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

Bridge Bancorp, Inc. (the Company), a New York corporation, is a one-bank holding company formed effective March 31, 1989, and on a parent only basis, has 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 below 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 represents the difference between income on interest earning assets and expenses on interest bearing liabilities. Interest income on loans and investments is a function of the average balances outstanding and the average rates earned during a period. Interest expense is a function of the average amount of interest-bearing deposits and the average rates paid on such deposits during a period. The Bank also generates other income, such as fee income on deposit accounts and income from mortgage banking operations and merchant credit card processing programs. The Bank's net income is further affected by the level of its other expenses, such as employees' salaries and benefits and occupancy costs. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 1998 Annual Report on Form 10-K.

The assets of the Registrant totaled $296,987,000 at June 30, 1999, an increase of $30,036,000 or 11.3% from the year end. This increase mainly results from an increase in cash and cash equivalents of $21,057,000 or 147.4%. Net loans increased $1,783,000 or 1.1%, and debt and equity securities increased $6,141,000 or 8.2%. The primary source of funds for the increase in assets was derived from increased deposits of $31,297,000 or 13.0%. Demand deposits increased $7,317,000 or 9.8%, savings, NOW and money market accounts increased $27,815,000 or 27.0% and certificates of deposits of $100,000 or more increased $2,729,000 or 12.9% over December 31, 1998; however, other time deposits decreased 6,564,000 or 15.3% over December 3, 1998. The increase in deposits is attributed to increased public fund deposits and the introduction of a new money market product targeted to high balance accounts. The decrease in other time deposits is primarily due to the roll off of two year certificates of deposits under $100,000 that were issued during a promotion in 1997.

Total stockholders' equity was $22,622,000 at June 30, 1999, an increase of 1.8% over December 31, 1998. The increase of $390,000 was the result of net income for the six month period ended June 30, 1999, of $2,120,000; plus the proceeds of $156,000 from the exercise of stock options pursuant to the equity incentive plan; less cash dividends declared of $850,000; and less the net decrease in unrealized appreciation in securities available for sale, net of tax, of $1,036,000. The net decrease in unrealized appreciation in securities available for sale is attributable to changes in market conditions.

Net interest income, the primary contributor to earnings, represents the difference between income on interest earning assets and expenses on interest bearing liabilities.

The following table sets forth certain information relating to the Company's average consolidated statements of financial condition and reflects the average yields on assets and average costs of liabilities for the three month and six month periods ended June 30, 1999 and 1998, respectively. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances. Interest on nonaccruing loans has been included only to the extent reflected in the consolidated statements of income. However, the loan balances are included in the average amounts outstanding. Loan fee income for the three months ended June 30, 1999 and 1998 totaled $49,000 and $122,000, respectively. For the six months ended June 30, 1999 and 1998 loan fee income total $91,000 and $191,000, respectively. For purposes of this table the average balances for investment in debt and equity securities exclude unrealized appreciation/depreciation due to the application of SFAS No. 115.

Six months ended June 30,                                      1999                                             1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
                                                                            Average                                         Average
                                                 Average                     Yield/              Average                     Yield/
                                                 Balance     Interest         Cost               Balance      Interest        Cost
------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
  Loans (including fee income) .... ...........  $168,961    $  7,487         8.94%              $150,176     $  7,015        9.42%
  Deposits with banks .........................     1,885          45         4.81%                    96            2        4.20%
  Federal funds sold ..........................    14,383         341         4.78%                 3,096           84        5.47%
  Taxable investment securities ...............    12,610         407         6.51%                14,081          458        6.56%
  Tax exempt investment securities ............    27,084         593         4.42%                28,520          644        4.55%
  Other securities ............................     1,083          36         6.70%                 1,083           40        7.45%
  Mortgage backed securities ..................    33,407       1,104         6.66%                25,310          884        7.04%
                                                 ----------------------------------------------------------------------------------
Total interest earning assets .................  $259,413    $ 10,013         7.78%              $222,362     $  9,127        8.28%

Interest bearing liabilities:
  Savings, N.O.W. and
    money market deposits .....................  $114,433    $  1,319         2.32%              $ 83,807     $    928        2.23%
  Certificates of deposit of $100,000
     or more ..................................    28,957         691         4.81%                29,796          799        5.41%
  Other time deposits .........................    41,358         982         4.79%                42,933        1,106        5.19%
  Federal funds purchased .....................      --          --            --                    --           --           --
  Other borrowings ............................      --          --            --                   2,376           64        5.43%
                                                 ----------------------------------------------------------------------------------
Total interest bearing liabilities ............  $184,748    $  2,992         3.27%              $158,912     $  2,897        3.68%
                                                 ----------------------------------------------------------------------------------
Net interest income/interest
  rate spread .................................              $  7,021         4.52%                           $  6,230        4.60%
                                                             --------         -----                           --------        -----
Net earning assets/net yield on
  average interest earnings assets ............  $ 74,665                     5.46%              $ 63,450                     5.65%
                                                 --------                     -----              --------                     -----
Ratio of interest earning assets to
  interest bearing liabilities ................                             140.41%                                         139.93%
                                                                            -------                                         -------


Three months ended June 30,                                    1999                                            1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
                                                                            Average                                         Average
                                                 Average                     Yield/              Average                     Yield/
                                                 Balance     Interest         Cost               Balance      Interest        Cost
------------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
  Loans (including fee income) ................  $169,184    $  3,845         9.12%              $155,034     $  3,651        9.45%
  Deposits with banks .........................     3,410          41         4.82%                    57          --         0.00%
  Federal funds sold ..........................    15,774         194         4.93%                 5,721           77        5.40%
  Taxable investment securities ...............    13,040         213         6.55%                14,079          230        6.55%
  Tax exempt investment securities ............    27,282         297         4.37%                27,823          314        4.53%
  Other securities ............................     1,083          19         7.04%                 1,083           21        7.78%
  Mortgage backed securities ..................    33,362         548         6.59%                24,995          435        6.98%
                                                 ----------------------------------------------------------------------------------
Total interest earning assets .................  $263,135    $  5,157         7.86%              $228,792     $  4,728        8.29%

Interest bearing liabilities:
  Savings, N.O.W. and
    money market deposits .....................  $116,432    $    675         2.33%              $ 86,244     $    496        2.31%
  Certificates of deposit of $100,000
     or more ..................................    30,641         366         4.79%                30,158          405        5.39%
  Other time deposits .........................    39,830         462         4.65%                43,436          562        5.19%
  Federal funds purchased .....................      --          --            --                    --           --           --
  Other borrowings ............................      --          --            --                   1,464           20        5.48%
                                                 ----------------------------------------------------------------------------------
Total interest bearing liabilities ............  $186,903    $  1,503         3.23%              $161,302     $  1,483        3.69%
                                                 ----------------------------------------------------------------------------------
Net interest income/interest
  rate spread .................................              $  3,654         4.64%                           $  3,245        4.60%
                                                             --------         -----                           --------        -----
Net earning assets/net yield on
  average interest earnings assets ............  $ 76,232                     5.57%              $ 67,490                     5.69%
                                                 --------                     -----              --------                     -----
Ratio of interest earning assets to
  interest bearing liabilities ................                             140.79%                                         141.84%
                                                                            -------                                         -------

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

For the Periods Ended June 30,                                     Three months ended                         Six months ended
                                                                     1999 Over 1998                            1999 Over 1998
(In thousands)                                               Changes Due To                            Changes Due To
------------------------------------------------------------------------------------------------------------------------------------
                                                           Volume       Rate     Net Change          Volume       Rate    Net Change
                                                         ---------------------------------------------------------------------------
INTEREST INCOME ON INTEREST
   EARNING ASSETS:
Federal funds sold ...................................   $   163     ($   46)    $   117            $   289     ($   32)    $   257
Deposits with banks ..................................        40           1          41                 42           1          43
Taxable investment securities ........................       (17)        --          (17)               (48)         (3)        (51)
Tax exempt investment securities .....................        (6)        (11)        (17)               (32)        (19)        (51)
Other securities .....................................       --           (2)         (2)               --           (4)         (4)
Mortgage-backed securities ...........................       265        (152)        113                353        (133)        220
Loans (including loan fee income) ....................       881        (687)        194              1,365        (893)        472
                                                         ---------------------------------------------------------------------------
   Total interest earning assets .....................     1,325        (896)        429              1,970      (1,084)        886
                                                         ---------------------------------------------------------------------------
INTEREST EXPENSE ON INTEREST
   BEARING LIABILITIES:

Savings, NOW and money market deposits ...............       175           4         179                351          40         391
Certificates of deposits of $100,000 or more .........        41         (80)        (39)               (22)        (86)       (108)
Other time deposits ..................................       (45)        (55)       (100)               (40)        (84)       (124)
Federal funds purchased ..............................       --          --          --                 --          --          --
Other borrowings .....................................       (20)        --          (20)               (64)        --          (64)
                                                         ---------------------------------------------------------------------------
   Total interest bearing liabilities ................       151        (131)         20                225        (130)         95
                                                         ---------------------------------------------------------------------------
Net interest income ..................................     1,174        (765)        409              1,745        (954)        791
                                                         ---------------------------------------------------------------------------

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Bank's capital amounts and classification are also 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 Bank to maintain minimum amounts and ratios (set forth in the table below) 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 June 30, 1999, that the Bank meets all capital adequacy requirements to which it is subject.

The Bank's actual capital amounts and ratios are presented in the following table:

As of June 30,                                                                           1999
-------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                                   To Be Well
                                                                                      For Capital             Capitalized Under
                                                                                       Adequacy               Prompt Corrective
                                                                Actual                 Purposes               Action Provisions
-------------------------------------------------------------------------------------------------------------------------------
                                                           Amount     Ratio          Amount     Ratio        Amount       Ratio
                                                           --------------------------------------------------------------------
Total Capital (to risk weighted assets) ................   24,646      12.6%         15,704      >8.0%       19,630       >10.0%
Tier 1 Capital (to risk weighted assets) ...............   22,696      11.6%          7,852      >4.0        11,778       >6.0
Tier 1 Capital (to average assets) .....................   22,696       7.9%         11,423      >4.0        14,278       >5.0

As of December 31,                                                                       1998
-------------------------------------------------------------------------------------------------------------------------------
(In thousands)                                                                                                   To Be Well
                                                                                      For Capital             Capitalized Under
                                                                                       Adequacy               Prompt Corrective
                                                                Actual                 Purposes               Action Provisions
-------------------------------------------------------------------------------------------------------------------------------
                                                           Amount     Ratio          Amount     Ratio        Amount       Ratio
                                                           --------------------------------------------------------------------
Total Capital (to risk weighted assets) ................   22,983      12.0%         15,372      >8.0%       19,215       >10.0%
Tier 1 Capital (to risk weighted assets) ...............   21,270      11.1%          7,686      >4.0        11,529       >6.0
Tier 1 Capital (to average assets) .....................   21,270       8.2%         10,319      >4.0        12,899       >5.0

The equity section of the balance sheet, at June 30, 1999, shows the effect of the retirement of treasury stock acquired by management's past repurchases of the Company's Common Stock.

At June 30, 1999, the equity section of the balance sheet also reflects the decrease in the par value of the Company's Common Stock from a par value of Five Dollars ($5.00) per share to a par value of One Cent ($0.01) per share.

This change was authorized by the Board of Directors and adopted by the Shareholders at the Company's April 19, 1999 annual meeting, the change was effectuated during the second quarter by filing of an amendment to the Company's certificate of incorporation. Such reduction in par value permitted the Company to decrease its stated capital by approximately $21,203,000. Capital surplus increased by approximately $21,203,000, thereby providing the Company with the added flexibility of allowing payments of dividends from surplus if deemed advisable or necessary by the Board of Directors. Capital surplus has not been restated for prior periods. It should be realized, however, that as a practical matter the Company would only have the ability to pay out a moderate proportion of the aggregate increase in capital surplus as dividends since there are important regulatory restrictions on the payment of dividends.

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards NO. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of a derivative and the resulting designation.

In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133". This pronouncement delayed the effective date of the provisions of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. In management's opinion, SFAS No. 133, when adopted, will not have a material impact on the Company's financial statements.

During the six month period ended June 30, 1999, the Registrant earned net income of $2,120,000 or $ .49 per share as compared with $1,765,000 or $.41 per share for the same period in 1998. During the three month period ended June 30, 1999, the Registrant earned net income of $1,167,000 or $.27 per share as compared with $945,000 or $ .22 per share for the same period in 1998. Highlights for the three months ended June 30, 1999 include: (i) a $409,000 or 12.6% increase in net interest income; (ii) a $15,000 or 1.9% increase in total other income; and (iii) a $61,000 or 2.4% increase in total other expenses over the same period in 1998. Highlights for the six months ended June 30, 1999 include: (i) a $791,000 or 12.7% increase in net interest income; (ii) a $96,000 or 6.4% decrease in total other income; and (iii) a $72,000 or 1.5% increase in total other expenses over the same period in 1998.

Net income for the first six months of 1999 reflects annualized returns of 19.33% on average total stockholders' equity and 1.50% on average total assets as compared to the corresponding figures for the preceding calendar year of 19.19% on average total stockholders' equity and 1.51% on average total assets. For purposes of these calculations, average stockholders' equity excludes the effects of changes in the unrealized appreciation (depreciation) on securities available for sale, net of taxes.

Net interest income, the primary source of income, increased by $409,000 or 12.6% for the current three month period over the same period last year. The increase primarily resulted from an increase in average total interest earning assets from $228,792,000 in 1998 to $263,135,000 for the comparable period in 1999, a 15.0% increase. Average interest bearing liabilities increased 15.9% to $186,903,000 in 1999 from $161,302,000 for the same period last year. The yield on average interest earning assets for the current three month period decreased to 7.86% from 8.29% for the same period last year. The cost of average interest bearing liabilities decreased to 3.23% from 3.69% during the same period in 1998. The net yield on average earning assets decreased to 5.57% from 5.69% during the same period in 1998.

Net interest income increased by $791,000 or 12.7% for the current six month period over the same period last year. The increase primarily resulted from an increase in average total interest earning assets from $222,362,000 in 1998 to $259,413,000 for the comparable period in 1999, a 16.7% increase. Average interest bearing liabilities increased by 16.3% to $184,748,000 in 1999 from $158,912,000 for the same period last year. The yield on average interest earning assets at June 30, 1999 decreased to 7.8% from 8.3% during the same period in 1998. The cost of average interest bearing liabilities decreased to 3.27% from 3.68% during the same period in 1998. The net yield on average earning assets decreased to 5.46% from 5.65% during the same period in 1998.

A $105,000 provision for possible loan losses was made during the three month period ended June 30, 1999, compared to a $100,000 provision for the same period in 1998. The provision for possible loan losses made during the six month period ended June 30, 1999 totaled $210,000 compared to a $190,000 provision for the same period in 1998. The allowance for possible loan losses increased to $1,950,000 at June 30, 1999, as compared to $1,713,000 at December 31, 1998. As a percentage of loans, the allowance was 1.14% at June 30, 1999 and 1.02% at December 31, 1998. The allowance as a percentage of nonperforming loans (including loans past due 90 days or more and still accruing) was 315.0% at June 30, 1999 compared to 141.3% at December 31, 1998.

The adequacy of the allowance for loan losses is determined based on management's detailed analysis of classified loans, input from the Bank's outside loan review consultants, past loss experience, current economic conditions, delinquency trends and other pertinent factors. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

Management believes that the allowance for loan losses is adequate. 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 the allowance based on their judgments about information available to them at the time of their examination.

Total other income increased during the three month period ended June 30, 1999 by $15,000 or 1.9% over the same period last year. For the six month period ended June 30, 1999 total other income decreased $96,000 or 6.4% over the same period last year. Income from mortgage banking activities for the three month period ended June 30, 1999 totaled $175,000, a decrease of $243,000 or 58.1% over the same period last year. Income from mortgage banking activities for the six month period ended June 30, 1999 totaled $396,000, a decrease of $348,000 or 46.8% over the same period last year. The Bank's practice is to originate and sell these mortgages in the secondary market. Increased competition within the Bank's market has decreased the return on residential mortgages. Additionally, the department has been streamlined to become more efficient. While revenue is down, corresponding expense reductions partially offset such decline. Service charges on deposit accounts for the three month period ended June 30, 1999 increased $55,000 or 24.3%. For the six month period ended June 30, 1999 service charges on deposit accounts increased $77,000 or 18.2% over the same period last year. These increases primarily result from the Bank increasing fees charged on deposit accounts during the second quarter of 1999. Securities gains increased $116,000 or 100% for the three and six month periods ended June 30, 1999 over the same periods last year. These gains resulted primarily from sales of securities in accordance with the Bank's investment strategies.

Other operating income for the three month period ended June 30, 1999 totaled $237,000, an increase of $87,000 or 58.0% over the same period last year. This increase primarily results from an increase in merchant processing fees resulting from a change in the pricing structure made in the second quarter. Other operating income for the six month period ended June 30, 1999 totaled $397,000, an increase of $59,000 or 17.5% over the same period last year. This increase primarily results from an increase in merchant processing fees, ATM fees and checkbook fees.

Total other expenses increased during the three month period ended June 30, 1999 by $61,000 or 2.4% over the same period last year. For the six month period ended June 30, 1999 total other expenses increased $72,000 or 1.5% over the same period last year. Salary and benefit expense decreased $113,000 or 8.9% for the three month period ended June 30, 1999 over the same period last year. For the six month period ended June 30, 1999 salary and benefit expense decreased $128,000 or 5.1% over the same period last year. These decreases are attributed to a decrease in staffing in the mortgage department which has been streamlined to become more efficient. Furniture and fixture expense increased $26,000 or 14.9% for the three month period ended June 30, 1999 over the same period last year. For the six month period ended June 30, 1999 furniture and fixture expense increased $55,000 or 16.3% over the same period last year. This increase primarily results from increased depreciation expenses relative to equipment upgrades in preparation for year 2000 readiness.

Total other operating expenses increased during the three month period ended June 30, 1999 by $143,000 or 16.4% over the same period last year. For the six month period ended June 30, 1999 total other operating expenses increased $143,000 or 8.6% over the same period last year. These increases are primarily attributed to increased consulting and legal fees relative to the formation of a subsidiary in the second quarter of 1999. It is the Bank's intention to operate this subsidiary as a Real Estate Investment Trust, allowing the Bank to better manage its real estate assets.

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 the credit quality of the portfolio. Management's asset/liability objectives are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks and to maintain adequate liquidity.

The Company's Asset/ Liability Committee, comprised of members of senior management and the Board, meets periodically to evaluate 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.

The objective of liquidity management is to ensure the availability of sufficient resources to meet all financial commitments. Liquidity management addresses the ability to meet deposit withdrawals either on demand or contractual maturity, to repay other borrowings as they mature and to make new loans and investments as opportunities arise.

The Company'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 Company's operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and security principal repayments and maturities, lines of credit with other financial institutions, the sale of securities from the available for sale portfolio, and growth in the core deposit base. While scheduled loan amortization, maturing securities and short term investments are a relatively predictable source of funds, deposit flows and loan 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 deposit outflows, loans, asset/liability objectives and suggested O.C.C. measurements such as loans to capital ratios. At June 30, 1999, the Company had aggregate lines of credit of $8,000,000 with correspondent banks to provide short term credit for liquidity requirements. The Company also has the ability, as a member of the Federal Home Loan Bank ("FHLB") system, to borrow approximately $12,171,800 in the form of an overnight line of credit, and an additional $12,171,800 in the form of a one month line of credit. At June 30, 1999, the Company had no such borrowings outstanding.

The Company's liquidity positions are monitored daily to ensure the maintenance of an optimum level and efficient use of available funds. Management believes the Company has sufficient liquidity to meet its operating requirements.

The Bank is working diligently to assure a smooth transition into the new millennium. To accomplish Year 2000 compliance, the Bank has implemented a project plan as established by the banking regulatory authorities. The established timetable breaks the plan into seven phases; the awareness phase, inventory phase, assessment phase, renovation phase, validation phase, implementation phase, and post implementation phase. Completion of the plan through the implementation phase is targeted for the late spring of 1999.

The Bank uses software purchased from third party vendors for all processing applications; therefore, no significant internal program renovation by Bank staff is necessary to prepare these systems to handle transactions in the Year 2000. The majority of the Bank's efforts in preparation for Year 2000 processing relate to replacing or upgrading noncompliant software and hardware as well as testing purchased and outsourced processing systems.

The Bank has established formal processes for identifying, assessing, and managing the Year 2000 risks posed by internal bank activities, vendors, and customers. The Bank has assessed the risks posed by its customers. The Bank is evaluating Year 2000 readiness of commercial loan applicants as part of the underwriting process, has called and continues calling upon significant existing borrowers to assess their readiness for Year 2000. Seminars have been offered to the Bank's commercial and municipal customers, and the Bank has presented these seminars to different community groups to educate the local public about the Year 2000 matter and the Bank's preparedness to address the issue.

Testing of internal systems was substantially completed by December 31, 1998. Testing with significant third party vendors has been substantially completed. During 1999 the Bank will continue to monitor its own internal activities and the plans of its vendors and customers to address the Year 2000 issue.

The Bank utilizes Fiserv, Inc., one of the largest data processing providers for banks and savings institutions to perform its core systems data processing. Fiserv runs software from Information Technology Inc. (ITI), a subsidiary of Fiserv, to perform the vast majority of its data processing activities. This system, which handles processing of loans, deposits, general ledger, accounts payable, fixed assets, and other ancillary applications, is believed to be Year 2000 ready according to the vendor. However, the Bank has embarked on a project to thoroughly test the system for Year 2000 compliance. If Year 2000 processing problems are uncovered during the testing phase, ITI is committed to correct those problems. To date, no problems have been encountered in testing. In addition, the Bank is currently in the process of finalizing contingency plans with respect to all critical services and operations regardless if performed internally or by external sources including outside vendors. This plan is a coordinated effort with a three fold goal of ensuring that the century date change occurs with minimal, if any, disruptions of service to both the institution and its customers, minimizing any possibility of financial losses, and ensuring a timely resumption of normal banking operations.

Monitoring and managing the Year 2000 project will result in additional direct and indirect costs to the Bank. Direct costs include potential charges by third party software vendors for product enhancements, costs involved in testing software products for Year 2000 compliance, and any resulting costs for developing and implementing contingency plans for critical software products. Indirect costs will principally consist of time devoted by existing employees in monitoring software vendor progress, testing renovated software products and implementing any necessary contingency plans. These costs will be charged to earnings as incurred.

The Bank has upgraded equipment in its branch and back office systems to better serve its customers and improve the efficiency of its operations. The timing of the upgrades was accelerated as a result of the Year 2000 issue. The total cost of the upgrades is expected to be approximately $350,000 all of which has been placed in service. Based on current information, management does not expect these costs when taken together with other Year 2000 compliance costs to materially impact the Company's future results of operations, financial condition, or liquidity.

In addition to historical information, this Management's discussion and analysis includes certain forward-looking statements based on current management expectations. The Bank's annual results could differ materially from those management expectations contemplated by the forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, 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, demand for financial services, competition, changes in the quality and composition of the Bank's loan and investment portfolios, changes in accounting principles, policies or guidelines, and other economic, competitive, governmental and technological factors affecting the Bank's operations, markets, products, services and prices. In addition, the Bank assumes no duty to update forward-looking statements.