10-Q 1 tv478103_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
  SECURITIES EXCHANGE ACT OF 1934  

 

For the quarterly period ended September 30, 2017

 

Commission file number 001-34096

 

 

 

BRIDGE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

NEW YORK 11-2934195
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
   
2200 MONTAUK HIGHWAY, BRIDGEHAMPTON, NEW YORK 11932
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (631) 537-1000

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
   
  Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

There were 19,709,972 shares of common stock outstanding as of October 31, 2017.

 

 

 

 

 

  

BRIDGE BANCORP, INC.

 

PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 3
     
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 4
     
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 5
     
  Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 7
     
  Condensed Notes to the Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
     
Item 4. Controls and Procedures 52
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 52
     
Item 1A. Risk Factors 52
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 53
     
Item 5. Other Information 53
     
Item 6. Exhibits 53
     
Signatures   53

 

 2 

  

Item 1. Financial Statements

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(In thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2017   2016 
ASSETS          
Cash and due from banks  $57,915   $102,280 
Interest earning deposits with banks   29,038    11,558 
Total cash and cash equivalents   86,953    113,838 
           
Securities available for sale, at fair value   792,058    819,722 
Securities held to maturity (fair value of $190,105 and $222,878, respectively)   189,603    223,237 
Total securities   981,661    1,042,959 
           
Securities, restricted   34,234    34,743 
           
Loans held for investment   2,921,705    2,600,440 
Allowance for loan losses   (29,273)   (25,904)
Loans, net   2,892,432    2,574,536 
           
Premises and equipment, net   35,000    35,263 
Accrued interest receivable   11,005    10,233 
Goodwill   105,950    105,950 
Other intangible assets   5,220    5,824 
Prepaid pension   9,405    7,070 
Bank owned life insurance   86,933    85,243 
Other assets   35,485    38,911 
Total Assets  $4,284,278   $4,054,570 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Demand deposits  $1,194,819   $1,151,268 
Savings, NOW and money market deposits   1,785,184    1,568,009 
Certificates of deposit of $100,000 or more   159,511    126,198 
Other time deposits   63,794    80,534 
Total deposits   3,203,308    2,926,009 
           
Federal funds purchased   50,000    100,000 
Federal Home Loan Bank advances   476,674    496,684 
Repurchase agreements   846    674 
Subordinated debentures, net   78,606    78,502 
Junior subordinated debentures, net   -    15,244 
Other liabilities and accrued expenses   32,905    29,470 
Total Liabilities   3,842,339    3,646,583 
           
Commitments and Contingencies   -    - 
           
Stockholders' equity:          
Preferred stock, par value $.01 per share (2,000,000 shares authorized; none issued)   -    - 
Common stock, par value $.01 per share (40,000,000 shares authorized; 19,713,717 and 19,106,246 shares issued, respectively; and 19,706,526 and 19,100,389 shares outstanding, respectively)   197    191 
Surplus   346,778    329,427 
Retained earnings   105,379    91,594 
Treasury stock at cost, 7,191 and 5,857 shares, respectively   (206)   (161)
    452,148    421,051 
Accumulated other comprehensive loss, net of income taxes   (10,209)   (13,064)
Total Stockholders' Equity   441,939    407,987 
Total Liabilities and Stockholders' Equity  $4,284,278   $4,054,570 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 3 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Interest income:                    
Loans (including fee income)  $32,571   $29,951   $92,206   $87,128 
Mortgage-backed securities, CMOs and other asset-backed securities   3,777    2,840    11,492    10,337 
U.S. GSE securities   300    342    901    994 
State and municipal obligations   963    962    2,968    2,799 
Corporate bonds   295    282    878    838 
Deposits with banks   91    43    208    115 
Other interest and dividend income   441    341    1,236    890 
Total interest income   38,438    34,761    109,889    103,101 
                     
Interest expense:                    
Savings, NOW and money market deposits   2,161    1,321    5,524    3,888 
Certificates of deposit of $100,000 or more   496    227    1,306    558 
Other time deposits   195    190    552    507 
Federal funds purchased and repurchase agreements   402    301    1,073    779 
Federal Home Loan Bank advances   1,704    562    4,382    2,233 
Subordinated debentures   1,135    1,134    3,405    3,404 
Junior subordinated debentures   -    342    48    1,026 
Total interest expense   6,093    4,077    16,290    12,395 
                     
Net interest income   32,345    30,684    93,599    90,706 
Provision for loan losses   1,900    2,000    3,650    4,150 
Net interest income after provision for loan losses   30,445    28,684    89,949    86,556 
                     
Non-interest income:                    
Service charges and other fees   2,392    2,354    6,662    6,437 
Net securities gains   260    -    260    449 
Title fee income   757    438    1,848    1,352 
Gain on sale of Small Business Administration loans   100    213    1,442    670 
BOLI income   563    556    1,690    1,358 
Other operating income   900    473    1,701    2,032 
Total non-interest income   4,972    4,034    13,603    12,298 
                     
Non-interest expense:                    
Salaries and employee benefits   11,766    10,330    34,467    31,483 
Occupancy and equipment   3,514    3,256    10,351    9,439 
Technology and communications   1,469    1,235    4,194    3,638 
Marketing and advertising   1,254    1,039    3,742    3,005 
Professional services   678    768    2,101    2,815 
FDIC assessments   341    446    984    1,491 
Acquisition costs   -    -    -    (270)
Amortization of other intangible assets   247    462    800    1,810 
Other operating expenses   2,002    1,668    5,934    5,141 
Total non-interest expense   21,271    19,204    62,573    58,552 
                     
Income before income taxes   14,146    13,514    40,979    40,302 
Income tax expense   4,703    4,663    13,524    13,971 
Net income  $9,443   $8,851   $27,455   $26,331 
Basic earnings per share  $0.48   $0.50   $1.39   $1.50 
Diluted earnings per share  $0.48   $0.50   $1.39   $1.50 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 4 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Net Income  $9,443   $8,851   $27,455   $26,331 
Other comprehensive income (losses):                    
Change in unrealized net gains (losses) on securities available for sale, net of reclassifications and deferred income taxes   152    (1,886)   2,695    5,263 
Adjustment to pension liability, net of reclassifications and deferred income taxes   67    57    230    176 
Unrealized gains (losses) on cash flow hedges, net of reclassifications and deferred income taxes   303    595    (70)   (709)
Total other comprehensive income (losses)   522    (1,234)   2,855    4,730 
Comprehensive income  $9,965   $7,617   $30,310   $31,061 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 5 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)

(In thousands, except share and per share amounts)

 

   Common
Stock
   Surplus   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Loss
   Total 
Balance at December 31, 2016  $191   $329,427   $91,594   $(161)  $(13,064)  $407,987 
Net income             27,455              27,455 
Shares issued under the dividend reinvestment plan        721                   721 
Shares issued for trust preferred securities conversions (529,292 shares)   5    14,944                   14,949 
Stock awards granted and distributed   1    (417)        416         - 
Stock awards forfeited        131         (131)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (330)        (330)
Share based compensation expense        1,972                   1,972 
Cash dividend declared, $0.69 per share             (13,670)             (13,670)
Other comprehensive income, net of deferred income taxes                       2,855    2,855 
Balance at September 30, 2017  $197   $346,778   $105,379   $(206)  $(10,209)  $441,939 

 

   Common
Stock
   Surplus   Retained
Earnings
   Treasury
Stock
   Accumulated Other
Comprehensive
Loss
   Total 
Balance at December 31, 2015  $174   $278,333   $72,243   $-   $(9,622)  $341,128 
Net income             26,331              26,331 
Shares issued under the dividend reinvestment plan        688                   688 
Shares issued for trust preferred securities conversions (6,896 shares)        195                   195 
Stock awards granted and distributed   1    (176)        175         - 
Stock awards forfeited        173         (173)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (328)        (328)
Exercise of stock options        (29)        29         - 
Impact of modification of convertible trust preferred securities        356                   356 
Share based compensation expense        1,597                   1,597 
Cash dividend declared, $0.69 per share             (12,095)             (12,095)
Other comprehensive income, net of deferred income taxes                       4,730    4,730 
Balance at September 30, 2016  $175   $281,137   $86,479   $(297)  $(4,892)  $362,602 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 6 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2017   2016 
Cash flows from operating activities:          
Net income  $27,455   $26,331 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   3,650    4,150 
Depreciation and (accretion)   (2,913)   (5,011)
Net amortization on securities   4,865    4,699 
Increase in cash surrender value of bank owned life insurance   (1,690)   (1,358)
Amortization of intangible assets   800    1,810 
Share based compensation expense   1,972    1,597 
Net securities gains   (260)   (449)
Increase in accrued interest receivable   (772)   (297)
Small Business Administration ("SBA") loans originated for sale   (15,523)   (7,220)
Proceeds from sale of the guaranteed portion of SBA loans   17,290    8,042 
Gain on sale of the guaranteed portion of SBA loans   (1,442)   (670)
Loss on sale of loans   33    - 
(Increase) decrease in other assets   (664)   2,468 
Increase (decrease) in accrued expenses and other liabilities   3,824    (5,668)
Net cash provided by operating activities   36,625    28,424 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (87,916)   (263,576)
Purchases of securities, restricted   (404,267)   (299,908)
Purchases of securities held to maturity   (3,628)   (43,489)
Proceeds from sales of securities available for sale   26,685    264,358 
Redemption of securities, restricted   404,776    300,181 
Maturities, calls and principal payments of securities available for sale   89,630    137,821 
Maturities, calls and principal payments of securities held to maturity   36,390    23,766 
Net increase in loans   (319,312)   (176,770)
Proceeds from loan sale   2,574    - 
Proceeds from sales of other real estate owned, net   -    278 
Purchase of bank owned life insurance   -    (30,000)
Purchase of premises and equipment   (2,595)   (2,500)
Net cash used in investing activities   (257,663)   (89,839)
           
Cash flows from financing activities:          
Net increase in deposits   277,345    80,762 
Net decrease in federal funds purchased   (50,000)   (20,000)
Net decrease in Federal Home Loan Bank advances   (19,733)   (27,624)
Repayment of junior subordinated debentures   (352)   - 
Net increase in repurchase agreements   172    203 
Net proceeds from issuance of common stock   721    688 
Repurchase of surrendered stock from vesting of restricted stock awards   (330)   (328)
Cash dividends paid   (13,670)   (12,095)
Net cash provided by financing activities   194,153    21,606 
           
Net decrease in cash and cash equivalents   (26,885)   (39,809)
Cash and cash equivalents at beginning of period   113,838    104,558 
Cash and cash equivalents at end of period  $86,953   $64,749 
           
Supplemental Information-Cash Flows:          
Cash paid for:          
Interest  $17,660   $13,690 
Income tax  $4,195   $17,082 
           
Noncash investing and financing activities:          
Conversion of junior subordinated debentures  $15,350   $- 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 7 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. BASIS OF PRESENTATION

 

Bridge Bancorp, Inc. (the “Company”) is a bank holding company incorporated under the laws of the State of New York. 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.; a financial title insurance subsidiary, Bridge Abstract LLC (“Bridge Abstract”); and an investment services subsidiary, Bridge Financial Services, Inc. (“Bridge Financial Services”). In addition to the Bank, the Company had another subsidiary, Bridge Statutory Capital Trust II (“the Trust”), which was formed in 2009 and sold $16.0 million of 8.5% cumulative convertible trust preferred securities (“TPS”) in a private placement to accredited investors. In accordance with accounting guidance, the Trust was not consolidated in the Company’s financial statements. The TPS were redeemed effective January 18, 2017 and the Trust was cancelled effective April 24, 2017.

 

The accompanying Unaudited Consolidated Financial Statements, which include the accounts of the Company and its wholly-owned subsidiary, the Bank, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Unaudited Consolidated Financial Statements included herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In preparing the interim financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. 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 annualized results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results of operations that may be expected for the entire fiscal year. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain reclassifications have been made to prior year amounts, and the related discussion and analysis, to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders’ equity. The Unaudited Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

2. EARNINGS PER SHARE

 

Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260-10-45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”).  The restricted stock awards and certain restricted stock units granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities.  The two-class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.

 

 8 

  

The following table presents the computation of EPS for the three and nine months ended September 30, 2017 and 2016:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(In thousands, except per share data)  2017   2016   2017   2016 
Net Income  $9,443   $8,851   $27,455   $26,331 
Dividends paid on and earnings allocated to participating securities   (197)   (188)   (557)   (542)
Income attributable to common stock  $9,246   $8,663   $26,898   $25,789 
                     
Weighted average common shares outstanding, including participating securities   19,793    17,537    19,748    17,511 
Weighted average participating securities   (412)   (372)   (405)   (365)
Weighted average common shares outstanding   19,381    17,165    19,343    17,146 
Basic earnings per common share  $0.48   $0.50   $1.39   $1.50 
                     
Income attributable to common stock  $9,246   $8,663   $26,898   $25,789 
Impact of assumed conversions - interest on 8.5% trust preferred securities   -    219    32    661 
Income attributable to common stock including assumed conversions  $9,246   $8,882   $26,930   $26,450 
                     
Weighted average common shares outstanding   19,381    17,165    19,343    17,146 
Incremental shares from assumed conversions of options and restricted stock units   25    15    21    11 
Incremental shares from assumed conversions of 8.5% trust preferred securities   -    546    23    531 
Weighted average common and equivalent shares outstanding   19,406    17,726    19,387    17,688 
Diluted earnings per common share  $0.48   $0.50   $1.39   $1.50 

 

There were no stock options outstanding for the nine months ended September 30, 2017. There were no stock options that were antidilutive for the nine months ended September 30, 2016. There were no restricted stock units that were antidilutive for the three and nine months ended September 30, 2017 and 2016. The $15.7 million in trust preferred securities outstanding at December 31, 2016 were redeemed effective January 18, 2017 and therefore were not included in the computation of diluted earnings per share for the three months ended September 30, 2017, but were dilutive for the nine months ended September 30, 2017 and therefore were included in the computation of diluted earnings per share for that period. The $15.8 million in trust preferred securities outstanding at September 30, 2016 were dilutive for the three and nine months ended September 30, 2016 and therefore were included in the computation of diluted earnings per share for those periods.

 

3. STOCK BASED COMPENSATION PLANS

 

The Compensation Committee of the Board of Directors determines restricted stock awarded under the Bridge Bancorp, Inc. Equity Incentive Plan (“Plan”) and the Company accounts for this Plan under FASB ASC No. 718. The Company’s 2012 Stock-Based Incentive Plan provides for the grant of stock-based and other incentive awards to officers, employees and directors of the Company.

 

The following table summarizes the status of the Company’s unvested restricted stock as of and for the nine months ended September 30, 2017:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2017   301,991   $24.59 
Granted   70,981   $35.62 
Vested   (46,201)  $23.36 
Forfeited   (5,001)  $26.79 
Unvested, September 30, 2017   321,770   $27.17 

 

During the nine months ended September 30, 2017, restricted stock awards of 70,981 shares were granted. Of the 70,981 shares granted, 31,860 shares vest over seven years with a third vesting after years five, six and seven, 25,396 shares vest over five years with a third vesting after years three, four and five, 10,270 shares vest ratably over three years, and 3,455 shares vest over nine months. During the nine months ended September 30, 2016, restricted stock awards of 68,309 shares were granted. Of the 68,309 shares granted, 36,000 shares vest over seven years with a third vesting after years five, six and seven, 27,709 shares vest over five years with

 

 9 

  

a third vesting after years three, four and five, and 4,600 shares vest ratably over three years. Compensation expense attributable to restricted stock awards was $432,000 and $1.3 million for the three and nine months ended September 30, 2017, respectively, and $352,000 and $1.1 million for the three and nine months ended September 30, 2016, respectively.

 

Effective in 2015, the Board revised the design of the Long Term Incentive Plan (“LTI Plan”) for Named Executive Officers to include performance-based awards. The LTI Plan includes 60% performance vested awards based on 3-year relative Total Shareholder Return to the proxy peer group and 40% time vested awards. The awards are in the form of restricted stock units which cliff vest after five years and require an additional two-year holding period before being delivered in shares of common stock. The Company recorded expense of $81,000 and $229,000 in connection with these awards for the three and nine months ended September 30, 2017, respectively, and $51,000 and $142,000 for the three and nine months ended September 30, 2016, respectively.

 

In April 2009, the Company adopted a Directors Deferred Compensation Plan (“Directors Plan”). Under the Directors Plan, independent directors may elect to defer all or a portion of their annual retainer fee in the form of restricted stock units. In addition, directors receive a non-election retainer in the form of restricted stock units. These restricted stock units vest ratably over one year and have dividend rights but no voting rights. In connection with the Directors Plan, the Company recorded expense of $135,000 and $395,000 for the three and nine months ended September 30, 2017, respectively, and $128,000 and $366,000 for the three and nine months ended September 30, 2016, respectively.

 

4. SECURITIES

 

The following tables summarize the amortized cost and estimated fair value of the available for sale and held to maturity investment securities portfolio at September 30, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses therein:

 

   September 30, 2017 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $64,994   $-   $(766)  $64,228 
State and municipal obligations   91,359    430    (469)   91,320 
U.S. GSE residential mortgage-backed securities   195,062    112    (1,770)   193,404 
U.S. GSE residential collateralized mortgage obligations   323,427    75    (4,300)   319,202 
U.S. GSE commercial mortgage-backed securities   6,129    41    (17)   6,153 
U.S. GSE commercial collateralized mortgage obligations   51,211    -    (825)   50,386 
Other asset backed securities   24,250    -    (1,213)   23,037 
Corporate bonds   46,000    -    (1,672)   44,328 
Total available for sale   802,432    658    (11,032)   792,058 
                     
Held to maturity:                    
State and municipal obligations   60,616    1,446    (36)   62,026 
U.S. GSE residential mortgage-backed securities   11,905    -    (175)   11,730 
U.S. GSE residential collateralized mortgage obligations   55,871    389    (348)   55,912 
U.S. GSE commercial mortgage-backed securities   28,202    158    (350)   28,010 
U.S. GSE commercial collateralized mortgage obligations   33,009    13    (595)   32,427 
Total held to maturity   189,603    2,006    (1,504)   190,105 
Total securities  $992,035   $2,664   $(12,536)  $982,163 

 

 10 

  

   December 31, 2016 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $64,993   $-   $(1,344)  $63,649 
State and municipal obligations   117,292    212    (1,339)   116,165 
U.S. GSE residential mortgage-backed securities   160,446    16    (2,414)   158,048 
U.S. GSE residential collateralized mortgage obligations   373,098    149    (5,736)   367,511 
U.S. GSE commercial mortgage-backed securities   6,337    6    (36)   6,307 
U.S. GSE commercial collateralized mortgage obligations   56,148    -    (956)   55,192 
Other asset backed securities   24,250    -    (1,697)   22,553 
Corporate bonds   32,000    -    (1,703)   30,297 
Total available for sale   834,564    383    (15,225)   819,722 
                     
Held to maturity:                    
State and municipal obligations   66,666    1,085    (130)   67,621 
U.S. GSE residential mortgage-backed securities   13,443    -    (287)   13,156 
U.S. GSE residential collateralized mortgage obligations   61,639    352    (552)   61,439 
U.S. GSE commercial mortgage-backed securities   28,772    136    (509)   28,399 
U.S. GSE commercial collateralized mortgage obligations   41,717    93    (573)   41,237 
Corporate bonds   11,000    26    -    11,026 
Total held to maturity   223,237    1,692    (2,051)   222,878 
Total securities  $1,057,801   $2,075   $(17,276)  $1,042,600 

 

The following table summarizes the amortized cost and estimated fair value by contractual maturity of the available for sale and held to maturity investment securities portfolio at September 30, 2017. 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.

 

   September 30, 2017 
       Estimated 
(In thousands)  Amortized Cost   Fair Value 
Maturity          
Available for sale:          
Within one year  $8,897   $8,900 
One to five years   97,886    97,300 
Five to ten years   130,905    128,893 
Beyond ten years   564,744    556,965 
Total  $802,432   $792,058 
           
Held to maturity:          
Within one year  $3,537   $3,534 
One to five years   36,367    36,634 
Five to ten years   55,308    56,280 
Beyond ten years   94,391    93,657 
Total  $189,603   $190,105 

 

 11 

  

The following tables summarize securities with gross unrealized losses at September 30, 2017 and December 31, 2016, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position:

 

   September 30, 2017 
   Less than 12 months   Greater than 12 months 
   Estimated   Gross   Estimated   Gross 
   Fair   Unrealized   Fair   Unrealized 
(In thousands)  Value   Losses   Value   Losses 
Available for sale:                    
U.S. GSE securities  $37,659   $(334)  $26,568   $(432)
State and municipal obligations   27,585    (146)   25,204    (323)
U.S. GSE residential mortgage-backed securities   129,703    (1,162)   25,682    (608)
U.S. GSE residential collateralized mortgage obligations   178,035    (2,174)   114,900    (2,126)
U.S. GSE commercial mortgage-backed securities   2,455    (17)   -    - 
U.S. GSE commercial collateralized mortgage obligations   25,236    (364)   25,151    (461)
Other asset backed securities   -    -    23,037    (1,213)
Corporate bonds   -    -    30,328    (1,672)
 Total available for sale   400,673    (4,197)   270,870    (6,835)
                     
Held to maturity:                    
State and municipal obligations   2,828    (29)   1,015    (7)
U.S. GSE residential mortgage-backed securities   5,326    (57)   6,404    (118)
U.S. GSE residential collateralized mortgage obligations   14,488    (183)   8,941    (165)
U.S. GSE commercial mortgage-backed securities   12,806    (166)   5,679    (184)
U.S. GSE commercial collateralized mortgage obligations   13,785    (109)   12,955    (486)
Total held to maturity  $49,233   $(544)  $34,994   $(960)

 

   December 31, 2016 
   Less than 12 months   Greater than 12 months 
   Estimated   Gross   Estimated   Gross 
   Fair   Unrealized   Fair   Unrealized 
(In thousands)  Value   Losses   Value   Losses 
Available for sale:                    
U.S. GSE securities  $63,649   $(1,344)  $-   $- 
State and municipal obligations   78,883    (1,338)   240    (1)
U.S. GSE residential mortgage-backed securities   140,514    (2,409)   241    (5)
U.S. GSE residential collateralized mortgage obligations   319,197    (5,221)   15,627    (515)
U.S. GSE commercial mortgage-backed securities   2,573    (36)   -    - 
U.S. GSE commercial collateralized mortgage obligations   48,901    (886)   6,292    (70)
Other asset backed securities   -    -    22,552    (1,697)
Corporate bonds   17,834    (1,166)   12,463    (537)
 Total available for sale   671,551    (12,400)   57,415    (2,825)
                     
Held to maturity:                    
State and municipal obligations   21,867    (130)   -    - 
U.S. GSE residential mortgage-backed securities   13,156    (287)   -    - 
U.S. GSE residential collateralized mortgage obligations   31,297    (455)   3,873    (97)
U.S. GSE commercial mortgage-backed securities   12,860    (286)   5,877    (223)
U.S. GSE commercial collateralized mortgage obligations   22,666    (372)   3,790    (201)
Total held to maturity  $101,846   $(1,530)  $13,540   $(521)

 

 12 

  

Other-Than-Temporary Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) quarterly and more frequently when economic or market conditions warrant. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held to maturity are generally evaluated for OTTI under FASB ASC 320, “Accounting for Certain Investments in Debt and Equity Securities”. In determining OTTI under the FASB ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet these criteria, the amount of impairment is split into two components: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

At September 30, 2017, substantially all of the securities in an unrealized loss position had a fixed interest rate and the cause of the temporary impairment was directly related to changes in interest rates. The Company generally views changes in fair value caused by changes in interest rates as temporary, which is consistent with its experience. Other asset backed securities are comprised of student loan backed bonds which are guaranteed by the U.S. Department of Education for 97% to 100% of principal. Additionally, the bonds have credit support of 3% to 5% and have maintained their Aaa Moody’s rating during the time the Bank has owned them.  The corporate bonds within the portfolio have all maintained an investment grade rating by either Moody’s or Standard and Poor’s. None of the unrealized losses is related to credit losses. The Company does not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2017.

 

Sales and Calls of Securities

 

There were $26.7 million of proceeds from sales of securities with gross gains of approximately $0.3 million and gross losses of approximately $0.1 million for the three and nine months ended the September 30, 2017. There were no sales of securities for the three months ended September 30, 2016. There were $264.4 million of proceeds from sales of securities with gross gains of $1.6 million and gross losses of $1.2 million realized for the nine months ended September 30, 2016. There were no proceeds from calls of securities for the three and nine months ended the September 30, 2017. Proceeds from calls of securities were $13.3 million and $66.2 million for the three and nine months ended September 30, 2016, respectively.

 

Pledged Securities

 

Securities having a fair value of $522.7 million and $570.1 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) overnight borrowings.

 

Trading Securities

 

The Company did not hold any trading securities during the nine months ended September 30, 2017 or the year ended December 31, 2016.

 

Restricted Securities

 

The Bank is a member of the FHLB of New York. 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. The Bank is a member of the Atlantic Central Banker’s Bank (“ACBB”) and is required to own ACBB stock. The Bank is also a member of the FRB system and required to own FRB stock. FHLB, ACBB and FRB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Bank owned $34.2 million and $34.7 million in FHLB, ACBB and FRB stock at September 30, 2017 and December 31, 2016, respectively. These amounts were reported as restricted securities in the consolidated balance sheets.

 

 13 

  

5. FAIR VALUE

 

FASB ASC No. 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also 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 values:

 

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 an asset or liability.

 

The following tables summarize assets and liabilities measured at fair value on a recurring basis:

 

   September 30, 2017 
       Fair Value Measurements Using: 
           Significant     
       Quoted Prices In   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
(In thousands)  Value   (Level 1)   (Level 2)   (Level 3) 
Financial assets:                
Available for sale securities:                    
U.S. GSE securities  $64,228        $64,228      
State and municipal obligations   91,320         91,320      
U.S. GSE residential mortgage-backed securities   193,404         193,404      
U.S. GSE residential collateralized mortgage obligations   319,202         319,202      
U.S. GSE commercial mortgage-backed securities   6,153         6,153      
U.S. GSE commercial collateralized mortgage obligations   50,386         50,386      
Other asset backed securities   23,037         23,037      
Corporate bonds   44,328         44,328      
Total available for sale securities  $792,058        $792,058      
Derivatives  $2,447        $2,447      
                     
Financial liabilities:                    
Derivatives  $1,719       $1,719     

 

 14 

  

   December 31, 2016 
       Fair Value Measurements Using: 
           Significant     
       Quoted Prices In   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
(In thousands)  Value   (Level 1)   (Level 2)   (Level 3) 
Financial assets:                    
Available for sale securities:                    
U.S. GSE securities  $63,649       $63,649     
State and municipal obligations   116,165         116,165      
U.S. GSE residential mortgage-backed securities   158,048         158,048      
U.S. GSE residential collateralized mortgage obligations   367,511         367,511      
U.S. GSE commercial mortgage-backed securities   6,307         6,307      
U.S. GSE commercial collateralized mortgage obligations   55,192         55,192      
Other asset backed securities   22,553         22,553      
Corporate bonds   30,297         30,297      
Total available for sale securities  $819,722        $819,722      
Derivatives  $2,510        $2,510      
                     
Financial liabilities:                    
Derivatives  $1,670        $1,670      

 

The following tables summarize assets measured at fair value on a non-recurring basis:

 

   September 30, 2017 
       Fair Value Measurements Using: 
           Significant     
       Quoted Prices In   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
(In thousands)  Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $4,196           $4,196 

 

   December 31, 2016 
       Fair Value Measurements Using: 
           Significant     
       Quoted Prices In   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
(In thousands)  Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans  $64           $64 

 

Impaired loans with an allocated allowance for loan losses at September 30, 2017 had a carrying amount of $4.2 million, which is made up of the outstanding balance of $6.2 million, net of a valuation allowance of $2.0 million. This resulted in an additional provision for loan losses of $2.0 million that is included in the amount reported on the Consolidated Statements of Income for the nine months ended September 30, 2017. Impaired loans with an allocated allowance for loan losses at December 31, 2016 had a carrying amount of $64 thousand, which is made up of the outstanding balance of $65 thousand, net of a valuation allowance of $1 thousand. This resulted in an additional provision for loan losses of $1 thousand that is included in the amount reported on the Consolidated Statement of Income for the year ended December 31, 2016. There was no other real estate owned at September 30, 2017 and December 31, 2016.

 

The Company used the following methods and assumptions in estimating the fair value of its financial instruments:

 

Cash and Due from Banks and Interest Earning Deposits with Banks: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities and as such are classified as Level 1.

 

 15 

  

Securities Available for Sale and Held to Maturity: If available, the estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges and are classified as Level 1. For securities where quoted prices are not available, fair value is based on 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 resulting in a Level 2 classification.

 

Restricted Securities: It is not practicable to determine the fair value of FHLB, ACBB and FRB stock due to restrictions placed on transferability.

 

Derivatives: Represents interest rate swaps for which the estimated fair values are based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.

 

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 resulting in a Level 3 classification. 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. All nonaccrual loans are carried at their current fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price and therefore, while permissible for presentation purposes under FASB ASC 825-10, do not conform to FASB ASC 820-10.

 

Impaired Loans and Other Real Estate Owned: For impaired loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance.  For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of other real estate owned is also evaluated in accordance with current accounting guidance and determined based on recent appraised values less the estimated cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Adjustments may relate to location, square footage, condition, amenities, market rate of leases as well as timing of comparable sales. All appraisals undergo a second review process to insure that the methodology employed and the values derived are reasonable. The fair value of the loan is compared to the carrying value to determine if any write-down or specific reserve is required. Impaired loans are evaluated quarterly for additional impairment and adjusted accordingly.

 

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual sale price of collateral that has been sold to the most recent appraised value to determine what additional adjustments should be made to appraisal values to arrive at fair value. Management also considers the appraisal values for commercial properties associated with current loan origination activity. Collectively, this information is reviewed to help assess current trends in commercial property values. For each collateral dependent impaired loan, management considers information that relates to the type of commercial property to determine if such properties may have appreciated or depreciated in value since the date of the most recent appraisal. Adjustments to fair value are made only when the analysis indicates a probable decline in collateral values. Adjustments made in the appraisal process are not deemed material to the overall consolidated financial statements given the level of impaired loans measured at fair value on a nonrecurring basis.

 

Deposits: The estimated fair values of certificates of deposit are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificate of deposit maturities resulting in a Level 2 classification. Stated value is fair value for all other deposits resulting in a Level 1 classification.

 

Borrowed Funds: Represents federal funds purchased, repurchase agreements and FHLB advances for which the estimated fair values are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for funding maturities resulting in a Level 1 classification for overnight federal funds purchased, repurchase agreements and FHLB advances and a Level 2 classification for all other maturity terms.

 

Subordinated Debentures: The estimated fair value is based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.

 

Junior Subordinated Debentures: The estimated fair value is based on estimates using market data for similarly risk weighted items and takes into consideration the convertible features of the debentures into Company common stock which is an unobservable input resulting in a Level 3 classification.

 

 16 

  

Accrued Interest Receivable and Payable: For these short-term instruments, the carrying amount is a reasonable estimate of the fair value resulting in a Level 1, 2 or 3 classification consistent with the underlying asset or liability the interest is associated with.

 

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 September 30, 2017 and December 31, 2016.

 

Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. These estimates are subjective in nature and dependent on 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 Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

 

The following tables summarize the estimated fair values and recorded carrying amounts of the Company’s financial instruments at September 30, 2017 and December 31, 2016:

 

   September 30, 2017 
       Fair Value Measurements Using:     
           Significant         
       Quoted Prices In   Other   Significant     
       Active Markets for   Observable   Unobservable   Total 
   Carrying   Identical Assets   Inputs   Inputs   Fair 
(In thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   Value 
Financial assets:                         
Cash and due from banks  $57,915   $57,915   $-   $-   $57,915 
Interest earning deposits with banks   29,038    29,038    -    -    29,038 
Securities available for sale   792,058    -    792,058    -    792,058 
Securities restricted   34,234    n/a    n/a    n/a    n/a 
Securities held to maturity   189,603    -    190,105    -    190,105 
Loans, net   2,892,432    -    -    2,850,092    2,850,092 
Derivatives   2,447    -    2,447    -    2,447 
Accrued interest receivable   11,005    -    3,566    7,439    11,005 
                          
Financial liabilities:                         
Certificates of deposit   223,305    -    222,814    -    222,814 
Demand and other deposits   2,980,003    2,980,003    -    -    2,980,003 
Federal funds purchased   50,000    50,000    -    -    50,000 
Federal Home Loan Bank advances   476,674    159,915    316,132    -    476,047 
Repurchase agreements   846    -    846    -    846 
Subordinated debentures   78,606    -    78,720    -    78,720 
Derivatives   1,719    -    1,719    -    1,719 
Accrued interest payable   432    -    420    12    432 

 

 17 

  

   December 31, 2016 
       Fair Value Measurements Using:     
           Significant         
       Quoted Prices In   Other   Significant     
       Active Markets for   Observable   Unobservable   Total 
   Carrying   Identical Assets   Inputs   Inputs   Fair 
(In thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   Value 
Financial assets:                         
Cash and due from banks  $102,280   $102,280   $-   $-   $102,280 
Interest earning deposits with banks   11,558    11,558    -    -    11,558 
Securities available for sale   819,722    -    819,722    -    819,722 
Securities restricted   34,743    n/a    n/a    n/a    n/a 
Securities held to maturity   223,237    -    222,878    -    222,878 
Loans, net   2,574,536    -    -    2,542,395    2,542,395 
Derivatives   2,510    -    2,510    -    2,510 
Accrued interest receivable   10,233    -    3,480    6,753    10,233 
                          
Financial liabilities:                         
Certificates of deposit   206,732    -    206,026    -    206,026 
Demand and other deposits   2,719,277    2,719,277    -    -    2,719,277 
Federal funds purchased   100,000    100,000    -    -    100,000 
Federal Home Loan Bank advances   496,684    175,000    321,249    -    496,249 
Repurchase agreements   674    -    674    -    674 
Subordinated debentures   78,502    -    78,303    -    78,303 
Junior subordinated debentures   15,244    -    -    15,258    15,258 
Derivatives   1,670    -    1,670    -    1,670 
Accrued interest payable   1,849    87    316    1,446    1,849 

 

6. LOANS

 

The following table sets forth the major classifications of loans:

 

(In thousands)  September 30, 2017   December 31, 2016 
Commercial real estate mortgage loans  $1,261,369   $1,091,752 
Multi-family mortgage loans   570,181    518,146 
Residential real estate mortgage loans   400,256    364,884 
Commercial, industrial and agricultural loans   572,393    524,450 
Real estate construction and land loans   93,393    80,605 
Installment/consumer loans   19,671    16,368 
Total loans   2,917,263    2,596,205 
Net deferred loan costs and fees   4,442    4,235 
Total loans held for investment   2,921,705    2,600,440 
Allowance for loan losses   (29,273)   (25,904)
Loans, net  $2,892,432   $2,574,536 

 

In June 2015, the Company completed the acquisition of Community National Bank (“CNB”) resulting in the addition of $729.4 million of acquired loans recorded at their fair value. There were approximately $386.9 million and $464.2 million of acquired CNB loans remaining as of September 30, 2017 and December 31, 2016, respectively.

 

In February 2014, the Company completed the acquisition of FNBNY Bancorp, Inc. and its wholly owned subsidiary First National Bank of New York (collectively “FNBNY”) resulting in the addition of $89.7 million of acquired loans recorded at their fair value. There were approximately $21.8 million and $26.5 million of acquired FNBNY loans remaining as of September 30, 2017 and December 31, 2016, respectively.

 

Lending Risk

 

The principal business of the Bank is lending in commercial real estate mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial, industrial and agricultural loans, land loans and consumer loans. The Bank considers its primary lending area to be Nassau and Suffolk Counties located on Long Island and the New York City

 

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boroughs. A substantial portion of the Bank’s loans is secured by real estate in these areas. Accordingly, the ultimate collectability of the loan portfolio is susceptible to changes in market and economic conditions in this region.

 

Commercial Real Estate Mortgages

 

Loans in this classification include income producing investment properties and owner occupied real estate used for business purposes. The underlying properties are located largely in the Bank’s primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $250,000 in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

 

Multi-Family Mortgages

 

Loans in this classification include income producing residential investment properties of five or more families. The loans are usually made in areas with limited single-family residences generating high demand for these facilities.  Loans are made to established owners with a proven and demonstrable record of strong performance. Loans are secured by a first mortgage lien on the subject property with a loan to value ratio generally not exceeding 75%. Repayment is derived generally from the rental income generated from the property and may be supplemented by the owners’ personal cash flow. Credit risk arises with an increase in vacancy rates, property mismanagement and the predominance of non-recourse loans that are customary in the industry. 

 

Residential Real Estate Mortgages and Home Equity Loans

 

Loans in these classifications are generally secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, can have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant subprime loans.

 

Commercial, Industrial and Agricultural Loans

 

Loans in this classification are made to businesses and include term loans, lines of credit, senior secured loans to corporations, equipment financing and taxi medallion loans. Generally, these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality in this loan class.

 

Real Estate Construction and Land Loans

 

Loans in this classification primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived primarily from sale of the lots/units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent, this class includes commercial development projects that the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by the Bank, all affect the credit risk in this loan class.

 

Installment and Consumer Loans

 

Loans in this classification may be either secured or unsecured. Repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan, such as automobiles. Therefore, the overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class.

 

Credit Quality Indicators

 

The Company categorizes loans into risk categories of pass, special mention, substandard and doubtful based on relevant information about the ability of borrowers to service their debt including repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Assigned risk rating grades are continuously updated as new information is obtained. Loans risk rated special mention, substandard and doubtful are reviewed on a quarterly basis. The Company uses the following definitions for risk rating grades:

 

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Pass: Loans classified as pass include current loans performing in accordance with contractual terms, pools of homogenous residential real estate and installment/consumer loans that are not individually risk rated and loans which do not exhibit certain risk factors that require greater than usual monitoring by management.

 

Special mention: Loans classified as special mention, while generally not delinquent, have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date.

 

Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be in delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

 

The following tables represent loans categorized by class and internally assigned risk grades as of September 30, 2017 and December 31, 2016:

 

   September 30, 2017 
(In thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Commercial real estate:                         
Owner occupied  $449,761   $1,334   $20,081   $-   $471,176 
Non-owner occupied   776,497    9,278    4,418    -    790,193 
Multi-family   570,181    -    -    -    570,181 
Residential real estate:                         
Residential mortgage   329,338    4,883    373    -    334,594 
Home equity   64,134    825    703    -    65,662 
Commercial and industrial:                         
Secured   68,934    16,111    12,009    -    97,054 
Unsecured   456,964    10,838    7,537    -    475,339 
Real estate construction and land loans   93,070    -    323    -    93,393 
Installment/consumer loans   19,553    18    100         19,671 
Total loans  $2,828,432   $43,287   $45,544   $-   $2,917,263 

 

At September 30, 2017, there were $1.9 million and $2.6 million of acquired CNB loans included in the special mention and substandard grades, respectively, and $0.2 million and $0.3 million of acquired FNBNY loans included in the special mention and substandard grades, respectively.

 

   December 31, 2016 
(In thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Commercial real estate:                         
Owner occupied  $404,584   $18,909   $722   $-   $424,215 
Non-owner occupied   643,426    20,035    4,076    -    667,537 
Multi-family   518,146    -    -    -    518,146 
Residential real estate:                         
Residential mortgage   299,297    82    370    -    299,749 
Home equity   64,195    563    377    -    65,135 
Commercial and industrial:                         
Secured   75,837    31,143    2,254    -    109,234 
Unsecured   409,879    2,493    2,844    -    415,216 
Real estate construction and land loans   80,272    -    333    -    80,605 
Installment/consumer loans   16,268    -    100    -    16,368 
Total loans  $2,511,904   $73,225   $11,076   $-   $2,596,205 

 

At December 31, 2016, there were $0.01 million and $1.5 million of acquired CNB loans included in the special mention and substandard grades, respectively, and $0.2 million and $0.2 million of acquired FNBNY loans included in the special mention and substandard grades, respectively.

 

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Past Due and Nonaccrual Loans

 

The following tables represent the aging of the recorded investment in past due loans as of September 30, 2017 and December 31, 2016 by class of loans, as defined by FASB ASC 310-10:

 

   September 30, 2017 
(In thousands)  30-59
Days
Past Due
   60-89
Days
Past Due
   >90 Days
Past Due
and
Accruing
  

Nonaccrual
Including
90 Days or
More
Past Due

   Total Past
Due and
Nonaccrual
   Current   Total Loans 
Commercial real estate:                                   
Owner occupied  $480   $-   $563   $145   $1,188   $469,988   $471,176 
Non-owner occupied   912    -    1,182    -    2,094    788,099    790,193 
Multi-family   -    -    -    -    -    570,181    570,181 
Residential real estate:                                   
Residential mortgages   1,309    217    -    490    2,016    332,578    334,594 
Home equity   145    -    263    199    607    65,055    65,662 
Commercial and industrial:                                   
Secured   32    -    436    1,568    2,036    95,018    97,054 
Unsecured   75    559    -    5,049    5,683    469,656    475,339 
Real estate construction and land loans   -    -    -    -    -    93,393    93,393 
Installment/consumer loans   26    -    -    -    26    19,645    19,671 
Total loans  $2,979   $776   $2,444   $7,451   $13,650   $2,903,613   $2,917,263 
                                    

 

   December 31, 2016 
(In thousands)  30-59
Days
Past Due
   60-89
Days
Past Due
   >90 Days
Past Due
and
Accruing
   Nonaccrual
Including 90
Days or
More Past
Due
   Total Past
Due and
Nonaccrual
   Current   Total Loans 
Commercial real estate:                                   
Owner occupied  $222   $-   $467   $184   $873   $423,342   $424,215 
Non-owner occupied   -    -    -    -    -    667,537    667,537 
Multi-family   -    -    -    -    -    518,146    518,146 
Residential real estate:                                   
Residential mortgages   1,232    -    -    770    2,002    297,747    299,749 
Home equity   532    -    238    265    1,035    64,100    65,135 
Commercial and industrial:                                   
Secured   27    -    204    -    231    109,003    109,234 
Unsecured   115    -    118    22    255    414,961    415,216 
Real estate construction and land loans   -    -    -    -    -    80,605    80,605 
Installment/consumer loans   28    -    -    -    28    16,340    16,368 
Total loans  $2,156   $-   $1,027   $1,241   $4,424   $2,591,781   $2,596,205 

 

There were $1.9 million and $1.0 million of acquired loans that were 30-89 days past due at September 30, 2017 and December 31, 2016, respectively. All loans 90 days or more past due that are still accruing interest represent loans acquired from CNB, FNBNY and Hamptons State Bank (“HSB”) which were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and expects to fully collect the carrying value of these acquired loans. Therefore, the difference between the carrying value of these loans and their expected cash flows is being accreted into income.

 

Impaired Loans

 

At September 30, 2017 and December 31, 2016, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $18.4 million and $3.4 million, respectively. During the nine months ended September 30, 2017, the Bank modified certain commercial real estate mortgage loans as troubled debt restructurings (“TDRs”) totaling $7.8 million, which are classified as special mention, and certain taxi medallion loans totaling $2.8 million, which are classified as substandard, which, coupled with an increase in nonaccrual loans, caused the increase in impaired loans from December 31, 2016. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and TDRs. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22. Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The

 

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fair value of the collateral is determined based on recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required.

 

The following tables set forth the recorded investment, unpaid principal balance and related allowance by class of loans at September 30, 2017 and December 31, 2016 for individually impaired loans. The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the three and nine months ended September 30, 2017 and 2016:

 

   September 30, 2017   Three Months Ended
September 30, 2017
   Nine Months Ended
September 30, 2017
 
(In thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   8,896    8,896    -    8,906    100    6,352    298 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   3,023    3,023    -    3,030    5    1,459    66 
Unsecured   333    333    -    342    4    367    12 
Total with no related allowance recorded  $12,252   $12,252   $-   $12,278   $109   $8,178   $376 
                                    
With an allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    -    -    - 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   1,216    1,216    646    1,216    6    540    6 
Unsecured   4,941    4,941    1,315    3,294    105    1,098    106 
Total with an allowance recorded  $6,157   $6,157   $1,961   $4,510   $111   $1,638   $112 
                                    
Total:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   8,896    8,896    -    8,906    100    6,352    298 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   4,239    4,239    646    4,246    11    1,999    72 
Unsecured   5,274    5,274    1,315    3,636    109    1,465    118 
Total  $18,409   $18,409   $1,961   $16,788   $220   $9,816   $488 

 

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   December 31, 2016   Three Months Ended
September 30, 2016
   Nine Months Ended
September 30, 2016
 
(In thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $326   $538   $-   $344   $2   $360   $7 
Non-owner occupied   1,213    1,213    -    1,224    20    1,232    57 
Residential real estate:                                   
Residential mortgages   520    558    -    555    -    437    - 
Home equity   264    285    -    657    -    613    - 
Commercial and industrial:                                   
Secured   556    556    -    194    3    173    9 
Unsecured   408    408    -    442    6    467    15 
Total with no related allowance recorded  $3,287   $3,558   $-   $3,416   $31   $3,282   $88 
                                    
With an allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    -    -    - 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   -    -    -    -    -    -    - 
Unsecured   66    66    1    203    1    132    5 
Total with an allowance recorded  $66   $66   $1   $203   $1   $132   $5 
                                    
Total:                                   
Commercial real estate:                                   
Owner occupied  $326   $538   $-   $344   $2   $360   $7 
Non-owner occupied   1,213    1,213    -    1,224    20    1,232    57 
Residential real estate:                                   
Residential mortgages   520    558    -    555    -    437    - 
Home equity   264    285    -    657    -    613    - 
Commercial and industrial:                                   
Secured   556    556    -    194    3    173    9 
Unsecured   474    474    1    645    7    599    20 
Total  $3,353   $3,624   $1   $3,619   $32   $3,414   $93 

 

The Bank had no other real estate owned at September 30, 2017 and December 31, 2016.

 

Troubled Debt Restructurings

 

The terms of certain loans were modified and are considered TDRs. The modification of the terms of such loans generally includes one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. The modification of these loans involved loans to borrowers who were experiencing financial difficulties.

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed to determine if that borrower is currently in payment default under any of its obligations or whether there is a probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

 

During the three months ended September 30, 2017, there were no loans modified as TDRs, compared to one loan modified as a TDR totaling $0.3 million for the three months ended September 30, 2016. During the nine months ended September 30, 2017, the Bank modified certain commercial real estate mortgage loans totaling $7.8 million and certain taxi medallion loans totaling $2.8 million as TDRs compared to four loans as TDRs totaling $0.9 million for the nine months ended September 30, 2016. These modifications did not result in a change to the recorded investment of the loans and did not increase the allowance for loan losses for those periods. During the nine months ended September 30, 2017, there were no

 

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charge-offs relating to TDRs. During the nine months ended September 30, 2016, there were $0.06 million charge-offs relating to TDRs. During the nine months ended September 30, 2017 there were two loans modified as TDRs for which there was a payment default within twelve months following the modification and none during the nine months ended September 30, 2016. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

 

As of September 30, 2017 and December 31, 2016, the Company had $0.5 million and $0.3 million, respectively, of nonaccrual TDRs and $12.7 million and $2.4 million, respectively, of performing TDRs. At September 30, 2017 and December 31, 2016, total nonaccrual TDRs are secured with collateral that has an appraised value of $4.0 million and $1.3 million, respectively. The Bank has no commitment to lend additional funds to these debtors.

 

The terms of certain other loans were modified during the nine months ended September 30, 2017 that did not meet the definition of a TDR. These loans have a total recorded investment at September 30, 2017 of $41.0 million. These loans were to borrowers who were not experiencing financial difficulties.

 

Purchased Credit Impaired Loans

 

Loans acquired in a business combination are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.

 

In determining the acquisition date fair value of purchased loans, acquired loans are aggregated into pools of loans with common characteristics. Each loan is reviewed at acquisition to determine if it should be accounted for as a loan that has experienced credit deterioration and it is probable that, at acquisition, the Company will not be able to collect all the contractual principal and interest due from the borrower. All loans with evidence of deterioration in credit quality are considered purchased credit impaired (“PCI”) loans unless the loan type is specifically excluded from the scope of FASB ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” such as loans with active revolver features, or because management has minimal doubt about the collection of the loan.

 

The Bank makes an estimate of the loans’ contractual principal and contractual interest payments as well as the expected total cash flows from the pools of loans, which includes undiscounted expected principal and interest. The excess of contractual amounts over the total cash flows expected to be collected from the loans is referred to as non-accretable difference, which is not accreted into income. The excess of the expected undiscounted cash flows over the fair value of the loans is referred to as accretable discount. Accretable discount is recognized as interest income on a level-yield basis over the life of the loans. Management has not included prepayment assumptions in its modeling of contractual or expected cash flows. The Bank continues to estimate cash flows expected to be collected over the life of the loans. Subsequent increases in total cash flows expected to be collected are recognized as an adjustment to the accretable yield with the amount of periodic accretion adjusted over the remaining life of the loans. Subsequent decreases in cash flows expected to be collected over the life of the loans are recognized as impairment in the current period through the allowance for loan losses.

 

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. When a loan accounted for in a pool is resolved, it is removed from the pool at its carrying amount. Any differences between the amounts received and the outstanding balance are absorbed by the non-accretable difference of the pool. For loans not accounted for in pools, a gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

 

Payments received earlier than expected or in excess of expected cash flows from sales or other resolutions may result in the carrying value of a pool being reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt. These proceeds may include cash or real estate acquired in foreclosure.

 

At the acquisition date, the PCI loans acquired as part of the FNBNY acquisition had contractually required principal and interest payments receivable of $40.3 million, expected cash flows of $28.4 million, and a fair value (initial carrying amount) of $21.8 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $11.9 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $6.6 million represented the initial accretable yield. At September 30, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $6.1 million and $4.0 million, respectively, with a remaining non-accretable difference of $1.1 million. At December 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $12.2 million and $7.0 million, respectively, with a remaining non-accretable difference of $1.3 million.

 

 24 

  

At the acquisition date, the PCI loans acquired as part of the CNB acquisition had contractually required principal and interest payments receivable of $23.4 million, expected cash flows of $10.1 million, and a fair value (initial carrying amount) of $8.7 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows of $13.3 million represented the non-accretable difference. The difference between the expected cash flows and fair value of $1.4 million represented the initial accretable yield. At September 30, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $10.9 million and $3.2 million, respectively, with a remaining non-accretable difference of $6.2 million. At December 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $12.2 million and $2.3 million, respectively, with a remaining non-accretable difference of $6.9 million.

 

The following table summarizes the activity in the accretable yield for the PCI loans:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
(In thousands)  2017   2016   2017   2016 
Balance at beginning of period  $3,966   $5,963   $6,915   $7,113 
Accretion   (1,067)   (559)   (3,970)   (3,217)
Reclassification (to) from nonaccretable difference during the period   (362)   46    (408)   1,138 
Other   -    -    -    416 
Accretable discount at end of period  $2,537   $5,450   $2,537   $5,450 

 

7. ALLOWANCE FOR LOAN LOSSES

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance quarterly. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances.

 

The Bank monitors its entire loan portfolio regularly, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB ASC No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectability in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to the Company’s policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectability of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

 

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

 

 25 

 

For PCI loans, a valuation allowance is established when it is probable that the Bank will be unable to collect all the cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition. A specific allowance is established when subsequent evaluations of expected cash flows from PCI loans reflect a decrease in those estimates. The allowance established represents the excess of the recorded investment in those loans over the present value of the currently estimated future cash flow, discounted at the last effective accounting yield.

 

The Bank uses assumptions and methodologies that are relevant to estimating the level of impairment and probable losses in the loan portfolio. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to PCI loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

 

The Credit Risk Management Committee (“CRMC”) is comprised of Bank management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the CRMC, based on its risk assessment of the entire portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee of the Board to review credit risk trends and the adequacy of the allowance for loan losses. Based on the CRMC’s review of the classified loans and the overall allowance levels as they relate to the entire loan portfolio at September 30, 2017 and December 31, 2016, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

The following tables represent the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under FASB ASC 310-10, and based on impairment method as of September 30, 2017 and December 31, 2016. The tables include loans acquired from CNB and FNBNY.

 

 

   September 30, 2017 
(In thousands)  Commercial
 Real Estate
Mortgage
Loans
   Multi-
Family
Loans
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Industrial
and
Agricultural
Loans
   Real Estate
Construction
 and Land
Loans
   Installment/
Consumer
Loans
   Total 
Allowance for loan losses:                                   
Individually evaluated for impairment  $-   $-   $-   $1,961   $-   $-   $1,961 
Collectively evaluated for impairment   10,470    4,840    1,660    9,463    745    134    27,312 
Loans acquired with deteriorated credit quality   -    -    -    -    -    -    - 
Total allowance for loan losses  $10,470   $4,840   $1,660   $11,424   $745   $134   $29,273 
                                    
Loans:                                   
Individually evaluated for impairment  $8,896   $-   $-   $9,513   $-   $-   $18,409 
Collectively evaluated for impairment   1,250,042    567,189    399,677    561,521    93,393    19,671    2,891,493 
Loans acquired with deteriorated credit quality   2,431    2,992    579    1,359    -    -    7,361 
Total loans  $1,261,369   $570,181   $400,256   $572,393   $93,393   $19,671   $2,917,263 

 

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   December 31, 2016 
(In thousands)  Commercial
 Real Estate

Mortgage

 Loans
   Multi-
Family

Loans
   Residential
 Real Estate

Mortgage

Loans
   Commercial,
 Industrial

  and

Agricultural

Loans
   Real Estate
 Construction

 and Land

 Loans
   Installment/
 Consumer

Loans
   Total 
Allowance for loan losses:                                   
Individually evaluated for impairment  $-   $-   $-   $1   $-   $-   $1 
Collectively evaluated for impairment   9,225    6,264    1,495    7,836    955    128    25,903 
Loans acquired with deteriorated credit quality   -    -    -    -    -    -    - 
Total allowance for loan losses  $9,225   $6,264   $1,495   $7,837   $955   $128   $25,904 
                                    
Loans:                                   
Individually evaluated for impairment  $1,539   $-   $784   $1,030   $-   $-   $3,353 
Collectively evaluated for impairment   1,088,332    514,853    363,230    519,686    80,605    16,368    2,583,074 
Loans acquired with deteriorated credit quality   1,881    3,293    870    3,734    -    -    9,778 
Total loans  $1,091,752   $518,146   $364,884   $524,450   $80,605   $16,368   $2,596,205 

 

The following tables represent the changes in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016, by portfolio segment, as defined under FASB ASC 310-10. The portfolio segments represent the categories that the Bank uses to determine its allowance for loan losses.

 

   Three Months Ended September 30, 2017 
               Commercial,             
   Commercial       Residential   Industrial   Real Estate         
   Real Estate   Multi-   Real Estate   and   Construction   Installment/     
   Mortgage   Family   Mortgage   Agricultural   and Land   Consumer     
(In thousands)  Loans   Loans   Loans   Loans   Loans   Loans   Total 
Allowance for loan losses:                                   
Beginning balance  $10,579   $4,846   $1,486   $9,970   $577   $86   $27,544 
Charge-offs   -    -    -    (124)   -    (49)   (173)
Recoveries   -    -    -    1    -    1    2 
Provision   (109)   (6)   174    1,577    168    96    1,900 
Ending balance  $10,470   $4,840   $1,660   $11,424   $745   $134   $29,273 

 

   Three Months Ended September 30, 2016 
               Commercial,             
   Commercial       Residential   Industrial   Real Estate         
   Real Estate   Multi-   Real Estate   and   Construction   Installment/     
   Mortgage   Family   Mortgage   Agricultural   and Land   Consumer     
(In thousands)  Loans   Loans   Loans   Loans   Loans   Loans   Total 
Allowance for loan losses:                                   
Beginning balance  $8,309   $5,287   $2,076   $5,771   $1,131   $134   $22,708 
    Charge-offs   -    -    (56)   (377)   -    -    (433)
    Recoveries   9    -    -    23    -    1    33 
    Provision   142    1,293    11    790    (219)   (17)   2,000 
Ending balance  $8,460   $6,580   $2,031   $6,207   $912   $118   $24,308 

 

 27 

  

   Nine Months Ended September 30, 2017 
               Commercial,             
   Commercial       Residential   Industrial   Real Estate         
   Real Estate   Multi-   Real Estate   and   Construction   Installment/     
   Mortgage   Family   Mortgage   Agricultural   and Land   Consumer     
(In thousands)  Loans   Loans   Loans   Loans   Loans   Loans   Total 
Allowance for loan losses:                                   
Beginning balance  $9,225   $6,264   $1,495   $7,837   $955   $128   $25,904 
Charge-offs   -    -    -    (252)   -    (49)   (301)
Recoveries   -    -    2    16    -    2    20 
Provision   1,245    (1,424)   163    3,823    (210)   53    3,650 
Ending balance  $10,470   $4,840   $1,660   $11,424   $745   $134   $29,273 

 

   Nine Months Ended September 30, 2016 
               Commercial,             
   Commercial       Residential   Industrial   Real Estate         
   Real Estate   Multi-   Real Estate   and   Construction   Installment/     
   Mortgage   Family   Mortgage   Agricultural   and Land   Consumer     
(In thousands)  Loans   Loans   Loans   Loans   Loans   Loans   Total 
Allowance for loan losses:                                   
Beginning balance  $7,850   $4,208   $2,115   $5,405   $1,030   $136   $20,744 
    Charge-offs   -    -    (56)   (674)   -    (2)   (732)
    Recoveries   109    -    2    30    -    5    146 
    Provision   501    2,372    (30)   1,446    (118)   (21)   4,150 
Ending balance  $8,460   $6,580   $2,031   $6,207   $912   $118   $24,308 

 

8. EMPLOYEE BENEFITS

 

The Bank maintains a noncontributory pension plan covering all eligible employees. The Bank uses a December 31st measurement date for this plan in accordance with FASB ASC 715-30 “Compensation – Retirement Benefits – Defined Benefit Plans – Pension.” During 2012, the Company amended the pension plan by revising the formula for determining benefits effective January 1, 2013, except for certain grandfathered employees. Additionally, new employees hired on or after October 1, 2012 are not eligible for the pension plan.

 

During 2001, the Bank adopted the Bridgehampton National Bank Supplemental Executive Retirement Plan (“SERP”). As recommended by the Compensation Committee of the Board of Directors and approved by the full Board of Directors, the SERP provides benefits to certain employees, 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 rabbi trust are reflected on the Consolidated Balance Sheets of the Company.

 

There were $2.2 million of contributions to the pension plan during the nine months ended September 30, 2017 and 2016. There were no contributions to the SERP during the nine months ended September 30, 2017 and 2016. In accordance with the SERP, a retired executive received a distribution from the plan totaling $84,000 during the nine months ended September 30, 2017 and 2016, respectively.

 

The Company’s funding policy with respect to its benefit plans is to contribute at least the minimum amounts required by applicable laws and regulations.

 

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The following table sets forth the components of net periodic benefit cost:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   Pension Benefits   SERP Benefits   Pension Benefits   SERP Benefits 
(In thousands)  2017   2016   2017   2016   2017   2016   2017   2016 
Service cost  $293   $288   $54   $44   $878   $865   $159   $132 
Interest cost   185    199    26    27    555    596    78    79 
Expected return on plan assets   (521)   (482)   -    -    (1,561)   (1,447)   -    - 
Amortization of net loss   113    102    12    6    338    305    38    20 
Amortization of prior service credit   (20)   (20)   -    -    (58)   (58)   -    - 
Amortization of transition obligation   -    -    7    7    -    -    21    21 
Net periodic benefit cost  $50   $87   $99   $84   $152   $261   $296   $252 

 

9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase totaled $0.8 million at September 30, 2017 and $0.7 million at December 31, 2016. The repurchase agreements were collateralized by investment securities, of which 53% were U.S. GSE residential collateralized mortgage obligations and 47% were U.S. GSE residential mortgage-backed securities with a carrying amount of $1.9 million at September 30, 2017 and 49% were U.S. GSE residential collateralized mortgage obligations and 51% were U.S. GSE residential mortgage-backed securities with a carrying amount of $2.3 million at December 31, 2016.

 

Securities sold under agreements to repurchase are financing arrangements with $0.8 million maturing during the fourth quarter of 2017. At maturity, the securities underlying the agreements are returned to the Company. The primary risk associated with these secured borrowings is the requirement to pledge a market value based balance of collateral in excess of the borrowed amount. The excess collateral pledged represents an unsecured exposure to the lending counterparty. As the market value of the collateral changes, both through changes in discount rates and spreads as well as related cash flows, additional collateral may need to be pledged. In accordance with the Company’s policies, eligible counterparties are defined and monitored to minimize exposure.

 

 29 

 

10. FEDERAL HOME LOAN BANK ADVANCES

 

The following tables set forth the contractual maturities and weighted average interest rates of FHLB advances over the next three years at September 30, 2017 and December 31, 2016:

 

   September 30, 2017 
(Dollars in thousands)  Amount   Weighted
Average Rate
 
Contractual Maturity        
Overnight  $160,000    1.29%
           
2017   290,000    1.34%
2018   25,170    1.06%
2019   1,504    0.97%
    316,674    1.32%
Total FHLB advances  $476,674    1.31%

 

   December 31, 2016 
(Dollars in thousands)  Amount   Weighted
Average Rate
 
Contractual Maturity        
Overnight  $175,000    0.74%
           
2017   294,113    0.82%
2018   25,431    1.05%
2019   2,140    1.04%
    321,684    0.84%
Total FHLB advances  $496,684    0.80%

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $1.05 billion and $923.9 million of residential and commercial mortgage loans under a blanket lien arrangement at September 30, 2017 and December 31, 2016, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $1.29 billion at September 30, 2017.

 

11. BORROWED FUNDS

 

Subordinated Debentures

 

In September 2015, the Company issued $80.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures. $40.0 million of the subordinated debentures are callable at par after five years, have a stated maturity of September 30, 2025 and bear interest at a fixed annual rate of 5.25% per year, from and including September 21, 2015 until but excluding September 30, 2020. From and including September 30, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 360 basis points. The remaining $40.0 million of the subordinated debentures are callable at par after ten years, have a stated maturity of September 30, 2030 and bear interest at a fixed annual rate of 5.75% per year, from and including September 21, 2015 until but excluding September 30, 2025. From and including September 30, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 345 basis points. The subordinated debentures totaled $78.6 million and $78.5 million at September 30, 2017 and December 31, 2016, respectively.

 

The subordinated debentures are included in tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

 

Junior Subordinated Debentures

 

In December 2009, the Company completed the private placement of $16.0 million in aggregate liquidation amount of 8.50% cumulative convertible trust preferred securities (“TPS”), through its subsidiary, Bridge Statutory Capital Trust II (the “Trust”). The TPS had a liquidation amount of $1,000 per security, were convertible into the Company’s common stock, at a modified effective conversion price of $29 per share, matured in 2039 and were callable by the Company at par after September 30, 2014.

 

The Company issued $16.0 million of junior subordinated debentures (the “Debentures”) to the Trust in exchange for ownership of all of the common securities of the Trust and the proceeds of the TPS sold by the Trust. In accordance with accounting guidance, the

 

 30 

 

Trust was not consolidated in the Company’s financial statements, but rather the Debentures were shown as a liability. The Debentures had the same interest rate, maturity and prepayment provisions as the TPS.

 

On December 15, 2016, the Company notified holders of the $15.8 million in outstanding TPS of the full redemption of the TPS on January 18, 2017. The redemption price equaled the liquidation amount, plus accrued but unpaid interest until but not including the redemption date. TPS not converted into shares of the Company’s common stock on or prior to January 17, 2017 were redeemed as of January 18, 2017. 15,450 shares of TPS with a liquidation amount of $15.5 million were converted into 532,740 shares of the Company’s common stock, which includes 100 shares of TPS with a liquidation amount of $100,000 which were converted into 3,448 shares of the Company’s common stock on December 28, 2016. The remaining 350 shares of TPS with a liquidation amount of $350,000 were redeemed on January 18, 2017. The Trust was cancelled effective April 24, 2017.

 

12. DERIVATIVES

 

Cash Flow Hedges of Interest Rate Risk

 

As part of its asset liability management, the Company utilizes interest rate swap agreements to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent the amount exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

 

Interest rate swaps with notional amounts totaling $290.0 million and $175.0 million at September 30, 2017 and December 31, 2016, respectively, were designated as cash flow hedges of certain FHLB advances. The swaps were determined to be fully effective during the periods presented and therefore no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in other assets/(other liabilities), with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

 

The following table summarizes information about the interest rate swaps designated as cash flow hedges at September 30, 2017 and December 31, 2016:

 

(Dollars in thousands)  September 30, 2017   December 31, 2016 
Notional amounts  $290,000   $175,000 
Weighted average pay rates   1.78%   1.61%
Weighted average receive rates   1.33%   0.95%
Weighted average maturity   2.89 years    2.98 years 

 

Interest expense recorded on these swap transactions totaled $369,000 and $1.1 million for the three and nine months ended September 30, 2017 and $236,000 and $725,000 for the three and nine months ended September 30, 2016, respectively, and is reported as a component of interest expense on FHLB advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the nine months ended September 30, 2017, the Company had $1.1 million of reclassifications to interest expense. During the next twelve months, the Company estimates that $0.7 million will be reclassified as an increase in interest expense.

 

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the three and nine months ended September 30, 2017 and 2016:

 

           Amount of loss 
   Amount of gain (loss)   Amount of loss   recognized in other 
(In thousands)  recognized in OCI   reclassified from OCI   non-interest income 
Interest rate contracts  (Effective Portion)   to interest expense   (Ineffective Portion) 
Three months ended September 30, 2017  $144   $(369)  $- 
Nine months ended September 30, 2017  $(1,216)  $(1,103)  $- 
Three months ended September 30, 2016  $764   $(236)  $- 
Nine months ended September 30, 2016  $(1,920)  $(725)  $- 

 

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The following table reflects the cash flow hedges included in the Consolidated Balance Sheets at the dates indicated:

 

   September 30, 2017   December 31, 2016 
       Fair   Fair       Fair   Fair 
(In thousands)  Notional   Value   Value   Notional   Value   Value 
  Amount   Asset   Liability   Amount   Asset   Liability 
Included in other assets/(liabilities):                        
Interest rate swaps related to FHLB advances  $290,000   $1,749   $(1,021)  $175,000   $1,994   $(1,153)

 

Non-Designated Hedges

 

Derivatives not designated as hedges may be used to manage the Company’s exposure to interest rate movements or to provide service to customers but do not meet the requirements for hedge accounting under U.S. GAAP. The Company executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third party in order to minimize the net risk exposure resulting from such transactions. These interest-rate swap agreements do not qualify for hedge accounting treatment, and therefore changes in fair value are reported in current period earnings.

 

The following table presents summary information about these interest rate swaps at September 30, 2017 and December 31, 2016:

 

(Dollars in thousands)  September 30, 2017   December 31, 2016 
Notional amounts  $80,939   $62,472 
Weighted average pay rates   3.84%   3.50%
Weighted average receive rates   3.84%   3.50%
Weighted average maturity   12.32 years    13.97 years 
Fair value of combined interest rate swaps  $-   $- 

 

Credit-Risk-Related Contingent Features

 

As of September 30, 2017, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0.5 million and the termination value of derivatives in a net asset position was $0.8 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net liability position, the Company is required to post collateral against its obligations under the agreements. However, if the termination value of derivatives is a net asset position, the counterparty is required to post collateral to the Company. At September 30, 2017, the Company posted collateral of $0.8 million against its obligations under the agreements in a net liability position and received collateral of $0.6 million from its counterparty under the agreements in a net asset position. If the Company had breached any of these provisions at September 30, 2017, it could have been required to settle its obligations under the agreements at the termination value.

 

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13. OTHER COMPREHENSIVE INCOME

 

The following table summarizes the components of other comprehensive income and related income tax effects:

 

   Three Months Ended   Nine Months Ended 
(In thousands)  September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016 
Unrealized holding gains (losses) on available for sale securities  $517   $(3,173)  $4,728   $9,292 
Reclassification adjustment for gains realized in income   (260)   -    (260)   (449)
Income tax effect   (105)   1,287    (1,773)   (3,580)
Net change in unrealized gains (losses) on available for sale securities   152    (1,886)   2,695    5,263 
                     
Reclassification adjustment for amortization realized in income   112    95    339    288 
Income tax effect   (45)   (38)   (109)   (112)
Net change in post-retirement obligation   67    57    230    176 
                     
Change in fair value of derivatives used for cash flow hedges   144    764    (1,216)   (1,920)
Reclassification adjustment for losses realized in income   369    236    1,103    725 
Income tax effect   (210)   (405)   43    486 
Net change in unrealized gains (losses) on cash flow hedges   303    595    (70)   (709)
                     
Other comprehensive income (loss)  $522   $(1,234)  $2,855   $4,730 

 

The following is a summary of the accumulated other comprehensive loss balances, net of income taxes, at the dates indicated:

 

       Other Comprehensive     
(In thousands)  December 31, 2016   Income   September 30, 2017 
Unrealized losses on available for sale securities  $(8,823)  $2,695   $(6,128)
Unrealized losses on pension benefits   (4,741)   230    (4,511)
Unrealized gains on cash flow hedges   500    (70)   430 
Accumulated other comprehensive loss  $(13,064)  $2,855   $(10,209)

 

The following represents the reclassifications out of accumulated other comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016:

 

   Three Months Ended   Nine Months Ended   Affected Line I