
Bridge Bancorp, Inc. (the “Registrant” or “Company”) is a registered bank holding company for The Bridgehampton National Bank
(the “Bank”). The Bank was established in 1910 as a national banking association and is headquartered in Bridgehampton, New York.
The Registrant was incorporated under the laws of the State of New York in 1988, at the direction of the Board of Directors of the
Bank for the purpose of becoming a bank holding company pursuant to a plan of reorganization; under which the former shareholders
of the Bank became the shareholders of the Company. Since commencing business in March 1989, after the reorganization, the
Registrant has functioned primarily as the holder of all of the Bank’s common stock. In May 1999, the Bank established a real estate
investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”) as an operating subsidiary. The assets transferred to BCI are
viewed by the bank regulators as part of the Bank’s assets in consolidation. The operations of the Bank also include Bridge Abstract
LLC (“Bridge Abstract”), a wholly owned subsidiary of the Bank which is a broker of title insurance services.
The Bank operates fourteen branches on eastern Long Island. Federally chartered in 1910, the Bank was founded by local farmers and
merchants. For nearly a century, the Bank has maintained its focus on building customer relationships in this market area. The mission
of the Company is to grow through the provision of exceptional service to its customers, its employees, and the community. The
Company strives to achieve excellence in financial performance and build long term shareholder value. The Bank engages in full
service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers,
businesses and local municipalities surrounding its branch offices. These deposits, together with funds generated from operations and
borrowings, are invested primarily in: (1) commercial real estate loans; (2) home equity loans; (3) construction loans; (4) residential
mortgage loans; (5) secured and unsecured commercial and consumer loans; (6) FHLB, FNMA, GNMA and FHLMC mortgage-
backed securities and collateralized mortgage obligations; (7) New York State and local municipal obligations; and (8) U.S
government sponsored entity (“U.S. GSE”) securities. The Bank also offers the CDARS program, providing up to $50,000,000 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, safe deposit boxes and individual retirement accounts.
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.
The Bank employs 175 people on a full-time and part-time basis. The Bank provides a variety of employment benefits and considers
its relationship with its employees to be positive. In addition, the Company has an equity incentive plan under which it may issue
shares of the common stock of the Company.
All phases of the Bank’s business are highly competitive. The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence. There is
also competition for banking business from competitors outside of its market areas. Most of these competitors are significantly larger
than the Bank, and therefore have greater financial and marketing resources and lending limits than those of the Bank. The fixed cost
of regulatory compliance remains high for community banks as compared to their larger competitors that are able to achieve
economies of scale. The Bank considers its major competition to be local commercial banks as well as other commercial banks with
branches in the Bank’s market area. Other competitors include mortgage brokers and financial services firms other than financial
institutions such as investment and insurance companies. Increased competition within the Bank’s market areas may limit growth and
profitability. Additionally, as the Bank’s market area expands westward, competitive pressure in new markets is expected to be strong.
The title insurance abstract subsidiary also faces competition from other title insurance brokers as well as directly from the companies
that underwrite title insurance. In New York State, title insurance is obtained on most transfers of real estate and mortgage
transactions.
The Bank’s principal market area is located on eastern Long Island. During 2007, the Bank opened three new branches. In January
2007, the Bank opened a state-of-the-art branch facility in the Village of Southampton; in February 2007, the Bank opened a new full-
service branch facility in Cutchogue; and in September 2007, the Bank opened its first full-service branch facility in the Town of
Riverhead, located in Wading River. The opening of the branch facility in Westhampton Beach in December 2005, and the branch in
Wading River in September 2007, move the Bank geographically westward and demonstrate the Bank’s commitment to traditional
growth through branch expansion.
In April 2008, the Bank received approval from the Office of the Comptroller of the Currency (“OCC”) and expects that the opening
of the new full service branch facility in the Village of East Hampton will be a fourth quarter 2009 event. In addition, in October 2008,
the Bank received approval from the OCC to open a new branch in Shirley, New York and in November 2008, the Bank received
OCC approval to open a branch in Deer Park, New York. The Bank anticipates opening these two locations during the first half of
2009.
The Bank routinely adds to its menu of products and services, continually meeting the needs of consumers and businesses. We believe
positive outcomes in the future will result from the expansion of our geographic footprint, investments in infrastructure and
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technology, such as BridgeNEXUS, our remote deposit capture product as well as the introduction of lockbox processing in the fourth
quarter of 2008, and continued focus on placing our customers first. In January 2009, the Bank launched Bridge Investment Services,
offering a full range of investment products and services through a third party broker dealer.
Eastern Long Island is semi-rural. Surrounded by water and including the Hamptons and North Fork, the region is a recreational
destination for the New York metropolitan area, and a highly regarded resort locale world-wide. While the local economy flourishes in
the summer months as a result of the influx of tourists and second homeowners, the year-round population has grown considerably in
recent years, resulting in a reduction of the seasonal fluctuations in the economy. Industries represented in the marketplace include
retail establishments; construction and trades; restaurants and bars; lodging and recreation; professional entities; real estate; health
services; passenger transportation and agricultural and related businesses. During the last decade, the Long Island wine industry has
grown with an increasing number of new wineries and vineyards locating in the region each year. The vast majority of businesses are
considered small businesses employing fewer than ten full-time employees. In recent years, more national chains have opened retail
stores within the villages on the north and south forks of the island. Major employers in the region include the municipalities, school
districts, hospitals, and financial institutions.
The Company, the Bank and its subsidiaries with the exception of the real estate investment trust, which files its own federal and state
tax return, report their income on a consolidated basis using the accrual method of accounting and are subject to federal and state
income taxation. In general, banks are subject to federal income tax in the same manner as other corporations. However, gains and
losses realized by banks from the sale of available for sale securities are generally treated as ordinary income, rather than capital gains
or losses. The Bank is subject to the New York State Franchise Tax on Banking Corporations based on certain criteria. The taxation of
net income is similar to federal taxable income subject to certain modifications.
REGULATION AND SUPERVISION
The Bridgehampton National Bank
The Bank is a national bank organized under the laws of the United States of America. The lending, investment, and other business
operations of the Bank are governed by federal law and regulations and the Bank is prohibited from engaging in any operations not
specifically authorized by such laws and regulations. The Bank is subject to extensive regulation by the Office of the Comptroller of
the Currency (“OCC”) and to a lesser extent by the Federal Deposit Insurance Corporation (“FDIC”), as its deposit insurer as well as
by the Board of Governors of the Federal Reserve System. The Bank’s deposit accounts are insured up to applicable limits by the
FDIC under its Deposit Insurance Fund (“DIF”). A summary of the primary laws and regulations that govern the operations of the
Bank are set forth below.
Loans and Investments
There are no restrictions on the type of loans a national bank can originate and/or purchase. However, OCC regulations govern the
Bank’s investment authority. Generally, a national bank is prohibited from investing in corporate equity securities for its own account.
Under OCC regulations, a national bank may invest in investment securities, which is generally defined as securities in the form of a
note, bond or debenture. The OCC classifies investment securities into five different types and, depending on its type a national bank
may have the authority to deal in and underwrite the security. The OCC has also permitted national banks to purchase certain
noninvestment grade securities that can be reclassified and underwritten as loans.
Lending Standards
The federal banking agencies adopted uniform regulations prescribing standards for extensions of credit that are secured by liens on
interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Under
these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose
of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent
underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and
documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies that have been adopted by the federal bank regulators.
Federal Deposit Insurance
The Bank is a member of the DIF, which is administered by the FDIC. Deposit accounts at the Bank are insured by the FDIC,
generally up to a maximum of $100,000 for each separately insured depositor and up to a maximum of $250,000 for self-directed
retirement accounts. However, the FDIC increased the deposit insurance available on all deposit accounts to $250,000, effective until
December 31, 2009. In addition, certain non interest-bearing transaction accounts maintained with financial institutions participating
in the FDIC’s Temporary Liquidity Guarantee Program are fully insured regardless of the dollar amount until December 31, 2009. The
Bank has opted to participate in the FDIC’s Temporary Liquidity Guarantee Program. See “Temporary Liquidity Guarantee Program”
below.
The FDIC imposes an assessment against all depository institutions for deposit insurance. This assessment is based on the risk
category of the institution and, prior to 2009, ranged from 5 to 43 basis points of the institution’s deposits. On October 7, 2008, as a
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result of decreases in the reserve ratio of the DIF, the FDIC issued a proposed rule establishing a Restoration Plan for the DIF. The
rulemaking proposed that, effective January 1, 2009, assessment rates would increase uniformly by 7 basis points for the first quarter
2009 assessment period. Effective April 1, 2009, the rulemaking proposed to alter the way in which the FDIC’s risk-based assessment
system differentiates for risk and set new deposit insurance assessment rates. Under the proposed rule, the FDIC would first establish
an institution’s initial base assessment rate. This initial base assessment rate would range, depending on the risk category of the
institution, from 10 to 45 basis points. The FDIC would then adjust the initial base assessment (higher or lower) to obtain the total
base assessment rate. The adjustment to the initial base assessment rate would be based upon an institution’s levels of unsecured debt,
secured liabilities, and brokered deposits. The total base assessment rate would range from 8 to 77.5 basis points of the institution’s
deposits. On December 22, 2008, the FDIC published a final rule raising the current deposit insurance assessment rates uniformly for
all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first quarter of 2009. However, the FDIC approved an
extension of the comment period on the parts of the proposed rulemaking that would become effective on April 1, 2009. On February
27, 2009, the FDIC issued a second final rule, to be effective April 1, 2009, to change the way that the FDIC’s assessment system
differentiates for risk and to set new assessment rates beginning with the second quarter of 2009. At the same time, the FDIC issued an
interim rule to impose an emergency special assessment of 20 basis points on all banks, payable on September 30, 2009. There is a 30
day comment period before this interim rule becomes final. The Company anticipates that the emergency special assessment will cost
approximately $1.4 million.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
In addition to the FDIC assessments, the Financing Corporation (FICO) is authorized to impose and collect, with the approval of the
Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the
FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due
to mature in 2017 through 2019. For the quarter ended December 31, 2008, the annualized FICO assessment was equal to 1.10 basis
points for each $100 in domestic deposits maintained at an institution.
Temporary Liquidity Guarantee Programs
On October 14, 2008, the FDIC announced a new program – the Temporary Liquidity Guarantee Program. This program has two
components. One guarantees newly issued senior unsecured debt of the participating organizations, up to certain limits established for
each institution, issued between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid principal and interest on an FDIC-
guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest in
accordance with the terms of the instrument. The guarantee will remain in effect until June 30, 2012. In return for the FDIC’s
guarantee, participating institutions will pay the FDIC a fee based on the amount and maturity of the debt. The Bank has opted to
participate in this component of the Temporary Liquidity Guarantee Program however, there is no guaranteed debt issued to date.
The other component of the program provides full federal deposit insurance coverage for non-interest bearing transaction deposit
accounts, regardless of dollar amount, until December 31, 2009. An annualized 10 basis point assessment on balances in non interest-
bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions that have not opted out of this component of the Temporary Liquidity Guarantee Program. The Bank
has opted to participate in this component of the Temporary Liquidity Guarantee Program.
Capitalization
Under OCC regulations, all national banks are required to comply with minimum capital requirements. For an institution determined
by the OCC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination
Council, the minimum capital leverage requirement is a ratio of Tier I capital to total assets of 3%. For all other institutions, the
minimum leverage capital ratio is not less than 4%. Tier I capital is the sum of common shareholders’ equity, non-cumulative
perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except
for certain servicing rights and credit card relationships) and certain other specified items.
The OCC regulations require national banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted
assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based
capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit
substitutes and residual interests) to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being
required for the categories perceived as representing greater risk. For example, under the OCC’s risk-weighting system, cash and
securities backed by the full faith and credit of the U.S. government are given a 0% risk weight, loans secured by one-to-four family
residential properties generally have a 50% risk weight, and commercial loans have a risk weighting of 100%.
National banks, such as the Bank, must maintain a minimum ratio of total capital to risk-weighted assets of at least 8%, of which at
least one-half must be Tier I capital. Total capital consists of Tier I capital plus Tier 2 or supplementary capital items, which include
allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital
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instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the
amount of the institution’s Tier I capital. Banks that engage in specified levels of trading activities are subject to adjustments in their
risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.
The OCC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account
the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The OCC
also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s
capital level is, or is likely to become, inadequate in light of the particular circumstances.
Safety and Soundness Standards
Each federal banking agency, including the OCC, has adopted guidelines establishing general standards relating to internal controls,
information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality,
earnings and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices
to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an
unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to
the services performed by an executive officer, employee, director, or principal shareholder.
Prompt Corrective Regulatory Action
Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to
institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
The OCC may order national banks which have insufficient capital to take corrective actions. For example, a bank which is
categorized as “undercapitalized” would be subject to growth limitations and would be required to submit a capital restoration plan,
and a holding company that controls such a bank would be required to guarantee that the bank complies with the restoration plan. A
“significantly undercapitalized” bank would be subject to additional restrictions. National banks deemed by the OCC to be “critically
undercapitalized” would be subject to the appointment of a receiver or conservator.
Dividends
Under federal law and applicable regulations, a national bank may generally declare a dividend, without approval from the OCC, in an
amount equal to its year-to-date net income plus the prior two years’ net income that is still available for dividend.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act govern transactions between a national bank and its affiliates, which includes the
Company. The Federal Reserve Board has adopted Regulation W, which comprehensively implements and interprets Sections 23A
and 23B, in part by codifying prior Federal Reserve Board interpretations under Sections 23A and 23B.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. A subsidiary
of a bank that is not also a depository institution or a “financial subsidiary” under federal law is not treated as an affiliate of the bank
for the purposes of Sections 23A and 23B; however, the OCC has the discretion to treat subsidiaries of a bank as affiliates on a case-
by-case basis. Sections 23A and 23B limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with
any one affiliate to an amount equal to 10% of such bank’s capital stock and surplus, and limit all such transactions with all affiliates
to an amount equal to 20% of such capital stock and surplus. The statutory sections also require that all such transactions be on terms
that are consistent with safe and sound banking practices. The term “covered transaction” includes the making of loans, purchase of
assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be
secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by an
association with an affiliate and any purchase of assets or services by an association from an affiliate must be on terms that are
substantially the same, or at least as favorable, to the bank as those that would be provided to a non-affiliate.
A bank’s loans to its executive officers, directors, any owner of more than 10% of its stock (each, an insider) and any of certain
entities affiliated with any such person (an insider’s related interest) are subject to the conditions and limitations imposed by Section
22(h) of the Federal Reserve Act and the FRB’s Regulation O thereunder. Under these restrictions, the aggregate amount of the loans
to any insider and the insider’s related interests may not exceed the loans-to-one-borrower limit applicable to national banks. All loans
by a bank to all insiders and insiders’ related interests in the aggregate may not exceed the bank’s unimpaired capital and unimpaired
surplus. With certain exceptions, loans to an executive officer, other than loans for the education of the officer’s children and certain
loans secured by the officer’s residence, may not exceed the greater of $25,000 or 2.5% of the bank’s unimpaired capital and
unimpaired surplus, but in no event more than $100,000. Regulation O also requires that any proposed loan to an insider or a related
interest of that insider be approved in advance by a majority of the board of directors of the bank, with any interested director not
participating in the voting, if such loan, when aggregated with any existing loans to that insider and the insider’s related interests,
would exceed either $500,000 or the greater of $25,000 or 5% of the bank’s unimpaired capital and surplus. Generally, such loans
must be made on substantially the same terms as, and follow credit underwriting procedures that are no less stringent than, those that
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are prevailing at the time for comparable transactions with other persons and must not present more than a normal risk of collectibility.
An exception is made for extensions of credit made pursuant to a benefit or compensation plan of a bank that is widely available to
employees of the bank and that does not give any preference to insiders of the bank over other employees of the bank.
Examinations and Assessments
The Bank is required to file periodic reports with and is subject to periodic examination by the OCC. Federal regulations generally
require annual on-site examinations for all depository institutions and annual audits by independent public accountants for all insured
institutions. The Bank is required to pay an annual assessment to the OCC to fund its supervision.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation consistent with its safe and
sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to
develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The
CRA requires the OCC in connection with its examination of the Bank, to assess its record of meeting the credit needs of its
community and to take that record into account in its evaluation of certain applications by the Bank. For example, the regulations
specify that a bank’s CRA performance will be considered in its expansion (e.g., branching) proposals and may be the basis for
approving, denying or conditioning the approval of an application. As of the date of its most recent regulatory examination, the Bank
was rated “satisfactory” with respect to its CRA compliance.
USA PATRIOT Act
The USA PATRIOT Act of 2001 gave the federal government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.
The USA PATRIOT Act also required the federal banking agencies to take into consideration the effectiveness of controls designed to
combat money laundering activities in determining whether to approve a merger or other acquisition application of a member
institution. Accordingly, if the Bank engages in a merger or other acquisition, our controls designed to combat money laundering
would be considered as part of the application process. The Bank has established policies, procedures and systems designed to comply
with these regulations.
Bridge Bancorp, Inc.
The Company, as a bank holding company controlling the Bank, is subject to the Bank Holding Company Act of 1956, as amended
(“BHCA”), and the rules and regulations of the Federal Reserve Board under the BHCA applicable to bank holding companies. The
Company is required to file reports with, and otherwise comply with the rules and regulations of the Federal Reserve Board.
These regulatory authorities have extensive enforcement authority over the institutions that they regulate to prohibit or correct
activities that violate law, regulation or a regulatory agreement or which are deemed to be unsafe or unsound banking practices.
Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the
termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and
institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal
of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions. Any change in laws and regulations, whether by the OCC, the FDIC, the Federal
Reserve Board or through legislation, could have a material adverse impact on the Bank and the Company and their operations and
stockholders. Additional information on regulatory requirements is set forth in Note 13 to the Consolidated Financial Statements.
The Company had nominal results of operations for 2008, 2007 and 2006 on a parent-only basis. During 2008, the Company received
approval and began trading on the NASDAQ Global Select Market under the symbol “BDGE”. Equity incentive plan grants of stock
options and stock awards are recorded directly to the holding company. The Company’s sources of funds are dependent on dividends
from the Bank, its own earnings, additional capital raised and borrowings. 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. The Bank also generates non interest income, such as fee income on deposit accounts and merchant credit and debit card
processing programs, income from its title insurance 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 abstract subsidiary, and income tax expense, further affects the Bank’s net income.
The Company files certain reports with the Securities and Exchange Commission (“SEC”) under the federal securities laws. The
Company’s operations are also subject to extensive regulation by other federal, state and local governmental authorities and it is
subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations.
Management believes that the Company is in substantial compliance, in all material respects, with applicable federal, state and local
laws, rules and regulations. Because the Company’s business is highly regulated, the laws, rules and regulations applicable to it are
subject to regular modification and change. There can be no assurance that these proposed laws, rules and regulations, or any other
laws, rules or regulations, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise
adversely affect the Company’s business, financial condition or prospects.
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OTHER INFORMATION
Through a link on the Investor Relations section of the Bank’s website of www.bridgenb.com, copies of the Company’s Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) for 15(d) of the Exchange Act, are made available, free of charge, as soon as reasonably
practicable after electronically filing such material with, or furnishing it to, the SEC. Copies of such reports and other information also
are available at no charge to any person who requests them or at www.sec.gov. Such requests may be directed to Bridge Bancorp, Inc.,
Investor Relations, 2200 Montauk Highway, PO Box 3005, Bridgehampton, NY 11932, (631) 537-1000.
Item 1A. Risk Factors
Concentration of Loan Portfolio
The Bank generally invests a significant portion of its assets in loans secured by commercial and residential real estate properties
located in eastern Long Island. A downturn in real estate values and economic conditions on eastern Long Island could have a
significant impact on the value of collateral securing the loans as well as the ability for the repayment of loans. See a further
discussion in “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition
– Loans.”
Changes in Interest Rates Could Affect Profitability
The ability to earn a profit, like most financial institutions, depends on the net interest income, which is the difference between the
interest income that the Bank earns on its interest-bearing assets, such as loans and investments, and the interest expense which we
pay on our interest-bearing liabilities, such as deposits. The Bank’s profitability depends on its ability to manage its assets and
liabilities during periods of changing market interest rates.
A sustained decrease in market interest rates could adversely affect the Bank’s earnings. When interest rates decline, borrowers tend to
refinance higher-rate, fixed-rate loans at lower rates. Under those circumstances, the Bank would not be able to reinvest those
prepayments in assets earning interest rates as high as the rates on those prepaid loans or in investment securities. In addition, the
majority of the Bank’s loans are at variable interest rates, which would adjust to lower rates.
In a period of rising interest rates, the interest income earned on the Bank’s assets may not increase as rapidly as the interest paid on
its liabilities. In an increasing interest rate environment, the Bank’s cost of funds is expected to increase more rapidly than interest
earned on its loan and investment portfolio as the primary source of funds is deposits with generally shorter maturities than those on
its loans and investments. This makes the balance sheet more liability sensitive in the short term.
Geographic Location and Competition
The Bank’s market area is located on eastern Long Island and its customer base is mainly located in the towns of East Hampton,
Southampton, Southold and Riverhead. In 2009, the Bank will expand its market areas to include branches in Shirley, New York
located in the town of Brookhaven and in Deer Park, New York located within the town of Babylon. Competition in the banking and
financial services industry is intense. The profitability of the Bank depends on the continued ability to successfully compete. The Bank
competes with commercial banks, savings banks, insurance companies, and brokerage and investment banking firms. Many of our
competitors have substantially greater resources and lending limits than the Bank and may offer certain services that the Bank does not
provide. In addition, competitors recently have been offering deposits at higher rates and loans with lower fixed rates, more attractive
terms and less stringent credit structures than the Bank has been willing to offer. Furthermore, the high cost of living on the twin forks
of eastern Long Island creates staff recruitment and retention challenges.
The Company’s Future Depends on Successful Growth of its Subsidiary
The Company’s primary business activity for the foreseeable future will be to act as the holding company of the Bank. Therefore, the
Company’s future profitability will depend on the success and growth of this subsidiary.
The Loss of Key Personnel Could Impair our Future Success
Our future success depends in part on the continued service of our executive officers, other key management, as well as our staff, and
on our ability to continue to attract, motivate, and retain additional highly qualified employees. The loss of services of one or more of
our key personnel or our inability to timely recruit replacements for such personnel, or to otherwise attract, motivate, or retain
qualified personnel could have an adverse effect on our business, operating results, and financial condition. In February 2008, the
Company’s Chief Retail Banking Officer (“CRBO”) resigned and in March 2008, the Company hired James Manseau as the
Company’s CRBO.
In addition, Kevin M. O’Connor was appointed to the Board of Directors in October 2007 and became President and Chief Executive
Officer effective January 1, 2008 succeeding Thomas J. Tobin. Mr. Tobin remains a member of the Board of Directors and assumed
his new role as President Emeritus and Advisor to the Board effective January 1, 2008.
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Highly Regulated Environment
The Bank and Company are subject to extensive regulation, supervision and examination by the OCC, FDIC, the Federal Reserve
Board and the SEC. Such regulation and supervision govern the activities in which a financial institution and its holding company may
engage and are intended primarily for the protection of the consumer. Recently regulators have intensified their focus on the USA
PATRIOT Act’s anti-money laundering and Bank Secrecy Act compliance requirements. In order to comply with regulations,
guidelines and examination procedures in this area as well as other areas of the Bank, we have been required to adopt new policies and
procedures and to install new systems. We cannot be certain that the policies, procedures, and systems we have in place are flawless
and there is no assurance that in every instance we are in full compliance with these requirements. Regulatory authorities have
extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the
operation of an institution. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or
legislation, may have a material impact on our operations.
We May Be Adversely Affected By Current Economic and Market Conditions
The recent national and global economic downturn has resulted in unprecedented levels of financial market volatility which may
depress the market value of financial institutions, limit access to capital or have a material adverse effect on the financial condition or
results of operations of banking companies. In the past year, significant declines in the values of mortgage-backed securities and
derivative securities by financial institutions, government sponsored entities, and major commercial and investment banks has led to
decreased confidence in financial markets among borrowers, lenders, and depositors, as well as disruption and extreme volatility in the
capital and credit markets and the failure of some entities in the financial sector. As a result, many lenders and institutional investors
have reduced or ceased to provide funding to borrowers. Continued turbulence in the capital and credit markets may adversely affect
our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us. In addition,
the possible duration and severity of the adverse economic cycle is unknown and may exacerbate the Company’s exposure to credit
risk.
Increases to the Allowance for Credit Losses May Cause Our Earnings to Decrease
Our customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be
insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a material adverse
effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including
the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans.
In determining the amount of the allowance for credit losses, we rely on loan quality reviews, past loss experience, and an evaluation
of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for credit losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance
would materially decrease our net income.
Bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or
loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities could
have a material adverse effect on our results of operations and/or financial condition.
Increases in FDIC Insurance Premiums May Cause Our Earnings to Decrease
The Emergency Economic Stabilization Act (“EESA”) temporarily increased the limit on FDIC coverage to $250,000 through
December 31, 2009. In addition, we have enrolled in the Temporary Liquidity Guarantee Program for non interest bearing transaction
deposit accounts. This, along with the full utilization or our assessment credit in early 2008 and the increase in FDIC insurance rates,
will cause the premiums assessed by the FDIC to increase. These actions will significantly increase our non interest expense in 2009
and in future years as long as the increased premiums are in place.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At present, the Registrant does not own or lease any property. The Registrant uses the Bank’s space and employees without separate
payment. Headquarters are located at 2200 Montauk Highway, Bridgehampton, New York 11932. The Bank’s internet address is
www.bridgenb.com.
All of the Bank’s properties are located in Suffolk County, New York. The Bank’s Main Office in Bridgehampton is owned. The Bank
also owns buildings that house its Montauk Branch located at 1 The Plaza, Montauk; its Southold Branch located at 54790 Main Road,
Southold; its Westhampton Beach Office at 194 Mill Road, Westhampton Beach; and its Southampton Village Branch located at 150
Hampton Road, Southampton. The Bank currently leases out a portion of the Montauk building and the Westhampton Beach building.
The Bank leases eight additional properties on eastern Long Island as branch locations at 32845 Main Road, Cutchogue; 26 Park
Place, East Hampton; 218 Front Street, Greenport; 48 East Montauk Highway, Hampton Bays; Mattituck Plaza, Main Road,
Page -8-
Mattituck; 2 Bay Street, Sag Harbor; 425 County Road 39A, Southampton and 6324 Route 25A, Wading River. Additionally, the
Bank utilizes space for a branch in the retirement community, Peconic Landing at 1500 Brecknock Road, Greenport. In 2003, the
Bank purchased property in the Village of East Hampton and construction of a new full service branch on that site is underway. In
2008, the Bank entered into two lease agreements for branches in Shirley and Deer Park, New York. The Bank has contractual rights
to purchase real estate in the Town of Southold which will also be considered as a site for a future branch facility.
Item 3. Legal Proceedings
The Registrant and its subsidiary are subject to certain pending and threatened legal actions that arise out of the normal course of
business. In the opinion of management at the present time, the resolution of any pending or threatened litigation will not have a
material adverse effect on its financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders was held at The Bridgehampton National Bank, 2200 Montauk Highway, Bridgehampton, New
York 11932 on December 12, 2008.
The approval of an amendment to the Company’s Certificate of Incorporation to authorize 2,000,000 shares of preferred stock, par
value $0.01 per share was voted upon.
Approval of an amendment to the Company’s Certificate of
Incorporation
Votes For
Votes Against
Abstentions
Non Votes
3,846,376
728,999
45,373
1,526,124
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
COMMON STOCK INFORMATION
The Company’s common stock was traded on the NASDAQ® over the counter bulletin board market under the symbol, “BDGE” until
June 2008 when it began trading on the NASDAQ Global Select Market. The following table details the quarterly high and low bid
prices of the Company’s common stock and the dividends declared for such periods.
At December 31, 2008 the Company had approximately 596 shareholders of record, not including the number of persons or entities
holding stock in nominee or the street name through various banks and brokers.
COMMON STOCK INFORMATION
By Quarter 2008
First
Second
Third
Fourth
By Quarter 2007
First
Second
Third
Fourth
Stock Prices
High
Low
Dividends
Declared
24.00
22.75
22.50
21.75
$
$
$
$
20.24
17.75
19.00
17.78
$
$
$
$
0.23
0.23
0.23
0.23
Stock Prices
High
Low
Dividends
Declared
24.75
24.60
24.75
25.05
$
$
$
$
23.60
23.80
23.50
23.25
$
$
$
$
0.23
0.23
0.23
0.23
$
$
$
$
$
$
$
$
Stockholders received cash dividends totaling $5.6 million in 2008 and in 2007. The ratio of dividends per share to net income per
share was 64.55% in 2008 compared to 67.67% in 2007.
Page -9-
PERFORMANCE GRAPH
Pursuant to the regulations of the SEC, the graph below compares the performance of the Company with that of the total return for the
NASDAQ® stock market and for certain bank stocks of financial institutions with an asset size $500 million to $1 billion, as reported
by SNL Financial L.C. from December 31, 2003 through December 31, 2008. The graph assumes the reinvestment of dividends in
additional shares of the same class of equity securities as those listed below.
Bridge Bancorp, Inc.
Total Return Performance
140
130
120
110
100
90
80
70
60
e
u
l
a
V
x
e
d
n
I
Bridge Bancorp, Inc.
NASDAQ Composite
SNL Bank $500M-$1B
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Index
Bridge Bancorp, Inc
NASDAQ Composite
SNL Bank $500M-$1B
Period Ending
12/31/03
100.00
100.00
100.00
12/31/04
134.32
108.59
113.32
12/31/05
112.11
110.08
118.18
12/31/06
113.00
120.56
134.41
12/31/07
118.81
132.39
107.71
12/31/08
94.70
78.72
69.02
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares
Purchased in
Month
—
—
—
Average
Price
Paid per
Share
—
—
—
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs-2006 (1)
141,959
141,959
141,959
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
167,041
167,041
167,041
Period
October 2008
November 2008
December 2008
(1)
The Board of Directors approved a stock repurchase program on March 27, 2006.
-
-
-
The Board of Directors approved repurchase of shares up to 309,000 shares.
There is no expiration date for the stock repurchase plan.
There is no stock repurchase plan that has expired or that has been terminated during the period ended December
31, 2008.
Page -10-
Item 6. Selected Financial Data
Five-Year Summary of Operations
(In thousands, except per share data and financial ratios)
Set forth below are selected consolidated financial and other data of the Company. The Company’s business is primarily the business
of the Bank. This financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements
of the Company.
December 31,
Selected Financial Data:
Securities available for sale
Securities, restricted
Securities held to maturity
Total loans
Total assets
Total deposits
Total stockholders’ equity
Year Ended December 31,
Selected Operating Data:
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total non interest income
Total non interest expense
Income before income taxes
Income tax expense
Net income
December 31,
Selected Financial Ratios and Other Data:
Return on average equity
Return on average assets
Average equity to average assets
Dividend payout ratio
Diluted earnings per share
Basic earnings per share
Cash dividends declared per common share
2008
2007
2006
2005
2004(1)
$ 310,695
3,800
43,444
429,683
839,059
659,085
56,139
$ 187,384
2,387
5,836
375,236
607,424
508,909
51,109
$ 202,590
878
9,444
325,997
573,644
504,412
45,539
$ 182,801
1,377
10,012
302,264
533,444
468,025
46,651
$ 202,042
1,979
21,213
296,134
547,200
469,311
47,213
$
$
$
$
$
39,620
9,489
30,131
2,000
28,131
6,064
21,157
13,038
4,288
8,750
$
$
35,864
10,437
25,427
600
24,827
5,678
18,168
12,337
4,043
8,294
16.29%
1.24%
7.62%
64.55%
$
1.43
$
1.44
$
0.92
17.47%
1.38%
7.91%
67.67%
1.36
1.37
0.92
$
$
$
$
$
32,030
8,337
23,693
85
23,608
4,413
16,002
12,019
3,851
8,168
17.68%
1.49%
8.41%
68.98%
1.33
1.33
0.92
$ 28,713
4,319
24,394
300
24,094
5,105
14,647
14,552
4,929
9,623
20.15%
1.76%
8.71%
58.88%
1.53
1.54
0.91
$
$
$
$
$
$
$
$
$
26,923
2,351
24,572
300
24,272
5,440
13,564
16,148
5,771
10,377
22.82%
1.89%
8.30%
43.39%
1.64
1.66
0.72
(1) Amounts have been restated for a three-for-two stock split, in the form of a stock dividend, effective July 9, 2004.
Page -11-
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This report may contain statements relating to the future results of the Company (including certain projections and business trends)
that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”).
Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs,
assumptions and expectations of management of the Company. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,”
“will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and
variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking
statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated
revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking, lending
and other areas; origination volume in the Company’s consumer, commercial and other lending businesses; current and future capital
management programs; non-interest income levels, including fees from the abstract subsidiary and banking services as well as product
sales; tangible capital generation; market share; expense levels; and other business operations and strategies. For this presentation, the
Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.
Factors that could cause future results to vary from current management expectations include, but are not limited to: changes in
economic conditions including an economic recession that could affect the value of real estate collateral and the ability for borrowers
to repay their loans; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of
the federal government; changes in tax policies, rates and regulations of federal, state and local tax authorities; changes in interest
rates; deposit flows; the cost of funds; demand for loan products and other financial services; competition; changes in the quality and
composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting
principles, policies or guidelines; changes in real estate values and other factors discussed elsewhere in this report, factors set forth
under Item 1A., Risk Factors, and in other reports filed by the Company with the Securities and Exchange Commission. The forward-
looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking
statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.
OVERVIEW
Who We Are and How We Generate Income
Bridge Bancorp, Inc., a New York corporation, is a single bank holding company formed in 1989. On a parent-only basis, the
Company has had minimal results of operations. In the event the Company subsequently expands its current operations, it will be
dependent on dividends from its wholly owned subsidiary, The Bridgehampton National Bank (“the Bank”), its own earnings,
additional capital raised, and borrowings as sources of funds. The information 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 and merchant credit and debit card processing programs,
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.
Year and Quarterly Highlights
•
•
•
•
•
•
•
Returns on average equity and average assets of 16.29% and 1.24% respectively for 2008;
Net income of $8.8 million or $1.43 per diluted share for 2008 as compared to net income of $8.3 million or $1.36
per diluted share for 2007;
Net income of $2.2 million or $0.36 per diluted share for the fourth quarter 2008 as compared with $2.0 million or
$0.33 per diluted share for the same period one year ago;
Net interest margin of 4.70% for 2008, and 4.69% for 2007;
Total assets of $839.1 million at December 31, 2008, an increase of 38.1% over the same date last year;
Total loans of $429.7 million at December 31, 2008, an increase of 14.5% from December 31, 2007;
Continued sound credit quality;
Page -12-
•
•
•
•
Total investments of $357.9 million at December 31, 2008, an increase of 83.0% over December 31, 2007;
Total deposits of $659.1 million at December 31, 2008, an increase of $150.2 million or 29.5% over the same date
last year;
The Company’s capital levels remain strong with a Tier 1 Capital to Average Assets ratio of 6.9%. The Company is
positioned well for future growth. Stockholders’ equity totaled $56.1 million at December 31, 2008 as compared
$51.1 million at December 31, 2007;
Declaration of cash dividends totaling $0.92 for 2008.
New Developments
Effective January 1, 2008, Kevin M. O’Connor succeeded Thomas J. Tobin and became President and Chief Executive Officer. Mr.
Tobin remains a member of the Board of Directors and assumed a new role as President Emeritus and Advisor to the Board effective
January 1, 2008 through March 2, 2010.
Significant Events
The economic events of the past twelve months have been unprecedented. The failure of several large financial institutions along with
the conservatorship of Fannie Mae and Freddie Mac driven by the diminution in housing values and sub-prime mortgage lending has
resulted in multiple actions by the United States government. On October 3, 2008, the Congress passed the Emergency Economic
Stabilization Act of 2008 (“EESA”) which provides up to $700 billion and grants new authorities to the United States Treasury
Department (“Treasury”), the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”) for initiatives
to restore stability and liquidity to U.S. markets. Many European nations have also taken actions to inject liquidity and capital into
critical financial institutions in order to stabilize world markets.
On October 14, 2008, the Treasury, FRB and FDIC jointly announced a sweeping plan to invest in banks and thrifts to help restore
confidence in the U.S. banking system. Some of the actions taken by these governmental agencies include: (i) temporarily increasing
FDIC insurance coverage to $250,000 from $100,000 through December 31, 2009; (ii) reducing the targeted federal funds rate to
1.50% from 2.00% and the discount rate to 1.75% from 2.25%, respectively; (iii) temporarily guaranteeing Money Market mutual
funds (iv) introducing a capital purchase program whereby the Treasury will purchase up to $250 billion in senior preferred shares
from healthy qualifying financial institutions; and (v) introducing a Temporary Liquidity Guarantee Program (“TLGP”) whereby the
FDIC will guarantee newly issued senior unsecured debt on or before June 30, 2009 and provide unlimited FDIC insurance coverage
for non-interest bearing transaction accounts for thirty days without charge followed by an annualized 10 basis point assessment for
the insurance coverage above $250,000 on such accounts effective until December 31, 2009. In November 2008, the Bank opted to
participate in the TLGP. In December 2008, the Federal Reserve reduced the targeted federal fund rate to between 0 and 0.25% from
1.50% and the discount rate to 0.25% from 1.75%. On February 27, 2009, the FDIC issued a final rule, to be effective April 1, 2009,
to change the way that the FDIC’s assessment system differentiates for risk and to set new assessment rates beginning with the second
quarter of 2009. At the same time, the FDIC issued an interim rule to impose an emergency special assessment of 20 basis points on
all banks, payable on September 30, 2009. There is a 30 day comment period before this interim rule becomes final. The Company
anticipates that the emergency special assessment will cost approximately $1.4 million.
One of the provisions resulting from the EESA is the Treasury’s Capital Purchase Program (“CPP”), which provides direct equity
investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an
institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and
declaration of dividends. Applications were due by November 14, 2008 and were subject to approval by the Treasury. The CPP
provides for a minimum investment of 1% of Risk-Weighted Assets, with a maximum investment equal to the lesser of 3% of Total
Risk-Weighted Assets or $25 billion. The perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth
anniversary of the Treasury investment, and a dividend of 9%, thereafter. The CPP also requires the Treasury to receive warrants for
common stock equal to 15% of the capital invested by the Treasury. In November 2008, the Company filed an application to
participate in this program. In order to be eligible to participate in this program, the Company also filed a proxy statement in
November 2008 requesting shareholder approval to amend its certificate of incorporation and authorize the issuance of preferred
stock. On December 12, 2008, the shareholders approved the proposal. The Company’s application to participate in this program was
approved by the Treasury Department on January 7, 2009. On January 27, 2009, management and the Board, after careful deliberation
and thoughtful review of the relevant issues, determined it was not in our shareholders’ best interest to participate, and declined the
Treasury investment.
Opportunities and Challenges
The economic and competitive landscape has changed dramatically over the past two years. Recognizing that our market areas are
generally affluent, large money center banks increasingly meet their funding needs by aggressively pricing deposits in the Bank’s
markets. Competition for deposits and loans is intense as various banks in the marketplace, large and small, promise excellent service
and often price their products aggressively. Deposit growth is essential to the Bank’s ability to increase earnings; therefore branch
Page -13-
expansion and building share in our existing markets remain key strategic goals. Controlling funding costs yet protecting the deposit
base along with focusing on profitable growth presents a unique set of challenges in this operating environment.
During the second half of 2007 and continuing throughout 2008, 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. Despite these actions, many of our competitors, due to liquidity concerns, have not
yet fully adjusted their deposit pricing. This contrasts with the impact on assets where yields on loans and securities have declined.
The squeeze between declining asset yields and more slowly declining liability pricing could impact margins.
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. During 2007, the Bank opened three
new branches. In January 2007, the Bank opened a state-of-the-art branch facility in the Village of Southampton; in February 2007,
the Bank opened a new full-service branch facility in Cutchogue; and in September 2007, the Bank opened its first full-service branch
facility in the Town of Riverhead, located in Wading River. The opening of the branch facility in Westhampton Beach in December
2005, and the branch in Wading River in September 2007, move the Bank geographically westward and demonstrate the Bank’s
commitment to traditional growth through branch expansion.
In April 2008, the Bank received approval from the Office of the Comptroller of the Currency (“OCC”) and expects that the opening
of the new full service branch facility in the Village of East Hampton will be a fourth quarter 2009 event. In addition, in October 2008,
the Bank received approval from the OCC to open a new branch in Shirley, New York and in November 2008, the Bank received
OCC approval to open a branch in Deer Park, New York. The Bank anticipates opening these two locations during the first half of
2009.
The Bank routinely adds to its menu of products and services, continually meeting the needs of consumers and businesses. We believe
positive outcomes in the future will result from the expansion of our geographic footprint, investments in infrastructure and
technology, such as BridgeNEXUS, our remote deposit capture product as well as the introduction of lockbox processing in the fourth
quarter of 2008, and continued focus on placing our customers first. In January 2009, the Bank launched Bridge Investment Services,
offering a full range of investment products and services through a third party broker dealer.
Corporate objectives for 2009 include: leveraging our expanding branch network to build customer relationships and grow loans and
deposits; focusing on opportunities and processes that continue to enhance the customer experience at the Bank; improving
operational efficiencies and prudent management of non-interest expense; and maximizing non-interest income through Bridge
Abstract as well as other lines of business. The ability to attract, retain, train and cultivate employees at all levels of the Company
remains significant to meeting these objectives. The Company has made great progress toward the achievement of these objectives,
and avoided many of the problems facing other financial institutions as a result of maintaining discipline in its underwriting,
expansion strategies, investing and general business practices. The Company has capitalized on opportunities presented by the market
in 2008 and continues to diligently seek opportunities for growth and to strengthen the franchise. The causes of the current economic
crisis are many and have occurred over a prolonged period and therefore cannot be expected to be resolved in days, weeks or months.
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.
CRITICAL ACCOUNTING POLICIES
Note 1 to our Consolidated Financial Statements for the year ended December 31, 2008 contains a summary of our significant
accounting policies. Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments. Our policy with respect to the methodologies used to determine the allowance
for loan losses is our most critical accounting policy. This policy is important to the presentation of our financial condition and results
of operations, and it involves a higher degree of complexity and requires management to make difficult and subjective judgments,
which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and
estimates could result in material differences in our results of operations or financial condition.
The following is a description of our critical accounting policy and an explanation of the methods and assumptions underlying its
application.
Page -14-
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 Statement of Financial Accounting Standard (“SFAS”) No. 114, “Accounting by
Creditors for Impairment of a Loan, an Amendment of FASB Statements No. 5 and 15,” and SFAS No. 118, “Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures, an Amendment of SFAS No. 114.” 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 also are used to determine the estimates of the fair value of the underlying collateral or the present
value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a
result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans
considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan
losses.
Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with
our lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations
are broken down as follows: first, loans with homogenous characteristics are pooled by loan type and include home equity loans,
residential mortgages, land loans and consumer loans. Then all remaining loans are segregated into pools based upon the risk rating of
each credit. Key factors in determining a credit’s risk rating include management’s evaluation of: cash flow, collateral, guarantor
support, financial disclosures, industry trends and strength of company management. The determination of the adequacy of the
valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation
allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. 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 when determining the allowances for each pool. In addition, we evaluate and consider 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 Classification 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 Classification Committee, based on its risk
assessment of the entire portfolio. Based on the Classification Committee’s review of the classified loans and the overall allowance
levels as they relate to the entire loan portfolio at December 31, 2008, 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 Bank’s 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.
For additional information regarding our allowance for loan losses, see Note 3 to the Consolidated Financial Statements.
Page -15-
NET INCOME
Net income for 2008 totaled $8.8 million or $1.43 per diluted share while net income for 2007 totaled $8.3 million or $1.36 per diluted
share, as compared to net income of $8.2 million, or $1.33 per diluted share for the year ended December 31, 2006. Net income
increased $456,000 or 5.5% compared to 2007 and net income for 2007 increased $126,000 or 1.5% as compared to 2006. Significant
trends for 2008 include: (i) a $4.7 million or 18.5% increase in net interest income; (ii) a $1.4 million increase in the provision for loan
losses; (iii) a $0.4 million or 6.8% increase in total non interest income; (iv) a $3.0 million or 16.5% increase in total non interest
expenses and (v) a $245,000 or 6.1% increase in income tax expense.
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 table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated
statements of income for the years indicated and reflect the average yield on assets and average cost of liabilities for the years
indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively,
for the years shown. Average balances are derived from daily average balances and include 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 SFAS No. 115, “Accounting for Certain Investments in Debt
and Equity Securities.”
Page -16-
Year Ended December 31,
(In thousands)
Interest earning assets:
Loans, net (including loan
2008
Average
Balance
Interest
Average
Yield/
Cost
Average
Balance
2007
Interest
Average
Yield/
Cost
2006
Interest
Average
Yield/
Cost
Average
Balance
fee income)
$ 397,560
$ 28,040
7.05% $ 347,029
$ 26,347
7.59% $
307,394
$ 23,345
7.59%
Mortgage-backed securities
170,592
Tax exempt securities (1)
Taxable securities
Federal funds sold
Deposits with banks
58,065
27,298
8,575
1,235
8,404
2,930
1,081
183
5
Total interest earning assets
663,325
40,643
4.93
5.05
3.96
2.13
0.40
6.13
120,314
53,599
28,529
12,375
173
5,764
2,823
1,213
638
4
562,019
36,789
4.73
5.19
4.19
5.08
2.31
6.52
112,463
57,948
27,165
10,800
348
4,989
3,060
1,035
560
21
516,118
33,010
4.38
5.21
3.76
5.11
6.03
6.37
Non interest earning assets:
Cash and due from banks
Other assets
Total assets
15,408
26,206
$ 704,939
16,081
22,242
$ 600,342
14,307
18,963
$
549,388
Interest bearing liabilities:
Savings, NOW and money
market deposits
Certificates of deposit of
$100,000 or more
Other time deposits
Federal funds purchased and
repurchase agreements
Federal Home Loan Bank
term advances
Total interest bearing liabilities
448,619
Non interest bearing liabilities:
$ 315,481
$
5,681
1.80% $ 287,450
$
7,634
2.66% $
259,747
$
6,322
2.43%
66,578
37,413
2,125
1,148
24,595
478
4,552
57
9,489
3.19
3.07
1.94
1.25
2.12
35,965
28,044
1,452
1,058
6,035
288
110
5
357,604
10,437
4.04
3.77
4.71
4.55
2.92
24,293
25,420
7,871
—
888
723
404
—
317,331
8,337
3.66
2.84
5.06
—
2.63
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income/interest
rate spread (2)
Net interest earning assets/net
197,179
5,428
651,226
53,713
191,022
4,229
552,855
47,487
183,157
2,699
503,187
46,201
$ 704,939
$ 600,342
$
549,388
31,154
4.01%
26,352
3.60%
24,673
3.74%
interest margin (3)
$ 214,706
4.70%
$ 204,415
4.69%
$
198,787
4.78%
Ratio of interest earning assets
to interest bearing liabilities
147.86%
157.16%
162.64%
Less: Tax equivalent
adjustment
(1,023)
Net interest income
$ 30,131
(925)
$ 25,427
(980)
$ 23,693
(1)
(2)
(3)
The above table is presented on a tax equivalent basis.
Net interest rate spread represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.
Net interest margin represents net interest income divided by average interest earning assets.
Page -17-
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 that 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.
2008 Over 2007
Changes Due To
2007 Over 2006
Changes Due To
Volume
Rate
Net
Change
Volume
Rate
Net
Change
Year Ended December 31,
(In thousands)
Interest income on interest earning assets:
Loans (including loan fee income)
Mortgage-backed securities
Tax exempt securities (1)
Taxable securities
Federal funds sold
Deposits with banks
Total interest earning assets
Interest expense on interest bearing liabilities:
$ 3,653
2,473
229
(51)
(156)
7
6,155
$ (1,960)
167
(122)
(81)
(299)
(6)
(2,301)
$
$
$
1,693
2,640
107
(132)
(455)
1
3,854
$ 2,995
364
(228)
52
81
(8)
3,256
(1,953)
673
90
701
464
80
$
7
411
(9)
126
(3)
(9)
523
611
100
255
190
52
(948)
4,802
(85)
5
1,165
$ 2,091
(31)
—
935
$ (412)
$
3,002
775
(237)
178
78
(17)
3,779
1,312
564
335
(116)
5
2,100
1,679
Savings, NOW and money market deposits
Certificates of deposit of $100,000 or more
Other time deposits
Federal funds purchased and repurchase
agreements
Federal Home Loan Bank Advances
Total interest bearing liabilities
Net interest income
689
1,028
311
446
58
2,532
$ 3,623
$
(2,642)
(355)
(221)
(256)
(6)
(3,480)
1,179
(1) The above table is presented on a tax equivalent basis.
The net interest margin stabilized in 2008 as the net interest margin was essentially flat at 4.70% for the year ended December 31,
2008 compared to 4.69% for 2007 and declined compared to 4.78% in 2006. The increase in 2008 compared to 2007 was primarily the
result of the increase in interest earning assets and the decrease in the cost of the average total interest bearing liabilities being greater
than the decrease in the yield on average total interest earning assets. The cost of interest bearing liabilities decreased approximately
80 basis points during 2008 compared to prior year, and the yield on average total interest earning assets decreased approximately 39
basis points.
Net interest income was $30.1 million in 2008 compared to $25.4 million in 2007 and $23.7 million in 2006. The increase in net
interest income of $4.7 million or 18.5% as compared to 2007 primarily resulted from the effect of the increase in the volume of
average total interest earning assets and the decrease in the cost of average total interest bearing liabilities being greater than the effect
of the increase in volume of average total interest bearing liabilities and the decrease in yield on average total interest earning assets.
The increase in net interest income of $1.7 million or 7.3% in 2007 as compared to 2006 primarily resulted from the effect of the
increase in the volume of average total interest earning assets being greater than the effect of the increase in both volume and rate of
average total interest bearing liabilities.
Average total interest earning assets grew by $101.3 million or 18.0% to $663.3 million in 2008 compared to $562.0 million in 2007.
During this period, the yield on average total interest earning assets decreased to 6.13% from 6.52%. Average interest earning assets
grew $45.9 million or 8.9% in 2007 from $516.1 million in 2006. During this period, the yield on average total interest earning assets
increased to 6.52% from 6.37%.
Page -18-
For the year ended December 31, 2008, average loans grew by $50.6 million or 14.6% to $397.6 million as compared to $347.0
million in 2007 and increased $39.6 million or 12.9% in 2007 as compared to $307.4 million in 2006. Real estate mortgage loans and
commercial loans primarily contributed to the growth. The Bank remains committed to growing loans with prudent underwriting,
sensible pricing and limited credit and extension risk.
For the year ended December 31, 2008, average total investments increased by $53.6 million or 26.4% to $256.0 million as compared
to $202.4 million in 2007 and increased $4.9 million or 2.5% in 2007 as compared to $197.5 million in 2006. To position the balance
sheet for the future and better manage liquidity and interest rate risk, a portion of the available for sale investment securities portfolio
was sold during 2007 resulting in a net loss of $101,000 compared to a net loss of $289,000 in 2006. There were no sales of securities
in 2008. Average federal funds sold decreased to $8.6 million or 30.7% in 2008 from $12.4 million in 2007 and increased $1.6 million
or 14.6% in 2007 as compared to $10.8 million in 2006. The decrease in the average federal funds sold in 2008 was primarily due to
growth in the average loans and investments.
Average total interest bearing liabilities totaled $448.6 million in 2008 compared to $357.6 million in 2007 and $317.3 million in
2006. The Bank continued to offer deposit promotions during the year in connection with increased competition in the market to
reduce potential core deposits outflows. The cost of interest bearing liabilities decreased to 2.12% for 2008 as compared to a cost of
2.92% during 2007 and 2.63% in 2006. 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. Funding costs continued to decline in 2008 in response to the Federal Reserve lowering the targeted federal
funds rate and discount rate and the prudent management of deposit pricing.
For the year ended December 31, 2008, average total deposits increased by $74.2 million or 13.7% to $616.7 million as compared to
average total deposits for the year ended December 31, 2007. Components of this increase include an increase in average demand
deposits for 2008 of $6.2 million or 3.2% to $197.2 million as compared to average demand deposits for 2007. The average balances
in savings, NOW and money market accounts increased $28.0 million or 9.8% to $315.5 million for the year ended December 31,
2008 compared to the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits
increased $40.0 million or 62.5% to $104.0 million for 2008 as compared to 2007. Average public fund deposits comprised 20.6% of
total average deposits during 2008 and 21.7% of total average deposits during 2007. Average federal funds purchased and repurchase
agreements together with average other borrowed money and average Federal Home Loan Bank term advances increased $23.0
million or 374.3% for the year ended December 31, 2008 as compared to average balances for the same period in the prior year.
Total interest income increased to $39.6 million from $35.9 million in 2007 and $32.0 million in 2006, an increase of 10.5% between
2008 and 2007 and a 12.0% increase between 2007 and 2006. The ratio of interest earning assets to interest bearing liabilities
decreased to 147.86% in 2008 as compared to 157.16% in 2007 and 162.64% in 2006. Interest income on loans increased $1.7 million
in 2008 over 2007 and increased $3.0 million in 2007 over 2006 primarily due to growth in the loan portfolio. The yield on average
loans was 7.05% for 2008 and 7.59% for 2007 and 2006, respectively.
Interest income on investments in mortgage-backed, taxable and tax exempt securities increased to $11.4 million or 28.4% in 2008
from $8.9 million in 2007 and increased $0.8 million or 9.5% in 2007 from $8.1 million in 2006. Interest income on securities
included net accretion of discounts of $55,000 in 2008 and $22,000 in 2007 compared to amortization of premiums on securities of
$0.3 million in 2006 as the rate environment changed and prepayments substantially slowed on the mortgage-backed security
portfolio. The tax adjusted average yield on total securities increased to 4.85% in 2008 from 4.84% in 2007 and 4.52% in 2006.
Interest expense decreased $0.9 million or 9.1% to $9.5 million in 2007 and increased $2.1 million or 25.2% to $10.4 million in 2007
from $8.3 million in 2006. The decrease in interest expense in 2008 resulted from the Federal Reserve lowering the targeted federal
funds rate and discount rate and the prudent management of deposit pricing. The increases in interest expense in 2007 and 2006
resulted from growth in average deposit balances and the higher cost of average interest bearing liabilities. The cost of average interest
bearing liabilities was 2.12% in 2008, 2.92% in 2007, and 2.63% in 2006.
Provision for Loan Losses
The Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in
the Bank’s principal lending area on eastern Long Island. The interest rates charged by the Bank on loans are affected primarily by the
demand for such loans, the supply of money available for lending purposes, the rates offered by its competitors, the Bank’s
relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic
conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative
policies and governmental budgetary matters.
The performance of the loan portfolio continued to be strong for the years ended December 31, 2008 and 2007. Nonaccrual loans
increased $2.9 million to $3.1 million in 2008 from $0.2 million in 2007. In 2007, nonaccrual loans decreased $194,000 to $229,000
from 2006. Nonaccrual loans represented 0.71% and 0.06% of net loans at December 31, 2008 and 2007, respectively. The increase in
non accrual loans in 2008, while significant, includes a single loan of approximately $2.5 million. At December 31, 2008,
Page -19-
management determined that this loan was an impaired loan as defined by SFAS No. 114 “Accounting by Creditors for Impairment of
a Loan – An Amendment of FASB Statement No. 5 and 15” (“SFAS 114”). For a loan to be considered impaired, management
determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Additionally management applies its normal loan review procedures in making these judgments. The
collateral underlying this loan is a first lien on real estate with an updated appraised value of $8.4 million, and no material losses are
anticipated. As of December 31, 2007, and December 31, 2006, there were no impaired loans as defined by SFAS No. 114.
Loans of approximately $9.8 million, $12.9 million, and $4.2 million at December 31, 2008, 2007, and 2006, respectively, were
classified as potential problem loans which include nonaccrual loans. This represents 2.3%, 3.4% and 1.3% of total loans at December
31, 2008, 2007, and 2006, respectively. These are loans for which management has information that indicates the borrower may not be
able to comply with the present repayment terms. The increase of $8.7 million in potential problem loans at December 31, 2007,
represents four commercial and three residential real estate mortgage loans which were currently performing under their original
terms. These loans are subject to increased management attention and their classification is reviewed on at least a quarterly basis. Due
to the structure and nature of the credits, management currently believes that the likelihood of sustaining a material loss on these
relationships is remote.
As of December 31, 2008, management determined that one commercial mortgage loan for $3.2 million to a local not for profit
organization was considered to be a troubled debt restructuring, as defined by SFAS No. 114. The identified loan had an original
principal balance of $4.0 million and during the third quarter of 2008 the Bank received principal payments of $660,000. During the
fourth quarter of 2008, the terms of the loan were modified. This loan is current as of December 31, 2008 and performing in
accordance with the modified terms. The loan is secured with collateral that has a fair value of approximately $5.4 million as well as
personal guarantors. After review of the estimated fair value of the underlying collateral less the costs to sell, management believed it
would be able to collect all amounts due without a shortfall according to the modified terms of the loan agreement. Management
believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize interest income
on an accrual basis. There were no loans considered to be trouble debt restructurings at December 31, 2007. As of December 31, 2006,
there was one loan considered to be a troubled debt restructuring, totaling $118,000. After review of the estimated fair value of the
underlying collateral less the costs to sell, management believed it would be able to collect all amounts due without a shortfall
according to the modified terms of the loan agreement. Subsequent to December 31, 2006, six consecutive payments were made on
this loan in accordance with the modified loan terms. The Bank had no foreclosed real estate at December 31, 2008, 2007 and 2006,
respectively.
Net charge-offs were $1,001,000 for the year ended December 31, 2008 compared to $158,000 for the year ended December 31, 2007.
Net recoveries were $44,000 for the year ended December 31, 2006. The ratio of allowance for loan losses to nonaccrual loans was
129%, 1290% and 594%, at December 31, 2008, 2007, and 2006, 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 or recoveries, a provision for loan losses of $2,000,000 was recorded in 2008 as compared to $600,000 in 2007
and $85,000 in 2006. The allowance for loan losses increased to $3,953,000 at December 31, 2008 as compared to $2,954,000 at
December 31, 2007 and $2,512,000 at December 31, 2006. As a percentage of total loans, the allowance was 0.92%, 0.79% and
0.77% at December 31, 2008, 2007 and 2006, respectively. Management continues to carefully monitor the loan portfolio as well as
real estate trends on 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.
Page -20-
The following table sets forth changes in the allowance for loan losses.
December 31,
(Dollars in thousands)
2008
2007
2006
2005
2004
Allowance for loan losses balance at beginning of period
$
2,954
$
2,512
$
2,383
$
2,188
$
2,144
Charge-offs:
Commercial, financial and agricultural loans
Real estate construction loans
Real estate mortgage loans
Installment/consumer loans
Total
Recoveries:
Commercial, financial and agricultural loans
Real estate construction loans
Real estate mortgage loans
Installment/consumer loans
Total
534
—
480
56
1,070
53
—
—
16
69
203
—
—
23
226
13
—
1
54
68
33
—
—
50
83
59
—
6
62
127
153
—
7
129
289
37
100
17
30
184
302
—
3
65
370
61
—
23
30
114
Net (charge-offs) recoveries
Provision for loan losses charged to operations
Balance at end of period
Ratio of net (charge-offs) recoveries during period to average
(1,001)
2,000
3,953
$
(158)
600
2,954
$
44
85
2,512
$
(105)
300
2,383
$
(256)
300
2,188
$
loans outstanding
(0.25%)
(0.05%)
0.01%
(0.04%)
(0.09%)
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the total allowance for loan losses by loan type.
Year Ended December 31,
(Dollars in thousands)
Commercial, financial and
agricultural loans
Real estate construction
loans
Real estate mortgage loans
Installment/consumer loans
$
Total
2008
Percentage
of Loans
to Total
Loans
2007
Percentage
of Loans
to Total
Loans
2006
Percentage
of Loans
to Total
Loans
Amount
2005
Percentage
of Loans
to Total
Loans
2004
Percentage
of Loans
to Total
Loans
Amount
Amount
Amount
Amount
$
617
14.8% $
420
13.4% $
303
11.2% $
273
10.5% $
315
11.6%
266
3,009
61
3,953
3.8
78.8
2.6
253
2,194
87
100.0% $ 2,954
4.0
80.3
2.3
121
2,009
79
100.0% $ 2,512
4.5
81.6
2.7
100.0% $
183
1,817
110
2,383
5.9
80.4
3.2
100.0% $
148
1,659
66
2,188
6.2
80.0
2.2
100.0%
Non Interest Income
Total non interest income increased by $0.4 million or 6.8% in 2008 to $6.1 million and increased $1.3 million or 28.7% to $5.7
million in 2007 as compared to $4.4 million in 2006. The increase in total non interest income in 2008 compared to 2007 was due to a
$0.5 million increase in service charges on deposit accounts and an increase of $0.025 million on fees for other customer services,
partially offset by a $0.2 million decrease in revenues from the title insurance abstract subsidiary, Bridge Abstract and a decline in
other operating income. The increase in total non interest income during 2007 compared to 2006 was due to a $0.3 million increase in
title fee income from Bridge Abstract, a $0.5 million increase in service charges on deposit accounts, and a $0.3 million increase in
fees for other customer services partly offset by a decrease in other operating income of $0.03 million. Excluding net securities losses
and gains, total non interest income increased $0.3 million or 4.9% in 2008 and increased $1.1 million or 22.9% for the year ended
December 31, 2007.
No securities losses were recognized in 2008. Net securities losses of $101,000 and $289,000 were recognized in 2007 and 2006,
respectively. The net losses on securities in 2007 and 2006 were due to repositioning of the available for sale investment portfolio.
Bridge Abstract, the Bank’s title insurance abstract subsidiary, generated title fee income of $1.1 million and $1.3 million, and $1.0
million in 2008, 2007 and 2006, respectively. The decrease of $0.2 million or 16.4% in 2008 was due to a decrease in the number and
Page -21-
average value of transactions processed by the subsidiary. The increase of $0.3 million or 28.5% in 2007 was due to an increase in the
volume of transactions processed by the subsidiary.
Fees from other customer services increased $0.025 million or 1.44% to $1.8 million in 2008 as compared to $1.7 million in 2007.
The increase was due primarily to additional sales volume in our merchant and debit card cash management services. Fees from other
customer services increased $0.3 million or 21.9% in 2007 as compared to 2006. Service charges on deposit accounts for the year
ended December 31, 2008 totaled $3.1 million, an increase of $0.5 million as compared to 2007. This increase was driven by growth
in the number of deposit accounts subject to service charges and changes in our service fee structure. For the year ended December 31,
2007, service charges were $2.5 million, an increase of $0.5 million from 2006.
Other operating income for the year ended December 31, 2008 totaled $118,000, a decrease of $48,000 from $166,000 for the year
ended December 31, 2007, and decreased $3,000 or 1.78% in 2007 from the prior year.
Non Interest Expense
Non interest expenses increased by $3.0 million or 16.5% in 2008 to $21.2 million from $18.2 million in 2007, and non interest
expense increased $2.2 million or 13.5% in 2007 from $16.0 million in 2006. The primary components of these changes were an
increase in salaries and employee benefits, net occupancy expense, furniture and fixture expense and other operating expenses.
Salaries and benefits increased $2.0 million or 18.2% in 2008 as compared to 2007 and increased $1.6 million or 17.1% in 2007 as
compared to 2006. The increases in salary and benefits reflect base salary increases, filling vacant positions, hiring new employees to
support the Company’s expanding infrastructure and new branch offices, increases in incentive based compensation and an increase in
employee benefit costs, particularly medical insurance costs and pension expense.
Net occupancy expense increased $0.2 million or 7.8% to $1.9 million in 2008 from $1.7 million in 2007 and increased $0.3 million
or 22.6% in 2007 from $1.4 million in 2006. Higher net occupancy expenses were due to increases in depreciation expense and rent
expense related to the new branch offices in 2008 and in 2007 as well as annual rent increases in other branch locations. Furniture and
fixture expense increased $17,000 or 2.0% to $850,000 in 2008 from $833,000 in 2007 and increased $91,000 or 12.3% in 2007 from
$742,000 in 2006. The increase in furniture and fixture expense in 2007 relates primarily to the opening of three new branches. Other
operating expenses increased $0.8 million or 20.3% to $4.8 million in 2008 from $4.0 million in 2007 and increased $0.2 million or
5.1% in 2007 from $3.8 million in 2006. The increase during 2008 included higher professional fees associated with the listing and
trading of the Company’s common stock on the NASDAQ Global Select Market, the special shareholders meeting legal work and
outsourced internal audits, as well as higher FDIC assessments related to growth in deposits and higher rates.
Income Tax Expense
Income tax expense for December 31, 2008, 2007, and 2006 was $4.3 million, $4.0 million and $3.9 million, respectively. The
increase in 2008 was due to an increase in income before income taxes of $0.7 million to $13.0 million from $12.3 million in 2007
and a slightly higher effective tax rate. The increase in income tax expense in 2007 was due to an increase in income before income
taxes and a higher effective tax rate resulting from a lower percentage of interest income from tax exempt securities in 2007 compared
to 2006 partially offset by a reduction in the New York State tax rate. The effective tax rate was 32.9%, 32.8% and 32.0% for the
years ended December 31, 2008, 2007, and 2006, respectively.
FINANCIAL CONDITION
The assets of the Company totaled $839.1 million at December 31, 2008, an increase of $231.6 million or 38.1% from the previous
year-end. This increase was primarily driven by growth in total securities, net, of $162.3 million, total loans of $54.4 million or
14.5%, and an increase of $14.5 million or 101.3% in cash and cash equivalents.
This growth in assets was funded principally by growth in deposits fueled by increased sales initiatives and maturation of newer
branches, and borrowings. The deposit growth occurred in all markets and included both new commercial and consumer relationships.
Core retail and commercial deposits increased $102.6 million or 25% over the prior year to $520.8 million at December 31, 2008.
Demand deposits increased $5.1 million or 2.9% to $181.2 million at December 31, 2008 compared to $176.1 million at December 31,
2007. Savings, NOW and money market deposits increased $91.8 million or 36.3% to $344.9 million at December 31, 2008 from
$253.0 million at December 31, 2007. Certificates of deposit of $100,000 or more and other time deposits increased $53.2 million or
66.8%.
Market opportunities contributed to the fourth quarter strategy to utilize wholesale funding to increase securities holdings and manage
seasonal deposit flows. This strategy enhanced earnings and assisted in managing the Bank’s liquidity. Federal funds purchased and
Federal Home Loan Bank overnight borrowings increased $63.9 million to $70.9 million at December 31, 2008 compared to $7.0
million at December 31, 2007. Federal Home Loan Bank term advances increased $20.0 million or 200% to $30.0 million outstanding
at December 31, 2008 compared to $10.0 million at December 31, 2007. Repurchase agreements decreased $10.0 million to $15.0
million outstanding at December 31, 2008 compared to $25.0 million at December 31, 2007.
Page -22-
Other liabilities increased $2.5 million to $7.3 million at December 31, 2008 from $4.8 million at December 31, 2007 due primarily to
an increase in deferred tax liabilities related to the increase in unrealized gains on securities as of December 31, 2008 compared to
December 31, 2007.
Total stockholders’ equity was $56.1 million at December 31, 2008, an increase of $5.0 million or 9.8% from December 31, 2007
primarily due to net income of $8.8 million, an increase in net unrealized gains on securities of $3.2 million partially offset by the
declaration of dividends totaling $5.7 million and a $1.6 million increase in the pension liability associated with SFAS 158. In
December 2008, the Company declared a quarterly dividend of $0.23 per share. The Company continues its long term trend of
uninterrupted dividends.
Loans
During 2008, the Company continued to experience growth trends in real estate lending. The concentration of loans in our primary
market areas may increase risk. Unlike larger banks that are more geographically diversified, the Bank’s loan portfolio consists
primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending area
on eastern Long Island. The markets in which the Company operates have experienced substantial growth in construction and land
development activity over the past several years, which has been a factor in overall loan growth. The local economic conditions on
eastern Long Island have a significant impact on the volume of loan originations and the quality of our loans, the ability of borrowers
to repay these loans, and the value of collateral securing these loans. A considerable decline in the general economic conditions caused
by inflation, recession, unemployment or other factors beyond the Company’s control would impact these local economic conditions
and could negatively affect the financial results of the Company’s operations. Additionally, while the Company has a significant
amount of commercial real estate loans, the majority of which are owner-occupied, decreases in tenant occupancy may also have a
negative effect on the ability of borrowers to make timely repayments of their loans, which would have an adverse impact on the
Company’s earnings.
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.
The Bank targets its business lending and marketing initiatives towards promotion of loans that primarily meet the needs of small to
medium-sized businesses. These small- to medium-sized businesses generally have fewer financial resources in terms of capital or
borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, the results of operations
and financial condition may be adversely affected.
With respect to the underwriting of loans, there are certain risks, including the risk of non-payment that is associated with each type of
loan that the Bank markets. Approximately 82.6% of the Bank’s loan portfolio at December 31, 2008 is secured by real estate and
approximately 46.4% is comprised of commercial real estate loans. Home equity lines of credit comprise approximately 14.6%,
construction mortgage loans comprise approximately 3.8%, residential mortgages comprise approximately 14.6%, and land loans
comprise approximately 3.2%. Risks associated with a concentration in real estate loans include potential losses from fluctuating
values of land and improved properties. Home equity loans represent loans originated in the Bank’s geographic markets with loan to
value ratios generally of 75% or less. The Bank’s residential mortgage portfolio includes approximately $4.8 million in interest only
mortgages. The underwriting standards for interest only mortgages are consistent with the remainder of the loan portfolio and do not
include any features that result in negative amortization. Largest loan concentrations by industry are loans granted to lessors of
commercial property both owner occupied and nonowner occupied. The Bank uses conservative underwriting criteria to better insulate
itself from a downturn in real estate values and economic conditions on eastern Long Island that could have a significant impact on the
value of collateral securing the loans as well as the ability of customers to repay loans.
The remainder of the loan portfolio is comprised of commercial and consumer loans, which represent approximately 17.4% of the
Bank’s loan portfolio. The primary risks associated with commercial loans are the cash flow of the business, the experience and
quality of the borrowers’ management, the business climate, and the impact of economic factors. The primary risks associated with
consumer loans relate to the borrower, such as the risk of a borrower’s unemployment as a result of deteriorating economic conditions
or the amount and nature of a borrower’s other existing indebtedness, and the value of the collateral securing the loan if the Bank must
take possession of the collateral. Consumer loans also have risks associated with concentrations of loans in a single type of loan.
The Bank’s policy for charging off loans is a multi-step process. A loan is considered a potential charge-off when it is in default of
either principal or interest for a period of 90, 120 or 180 days, depending upon the loan type, as of the end of the prior month. In
addition to date criteria, other triggering events may include, but are not limited to, notice of bankruptcy by the borrower or guarantor,
death of the borrower, and deficiency balance from the sale of collateral. These loans identified are presented for evaluation at the
regular meeting of the Classification Committee. The recovery of charged-off balances is actively pursued until the potential for
recovery has been exhausted, or until the expense of collection does not justify the recovery efforts.
Page -23-
Total loans grew $54.4 million or 14.5%, during 2008 and $49.2 million or 15.1% during 2007. Average net loans grew $50.5 million
or 14.6% during 2008 over 2007 and $39.6 million or 12.9% during 2007 when compared to 2006. Real estate mortgage loans were
the largest contributor of the growth for both 2008 and 2007 and increased $37.5 million or 12.4% and $35.4 million or 13.3%,
respectively. Growth in real estate loans is primarily attributed to an increase in commercial and residential mortgages and increases in
the home equity loan portfolio. Commercial, financial and agricultural loans increased $12.9 million or 25.6% in 2008 from 2007 and
increased $14.0 million or 38.5% in 2007 from 2006. Real estate construction loans increased $1.3 million or 10.1% in 2008 and
increased $100,000 or 0.7% in 2007. Installment/consumer loans increased $2.5 million or 29.6% and decreased $295,000 or 3.3%
during 2007. Fixed rate loans represented 23.3%, 19.2% and 16.7% of total loans at December 31, 2008, 2007, and 2006, respectively.
The following table sets forth the major classifications of loans:
December 31,
(In thousands)
2008
2007
2006
2005
2004
Real estate mortgage loans
Commercial, financial, and agricultural loans
Installment/consumer loans
Real estate construction loans
$ 338,694
63,468
11,081
16,174
$ 301,193
50,531
8,553
14,867
$ 265,824
36,498
8,848
14,767
$ 242,928
31,644
9,827
17,960
Total loans
Unamortized cost/(Unearned income)
Allowance for loan losses
Net loans
429,417
266
429,683
(3,953)
$ 425,730
375,144
92
375,236
(2,954)
$ 372,282
325,937
60
325,997
(2,512)
$ 323,485
302,359
(95)
302,264
(2,383)
$ 299,881
$ 236,812
34,342
6,685
18,452
296,291
(157)
296,134
(2,188)
$ 293,946
Selected Loan Maturity Information
The following table sets forth the approximate maturities and sensitivity to changes in interest rates of certain loans, exclusive of real
estate mortgage loans and installment/consumer loans to individuals as of December 31, 2008:
(In thousands)
Commercial loans
Construction loans (1)
Total
Rate provisions:
Amounts with fixed interest rates
Amounts with variable interest rates
Total
(1)
Within One
Year
After One
But Within
Five Years
After
Five Years
Total
$
$
$
$
23,752
10,336
34,088
8,484
25,604
34,088
$
$
$
$
21,471
$ 18,245
$ 63,468
919
22,390
4,919
$ 23,164
16,174
$ 79,642
14,368
$
5,248
$ 28,100
8,022
22,390
17,916
$ 23,164
51,542
$ 79,642
Included in the “After Five Years” column, are one-step construction loans that contain a preliminary construction
period (interest only) that automatically converts to amortization at the end of the construction phase.
Page -24-
Past Due, Nonaccrual and Restructured Loans
The following table sets forth selected information about past due, nonaccrual and restructured loans:
December 31,
(In thousands)
Loans 90 days or more past due and still accruing
Nonaccrual loans
Restructured loans
Other real estate owned, net
Total
Year ended December 31,
(In thousands)
Gross interest income that has not been paid or recorded
during the year under original terms:
Nonaccrual loans
Restructured loans
Gross interest income recorded during the year:
Nonaccrual loans
Restructured loans
Commitments for additional funds
2008
2007
2006
2005
2004
$
$
— $
3,068
3,229
—
6,297 $
— $
229
—
—
229 $
— $
305
118
—
423 $
— $
658
—
—
658 $
2008
2007
2006
2005
$
$
$
$
127 $
12
189 $
238
—
12 $
— $
5 $
— $
—
9 $
1
12 $
9
—
38 $
—
17 $
—
—
—
1,695
—
—
1,695
2004
16
—
12
—
—
Securities
Total securities increased to $357.9 million at December 31, 2008 from $195.6 million at December 31, 2007. The available for sale
portfolio increased 65.8% to $310.7 million from $187.4 million at December 31, 2007 and the securities held to maturity increased
644.4% to $43.4 million. Securities held as available for sale may be sold in response to, or in anticipation of, changes in interest rates
and resulting prepayment risk, or other factors. U.S. government sponsored entity (“U.S. GSE”) securities increased to $30.1 million
at December 31, 2008 from $19.1 million at December 31, 2007 and state and municipal obligations increased by $0.8 million, while
mortgage-backed securities increased by $111.5 million. Mortgage-backed securities held to maturity increased to $193 million at
December 31, 2008 from $0 at December 31, 2007. Fixed rate securities represented 84.7% of total securities at December 31, 2008
compared to 96.8% at December 31, 2007. Mortgage-backed securities represented approximately 74.7% of the available for sale
balance at December 31, 2008 as compared to 64.3% at the prior year-end. A change in market rates was the primary reason for the
net increase in unrealized gains in securities available for sale, which increased other comprehensive income.
Total securities include restricted securities which represent FHLB and FRB stock, of $3.8 million and $2.4 million at December 31,
2008 and 2007, respectively.
A summary of the amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of securities is as follows:
December 31,
(In thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
2008
Estimated
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
2007
Estimated
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
2006
Estimated
Fair
Value
Available for sale:
$
29,855 $
306 $
(27) $
30,134 $
19,035 $
139 $
(38 ) $
19,136 $
34,123 $
— $
(346 ) $ 33,777
47,848
840
(100)
48,588
47,547
435
(179)
47,803
49,008
316
(481)
48,843
227,325
4,731
(83)
231,973 120,450
1,060
(1,065)
120,445 122,009
364
(2,403) 119,970
305,028
5,877
(210)
310,695 187,032
1,634
(1,282)
187,384 205,140
680
(3,230) 202,590
State and
municipal
obligation
Mortgage-
backed
securities
Total held to
maturity
Total securities
24,153
68
(4)
24,217
5,836
19,291
382
—
19,673
—
8
—
43,444
$ 348,472 $
450
6,327 $
(4)
5,836
43,890
(214 ) $ 354,585 $ 192,868 $
8
1,642 $
Page -25-
—
5,844
9,444
—
(2)
9,442
—
—
—
—
—
—
—
5,844
(1,282 ) $ 193,228 $ 214,584 $
9,444
—
680 $
(2)
9,442
(3,232 ) $ 212,032
U.S. GSE
securities
State and
municipal
obligations
Mortgage-
backed
securities
Total available
for sale
Held to maturity:
The following table sets forth the fair value, amortized cost, maturities and approximated weighted average yield (based on the
estimated annual income divided by the average book value) at December 31, 2008. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on
tax-exempt obligations have been computed on a tax-equivalent basis.
December 31, 2008
(Dollars in
thousands)
Within
One Year
Fair
Value
Amount
Amortized
Cost
Amount Yield
After One But
Within Five Years
Fair
Value
Amount
Amortized
Cost
Amount Yield
After Five But
Within Ten Years
Fair
Value
Amount
Amortized
Cost
Amount Yield
After
Ten Years
Total
Fair
Value
Amount
Amortized
Cost
Amount Yield
Fair Value
Amount
Amortized
Cost
Amount
Available for sale:
U.S. GSE securities $ 12,844 $
Mortgage-backed
12,755 4.40 % $ 12,971 $ 12,754 3.54% $ 4,319 $
4,346 4.62% $
— $
— —% $
30,134 $
29,855
securities
State and municipal
obligations
Total available for
—
— —
10,411
10,378 3.88
34,493
33,793 4.32
187,069
183,154 5.32
231,973
227,325
8,437
8,393 4.30
21,032
20,717 4.60
19,119
18,738 5.85
—
— —
48,588
47,848
sale
21,281
21,148 4.36
44,414
43,849 4.12
57,931
56,877 4.85
187,069
183,154 5.32
310,695
305,028
Held to maturity:
Mortgage-backed
securities
State and municipal
—
— —
obligations
24,217
24,153 3.95
Total held to
maturity
24,217
24,153 3.95
—
—
—
— —
— —
—
—
— —
19,673
19,291 5.20
19,673
19,291
— —
—
— —
24,217
24,153
— —
—
— —
19,673
19,291 5.20
43,890
43,444
Total securities
$ 45,498 $
45,301 4.14 % $ 44,414 $ 43,849 4.12% $ 57,931 $
56,877 4.85% $ 206,742 $ 202,445 5.31% $ 354,585 $
348,472
Deposits and Borrowings
Borrowings including Fed Funds purchased, repurchase agreements and FHLB term advances, increased $73.9 million to $115.9
million at December 31, 2008 from the prior year-end. The increase was consistent with a strategy to utilize wholesale funding to
increase securities holdings and manage seasonal deposit flows. This strategy enhanced earnings and assisted in managing the Bank’s
liquidity. Total deposits increased $150.2 million or 29.5% in 2008 as compared to 2007. The growth in deposits is attributable to an
increase in core deposits of $102.6 million, driven by the opening of three new branches and the offering of promotional deposit
products, as well as an increase of $47.6 million in public funds deposits. Demand deposits increased $5.1 million or 2.9%. Savings,
NOW and money market deposits increased $91.8 million or 36.3% primarily related to public funds. Certificates of deposit of
$100,000 or more grew $33.4 million or 74.6% from December 31, 2007 and other time deposits increased $19.8 million or 56.7% as
compared to the prior year.
The following table sets forth the remaining maturities of the Bank’s time deposits at December 31, 2008.
(In thousands)
3 Months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months through 24 months
Over 24 months through 36 months
Over 36 months through 48 months
Over 48 months through 60 months
Over 60 months
Total
LIQUIDITY
Less than
$100,000
$100,000 or
Greater
Total
$
$
26,252
8,048
13,562
5,575
608
238
504
60
54,847
$
$
44,144
10,647
14,135
7,277
292
700
970
—
78,165
$
70,396
18,695
27,697
12,852
900
938
1,474
60
$ 133,012
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.
Page -26-
The Company’s principal sources of liquidity included cash and cash equivalents of $4.3 million as of December 31, 2008, and
dividends from the Bank. Cash available for distribution of dividends to shareholders of the Company is primarily derived from
dividends paid by the Bank to the Company. During 2008, the Bank declared and paid $3.0 million in cash dividends to the Company.
At December 31, 2008, the Bank had $5.8 million of retained net income available for dividends to the Company. Prior regulatory
approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank’s net income
of that year combined with its retained net income of the preceding two years. In the event that the Company subsequently expands its
current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other
borrowings to meet liquidity needs.
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, 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.
During 2008, the Bank grew its individual, partnership and corporate account balances (“core deposits”) as well as its level of public
funds. During 2007, the Bank grew its individual, partnership and corporate account balances (“core deposits”) and reduced its level
of public funds. However, during 2006 the Bank relied more heavily on funding from municipal accounts which are more rate
sensitive and therefore volatile, as individual, partnership and corporate account balances declined. The Bank’s Asset/Liability and
Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. At December 31, 2008, the Bank had
aggregate lines of credit of $217.5 million with unaffiliated correspondent banks to provide short-term credit for liquidity
requirements. Of these aggregate lines of credit, $197.5 million is available on an unsecured basis. The Bank also has the ability, as a
member of the Federal Home Loan Bank (“FHLB”) system, to borrow against unencumbered residential and commercial mortgages
owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As of
December 31, 2008, the amount of overnight borrowings under these lines was $70.9 million. The Bank had $15.0 million of
securities sold under agreements to repurchase outstanding as of December 31, 2008 with brokers and a $30.0 million advance that
was collateralized by securities outstanding as of December 31, 2008 with the FHLB. In addition, the Bank has an approved broker
relationship for the purpose of issuing brokered certificates of deposit. As of December 31, 2008 and December 31, 2007, the Bank
had issued $5.0 million and $7.2 million, respectively, of brokered certificates of deposit.
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 in overnight federal
funds sold.
CONTRACTUAL OBLIGATIONS
In the ordinary course of operations, the Company enters into certain contractual obligations.
The following represents contractual obligations outstanding at December 31, 2008:
(In thousands)
Operating leases
Purchase obligation
FHLB term advances and repurchase agreements
Time deposits
Total contractual obligations outstanding
Total
Amounts
Committed
Less than
One Year
One to
Three Years
Four to
FiveYears
Over Five
Years
$
5,976 $
250
45,000
133,012
849 $
250
30,000
116,788
$ 184,238 $ 147,887 $
1,192 $
—
—
13,752
14,944 $
916 $
—
5,000
2,412
8,328 $
3,019
—
10,000
60
13,079
Page -27-
COMMITMENTS, CONTINGENT LIABILITIES, AND OFF-BALANCE SHEET ARRANGEMENTS
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in
the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit
loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to
make such commitments as are used for loans, often including obtaining collateral at exercise of the commitment. At December 31,
2008, the Company had $27.8 million in outstanding loan commitments and $103.2 million in outstanding commitments for various
lines of credit including unused overdraft lines. The Company also has $1.8 million of standby letters of credit as of December 31,
2008. See Note 11 of the Notes to the Consolidated Financial Statements for additional information on loan commitments and standby
letters of credit.
CAPITAL RESOURCES
Stockholders’ equity increased to $56.1 million at December 31, 2008 from $51.1 million at December 31, 2007 as a result of
undistributed net income; plus the change in net unrealized appreciation in securities available for sale, net of deferred taxes; the
change in pension liability under SFAS 158, net of deferred taxes; and the issuance of shares of common stock pursuant to the equity
incentive plan; less the declaration of dividends. The ratio of average stockholders’ equity to average total assets decreased to 7.62%
at year end 2008 from 7.91% at year end 2007.
The Company’s capital strength is paralleled by the solid capital position of the Bank, as reflected in the excess of its regulatory
capital ratios over the risk-based capital adequacy ratio levels required for classification as a “well capitalized” institution by the FDIC
(see Note 13 to the Consolidated Financial Statements). Management believes that the current capital levels along with future retained
earnings will allow the Bank to maintain a position exceeding required capital levels and which is sufficient to support Company
growth. Additionally, the Company has the ability to issue additional common stock, preferred stock and/or trust preferred securities
should the need arise.
The Company had returns on average equity of 16.29%, 17.47% and 17.68% and returns on average assets of 1.24%, 1.38% and
1.49%, for the years ended December 31, 2008, 2007, and 2006, respectively. The Company utilizes cash dividends and stock
repurchases to manage capital levels. Cash dividends totaled $5.7 million in 2008 compared to dividends paid in 2007 of $5.6 million.
The dividend payout ratios for 2008 and 2007 were 64.55% and 67.67%, respectively. The Company continues its trend of
uninterrupted dividends.
On March 27, 2006, the Company approved its stock repurchase plan allowing the repurchase of up to 5% of its then current
outstanding shares, 309,000 shares. There is no expiration date for the share repurchase plan. The Company considers opportunities
for stock repurchases carefully. The Company did not repurchase any shares in 2008 or 2007. During 2006, 157,334 shares were
repurchased at a total cost of approximately $4,039,000 or an average price per share of $25.67.
IMPACT OF INFLATION AND CHANGING PRICES
The 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 aversely affect our results of operations and financial condition. Interest rates do not necessarily move in the
same direction, or in the same magnitude, as the prices of goods and services. Interest rates are highly sensitive to many factors, which
are beyond the control of the Company, including the influence of domestic and foreign economic conditions and the monetary and
fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Bank.
IMPACT OF PROSPECTIVE ACCOUNTING STANDARDS
For discussion regarding the impact of new accounting standards, refer to Note 1q) of the notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
Page -28-
The Company’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the
relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and
liabilities, and the credit quality of earning assets. The Company’s objectives in its asset and liability management are to maintain a
strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to
reduce vulnerability of its operations to changes in interest rates.
The Company’s Asset and Liability Committee evaluates periodically, but at least four times a year, the impact of changes in market
interest rates on assets and liabilities, net interest margin, capital and liquidity. Risk assessments are governed by policies and limits
established by senior management, which are reviewed and approved by the full Board of Directors at least annually. The economic
environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a
model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes
in interest rates.
At December 31, 2008, $303,294,000 or 84.7% 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 also could affect the type (fixed-
rate or adjustable-rate) and amount of loans originated by the Company and the average life of loans and securities, which can 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 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 both a 200 basis point upward and 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 December 31, 2008:
Change in Interest
Rates in Basis Points
(Dollars in thousands)
2008
Potential Change
in Net
Interest Income
$ Change
% Change
200
100
Static
(100)
$
$
$
(2,617)
(1,250)
—
249
(7.27)%
(3.47)%
—
0.69%
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.
Page -29-
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Cash and due from banks
Interest earning deposits with banks
Total cash and cash equivalents
Securities available for sale, at fair value
Securities held to maturity (fair value of $43,890 and $5,844, respectively)
Total securities, net
Securities, restricted
Loans
Allowance for loan losses
Loans, net
Premises and equipment, net
Accrued interest receivable
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits
Savings, NOW and money market deposits
Certificates of deposit of $100,000 or more
Other time deposits
Total deposits
Federal funds purchased and Federal Home Loan Bank overnight borrowings
Federal Home Loan Bank term advances
Repurchase agreements
Accrued interest payable
Other liabilities and accrued expenses
Total Liabilities
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized: 20,000,000 shares; 6,386,306 issued; 6,184,080 and 6,111,802 shares
outstanding, respectively
Surplus
Retained earnings
Less: Treasury Stock at cost, 202,226 and 276,274 shares, respectively
Accumulated other comprehensive income (loss):
Net unrealized gain on securities, net of deferred taxes of ($2,250) and ($140), respectively
Change in pension (liabilities) assets, net of deferred taxes of $1,060 and ($7), respectively
Total Stockholders’ Equity
$
December
31,
2008
December
31,
2007
$
24,744
4,141
28,885
310,695
43,444
354,139
14,213
135
14,348
187,384
5,836
193,220
3,800
2,387
429,683
(3,953)
375,236
(2,954)
425,730
372,282
18,377
3,626
4,502
$
839,059
$
181,213
344,860
78,165
54,847
659,085
70,900
30,000
15,000
672
7,263
782,920
64
20,452
40,081
(6,309)
54,288
3,417
(1,566)
56,139
$
$
18,469
2,707
4,011
607,424
176,130
253,012
44,769
34,998
508,909
7,000
10,000
25,000
641
4,765
556,315
64
21,671
37,031
(7,889)
50,877
213
19
51,109
Total Liabilities and Stockholders’ Equity
$
839,059
$
607,424
See accompanying notes to Consolidated Financial Statements.
Page -30-
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
Interest income:
Loans (including fee income)
Mortgage-backed securities
State and municipal obligations
U.S. GSE securities
Federal funds sold
Deposits with banks
Total interest income
Interest expense:
Savings, NOW and money market deposits
Certificates of deposit of $100,000 or more
Other time deposits
Federal funds purchased and repurchase agreements
Federal Home Loan Bank Advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non interest income:
Service charges on deposit accounts
Fees for other customer services
Title fee income
Net securities (losses)
Other operating income
Total non interest income
Non interest expenses:
Salaries and employee benefits
Net occupancy expense
Furniture and fixture expense
Data/Item processing
Advertising
Other operating expenses
Total non interest expense
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Comprehensive Income
See accompanying notes to Consolidated Financial Statements.
2008
28,040
8,404
1,907
1,081
183
5
39,620
5,681
2,125
1,148
478
57
9,489
30,131
2,000
28,131
3,067
1,759
1,120
—
118
6,064
12,710
1,870
850
481
440
4,806
21,157
13,038
4,288
8,750
1.44
1.43
10,369
$
$
$
$
$
2007
2006
26,347
5,764
1,898
1,213
638
4
35,864
7,634
1,452
1,058
288
5
10,437
25,427
600
24,827
2,540
1,734
1,339
(101)
166
5,678
10,755
1,734
833
423
429
3,994
18,168
12,337
4,043
8,294
1.37
1.36
10,787
$
$
$
$
$
23,345
4,989
2,080
1,035
560
21
32,030
6,322
888
723
404
—
8,337
23,693
85
23,608
2,069
1,422
1,042
(289)
169
4,413
9,187
1,414
742
445
414
3,800
16,002
12,019
3,851
8,168
1.33
1.33
9,019
$
$
$
$
$
Page -31-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
Common
Stock
64
$
Surplus
$ 21,631
Comprehensive
Income
Retained
Earnings
$ 31,813
8,168
8,168
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Stock
Awards
Treasury
Stock
(4,285) $
$
(108 ) $
108
Balance at December 31, 2005
Net income
Transfer due to adoption of SFAS 123 (R)
Stock awards granted
Stock awards forfeited
Exercise of stock options, including tax
benefit
Shared based compensation expense
Treasury stock purchases
Cash dividend declared, $0.92 per share
Other comprehensive income, net of
deferred taxes
Change in unrealized net losses in
securities available for sale, net of
reclassification and deferred tax effects .
Adjustment to intially apply SFAS 158, net
of deferred tax
Comprehensive Income
Balance at December 31, 2006
Net income
Stock awards granted
Stock awards forfeited
Exercise of stock options, including tax
benefit
Shared based compensation expense
Cash dividend declared, $0.92 per share
Other comprehensive income, net of
deferred taxes
Change in unrealized net gains in securities
available for sale, net of reclassification
and deferred tax effects
Adjustment to pension liability, net of
deferred tax
Comprehensive Income
Balance at December 31, 2007
Net income
Stock awards granted
Stock awards forfeited
Vesting of stock awards
Exercise of stock options, including tax
benefit
Shared based compensation expense
Cash dividend declared, $0.92 per share
Other comprehensive income, net of
deferred taxes
Change in unrealized net gains in securities
available for sale, net of reclassification
and deferred tax effects
Adjustment to pension liability, net of
deferred taxes
Comprehensive Income
Balance at December 31, 2008
(108)
(189)
2
110
119
189
(2)
(39)
(4,039)
(5,634)
851
9,019
$
64
$ 21,565
$ 34,347
$
(8,176)
—
$
(2,261) $ 45,539
(271)
39
94
244
8,294
8,294
271
(39)
55
(5,610)
1,738
755
10,787
8,294
—
—
149
244
(5,610)
1,738
1,738
755
755
$
64
$ 21,671
$ 37,031
$
(7,889)
—
$
232
$ 51,109
(1,848)
91
(34)
140
432
1,848
(91)
(40)
(137)
8,750
8,750
(5,665)
3,204
(1,585)
(35)
10,369
$
64
$ 20,452
$ 40,081
$
(6,309)
$
1,851
Total
(2,464) $ 46,651
8,168
—
—
—
71
119
(4,039)
(5,634)
851
851
(648)
(648)
8,750
—
—
(74)
3
432
(5,665)
—
3,204
3,204
(1,585)
(1,620)
—
$ 56,139
See accompanying notes to Consolidated Financial Statements.
Page -32-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Operating activities:
2008
2007
2006
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
$
8,750 $
8,294 $
8,168
Provision for loan losses
Depreciation and amortization
(Accretion) and amortization, net
Share based compensation expense
Tax expense from the vesting of stock awards
Tax benefit from exercise of stock options
SERP expense
Net securities losses
Increase in accrued interest receivable
Deferred income tax expense (benefit)
(Increase) decrease in other assets
(Decrease) increase in accrued and other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of securities available for sale
Purchases of FHLB stock
Purchases of securities held to maturity
Sales of securities available for sale
Redemption of FHLB stock
Maturities of securities available for sale
Maturities of securities held to maturity
Principal payments on mortgage-backed securities
Net increase in loans
Purchases of premises and equipment
Net cash used in investing activities
Financing activities:
Net increase in deposits
Net increase (decrease) in federal funds purchased and FHLB overnight borrowings
Increase in FHLB term advances
Net (decrease) increase in repurchase agreements
Purchase of Treasury stock
Net proceeds from exercise of stock options issued pursuant to equity incentive
plan
Repurchase of surrendered stock from exercise of stock options and vesting of
stock awards
Cash dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
Supplemental Information-Cash Flows:
Cash paid for:
Interest
Income taxes
Noncash investing and financing activities:
Dividends declared and unpaid at year end
See accompanying notes to Consolidated Financial Statements.
$
$
$
$
Page -33-
2,000
1,214
(55)
432
34
(19)
166
—
(919)
441
(863)
(1,468)
9,713
(213,851)
(65,496)
(46,571)
—
64,083
69,496
7,945
27,431
(55,448)
(1,122)
(213,533)
150,176
63,900
20,000
(10,000)
—
600
1,223
(22)
244
—
(25)
214
101
(15)
(257)
(1,346)
595
9,606
(37,935)
(16,595)
(5,836)
8,484
15,086
28,978
9,444
18,503
(49,397)
(1,687)
(30,955)
4,497
(11,600)
10,000
25,000
—
85
886
272
119
—
(21)
268
289
(68)
400
1,975
(835)
11,538
(62,500)
(10,343)
(9,444)
19,537
10,842
5,675
10,012
18,361
(23,689)
(3,251)
(44,800)
36,387
4,100
—
—
(4,039)
—
149
70
(71)
(5,648)
218,357
—
(5,612)
22,434
14,537
14,348
28,885 $
1,085
13,263
14,348 $
—
(5,668)
30,850
(2,412)
15,675
13,263
9,457 $
10,651 $
7,810
4,419 $
4,598 $
3,323
1,423 $
1,406 $
1,394
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bridge Bancorp, Inc. (the “Company”) is incorporated under the laws of the State of New York as a single bank holding company.
The Company’s business currently consists of the operations of its wholly-owned subsidiary, The Bridgehampton National Bank (the
“Bank”). The Bank’s operations include its real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”) and a
financial title insurance subsidiary, Bridge Abstract LLC (“Bridge Abstract”). The financial statements have been prepared in
accordance with U.S. generally accepted accounting principles and general practices within the financial institution industry. The
following is a description of the significant accounting policies that the Company follows in preparing its Consolidated Financial
Statements.
a) Basis of Financial Statement Presentation
The accompanying Consolidated Financial Statements are prepared on the accrual basis of accounting and include the accounts of the
Company and its wholly-owned subsidiary, the Bank. All material intercompany transactions and balances have been eliminated.
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of each consolidated balance sheet and the related consolidated statement of income for the years then ended.
Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances
are modified. Actual future results could differ significantly from those estimates. The allowance for loan losses, fair values of
financial instruments, deferred taxes, prepayment speeds on mortgage-backed securities, and pension assumptions are particularly
subject to change. Certain reclassifications have been made to prior year amounts, and the related discussion and analysis, to conform
to the current year presentation.
b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold,
which mature overnight. Cash flows are reported net for customer loan and deposit transactions and overnight borrowings.
c) Securities
Debt and equity securities are classified in one of the following categories: (i) “held to maturity” (management has a positive intent
and ability to hold to maturity), which are reported at amortized cost, (ii) “available for sale” (all other debt and marketable equity
securities), which are reported at fair value, with unrealized gains and losses reported net of tax, as accumulated other comprehensive
income, a separate component of stockholders’ equity, and (iii) “restricted” which represents FHLB and FRB stock which are reported
at cost.
Premiums and discounts on securities are amortized to expense and accreted to income over the estimated life of the respective
securities using the interest method. Gains and losses on the sales of securities are recognized upon realization based on the specific
identification method. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized
losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less
than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair value.
d) Loans and Loan Interest Income Recognition
Loans are stated at the principal amount outstanding, net deferred origination costs and fees. Loan origination and commitment fees
and certain direct and indirect costs incurred in connection with loan originations are deferred and amortized to income over the life of
the related loans as an adjustment to yield. When a loan prepays, the remaining unamortized net deferred origination fees or costs are
recognized in the current year. Interest on loans is credited to income based on the principal outstanding during the period. Loans that
are 90 days past due are automatically placed on nonaccrual and previously accrued interest is reversed and charged against interest
income. However, if the loan is in the process of collection and the Bank has reasonable assurance that the loan will be fully
collectible based upon individual loan evaluation assessing such factors as collateral and collectibility, accrued interest will be
recognized as earned. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status and the probability of collecting scheduled principal and interest
Page -34-
payments when due. The impairment of a loan is measured at the value of expected future cash flows using the loan’s effective
interest rate, or at the loan’s observable market price or the fair value of the collateral less costs to sell if the loan is collateral
dependent. Generally, the Bank measures impairment of such loans by reference to the fair value of the collateral less costs to sell.
Loans that experience minor payment delays and payment shortfall generally are not classified as impaired.
e) Allowance for Loan Losses
The Bank monitors its entire loan portfolio on a regular basis, with consideration given to loan growth, detailed analyses of classified
loans, repayment patterns, current delinquencies, 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. Based on the determination of management and the Classification Committee, the overall level of allowance
is periodically adjusted to account for the inherent and specific risks within the entire portfolio. Based on the Classification
Committee’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at December 31,
2008, management believes the allowance for loan losses is adequate.
A loan is considered a potential charge-off when it is in default of either principal or interest for a period of 90, 120 or 180 days,
depending upon the loan type, as of the end of the prior month. In addition to delinquency criteria, other triggering events may
include, but are not limited to, notice of bankruptcy by the borrower or guarantor, death of the borrower, and deficiency balance from
the sale of collateral.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based
on changes in conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review
the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to, or charge-offs against, the
allowance based on their judgment about information available to them at the time of their examination.
f) Premises and Equipment
Buildings, furniture and fixtures and equipment are stated at cost less accumulated depreciation. Buildings and related components are
depreciated using the straight-line method using a useful life of fifty years for buildings and a range of two to ten years for equipment,
computer hardware and software, and furniture and fixtures. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter. Land is recorded at cost.
Improvements and major repairs are capitalized, while the cost of ordinary maintenance, repairs and minor improvements is charged
to expense.
g) Other Real Estate Owned
Other real estate owned consists of real estate acquired by foreclosure or deed in lieu of foreclosure and is recorded at the lower of the
net loan balance at the foreclosure date plus acquisition costs or fair value, less estimated costs to sell. Subsequent valuation
adjustments are made if fair value less estimated costs to sell the property falls below the carrying amount. At December 31, 2008 and
2007, the Company carried no other real estate owned.
h) Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as unused lines of credit, commitments to make loans and
commercial letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such financial instruments are recorded on the balance sheet when they are
funded.
i) Income Taxes
The Company follows the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities,
computed using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized.
It is management’s position, as currently supported by the facts and circumstances, that no valuation allowance is necessary against
any of the Company’s deferred tax assets.
The Company adopted Financial Accounting Standards Board (“FASB”) Interpretation 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the
largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. The adoption had no affect on the Company’s financial statements.
Page -35-
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have
any amounts accrued for interest and penalties at December 31, 2008 or 2007.
j) Treasury Stock
Repurchases of common stock are recorded as treasury stock at cost. Treasury stock is reissued using the first in, first out method.
k) Earnings Per Share
Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per share, which reflects the potential dilution that could occur if outstanding stock options were exercised
and if stock awards were fully vested and resulted in the issuance of common stock that then shared in the earnings of the Company, is
computed by dividing net income by the weighted average number of common shares and common stock equivalents.
l) Dividends
Cash available for distribution of dividends to shareholders of the Company is primarily derived from dividends paid by the Bank to
the Company. Due to regulatory restrictions, dividends from the Bank to the Company at December 31, 2008, were limited to $8.8
million which represents the Bank’s 2008 retained net income and net retained earnings from the previous two years, of which $3.0
million was declared from the Bank to the Company during 2008. 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.
m) Segment Reporting
While management monitors the revenue streams of the various products and services, the identifiable segments are not material and
operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service
operations are considered by management to be aggregated in one reportable operating segment.
n) Stock Based Compensation Plans
Statement of Financial Accounting Standards 123(R) (“SFAS 123(R)”), “Accounting for Stock-Based Compensation, Revised,”
requires companies to record compensation cost for stock options and stock awards granted to employees in return for employee
service. The cost is measured at the fair value of the options and awards when granted, and this cost is expensed over the employee
service period, which is normally the vesting period of the options and awards. The Company adopted SFAS 123(R) beginning
January 1, 2006 applying the modified prospective transition method. Under the modified prospective transition method, the financial
statements will not reflect restated amounts.
o) Comprehensive Income
Comprehensive income includes net income and all other changes in equity during a period, except those resulting from investments
by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive
income and accumulated other comprehensive income are reported net of deferred income taxes. Accumulated other comprehensive
income for the Company includes unrealized holding gains or losses on available for sale securities, the minimum pension liability for
the years prior to the adoption of Statement of Financial Accounting Standards 158 (“SFAS 158”), “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R.)”, and the
pension liability after adopting SFAS No. 158. SFAS 158 requires employers to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded
status in the year the changes occur through comprehensive income. Other comprehensive income is net of reclassification
adjustments for realized gains (losses) on sales of available for sale securities.
p) Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in
Note 12. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
q) New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a
Page -36-
fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a
restriction on the sale or use of an asset. This statement does not require any new fair value measurements. It is effective for financial
statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,
“Effective Date of FASB Statement No. 157.” This FSP delays the effective date of SFAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of
the adoption of SFAS 157, with respect to its current practice of measuring fair value and disclosure in its financial statements,
however the impact of adoption of this standard is not anticipated to be material.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including
an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure selected financial assets
and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of assets and liabilities. Early adoption was permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of
SFAS 157. The Company did not early adopt SFAS 159. The standard is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The Company did not elect the fair value option for any financial assets and liabilities as of
January 1, 2008.
On November 5, 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to
Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the
expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written
loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible
assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is
effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of
SAB 109 did not have a significant impact on the Company’s financial statements.
On December 21, 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”) that amends and replaces Question 6 of
Section D.2 of Topic 14, Share Based Payment, of the Staff Accounting Bulletin Series. SAB 110 states that the continued use of the
simplified method in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS No.
123(R), “Accounting for Stock-Based Compensation, Revised,” that was outlined in Staff Accounting Bulletin No. 107 is acceptable.
r) Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to own a particular amount of stock based on the level of
borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are
reported as income.
s) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Page -37-
2. SECURITIES
A summary of the amortized cost, gross unrealized gains and losses and estimated fair value of securities is as follows:
December 31,
(In thousands)
Available for sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
2008
2007
U.S. GSE securities
State and municipal obligations
Mortgage-backed securities
Total available for sale
$
29,855
47,848
227,325
305,028
Held to maturity:
State and municipal obligation
Mortgage-backed securities
Total held to maturity
Total securities
24,153
19,291
43,444
$ 348,472
$
$
306
840
4,731
5,877
68
382
450
6,327
$
$
(27)
(100)
(83)
(210)
(4)
—
(4)
(214)
$
$
30,134
48,588
231,973
310,695
24,217
19,673
43,890
354,585
$
19,035
47,547
120,450
187,032
5,836
—
5,836
$ 192,868
$
$
139
435
1,060
1,634
8
—
8
1,642
$
$
(38)
(179)
(1,065)
(1,282)
$
19,136
47,803
120,445
187,384
—
—
—
(1,282)
5,844
—
5,844
$ 193,228
Securities with unrealized losses at year-end 2008 and 2007, aggregated by category and length of time that individual securities have
been in a continuous unrealized loss position, are as follows:
December 31,
(In thousands)
U.S. GSE securities
State and municipal obligations
Mortgage-backed securities
Total temporarily impaired
Less than 12 months
Fair
Value
4,319
6,156
17,224
$
Unrealized
losses
27
55
64
$
2008
2007
Greater than 12 months
Unrealized
losses
—
49
19
Fair
Value
—
701
1,529
$
$
Less than 12 months
Greater than 12 months
Fair
Value
—
3,284
—
Unrealized
losses
—
49
—
$
$
Fair
Value
12,328
14,918
49,468
$
Unrealized
losses
38
130
1,065
$
securities
$ 27,699
$
146
$
2,230
$
68
$
3,284
$
49
$
76,714
$
1,233
Unrealized losses on securities have not been recognized into income, as the losses on these securities would be expected to dissipate
as they approach their maturity dates. The Company evaluates securities for other-than-temporary impairment periodically and with
increased frequency when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and
ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value. In
analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its
entities, whether downgrades by bond rating agencies have occurred, and the issuer’s financial condition.
The following table sets forth the fair value, amortized cost and maturities of the securities at December 31, 2008. Expected maturities
will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
December 31, 2008
(Dollars in thousands)
Within
One Year
After One But
Within Five Years
After Five But
Within Ten Years
After
Ten Years
Total
Fair Value
Amount
Amortized
Cost
Amount
Fair Value
Amount
Amortized
Cost
Amount
Fair Value
Amount
Amortized
Cost
Amount
Fair Value
Amount
Amortized
Cost
Amount
Fair Value
Amount
Amortized
Cost
Amount
Available for sale:
$
U.S. GSE securities
Mortgage-backed securities
State and municipal
obligations
Total available for sale
Held to maturity:
Mortgage-backed securities
State and municipal
obligations
Total held to maturity
12,844 $
—
12,755 $ 12,971 $
—
10,411
12,754 $
10,378
4,319 $
4,346 $
— $
34,493
33,793
187,069
— $
30,134 $
183,154 $ 231,973 $
29,855
227,325
8,437
21,281
8,393
21,148
21,032
44,414
20,717
43,849
19,119
57,931
18,738
56,877
—
187,069
— $
183,154
48,588 $
310,695
47,848
305,028
—
—
24,217
24,217
24,153
24,153
—
—
—
—
—
—
—
—
—
—
—
—
19,673
19,291 $
19,673 $
19,291
—
19,673
— $
19,291
24,217 $
43,890
24,153
43,444
Total securities
$
45,498 $
45,301 $ 44,414 $
43,849 $
57,931 $
56,877 $ 206,742 $ 202,445 $ 354,585 $
348,472
There were no sales of available for sale securities during 2008. There were $8.5 million and $19.5 million of proceeds on sales of
Page -38-
available for sale securities in 2007, and 2006, respectively. Gross gains of approximately $13,000 were realized on sales of available
for sale securities during 2006. Gross losses of approximately $101,000, and $302,000 were realized on sales of available for sale
securities during 2007 and 2006, respectively. There were no sales of held to maturity securities during 2008, 2007, and 2006.
Securities having a fair value of approximately $276.0 million and $145.7 million at December 31, 2008 and 2007, respectively, were
pledged to secure public deposits and Federal Home Loan Bank and Federal Reserve Bank overnight borrowings. The Company did
not hold any trading securities during the years ended December 31, 2008 and 2007.
There were no investment holdings of any one issuer that exceeded 10% of stockholders’ equity at December 31, 2008 and 2007,
other than U.S. Government and its Entities.
3. LOANS
The following table sets forth the major classifications of loans:
December 31,
(In thousands)
Commercial real estate mortgage loans
Residential real estate mortgage loans
Commercial, financial, and agricultural loans
Installment/consumer loans
Real estate-construction loans
Total loans
Net deferred loan cost and fees
Allowance for loan losses
Net loans
2008
2007
$
$
199,156
139,342
63,468
11,081
16,370
429,417
266
429,683
(3,953)
425,730
$
$
175,876
125,317
50,531
8,553
14,867
375,144
92
375,236
(2,954)
372,282
Lending Risk
The principal business of the Bank is lending, primarily in commercial real estate loans, residential mortgage loans, construction
loans, home equity loans, commercial and industrial loans, construction loans, land loans and consumer loans. The Bank considers its
primary lending area to be eastern Long Island in Suffolk County, New York, and a substantial portion of the Bank’s loans are secured
by real estate in this area. Accordingly, the ultimate collectibility of such a loan portfolio is susceptible to changes in market and
economic conditions in this region.
Allowance for Loan Losses
The following table sets forth changes in the allowance for loan losses:
December 31,
(In thousands)
Allowance for loan losses balance at beginning of period
Charge-offs
Recoveries
Net (charge-offs) recoveries
Provision for loan losses charged to operations
Balance at end of period
2008
2007
2006
$
$
2,954
(1,070)
69
(1,001)
2,000
$
2,512
(226 )
68
(158 )
600
2,383
(83)
127
44
85
$
3,953
$
2,954
$
2,512
Past Due, Nonaccrual and Restructured Loans
Nonaccrual loans at December 31, 2008 and 2007 were $3.1 million and $0.2 million, respectively. There were no loans 90 days or
more past due that were still accruing interest at December 31, 2008 and 2007.
As of December 31, 2008, management determined that one commercial mortgage loan for $2.5 million was an impaired loan as
defined by SFAS No. 114, “Accounting by Creditors for Impairment of a Loan – An Amendment of FASB Statement No. 5 and 15”
(“SFAS 114”). For a loan to be considered impaired, management determines after review whether it is probable that the Company
will not be able to collect all amounts due according to the original contractual terms of the loan agreement. Additionally management
applies its normal loan review procedures in making these judgments. Recognition of interest income on impaired loans is
discontinued when reasonable doubt exists as to the ultimate collectibility of the interest and principal of the loan. The loan was
determined to be impaired on December 28, 2008 therefore the average recorded investment in the impaired loan during the twelve
Page -39-
months ended December 31, 2008 was immaterial to the financial statements. The collateral underlying this loan is a first lien on real
estate with an updated appraised value of $8.4 million; therefore management believes that the ultimate collection of principal and
interest is reasonably assured. Since management believes in the ultimate collection of the loan there is not a specific allocation of the
allowance for loan loss attributable to this loan. Currently the loan is nonaccrual and is not accruing interest. As of December 31, 2007
and 2006, the Bank did not have any impaired loans as defined in SFAS No. 114.
As of December 31, 2008, management determined that one commercial mortgage loan for $3.2 million to a local not for profit
organization was a troubled debt restructuring as defined by SFAS No. 114. The related allowance for loan loss associated with the
loan as of December 31, 2008 was $65,000. The average recorded investment in the troubled debt restructured loan during the twelve
months ended December 31, 2008 was $0.8 million. The loan was determined to be impaired during the third quarter of 2008 and
since that determination $52,000 of interest income has been recognized. The troubled debt restructured loan is current as of
December 31, 2008 and is secured with collateral that has a fair value of approximately $5.4 million as well as personal guarantors.
Management believes that the ultimate collection of principal and interest is reasonably assured and therefore continues to recognize
interest income on an accrual basis. There were no restructured loans at December 31, 2007.
Related Party Loans
Certain directors, executive officers, and their related parties, including their immediate families and companies in which they are
principal owners, were loan customers of the Bank during 2008 and 2007.
The following table sets forth selected information about related party loans at December 31, 2008:
(In thousands)
Balance at December 31, 2007
New loans
Effective change in related parties
Advances
Repayments
Balance at December 31, 2008
4. PREMISES AND EQUIPMENT
Premises and equipment consist of:
December 31,
(In thousands)
Land
Construction in progress
Building and improvements
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
Balance
Outstanding
1,349
2,196
(79)
170
(369)
3,267
2008
2007
6,142
769
11,515
8,372
2,410
29,208
(10,831)
18,377
$
$
$
6,142
98
11,605
8,012
2,241
28,098
(9,629)
18,469
$
$
$
$
$
Page -40-
5. DEPOSITS
Time Deposits
The following table sets forth the remaining maturities of the Bank’s time deposits at December 31, 2008:
(In thousands)
2009
2010
2011
2012
2013
2014
Total
Less than
$100,000
$100,000 or
Greater
$
$
47,862 $
5,575
608
238
504
60
54,847 $
68,926 $
7,277
292
700
970
—
78,165 $
Total
116,788
12,852
900
938
1,474
60
133,012
Deposits from principal officers, directors and their affiliates at December 31, 2008 and 2007 were approximately $8.7 million and
$3.7 million, respectively. Public fund deposits at December 31, 2008 and 2007 were $138.2 million and $90.6 million, respectively.
6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 2008 and 2007, securities sold under agreements to repurchase totaled $15.0 million and $25.0 million, respectively,
and were secured by mortgage-backed securities with a carrying amount of $23.4 million and $30.2 million, respectively.
Securities sold under agreements to repurchase are financing arrangements with $5.0 million maturing during the first quarter of 2013
and $10 million maturing during the first quarter of 2015. At maturity, the securities underlying the agreements are returned to the
Company. Information concerning securities sold under agreements to repurchase is summarized as follows:
(In thousands)
Average daily balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at year-end
7. FEDERAL HOME LOAN BANK ADVANCES
2008
2007
2006
$
$
13,183
2.39%
15,000
2.39%
$
$
753
4.50%
25,000
4.50%
—
—
—
—
As of December 31, 2008, there was one term advance from the Federal Home Loan Bank for $30.0 million with a fixed interest rate
of 0.49% maturing in January 2009. The term advance is payable at its maturity date and is subject to a prepayment penalty. The term
advance was collateralized by $35.3 million of mortgage-backed securities as of December 31, 2008. In addition to the term advance,
there was $34.9 million of overnight borrowing from the Federal Home Loan Bank outstanding as of December 31, 2008. The
overnight borrowings were collateralized by $15.8 million of securities and a blanket lien on residential mortgages as of December 31,
2008. As of December 31, 2007, there was one advance from the Federal Home Loan Bank for $10.0 million with a fixed interest rate
of 4.3% maturing in January 2008. The advance was payable at its maturity date and was subject to a prepayment penalty. The
advance was collateralized by $15.0 million of agency securities as of December 31, 2007. There were no overnight borrowings from
the Federal Home Loan Bank outstanding as of December 31, 2007.
Page -41-
8. INCOME TAXES
The components of income tax expense are as follows:
Year Ended December 31,
2008
2007
2006
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Income tax expense
$
$
3,263
584
3,847
399
42
441
4,288
$
$
3,609
691
4,300
(194)
(63)
(257)
4,043
$
$
2,967
484
3,451
310
90
400
3,851
The reconciliation of the expected Federal income tax expense at the statutory tax rate to the actual provision follows:
Year Ended December 31
(Dollars in thousands)
Federal income tax expense computed by
Amount
2008
Percentage
of Pre-tax
Earnings
2007
Percentage
of Pre-tax
Earnings
2006
Percentage
of Pre-tax
Earnings
Amount
Amount
applying the statuory rate to income before
income taxes
Tax exempt interest
State taxes, net of Federal income tax benefit
Other
Income tax expense
$
$
4,442
(699)
413
132
4,288
34% $
(5)
3
1
33% $
4,195
(644)
415
77
4,043
34% $
(5)
3
1
33% $
4,087
(706)
379
91
3,851
34%
(6)
3
1
32%
Deferred tax assets and liabilities are comprised of the following:
December 31,
(In thousands)
Deferred tax assets:
Allowance for loan losses
Total
Deferred tax liabilities:
Pension and SERP expense
Other
Depreciation
Total
Total before other comprehensive Income
SFAS 115 deferred tax liability
SFAS 158 deferred tax asset (liability)
Net deferred tax (liability) asset
2008
2007
$
1,726
1,726
$
1,300
1,300
(853)
(507)
(263)
(1,623)
103
(2,250)
1,060
(1,087)
$
$
(435 )
(94 )
(227 )
(756 )
544
(140 )
(7 )
397
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the State of New York. The
Company is no longer subject to examination by taxing authorities for years before 2004. The Company does not expect the total
amount of unrecognized tax benefits to significantly increase in the next twelve months.
Page -42-
9. EMPLOYEE BENEFITS
a) Pension Plan and Supplemental Executive Retirement Plan
The Bank maintains a noncontributory pension plan through the New York State Bankers Association Retirement System covering all
eligible employees. Beginning in 2008, the Bank uses a December 31st measurement date for this plan in accordance with SFAS No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No.
87, 88, 106 and 132(R)”. Prior to 2008, the Bank used a September 30th measurement date. In order to properly reflect the change in
measurement dates the Bank recorded a net transition adjustment of $35,000.
During 2001, the Bank adopted the Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”). The SERP
provides benefits to certain employees, as recommended by the Compensation Committee of the Board of Directors and approved by
the full Board of Directors, whose benefits under the pension plan are limited by the applicable provisions of the Internal Revenue
Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension Plan and the
401(k) Plan in the absence of such Internal Revenue Code limitations. The assets of the SERP are held in a rabbi trust to maintain the
tax-deferred status of the plan and are subject to the general, unsecured creditors of the Company. As a result, the assets of the trust
are reflected on the Consolidated Balance Sheets of the Company.
Information about changes in obligations and plan assets of the defined benefit pension plan and the defined benefit plan component
of the SERP are as follows:
At December 31,
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Benefits paid and expected expenses
Assumption changes and other
Benefit obligation at end of year
Change in plan assets, at fair value
Plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid and actual expenses
Plan assets at end of year
Funded status (plan assets less benefit obligations)
Pension Benefits
2008
2007
SERP Benefits
2008
2007
$
$
$
$
$
4,716
553
348
(270)
10
5,357
6,574
(1,736)
2,000
(266)
6,572
1,215
$
$
$
$
$
4,943
451
280
(205)
(753)
4,716
5,005
785
990
(206)
6,574
$
$
1,054
71
48
—
308
1,481
$
$
—
—
—
—
—
1,119
61
53
(17)
(162)
1,054
—
—
17
(17)
—
1,858
$
(1,481)
$
(1,054)
Amounts recognized in accumulated other comprehensive income at December 31, consist of:
At December 31,
(In thousands)
Net actuarial loss/(gain)
Prior service cost
Transition obligation
Net amount recognized
Pension Benefits
2008
1,930
108
—
2,038
$
$
$
$
2007
(431)
120
—
(311)
$
$
SERP Benefits
2008
2007
312
—
252
564
$
$
4
—
280
284
The accumulated benefit obligation was $4.6 million and $1.2 million for the pension plan and the SERP, respectively, as of
December 31, 2008. As of December 31, 2007, the accumulated benefit obligation was $3.8 million and $1.0 milliom for the pension
plan and the SERP, respectively.
Page -43-
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
At December 31,
(In thousands)
Components of net periodic benefit cost and other
amounts recognized in Other Comprehensive Income
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Amortization of unrecognized prior service cost
Amortization of unrecognized transition (asset) obligation
Net periodic benefit cost
Net loss (gain)
Prior service cost
Transition obligation
Amortization of net gain
Amortization of prior service cost
Amortization of transition obligation
Deferred taxes
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and other
Pension Benefits
SERP Benefits
2008
Transition
2007
2007
2006
2008
2007
2006
$
$
$
442
279
(495)
—
9
—
235
$
$
2,361
—
—
—
(11)
—
2,350
(933)
1,417
111
70
(124)
—
2
—
59
$
$
$
(24)
451
280
(395)
14
9
—
359
$
$
(1,141)
—
—
(14)
(9)
—
(1,164)
462
(702)
$
$
$
424
252
(327)
40
9
(3)
395
—
—
—
—
—
—
—
—
—
$
$
$
71
47
—
—
—
28
146
308
—
—
—
—
(28)
280
(111)
169
$
$
61
52
—
—
—
28
141
4
—
(64)
—
—
(28)
(88)
35
(53)
65
55
—
—
—
28
148
—
—
—
—
—
—
—
—
—
comprehensive income
$
1,711
$
35
$
(343) $
395
$
315
$
88
$
148
The estimated net loss, transition obligation and prior service costs for the defined benefit pension plan that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $88,000, $0 and $9,000,
respectively. The estimated net gain and unrecognized net transition obligation for the SERP that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over the next fiscal year is $13,000 and $28,000, respectively.
The Company’s pension plan weighted-average asset allocations at December 31, 2008 and 2007 by asset category are as follows:
Plan Assets at December 31,
2008
2007
Asset Category:
Equity securities
Debt securities
Other
Total
Investment Policies
50%
43%
7%
100%
54%
40%
6%
100%
The New York State Bankers Retirement System (the “System”) was established in 1938 to provide for the payment of benefits to
employees of participating banks. The System is overseen by a Board of Trustees (“Trustees”), who meet quarterly, and set the
investment policy guidelines.
The System utilizes two investment management firms (which will be referred to as “Firm I” and “Firm II”). Firm I is investing
approximately 68% of the portfolio and Firm II is investing approximately 32% of the portfolio. The System’s investment objective is
to exceed the investment benchmarks in each asset category. Each firm operates under a separate written investment policy approved
by the Trustees and designed to achieve an allocation approximating 60% invested in Equity Securities and 40% invested in Debt
Securities.
Each Firm shall report at least quarterly to the Investment Committee of the System and semi-annually to the Board.
Equities: The target allocation percentage for equity securities is 60% but may vary from 50%-70% at the investment manager’s
discretion.
Page -44-
Firm I is employed for its expertise as a Value Manager. It is allowed to invest a certain amount of the equity portfolio under its
management in international securities and to hedge said international securities so as to protect against currency devaluations.
The equities managed by Firm II are in a separately managed Large Cap Core Equity Fund. The portfolio is permitted to invest in a
diversified range of securities in the United States (“US”) equity markets. Although the portfolio holds primarily common stocks,
from time to time the portfolio may invest in other types of investments on an opportunistic basis.
Fixed Income: For both investment portfolios, the target allocation percentage for debt securities is 40%, but may vary from 30% to
50% at the investment manager’s discretion.
The Fixed Income Portfolio managed by Firm I operates with guidelines relating to types of debt securities, quality ratings, maturities,
and maximum single and sector allocations.
The portfolio may trade foreign currencies in both spot and forward markets to affect securities transactions and to hedge underlying
asset positions. The purchase and sale of futures and options on futures on foreign currencies and on foreign and domestic bonds, bond
indices and short-term securities is permitted; however, purchases may not be used to leverage the portfolio. Currency transactions
may only be used to hedge 0-100% of currency exposure of foreign securities.
The Fixed Income managed by Firm II is a Core Bond Fixed Income Fund. The portfolio investments are limited to U.S. Dollar
denominated, fixed income securities and selective derivatives designed to have similar attributes of such fixed income securities. The
term “fixed income security” is defined to include instruments with fixed, floating, variable, adjustable, auction-rate, zero, or other
coupon features.
Expected Long-Term Rate-of-Return
The expected long-term rate-of-return on plan assets reflects long-term earnings expectations on existing plan assets and those
contributions expected to be received during the current plan year. In estimating that rate, appropriate consideration was given to
historical returns earned by plan assets in the fund and the rates of return expected to be available for reinvestment. Average rates of
return over the past 1, 3, 5 and 10-year periods were determined and subsequently adjusted to reflect current capital market
assumptions and changes in investment allocations.
At December 31,
Weighted Average Assumptions Used to
Determine Benefit Obligations
Discount rate
Rate of compensation increase
Weighted Average Assumptions Used to
Determine Net Periodic Benefit Cost
Discount rate
Rate of compensation increase
Expected long-term rate of return
Contributions
Pension Benefits
SERP Benefits
2008
2007
2006
2008
2007
2006
6.00%
3.50
6.00%
4.00
5.75%
4.50
4.00%
5.00
4.52%
5.00
4.69%
5.00
6.00%
4.00
7.75
5.75%
4.50
8.00
5.50%
4.50
8.00
4.52%
5.00
—
4.69%
5.00
—
4.73%
4.00
—
The Company expects to contribute $400,000 to the pension plan and approximately $290,000 to the SERP plan in 2009.
Estimated Future Payments
The following benefit payments, which reflect expected future service, are expected to be paid as follows:
Year
(In thousands)
2009
2010
2011
2012
2013
Following 5 years
Pension and SERP Payments
$
141
1,739
198
212
219
1,239
Page -45-
b) 401(k) Plan
A savings plan is maintained under Section 401(k) of the Internal Revenue Code and covers substantially all current employees.
Newly hired employees can elect to participate in the savings plan after completing six months of service. Under the provisions of the
savings plan, employee contributions are partially matched by the Bank with cash contributions. Participants can invest their account
balances into several investment alternatives. The savings plan does not allow for investment in the Company’s common stock.
During the years ended December 31, 2008, 2007 and 2006 the Bank made cash contributions of $189,000, $140,000, and $128,000,
respectively.
c) Equity Incentive Plan
During 2006, the Bridge Bancorp, Inc. Equity Incentive Plan (the “Plan”) was approved by the shareholders to provide for the grant of
options to purchase shares of common stock of the Company and for the award of shares of common stock. The plan supersedes the
Bridge Bancorp, Inc. Equity Incentive Plan that was approved in 1996 and amended in 2001. Of the total 620,000 shares of common
stock approved for issuance under the Plan, 477,787 shares remain available for issuance at December 31, 2008.
The Compensation Committee of the Board of Directors determines options awarded under the Plan. The Company accounts for this
Plan under SFAS 123(R).
The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
For the Year Ended
Risk free interest rate
Expected dividend yield
Expected volatility
Expected life (in years)
2008
—
—
—
—
2007
—
—
—
—
2006
4.70%
3.67
20.2
6.0
A summary of the status of the Company’s stock options as of December 31, 2008 follows:
Outstanding, December 31, 2007
Granted
Exercised
Forfeited
Expired
Outstanding, December 31, 2008
Vested or expected to vest
Exercisable, December 31, 2008
Range of Exercise Prices
Weighted
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
6.28 years
6.20 years
5.89 years
$ 83,790
$ 83,790
$ 83,790
Number
of
Options
100,415
—
(13,683)
(5,527)
—
81,205
77,394
60,648
Number
of
Shares
8,400
11,100
8,659
47,643
5,403
Weighted
Average
Exercise
Price
21.72
—
14.67
25.27
—
22.67
22.54
21.76
$
$
$
$
$
$
Price
12.53
$
15.47
$
24.00
$
$
25.25
$ 26.55-30.60
The aggregate intrinsic value for options outstanding and exercisable as of December 31, 2008 is the same because the options that are
unvested have no intrinsic value.
Page -46-
A summary of activity related to the stock options follows:
December 31,
(In thousands, except for per share data)
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from option exercises
Weighted average fair value of options granted
2008
2007
2006
$
$
75
—
19
—
130
124
25
—
$
$
180
49
21
4.45
During the year ended December 31, 2006 the Company granted 63,983 options to purchase shares of common stock of the Company.
These options vest ratably over five years beginning December 31, 2006 and have a 10 year contractual term. The Company did not
grant any stock options in 2008 and 2007. Compensation expense attributable to these options was $ 39,000, $44,000 and $68,000 for
the years ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008, 2007 and 2006, there were $133,000,
$173,000 and $217,000, respectively, of total unrecognized compensation costs related to nonvested stock options granted under the
Plan.
A summary of the status of the Company’s shares of unvested restricted stock as of December 31, 2008 follows:
Unvested, December 31, 2007
Granted
Vested
Forfeited
Unvested, September 30, 2008
Weighted
Average Grant-
Date
Fair Value
24.82
20.86
25.41
24.13
21.55
Shares
36,673
78,970
(12,673)
(7,400)
95,570
$
$
$
$
$
The Company’s Equity Incentive Plan also provides for issuance of restricted stock awards. During the year ended December 31,
2008, the Company granted restricted stock awards of 78,970 shares. These awards vest over five years with a third vesting after three
years, four years and five years. During the year ended December 31, 2007, the Company granted restricted stock awards of 22,000
shares. These awards vest over five years with a third vesting after three years, four years and five years. During the year ended
December 31, 2006, the Company granted restricted stock awards of 15,987 shares. These awards cliff vested as of December 31,
2008. Such shares are subject to restrictions based on continued service as employees of the Company or employees of subsidiaries of
the Company. Compensation expense attributable to these awards was approximately $393,000, $200,000 and $51,000 for the years
ended December 31, 2008, 2007, and 2006, respectively. The total fair value of shares vested during the years ended December 31,
2008, 2007 and 2006 was $286,000, $50,000 and $85,000, respectively. As of December 31, 2008, 2007, and 2006 there was
$1,924,000, $733,000 and $411,000, respectively, of total unrecognized compensation costs related to nonvested restricted stock
awards granted under the Plan.
10. EARNINGS PER SHARE
The following is a reconciliation of earnings per share for December 31, 2008, 2007 and 2006:
For the Year Ended December 31,
(In thousands, except per share data)
Net Income
Common Equivalent Shares:
Weighted Average Common Shares Outstanding
Weighted Average Common Equivalent Shares Outstanding
Weighted Average Common and Equivalent Shares Outstanding
Basic Earnings per Share
Diluted Earnings per Share
2008
2007
2006
$ 8,750
$ 8,294
$ 8,168
6,076
23
6,099
6,072
20
6,092
6,139
20
6,159
$
$
1.44
1.43
$
$
1.37
1.36
$
$
1.33
1.33
Page -47-
There are 61,705 options outstanding at December 31, 2008 that were not included in the computation of diluted earnings per share
because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive.
There are 95,570 shares of unvested restricted stock at December 31, 2008 with a grant price higher than the average market price of
the common stock.
11. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
In the normal course of business, there are various outstanding commitments and contingent liabilities, such as claims and legal
actions, minimum annual rental payments under non-cancelable operating leases, guarantees and commitments to extend credit, which
are not reflected in the accompanying consolidated financial statements. No material losses are anticipated as a result of these
commitments and contingencies.
a) Leases
The Company is obligated to make minimum annual rental payments under non-cancelable operating leases for its premises. Projected
minimum rentals under existing leases are as follows:
December 31, 2008
(In thousands)
2009 $
2010
2011
2012
2013
Thereafter
Total minimum rentals $
849
691
501
478
438
3,019
5,976
Certain leases contain renewal options and rent escalation clauses. In addition, certain leases provide for additional payments based
upon real estate taxes, interest and other charges. Rental expenses under these leases for the years ended December 31, 2008, 2007 and
2006 approximated $659,000, $584,000, and $516,000, respectively.
b) Loan commitments
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in
the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit
loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to
make such commitments as are used for loans, often including obtaining collateral at exercise of the commitment. The following
represents commitments outstanding:
December 31,
(In thousands)
Standby letters of credit
Loan commitments outstanding (1)
Unused lines of credit
Total commitments outstanding
2008
2007
$
$
1,781
27,752
103,237
132,770
$
$
3,016
23,452
106,207
132,675
(1) Of the $27.8 million of loan commitments outstanding at December 31, 2008, $3.6 million are fixed rate
commitments and $24.2 million are variable rate commitments
c) Other
During 2008, the Bank was required to maintain certain cash balances with the Federal Reserve Bank of New York for reserve and
clearing requirements. The required cash balance at December 31, 2008 was $3.9 million.
During 2008, 2007 and 2006, the Bank maintained an overnight line of credit with the Federal Home Loan Bank of New York
(“FHLB”). The Bank has the ability to borrow against its unencumbered residential and commercial mortgages and investment
securities owned by the Bank. At December 31, 2008, the Bank had aggregate lines of credit of $217.5 million with unaffiliated
correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $197.5 million is
available on an unsecured basis. As of December 31, 2008, the Bank had $70.9 million in such borrowings outstanding.
Page -48-
In March 2001, the Bank entered into a Master Repurchase Agreement with the FHLB whereby the FHLB agrees to purchase
securities from the Bank, upon the Bank’s request, with the simultaneous agreement to sell the same or similar securities back to the
Bank at a future date. Securities are limited, under the agreement, to government securities, securities issued, guaranteed or
collateralized by any agency or instrumentality of the U.S. Government or any government sponsored enterprise, and non-agency AA
and AAA rated mortgage-backed securities. At December 31, 2008, there was $79.2 million available for transactions under this
agreement.
The Bank had $15.0 million of securities sold under agreements to repurchase outstanding as of December 31, 2008 and a $30.0
million advance that was collateralized by securities outstanding as of December 31, 2008 (See Notes 6 and 7).
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the
effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal
years. The impact of adoption was not material.
Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair
value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market
participants would use in pricing and asset or liability.
The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges
(Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark
quoted securities (Level 2 inputs).
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
(In thousands)
Fair Value Measurements Using
Quoted Prices In
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
December 31,
2008
Assets:
Available for sale securities
$
310,695
$
310,695
Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. Such
estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial
instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments,
estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the
estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could
result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument, or the tax consequences of
realizing gains or losses on the sale of financial instruments.
Page -49-
The Company used the following method and assumptions in estimating the fair value of its financial instruments:
Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either
payable on demand or have short-term maturities.
Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations on nationally
recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted securities.
Restricted Stock: It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on its
transferability.
Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow
calculations that use available market benchmarks when establishing discount factors for the types of loans. All nonaccrual loans are
carried at their current fair value. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be
discounted straight to their rate index plus or minus an appropriate spread.
Deposits: The estimated fair value of certificates of deposits are based on discounted cash flow calculations that use a replacement
cost of funds approach to establishing discount rates for certificates of deposits maturities. Stated value is fair value for all other
deposits.
Borrowed Funds and Brokered Deposits: The estimated fair value of borrowed funds and wholesale certificates of deposit are based
on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding
maturities.
Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair
value.
Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently
charged to enter into similar agreements. The fair value is immaterial as of December 31, 2008 and 2007.
The estimated fair values and recorded carrying values of the Bank’s financial instruments are as follows:
December 31,
(In thousands)
Financial Assets:
Cash and due from banks
Interest bearing deposits with banks
Securities available for sale
Securities restricted
Securities held to maturity
Loans, net
Accrued interest receivable
Financial liabilities:
Demand and other deposits
Federal funds purchased and Federal Home Loan Bank overnight
borrowings
Federal Home Loan Bank term advances
Repurchase agreements
Accrued interest payable
Off Balance- Sheet Liabilities Commitments to extend credit
13. REGULATORY CAPITAL REQUIREMENTS
2008
2007
Carrying
Amount
Fair
Value
Carrying
Amount
$
$
24,744
4,141
310,695
3,800
43,444
425,730
3,626
$
24,744
4,141
310,695
n/a
43,890
437,265
3,626
$
14,213
135
187,384
2,387
5,836
372,282
2,707
Fair
Value
14,213
135
187,384
n/a
5,844
378,698
2,707
659,085
660,176
508,909
508,747
70,900
30,000
15,000
672
—
70,882
29,998
15,368
672
—
7,000
10,000
25,000
641
—
7,000
10,000
25,000
641
—
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
Page -50-
requirements 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 Bank’s capital amounts and classifications 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 December 31, 2008, that the
Company and the Bank met all capital adequacy requirements with which it must comply.
As of December 31, 2008, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as “well
capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. Since that notification, there
are no conditions or events that management believes have changed the institution’s category.
The Company and the Bank’s actual capital amounts and ratios are presented in the following table:
Bridge Bancorp, Inc. (Consolidated)
As of December 31,
(Dollars In thousands)
Total Capital (to risk weighted assets)
Tier 1 Capital (to risk weighted assets)
Tier 1 Capital (to average assets)
As of December 31,
(Dollars In thousands)
2008
For Capital
Adequacy
Purposes
Actual
Ratio
Amount
Ratio
Amount
$ 58,360
54,288
54,288
Actual
11.1% $ 42,137
10.3% 21,068
6.9% 31,304
2007
For Capital
Adequacy
Purposes
Amount
Ratio
Amount
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
n/a
n/a
n/a
8.0%
4.0%
4.0%
n/a
n/a
n/a
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Total Capital (to risk weighted assets)
Tier 1 Capital (to risk Weighted assets)
Tier 1 Capital (to average assets)
$ 53,950
50,877
50,877
12.1% $ 35,542
11.5% 17,771
8.4% 24,347
8.0 %
4.0 %
4.0 %
n/a
n/a
n/a
n/a
n/a
n/a
Bridgehampton National Bank
As of December 31,
(Dollars In thousands)
Total Capital (to risk weighted assets)
Tier 1 Capital (to risk weighted assets)
Tier 1 Capital (to average assets)
As of December 31,
(In thousands)
2008
For Capital
Adequacy
Purposes
Actual
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 55,431
51,359
51,359
Ratio
Amount
10.5% $ 42,130
9.8% 21,065
6.6% 31,279
Ratio
Amount
8.0% $ 52,662
4.0% 31,597
4.0% 39,099
10.0%
6.0%
5.0%
2007
For Capital
Adequacy
Purposes
Actual
Amount
Ratio
Amount
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
Total Capital (to risk weighted assets)
Tier 1 Capital (to risk weighted assets)
Tier 1 Capital (to average assets)
$ 47,860
44,906
44,906
10.8% $ 35,524
10.1% 17,762
7.4% 24,338
8.0 % $ 44,405
4.0 % 26,643
4.0 % 30,423
10.0%
6.0%
5.0%
Page -51-
2008
2007
$
$
4,309
—
83
53,210
57,602
$
$
5,751
1,406
221
45,137
52,515
$
1,423
$
1,406
40
1,463
56,139
57,602
$
2008
3,000
149
—
1,406
51,109
52,515
2007
11,029
1
$
$
$
2,851
11,028
(50)
2,901
5,849
8,750
$
—
11,028
(2,734)
8,294
$
2006
9,482
1
9,481
—
9,481
(1,313)
8,168
14. BRIDGE BANCORP, INC. (PARENT COMPANY ONLY)
Condensed Balance Sheets
December 31,
(In thousands)
ASSETS
Cash and cash equivalents
Dividend receivable from the Bank
Other assets
Investment in the Bank
Total Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Dividends payable
Other liabilities
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Condensed Statements of Income
Year ended December 31,
(In thousands)
Dividends from the Bank
Non interest expenses
Income before income taxes and equity in undistributed earnings of
the Bank
Income tax benefit
Income before equity in undistributed earnings of the Bank
Equity in undistributed (overdistributed) earnings of the Bank
Net income
$
$
Page -52-
Condensed Statements of Cash Flows
Year ended December 31,
(In thousands)
Operating Activities:
2008
2007
2006
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
8,750
$ 8,294
$
8,168
Equity in (undistributed) overdistributed earnings of the Bank
Income tax benefit from exercise of employee stock options
Decrease in other assets
Increase (Decrease) in other liabilities
Net cash provided by operating activities
Cash flows used by financing activities:
Net proceeds from issuance of common stock upon exercise of stock options
Payment for the purchase of treasury stock
Dividends paid
Net cash used by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
15. OTHER COMPREHENSIVE INCOME (LOSS)
(5,849)
19
1,229
57
4,206
2,734
25
172
(13)
11,212
—
—
(5,648)
(5,648)
149
—
(5,612)
(5,463)
(1,442)
5,749
5,751
4,309
2
$ 5,751
$
$
Other comprehensive income (loss) components and related tax effects were as follows:
Year Ended December 31,
(In thousands)
Unrealized holding gains on available for sale Securities
Reclassification adjustment for losses realized in Income
Tax effect
Net change in unrealized gain on available for sale
$
Securities
Change in post-retirement obligation
Tax effect
Net change in post-retirement obligation
2008
2007
5,314 $
—
(2,110)
$
2,802
101
(1,165)
3,204
(2,629)
1,044
(1,585)
1,738
1,252
(497)
755
Total
$
1,619 $
2,493
$
The following is a summary of the accumulated other comprehensive income balances, net of tax:
1,313
21
602
(545)
9,559
70
(4,039)
(5,668)
(9,637)
(78)
80
2
2006
1,134
289
(572)
851
—
—
—
851
(In thousands)
Unrealized gains on available for sale securities
Unrealized gain (loss) on pension benefits
Total
$
$
213
19
232
$
$
3,204
(1,585)
1,619
$
$
3,417
(1,566)
1,851
Balance as of
December 31,
2007
Current Period
Change
Balance as of
December 31,
2008
Page -53-
16. QUARTERLY FINANCIAL DATA (Unaudited)
Selected Consolidated Quarterly Financial Data
2008 Quarter Ended,
(In thousands, except per share amounts)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non interest income
Non interest expenses
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
2007 Quarter Ended,
(In thousands, except per share amounts)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non interest income
Non interest expenses
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
March 31,
June 30,
September 30, December 31,
$
$
$
$
$
$
$
$
9,194
2,546
6,648
200
6,448
1,446
4,989
2,905
935
1,970
0.32
0.32
March 31,
8,556
2,769
5,787
45
5,742
1,234
4,480
2,496
747
1,749
0.29
0.29
$
$
$
$
$
$
$
$
9,558 $
2,248
7,310
325
6,985
1,609
5,283
3,311
1,076
2,235 $
0.37 $
0.37 $
10,075 $
2,266
7,809
550
7,259
1,677
5,401
3,535
1,179
2,356 $
0.39 $
0.39 $
10,793
2,429
8,364
925
7,439
1,332
5,484
3,287
1,098
2,189
0.36
0.36
June 30,
September 30, December 31,
8,862 $
2,707
6,155
50
6,105
1,541
4,376
3,270
1,063
2,207 $
0.36 $
0.36 $
9,309 $
2,496
6,813
150
6,663
1,541
4,627
3,577
1,255
2,322 $
0.38 $
0.38 $
9,137
2,465
6,672
355
6,317
1,362
4,685
2,994
978
2,016
0.33
0.33
Page -54-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee
Board of Directors
Bridge Bancorp, Inc.
Bridgehampton, New York
We have audited the accompanying consolidated balance sheets of Bridge Bancorp, Inc. as of December 31, 2008 and 2007, and the
related statements of consolidated income, stockholders’ equity and cash flows for each of the years in the three-year period ended
December 31, 2008. We also have audited Bridge Bancorp, Inc’s. internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Bridge Bancorp, Inc.’s management is responsible for these consolidated financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Report By Management on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on these consolidated financial statements and an opinion on Bridge Bancorp, Inc’s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control, based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Bridge Bancorp, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, Bridge Bancorp, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Livingston, New Jersey
March 10, 2009
Crowe Horwath LLP
Page -55-
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal
Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of
December 31, 2008. Based on that evaluation, the Company’s Principal Executive Officer and Principal Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the annual
report.
Report By Management On Internal Control Over Financial Reporting
Management of Bridge Bancorp, Inc. (“the Company”) is responsible for establishing and maintaining an effective system of internal
control over financial reporting. The Company’s system of internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal
control over financial reporting, including the possibility of human error and circumvention or overriding of controls. Accordingly,
even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Company’s internal control over financial reporting as of December 31, 2008. This assessment was based
on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of
December 31, 2008, the Company maintained effective internal control over financial reporting based on those criteria.
The Company’s independent registered public accounting firm that audited the financial statements that are included in this annual
report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting. The attestation report
of Crowe Horwath LLP appears on the previous page.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the year that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
“Item 1 – Election of Directors,” “Compliance with Section 16 (a) of the Exchange Act,” and “Code of Ethics” set forth in the
Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2009, are incorporated herein by
reference.
Item 11. Executive Compensation
“Compensation of Directors,” “Compensation of Executive Officers,” “Report of the Compensation Committee on Executive
Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Employment Contracts and Severance
Agreements” set forth in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2009, are
incorporated herein by reference.
Page -56-
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
“Beneficial Ownership” and “Item 1 – Election of Directors”, set forth in the Registrant’s Proxy Statement for the Annual Meeting of
Shareholders to be held on April 24, 2009, are incorporated herein by reference.
Set forth below is certain information as of December 31, 2008, regarding the Company’s equity compensation plan that has been
approved by stockholders.
Equity Compensation
Plan approved by
Stockholders
1996 Equity Incentive Plan
2006 Equity Incentive Plan
Total
Number of securities to
be Issued upon
Exercise
of outstanding options
and awards
34,562
142,213
176,775
Weighted Average
Exercise Price with
respect to
Outstanding
Stock Options
19.01
25.25
22.67
$
$
$
Number of Securities
Remaining Available
for
Issuance under the Plan
—
477,787
477,787
Item 13. Certain Relationships and Related Transactions, and Director Independence
“Certain Relationships and Related Transactions”, and “Director Nominations” set forth in the Registrant’s Proxy Statement for the
Annual Meeting of Shareholders to be held on April 24, 2009, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
“Item 2 - Ratification of the Appointment of the Independent Registered Public Accounting Firm” “Fees Paid to Crowe Horwath,” and
“Policy on Audit Committee Pre-approval of Audit and Non-audit Services of Independent Registered Public Accounting Firm” set
forth in the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 2009, is incorporated herein
by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following Consolidated Financial Statements, including notes thereto, and financial schedules of the Company, required in
response to this item are included in Part II, Item 8.
1.
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2.
Financial Statement Schedules
Page No.
30
31
32
33
34
55
Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto under Item 8, “Financial Statements and Supplementary Data.”
3.
Exhibits.
See Index of Exhibits on page 59.
Page -57-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 12, 2009
March 12, 2009
March 12, 2009
BRIDGE BANCORP, INC.
Registrant
/s/ Kevin M. O’Connor
Kevin M. O’Connor
President and Chief Executive Officer
/s/ Howard H. Nolan
Howard H. Nolan
Senior Executive Vice President, Chief Financial
Officer and Treasurer
/s/ Sarah K. Quinn
Sarah K. Quinn
Vice President, Controller and Principal
Accounting Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
March 12, 2009
,Director
,Director
,Director
,Director
,Director
,Director
,Director
,Director
,Director
,Director
/s/ Marcia Z. Hefter
Marcia Z. Hefter
/s/ Dennis A. Suskind
Dennis A. Suskind
/s/ Kevin M. O’Connor
Kevin M. O’Connor
/s/ Emanuel Arturi
Emanuel Arturi
/s/ Thomas E. Halsey
Thomas E. Halsey
/s/ R. Timothy Maran
R. Timothy Maran
/s/ Charles I. Massoud
Charles I. Massoud
/s/ Albert E. McCoy Jr.
Albert E. McCoy Jr.
/s/ Howard H. Nolan
Howard H. Nolan
/s/ Thomas J. Tobin
Thomas J. Tobin
Page -58-
EXHIBIT INDEX
Exhibit Number
Description of Exhibit
Exhibit
3.1
3.1(i)
3.1(ii)
3.2
10.1
10.2
10.3
10.5
10.6
23
31.1
31.2
32.1
Certificate of Incorporation of the registrant (incorporated by reference to Registrant’s
amended Form 10, File No. 0-18546, filed October 15, 1990)
Certificate of Amendment of the Certificate of Incorporation of the Registrant (incorporated
by reference to Registrant’s Form 10, File No. 0-18546, filed August 13, 1999)
Certificate of Amendment of the Certificate of Incorporation of the Registrant (incorporated
by reference to Registrant’s Definitive Proxy Statement, File No. 0-18546, filed November
18, 2008)
Revised By-laws of the Registrant (incorporated by reference to Registrant’s Form 8-K, File
No. 0-18546, filed December 17, 2007)
Amended and Restated Employment Contract - Thomas J. Tobin (incorporated by reference
to Registrant’s Form 8-K, File No. 0-18546, filed October 9, 2007)
Amended and Restated Employment Contract – Howard H. Nolan executed on December 16,
2008
Employment Contract – Kevin M. O’Connor (incorporated by reference to Registrant’s Form
8-K, File No. 0-18546, filed October 9, 2007)
Equity Incentive Plan (incorporated by reference to Registrant’s Form S-8, File No. 0-18546,
filed August 14, 2006)
Supplemental Executive Retirement Plan (Revised for 409A) (incorporated by reference to
Registrant’s Form 10-K, File No. 0-18546, filed March 14, 2008)
*
*
*
*
*
*
*
*
Consent of Independent Registered Public Accounting Firm
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-
14(b) and U.S.C. Section 1350
*
Denotes incorporated by reference.
Page -59-
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”) was originally made and entered into as of the 26th day of June, 2006
(“Effective Date”), by and between Bridgehampton National Bank, a bank organized and existing under the laws of the United States
of America and having its executive offices at 2200 Montauk Highway, Bridgehampton, New York (“Bank”), Bridge Bancorp, Inc.,
the holding company for the Bank (the “Company”), and Howard H. Nolan (“Executive”). The Agreement is hereby amended
effective as of January 1, 2008, as provided below, in order to conform the Agreement to Section 409A of the Internal Revenue Code,
as amended (the “Code”) and the final regulations (the “Final Regulations”) promulgated thereunder, and for certain other purposes.
WITNESSETH:
WHEREAS, Executive has been offered a position as Senior Executive Vice President and Chief Operating Officer of the
Bank and the Company;
WHEREAS, the Executive is willing to accept the offer of employment on the terms and conditions set forth in this
Agreement; and
WHEREAS, Code Section 409A deems certain severance and other payments to Executive herein to be nonqualified
deferred compensation that must comply with its terms or subject Executive to additional taxes and penalties, and the Bank, the
Company and Executive wish to update the Agreement to comply with Code Section 409A and the Final Regulations and for certain
other purposes.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and obligations hereinafter set forth, the
Bank, the Company and the Executive hereby agree as follows:
1. Employment Period.
(a) Three Year Contract. The Executive’s period of employment with the Bank under the terms of this Agreement shall begin
on the Effective Date and shall continue for a period of thirty-six months thereafter (the “Employment Period”). Unless extended, the
Employment Period shall end on the date that is thirty-six (36) months after the Effective Date. On or prior to the second anniversary
date of the Effective Date, the Bank and the Company shall notify the Executive in writing whether the Employment Period will be
extended and for what period, if any, the Employment Period will be extended.
(b) Annual Performance Evaluation. On a calendar year basis, the Bank and/or the Company (acting through the full Board or
a committee thereof) shall conduct an annual performance evaluation of the Executive, the results of which shall be included in the
minutes of the Board or committee meeting and communicated to the Executive. The first such annual performance evaluation shall
occur in January 2007.
(c) Continued Employment Following Termination of Employment Period. Nothing in this Agreement shall mandate or
prohibit a continuation of the Executive’s employment following the expiration of the Employment Period.
2. Duties.
(a) Title; Responsibility. During the Employment Period, the Executive shall serve as the Senior Executive Vice President
and Chief Operating Officer of the Bank and Company, and shall perform such administrative and management services as
customarily performed by person in a similar executive capacity and as may be directed from time to time by the CEO and/or the
Board. In his capacity as Senior Executive Vice President and Chief Operating Officer, the Executive shall directly report to the
President and Chief Executive Officer and to the Board of Directors. The Executive shall also be appointed as a member of the Board
of Directors of the Bank and the Company, subject in the case of the Company to election by the shareholders.
(b) Time Commitment. The Executive shall devote his full business time and attention to the business and affairs of the Bank
and the Company and shall use his best efforts to advance the interests of the Bank and Company.
3. Annual Compensation.
(a) Annual Salary. In consideration for the services performed by the Executive under this Agreement, the Bank shall pay to
the Executive an annual salary (“Base Salary”) of not less than $200,000. The Base Salary shall be paid in approximately equal
installments in accordance with the Bank’s customary payroll practices. The Bank shall review the Executive’s Base Salary at least
annually and such Base Salary may be increased, but may not be decreased without the Executive’s consent (any increase in Base
Page -60-
Salary shall become the new “Base Salary” for purposes of this Agreement). The first such annual review of Executive’s Base Salary
shall occur in January 2007.
(b) Board Meeting Fees. For his attendance at meetings of the Board of Directors of the Bank and the Company (but not for
committee meetings), the Executive shall receive such fees as are paid to directors of the Bank and the Company for such attendance.
(c) Incentive Compensation. The Executive shall be eligible to participate in any incentive compensation programs
established by the Bank and/or the Company from time to time for senior executive officers, in accordance with the terms of such
plans as they may exist from time to time.
(d) Equity Compensation. The Executive shall be eligible to participate in any equity compensation programs established by
the Bank and/or the Company from time to time for senior executive officers, including, but not limited to, the 2006 Stock-Based
Incentive Plan.
Nothing paid to Executive under any plan, program or arrangement referenced in (c) or (d) above shall be deemed to be in
lieu of other compensation to which Executive is entitled under this Agreement.
4. Employee Benefit Plans; Paid Time Off
(a) Benefit Plans. During the Employment Period, the Executive shall be an employee of the Bank and shall be entitled to
participate in the Bank’s (i) tax-qualified retirement plans (i.e., the defined benefit plan and 401(k) plan; (ii) the Bank’s Supplemental
Executive Retirement Plan; (iii) group life, health and disability insurance plans; and (iv) any other employee benefit plans and
programs in accordance with the Bank’s customary practices, provided he is a member of the class of employees authorized to
participate in such plans or programs.
(b) Paid Time Off. The Executive shall be entitled to paid vacation time each year during the Employment Period, as well as
sick leave, holidays and other paid absences, in accordance with the Bank’s policies and procedures for executive employees.
5. Outside Activities and Board Memberships
During the term of this Agreement, the Executive shall not, directly or indirectly, provide services on behalf of any financial
institution, any insurance company or agency, any mortgage or loan broker or any other entity or on behalf of any subsidiary or
affiliate of any such entity engaged in the financial services industry, as an employee, consultant, independent contractor, agent, sole
proprietor, partner, joint venturer, corporate officer or director; nor shall the Executive acquire by reason of purchase during the term
of this Agreement the ownership of more than 5% of the outstanding equity interest in any such entity. Subject to the foregoing, and to
the Executive’s right to continue to serve as an officer and/or director or trustee of any business organization as to which he was so
serving on the Effective Date of this Agreement (as described in an attachment to this Agreement), the Executive may serve on boards
of directors of unaffiliated, for-profit business corporations, subject to Board approval, which shall not be unreasonably withheld, and
such services shall be presumed for these purposes to be for the benefit of the Bank and the Company. Except as specifically set forth
herein, the Executive may engage in personal business and investment activities, including real estate investments and personal
investments in the stocks, securities and obligations of other financial institutions (or their holding companies). Notwithstanding the
foregoing, in no event shall the Executive’s outside activities, services, personal business and investments materially interfere with the
performance of his duties under this Agreement.
6. Working Facilities and Expenses
(a) Working Facilities. The Executive’s principal place of employment shall be at the Bank’s principal executive office or at
such other location upon which the Bank and the Executive may mutually agree.
(b) Expenses.
(1) Ordinary Expenses. The Bank shall reimburse the Executive for his ordinary and necessary business expenses,
incurred in connection with the performance of his duties under this Agreement, upon presentation to the Bank of an itemized account
of such expenses in such form as the Bank may reasonably require. Any such expenses shall be reimbursed no later than two and one-
half months following the end of the year in whch the expense was incurred.
(2) Automobile. The Bank shall provide the Executive with an automobile suitable to the Executive’s position and
such automobile may be used by the Executive in carrying out his duties under this Agreement, including commuting between his
residence and his principal place of employment and other personal use. The Bank shall be responsible for the cost of maintenance and
servicing such automobile and for insurance, gasoline and oil for such automobile. The Executive shall be responsible for the payment
of any taxes on account of his personal use of such automobile.
Page -61-
7. Termination of Employment with Bank Liability
(a) Reasons for Termination. In the event that the Executive’s employment with the Bank and/or the Company shall
terminate during the Employment Period on account of any of the events set forth in Sections 7(a)(i) or 7(a)(ii) below (an “Event of
Termination”):
(i)
The Executive’s voluntary resignation from employment with the Bank and the Company after the
occurrence of any of the following events without Executive’s consent, such that the Executive’s
resignation shall be treated as a resignation for “Good Reason,” provided that for purposes of this Section
7(a)(i), the Executive must provide not greater than ninety (90) days’ written notice to the Bank of the
initial existence of such condition and the Bank shall have thirty (30) days to cure the condition giving rise
to the Event of Termination (but the Bank may elect to waive such thirty (30) day period):
(A)
(B)
(C)
the failure to re-appoint the Executive to the officer position set forth under Section 2(a) and/or,
the failure of Executive to be appointed to the Board of Directors of the Bank, and with respect to
the Executive’s service as a director of the Company, the failure to re-nominate the Executive for
election to the Board;
a material change in Executive’s functions, duties, or responsibilities, which change would cause
Executive’s position to become one of lesser responsibility, importance, or scope;
a liquidation or dissolution of the Bank or the Company other than a liquidation or dissolution that
is caused by a reorganization that does not affect the status of the Executive;
(D)
a material breach of this Agreement by the Bank and/or the Company; or
(E)
the relocation of Executive’s principal place of employment to an office other than one located in
Southampton, East Hampton, Shelter Island, Southhold or Riverhead, New York.
(ii)
the involuntary termination of the Executive’s employment by the Bank and/or the Company for any reason
other than: for “Cause” as defined in Section 8(a); for “Disability” as set forth in Section 7(d) below;
following a Change in Control, as set forth in Section 7(c) below; or as a result of the death of the
Executive, provided that such termination of employment constitutes a “Separation from Service” within
the meaning of Section 409A and the Final Regulations thereunder,
then the Bank shall provide the benefits and pay to the Executive the amounts provided for under Section 7(b).
(b) Severance Pay. Subject to the limitations set forth in Section 7(e) below, upon an Event of Termination, the Bank shall
pay to the Executive (or, in the event of the Executive’s death after the event described in Section 7(a) has occurred, the Bank shall
pay to the Executive’s surviving spouse, beneficiary or estate) an amount equal to the following:
(i)
(ii)
(iii)
(iv)
(v)
his earned but unpaid Base Salary as of the date of his termination of employment with the Bank;
the benefits, if any, to which he is entitled as a former employee under the Bank’s employee benefit plans;
if the Event of Termination occurs within the first 18 months following the Effective Date (the “Initial
Period”), continued non-taxable group health and medical insurance benefits (on the same terms as such
benefits are made available to other executive employees of the Bank) for the greater of six months or the
remainder of the Initial Period;
if the Event of Termination occurs following the “Initial Period”, continued non-taxable group health and
medical insurance benefits (on the same terms as such benefits are made available to other executive
employees of the Bank) for the greater of six months or the remainder of the Employment Period;
if the Event of Termination occurs within the Initial Period, a lump sum cash payment, as liquidated
damages, in an amount equal to the greater of (a) the Base Salary that the Executive would have earned if
he had continued working for the Bank for the remainder of the Initial Period; or (b) one-half of his annual
Base Salary; and
Page -62-
(vi)
if the Event of Termination occurs following the Initial Period, a lump sum cash payment, as liquidated
damages, in an amount equal to the greater of (a) the Base Salary that the Executive would have earned if
he had continued working for the Bank for the remainder of the Employment Period; or (b) one-half of his
annual Base Salary.
(c) Change in Control. Upon the occurrence of a Change in Control (as defined in Section 9 of this Agreement), the Bank
and/or the Company shall provide: (i) continuing non-taxable group health and medical insurance benefits to Executive (on the same
terms as such benefits were made available to other executive employees of the Bank immediately prior to the Change in Control) for
a period of 36 months following Executive’s termination of employment at any time; and regardless of whether Executive has a
termination of employment in connection with a Change in Control, (ii) a lump sum cash payment to Executive, as liquidated
damages, in an amount equal to 2.99 times Executive’s “Base Amount,” as determined in accordance with Section 280G of the
Internal Revenue Code of 1986, as amended (the “Code”) and regulations promulgated thereunder (the “280G Regulations”),
provided, however, that for purposes of such calculations, (A) Executive’s “Base Period” under Code Section 280G and the 280G
Regulations shall be deemed to commence as of the Effective Date of the Agreement, and (B) if Executive’s Base Period includes a
short taxable year or less than all of a taxable year, compensation for such short or incomplete taxable year shall be annualized.
(d) Disability.
(i) In the event that during the term of this Agreement, Executive is unable to perform his duties hereunder because
he is disabled within the meaning of Code Section 409A and the Final Regulations (a “Disability”), the Executive shall be entitled to
any and all benefits under the Bank’s short-term and/or long-term disability insurance plan. During the first twenty-four (24) months
following termination of employment for Disability, the Bank and/or the Company shall provide a supplemental monthly cash
payment to Executive such that the payments received by Executive on a monthly basis, from both disability insurance and this
supplemental payment shall equal the monthly rate of after-tax Base Salary being paid to Executive immediately prior to such
termination (the insurance payments may be taken into account on a tax-adjusted basis if such payment are not subject to federal
and/or state taxes).
(ii) Upon termination of Executive’s employment because of Disability, the Executive shall be entitled continuing
non-taxable group health and medical insurance benefits for a period of twenty-four months following such termination, on the same
terms as such benefits are made available to other executive employees of Disability.
(e) Timing of Severance Pay. Except as otherwise provided herein, payment of severance benefits to Executive under Section
7(b) or 7(c) hereof generally shall commence within thirty (30) days of the event that triggers such distribution. Notwithstanding the
foregoing, to the extent required to avoid penalties under Code Section 409A and the Final Regulations thereunder, if the Executive is
a “Specified Employee” within the meaning of Code Section 409A and the Final Regulations, the cash severance payments described
in Sections 7(b)(v) and (vi) and 7(c)(ii) shall be made to him immediately following the expiration of six (6) months following his
“Separation from Service.” For purposes of this Agreement, a “Separation from Service” shall have occurred if the Bank and
Executive reasonably anticipate that no further services will be performed by the Executive after the date of the Event of Termination
(whether as an employee or independent contractor) or the level of further services performed will not exceed forty-nine percent
(49%) of the average level of bona fide services in the 36 months immediately preceding the Event of Termination. For all purposes
hereunder, the definition of “Separation from Service” shall be interpreted consistent with Final Regulations Section 1.409A-
1(h)(1)(ii).
(f) Executive agrees that upon any termination of his employment, whether by Executive or by the Bank or the Company, his
service as a director of the Bank and the Company shall cease and he shall be deemed to have resigned as a director effective upon
such termination.
8. Termination without Additional Bank or Company Liability
(a) Termination for Cause.
(i) The Bank and/or the Company may terminate the Executive’s employment at any time, but any termination other
than termination for “Cause,” as defined herein, shall not prejudice the Executive’s right to compensation or other benefits under the
Agreement. The Executive shall have no right to receive compensation or other benefits for any period after termination for “Cause.”
Termination for “Cause” shall include termination because of the Executive’s personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, breach of the Bank’s Code of Ethics, violation of Sarbanes-Oxley Act requirements
for officers of public companies, willfully engaging in actions that in the reasonable opinion of the Board will likely cause substantial
injury to the business reputation of the Company or Bank, intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than routine traffic violations or similar offenses) or final cease-and-desist order, or material breach of any
provision of the contract.
(ii) If the Bank and the Company wish to terminate the Executive’s employment for “Cause,” such determination
shall require the affirmative vote of the Board of Directors and prior to such vote the Board shall furnish Executive with a written
Page -63-
statement of its grounds for proposing to make such determination, and shall afford the Executive a reasonable (under the
circumstances) opportunity to make an oral and/or a written presentation to the Board to refute the grounds for the proposed
termination for Cause.
(b) Death; Voluntary Resignation Without Good Reason. In the event that the Executive’s employment with the Bank shall
terminate during the Employment Period on account of the reasons set forth in this Section 8(b), then the Bank shall have no further
obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the
termination of his employment, and the provision of such benefits, if any, to which he is entitled as a former employee under the
Bank’s employee benefit plans and programs and compensation plans and programs, including without limitation, any incentive
compensation plan. Termination of employment under this Section 8(b) shall mean termination of employment due to the following
events:
(i)
The Executive’s death; or
(ii)
the “Good Reasons” specified in Section 7(a)(i).
The Executive’s voluntary resignation from employment with the Bank for any reason other than
9. Change in Control
(a) Except for payments that are subject to Code Section 409A, for purposes of this Agreement, the term “Change in Control”
shall mean a change in control of a nature that: (i) would be required to be reported in response to Item 5.01(a) of the current report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
Act”); or (ii) results in a Change in Control of the Bank within the meaning of the Change in Bank Control Act, and applicable rules
and regulations promulgated thereunder, or results in a Change in Control of the Company within the meaning of the Bank Holding
Company Act of 1956, and the rules and regulations promulgated thereunder, in each case as in effect at the time of the Change in
Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any “person” (as the
term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner”(as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of
Company’s outstanding securities except for any securities purchased by the Bank’s employee stock ownership plan or trust; or (b)
individuals who constitute the Board of Directors of the Bank or the Company on the date hereof (the “Incumbent Board”) cease for
any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for
election by the Company’s stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall
be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction in which the Bank or
Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by
someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the
Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning
beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.
(b) With respect to any payments hereunder that are subject to Code Section 409A, “Change in Control” shall mean (i) a
change in the ownership of the Bank or the Company, (ii) a change in the effective control of the Bank or Company, or (iii) a change
in the ownership of a substantial portion of the assets of the Bank or Company, as described below.
(i) A change in ownership occurs on the date that any one person, or more than one person acting as a group (as
defined in Final Regulations section 1.409A-3(i)(5)(v)(B)), acquires ownership of stock of the Bank or Company that, together with
stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such
corporation.
(ii) A change in the effective control of the Bank or Company occurs on the date that either (i) any one person, or
more than one person acting as a group (as defined in Final Regulations section 1.409A-3(i)(5)(v)(B)) acquires (or has acquired during
the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Bank or
Company possessing 30% or more of the total voting power of the stock of the Bank or Company, or (ii) a majority of the members of
the Bank’s or Company’s board of directors is replaced during any 12-month period by directors whose appointment or election is not
endorsed by a majority of the members of the Bank’s or Company’s board of directors prior to the date of the appointment or election,
provided that this sub-section “(ii)” is inapplicable where a majority shareholder of the Bank or Company is another corporation.
Page -64-
(iii) A change in a substantial portion of the Bank’s or Company’s assets occurs on the date that any one person or
more than one person acting as a group (as defined in Final Regulations section 1.409A-3(i)(5)(vii)(C)) acquires (or has acquired
during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Bank or
Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of (i) all of the assets
of the Bank or Company, or (ii) the value of the assets being disposed of, either of which is determined without regard to any
liabilities associated with such assets. For all purposes hereunder, the definition of Change in Control shall be construed to be
consistent with the requirements of Final Regulations section 1.409A-3(g)(5).
10. Confidentiality. Unless he obtains prior written consent from the Bank or the Company, the Executive shall keep
confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank, the Company or any
entity which is a subsidiary or affiliate of the Bank or the Company or of which the Bank or the Company is a subsidiary or affiliate,
any material document or information obtained from the Bank, the Company or from any of their respective parents, subsidiaries or
affiliates, in the course of his employment with any of them concerning their properties, operations or business (unless such document
or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to
the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided,
however, that nothing in this Section 10 shall prevent the Executive, with or without the Bank’s or the Company’s consent, from
participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or
proceeding to the extent that such participation or disclosure is required under applicable law.
11. Non-Solicitation; Non-Competition; Post-Termination Cooperation.
(a) The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with
the Bank, he shall not, without the written consent of the Bank, either directly or indirectly:
(i) solicit, offer employment to, or take any other action intended (or that a reasonable person acting in like
circumstances would expect) to have the effect of causing any officer or employee of the Bank, the Company or any of their
respective subsidiaries or affiliates to terminate his or her employment and accept employment or become affiliated with, or provide
services for compensation in any capacity whatsoever to, any business whatsoever that competes with the business of the Bank or the
Company or any of their direct or indirect subsidiaries or affiliates or has headquarters or offices within the counties in which the
Bank or the Company has business operations or has filed an application for regulatory approval to establish an office; or
(ii) solicit, provide any information, advice or recommendation or take any other action intended (or that a
reasonable person acting in like circumstances would expect) to have the effect of causing any customer of the Bank or the Company
to terminate an existing business or commercial relationship with the Bank or the Company.
(b) The Executive hereby covenants and agrees that following any termination of employment, he shall not, without the
written consent of the Bank, either directly or indirectly: become an officer, employee, consultant, director, independent contractor,
agent, sole proprietor, joint venturer, greater than 5% equity-owner or stockholder, partner or trustee of any savings bank, savings and
loan association, savings and loan holding company, credit union, bank or bank holding company, insurance company or agency, any
mortgage or loan broker or any other entity competing with the Bank or its affiliates in the same geographic locations where the Bank
or its affiliates has business interests. If Executive’s employment is terminated within the Initial Period, this restriction shall apply for
the greater of six months or the remainder of the Initial Period, but in no event more than one year following termination. If
Executive’s employment is terminated after the Initial Period, this restriction shall apply for the greater of six months or the remainder
of the Employment Period, but in no event for more than one year following termination. Notwithstanding the foregoing, the
restriction contained in this Section 11(b) shall not apply if the Executive’s employment is terminated following a Change in Control.
(c) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank and/or the Company, as may
reasonably be required by the Bank and/or the Company, in connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become, a party; provided, however, that Executive shall not be required to provide information or assistance with
respect to any litigation between the Executive and the Bank, the Company or any of its subsidiaries or affiliates.
(d) All payments and benefits to the Executive under this Agreement shall be subject to the Executive’s compliance with this
Section. The parties hereto, recognizing that irreparable injury will result to the Bank, its business and property in the event of the
Executive’s breach of this Section 11, agree that, in the event of any such breach by the Executive, the Bank and/or the Company will
be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by the Executive
and all persons acting for or with the Executive. The Executive represents and admits that the Executive’s experience and capabilities
are such that the Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and
that the enforcement of a remedy by way of injunction will not prevent the Executive from earning a livelihood. Nothing herein will
be construed as prohibiting the Bank and the Company from pursuing any other remedies available to them for such breach or
threatened breach, including the recovery of damages from the Executive.
Page -65-
12. Additional Termination and Suspension Provisions
(a) Notwithstanding anything herein contained to the contrary, any payments to Executive by the Bank and/or the Company,
whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.
(b) Notwithstanding any other provision in this Agreement, (i) the Bank or the Company may terminate or suspend this
Agreement and the employment of the Executive hereunder, as if such termination were a Termination for Cause under Section 8(a)
hereof, to the extent required by federal or state laws or regulations related to banking, to deposit insurance or bank holding companies
or by regulations or orders issued by the Comptroller of the Currency, the Federal Deposit Insurance Corporation or the Board of
Governors of the Federal Reserve System and (ii) no payment shall be required to be made to Executive under this Agreement to the
extent such payment is prohibited by applicable law regulation or order issued by a banking agency or a court of competent
jurisdiction; provided, that it shall be the Bank’s or the Company’s burden to prove that any such action was so required.
13. Arbitration; Legal Fees.
(a) Arbitration. In the event that any dispute should arise between the parties as to the meaning, effect, performance,
enforcement, or other issue in connection with this Agreement, which dispute cannot be resolved by the parties, the dispute shall be
decided by final and binding arbitration of a panel of three arbitrators. Proceedings in arbitration and its conduct shall be governed by
the rules of the American Arbitration Association (“AAA”) applicable to commercial arbitrations (the “Rules”) except as modified by
this Section. The Executive shall appoint one arbitrator, the Bank shall appoint one arbitrator, and the third shall be appointed by the
two arbitrators appointed by the parties. The third arbitrator shall be impartial and shall serve as chairman of the panel. The parties
shall appoint their arbitrators within thirty (30) days after the demand for arbitration is served, failing which the AAA promptly shall
appoint a defaulting party’s arbitrator, and the two arbitrators shall select the third arbitrator within fifteen (15) days after their
appointment, or if they cannot agree or fail to so appoint, then the AAA promptly shall appoint the third arbitrator. The arbitrators
shall render their decision in writing within thirty (30) days after the close of evidence or other termination of the proceedings by the
panel, and the decision of a majority of the arbitrators shall be final and binding upon the parties, nonappealable, except in accordance
with the Rules and enforceable in accordance with the applicable state law. Any hearings in the arbitration shall be held in Suffolk
County, New York unless the parties shall agree upon a different venue, and shall be private and not open to the public. Each party
shall bear the fees and expenses of its arbitrator, counsel, and witnesses, and the fees and expenses of the third arbitrator shall be
shared equally by the parties. The other costs of the arbitration, including the fees of AAA, shall be borne as directed in the decision of
the panel.
(b) Legal Fees and Other Expenses. If the Executive is successful on the merits of the dispute, as determined in the
arbitration, all legal fees and such other expenses as reasonably incurred by the Executive as a result of or in connection with or
arising out of the dispute, shall be paid by the Bank and/or the Company, provided that such payment or reimbursement is made by the
Bank not later than two and one-half months after the end of the year in which such dispute is resolved in Executive’s favor.
14. Indemnification and Insurance.
(a) The Bank and/or the Company shall provide the Executive (including his heirs, executors and administrators) with
coverage under a standard directors’ and officers’ liability insurance policy at its expense, and shall indemnify Executive (and his
heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his
having been an officer of the Bank and/or the Company (whether or not he continues to be an officer at the time of incurring such
expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys’ fees and
the cost of reasonable settlements (such settlements must be approved by the Board); provided, however, that neither the Bank nor the
Company shall be required to indemnify or reimburse Executive for legal expenses or liabilities incurred in connection with an action,
suit or proceeding arising from any illegal or fraudulent act committed by Executive. Any such indemnification shall be made
consistent with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(k), and the regulations issued thereunder in 12
C.F.R. Part 359.
15. Notices. The persons or addresses to which mailings or deliveries shall be made may change from time to time by notice
given pursuant to the provisions of this Section. Any notice or other communication given pursuant to the provisions of this Section
shall be deemed to have been given (i) if sent by messenger, upon personal delivery to the party to whom the notice is directed; (ii) if
sent by reputable overnight courier, one business day after delivery to such courier; (iii) if sent by facsimile, upon electronic or
telephonic confirmation of receipt from the receiving facsimile machine and (iv) if sent by mail, three business days following deposit
in the United States mail, properly addressed, postage prepaid, certified or registered mail with return receipt requested.
Page -66-
All notices required or permitted to be given hereunder shall be addressed as follows:
If to the Executive:
If to the Company
and the Bank:
With a copy to:
Howard H. Nolan
[address omitted]
Bridgehampton National Bank
2200 Montauk Highway
Bridgehampton, New York 11932
Attention: President and Chief Executive Officer
Luse Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, NW, Suite 400
Washington, DC 20015
Attention: John J. Gorman, Esq.
16. Amendment. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto.
17. Miscellaneous.
(a) Notice of Termination. Any termination of Executive’s employment by the Bank and/or the Company shall be
communicated in writing to the Executive, and any voluntary termination of employment by the Executive shall be communicated in
writing to the Bank and/or the Company.
(b) Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Executive, his legal
representatives and estate and intestate distributees, and the Company and the Bank, their successors and assigns, including any
successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all
of the assets and business of the Bank or the Company may be sold or otherwise transferred. Any such successor of the Bank or the
Company shall be deemed to have assumed this Agreement and to have become obligated hereunder to the same extent as the
Company and Bank, and the Executive’s obligations hereunder shall continue in favor of such successor.
(c) Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity
or enforceability of any other provision hereof.
(d) Waiver. Failure to insist upon strict compliance with any terms, covenants or conditions hereof shall not be deemed a
waiver of such term, covenant or condition. A waiver of any provision of this Agreement must be made in writing, designated as a
waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment or any right or power
hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times.
(e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original,
and all of which shall constitute one and the same Agreement.
(f) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the
State of New York, without reference to conflicts of law principles, except to the extent governed by federal law in which case federal
law shall govern.
(g) Headings and Construction. The headings of sections in this Agreement are for convenience of reference only and are not
intended to qualify the meaning of any Section. Any reference to a Section number shall refer to a Section of this Agreement, unless
otherwise specified.
(h) Entire Agreement. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and
supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof.
(i) Source of Payments. All payments provided in this Agreement shall be timely paid in cash or check from the general
funds of the Bank. The Company, however, unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits are not timely paid or provided by the Bank, such amounts and benefits shall
be paid or provided by the Company.
Page -67-
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-50933 on Form S-8 of Bridge Bancorp, Inc. of our
report dated March 10, 2009 with respect to the consolidated financial statements of Bridge Bancorp, Inc. and the effectiveness of
internal control over financial reporting, which report appears in this Annual Report on Form 10-K of Bridge Bancorp, Inc. for the
year ended December 31, 2008.
Livingston, New Jersey
March 10, 2009
Crowe Horwath LLP
Page -68-
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A)
I, Kevin M. O’Connor, certify that:
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Bridge Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2009
/s/ Kevin M. O’Connor
Kevin M. O’Connor
President and Chief Executive Officer
Page -69-
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A)
I, Howard H. Nolan, certify that:
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Bridge Bancorp, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting;
5)
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 12, 2009
/s/ Howard H. Nolan
Howard H. Nolan
Senior Executive Vice President, Chief Financial Officer
and Treasurer
Page -70-
This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the “Exchange Act”)
and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of
the Exchange Act or otherwise subject to the liability of that section. This certification shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO RULE 13A-14(B) 18 U.S.C. SECTION 1350,
As adopted pursuant to
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Bridge Bancorp, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2008
as filed with the Securities and Exchange Commission on March 12, 2009, (the “Report”), we, Kevin M. O’Connor, President and
Chief Executive Officer of the Company and, Howard H. Nolan, Senior Executive Vice President, Chief Financial Officer and
Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 12, 2009
/s/ Kevin M. O’Connor
Kevin M. O’Connor
President and Chief Executive Officer
/s/ Howard H. Nolan
Howard H. Nolan
Senior Executive Vice President, Chief Financial Officer,
and Treasurer
A signed original of this written statement required by Section 906 has been provided to Bridge Bancorp, Inc. and will be retained by
Bridge Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Page -71-
Corporate Information
Bridge Bancorp, Inc.
Bridgehampton National Bank Officers
BOARD OF DIRECTORS AND
AFFILIATIONS
Marcia Z. Hefter
Chairperson
Partner
Esseks, Hefter & Angel, LLP
Riverhead and Water Mill, NY
Dennis A. Suskind
Vice Chairperson
Partner, Retired
Goldman, Sachs & Co.
New York, NY
Kevin M. O’Connor
Kevin M. O’Connor
President and Chief Executive Officer
Howard H. Nolan, CPA
Senior Executive Vice President,
Chief Administrative and Financial Officer
Thomas J. Tobin
President Emeritus and
Special Advisor to the Board
SENIOR VICE PRESIDENTS
Seamus J. Doyle
Senior Lending Officer
Southampton/Sag Harbor
President and Chief Executive Officer
James J. Manseau
Emanuel Arturi
CEO, Retired
BusinessEdge Solutions Inc.
New York, NY
Thomas E. Halsey
Owner
Halsey Farm
Water Mill, NY
R. Timothy Maran
Retired
Maran Corporate Risk Associates, Inc.
Southampton, NY
Charles I. Massoud
President
Paumanok Vineyards
Aquebogue, NY
Albert E. McCoy, Jr.
President
W. F. McCoy Petroleum Products Inc.
and McCoy Bus Company Inc.
Bridgehampton, NY
Howard H. Nolan, CPA
Sr. Executive Vice President
Chief Financial Officer,
Corporate Secretary and Treasurer
Thomas J. Tobin
President Emeritus and
Special Advisor to the Board
COMPANY OFFICERS
Kevin M. O’Connor
President and Chief Executive Officer
Howard H. Nolan, CPA
Sr. Executive Vice President
Chief Financial Officer,
Corporate Secretary and Treasurer
Thomas J. Tobin
President Emeritus and
Special Advisor to the Board
Chief Retail Banking Officer
Deborah McGrory
Director of Human Resources
Kevin L. Santacroce
Chief Lending
Thomas H. Simson
Chief Information Officer
VICE PRESIDENTS
William Araneo
Investment Officer
Bridge Investment Services
Steven Bodziner, Esq.
Bridge Abstract LLC
Kimberly Cioch
Commercial Lending
Bridgehampton
Peter M. Coleman
Commercial Lending
North Fork
Michelle Dosch
Director of Electronic Banking
Michael Fearon
Commercial Lending
Deer Park
Patricia F. Horan
Regional Branch Administrator
North Fork Market
John B. MacCulley
Commercial Lending
Wading River/Riverhead
Theresa Mackey
Private Banker
Marie McAlary
Commercial Lending
Hampton Bays/Westhampton
Nancy Messer
Commercial Lending
North Fork
Maureen P. Mougios
Director of Risk Management
Corrinne Newman
Private Banker
Claudia Pilato
Director of Marketing
Sarah Quinn, CPA
Controller
Donna Wetjen
Director of Branch Operations
Aidan Wood
Commercial Lending
East Hampton/Montauk
ASSISTANT VICE PRESIDENTS
Sharon Abbondondelo
Branch Manager, Westhampton Beach
Sabrina Aucello
Branch Manager, Southampton
Deborah Cosgrove
Facilities Manager
Robert Curtin
Branch Manager, Wading River
Joanne Dougherty
Branch Manager, Cutchogue
and Mattituck
Jeffrey M. Greenwald
Branch Manager, Bridgehampton
Peter Hillick
Credit Deputy
Erin D. Kaelin
Training and Development Manager
Caroline Kalish
Deposit Operations Manager
Margaret Meighan
Branch Manager, East Hampton
Maria Press
Cash Management Sales Manager
Keith Robertson
Private Banker
Raymond Sanchez
Assistant Director of IT
Susan G. Schaefer
Branch Manager, Sag Harbor
Marion Stark
Branch Operations Manager
ASSISTANT CASHIERS
Mimi Bristel
Marketing Coordinator
Linda Carlson
Branch Manager, Southold
Theresa Ceriello
Commercial Lending
Laura Gorman
Treasury Manager
Emily Healy
Branch Manager, Greenport
and Peconic Landing
Jill Ramundo
Branch Manager, Montauk
Gisella Recalde
Commercial Lending
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2200 Montauk Highway, P.O. Box 3005
Bridgehampton, New York 11932
631.537.1000
www.bridgenb.com