10-Q 1 tv492660_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 March 31, 2018

 

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 19,791,373 shares of common stock outstanding as of April 30, 2018.

 

 

 

 

 

 

BRIDGE BANCORP, INC. 

 

PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 3
     
  Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 5
     
  Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2018 and 2017 6
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 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 49
     
Item 4. Controls and Procedures 50
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 51
     
Item 1A. Risk Factors 51
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
     
Item 3. Defaults Upon Senior Securities 51
     
Item 4. Mine Safety Disclosures 51
     
Item 5. Other Information 51
     
Item 6. Exhibits 52
     
Signatures   52

 

 2 

 

 

Item 1. Financial Statements

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   March 31,   December 31, 
   2018   2017 
   (unaudited)     
Assets          
Cash and due from banks  $50,588   $76,614 
Interest earning deposits with banks   48,424    18,133 
Total cash and cash equivalents   99,012    94,747 
           
Securities available for sale, at fair value   726,056    759,916 
Securities held to maturity (fair value of $172,877 and $179,885, respectively)   176,089    180,866 
Total securities   902,145    940,782 
           
Securities, restricted   36,195    35,349 
           
Loans held for investment   3,201,897    3,102,752 
Allowance for loan losses   (32,812)   (31,707)
Loans, net   3,169,085    3,071,045 
           
Premises and equipment, net   33,892    33,505 
Accrued interest receivable   11,907    11,652 
Goodwill   105,950    105,950 
Other intangible assets   5,003    5,214 
Prepaid pension   10,039    9,936 
Bank owned life insurance   88,039    87,493 
Other real estate owned   175    - 
Other assets   39,182    34,329 
Total assets  $4,500,624   $4,430,002 
           
Liabilities          
Demand deposits  $1,224,043   $1,338,701 
Savings, NOW and money market deposits   1,924,455    1,773,478 
Certificates of deposit of $100,000 or more   159,303    158,584 
Other time deposits   123,444    63,780 
Total deposits   3,431,245    3,334,543 
           
Federal funds purchased   -    50,000 
Federal Home Loan Bank advances   520,092    501,374 
Repurchase agreements   872    877 
Subordinated debentures, net   78,676    78,641 
Other liabilities and accrued expenses   36,416    35,367 
Total liabilities   4,067,301    4,000,802 
           
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; 19,792,615 and 19,719,575 shares issued, respectively; and 19,779,699 and 19,709,360 shares outstanding, respectively)   198    197 
Surplus   348,420    347,691 
Retained earnings   104,050    96,547 
Treasury stock at cost, 12,916 and 10,215 shares, respectively   (436)   (296)
    452,232    444,139 
Accumulated other comprehensive loss, net of income taxes   (18,909)   (14,939)
Total stockholders' equity   433,323    429,200 
Total liabilities and stockholders' equity  $4,500,624   $4,430,002 

 

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 
   March 31, 
   2018   2017 
Interest income:          
Loans (including fee income)  $35,613   $29,383 
Mortgage-backed securities, CMOs and other asset-backed securities   3,724    3,817 
U.S. GSE securities   279    300 
State and municipal obligations   812    995 
Corporate bonds   355    290 
Deposits with banks   90    46 
Other interest and dividend income   491    386 
Total interest income   41,364    35,217 
           
Interest expense:          
Savings, NOW and money market deposits   2,514    1,551 
Certificates of deposit of $100,000 or more   517    379 
Other time deposits   195    178 
Federal funds purchased and repurchase agreements   1,115    316 
Federal Home Loan Bank advances   1,349    1,149 
Subordinated debentures   1,135    1,135 
Junior subordinated debentures   -    48 
Total interest expense   6,825    4,756 
           
Net interest income   34,539    30,461 
Provision for loan losses   800    800 
Net interest income after provision for loan losses   33,739    29,661 
           
Non-interest income:          
Service charges and other fees   2,163    2,050 
Title fee income   505    550 
Gain on sale of Small Business Administration loans   371    543 
BOLI income   546    560 
Other operating income   528    419 
Total non-interest income   4,113    4,122 
           
Non-interest expense:          
Salaries and employee benefits   12,812    11,500 
Occupancy and equipment   3,243    3,398 
Technology and communications   1,643    1,335 
Marketing and advertising   962    911 
Professional services   1,212    781 
FDIC assessments   464    311 
Amortization of other intangible assets   246    279 
Other operating expenses   2,016    1,781 
Total non-interest expense   22,598    20,296 
           
Income before income taxes   15,254    13,487 
Income tax expense   3,181    4,316 
Net income  $12,073   $9,171 
Basic earnings per share  $0.61   $0.47 
Diluted earnings per share  $0.61   $0.47 

 

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 
   March 31, 
   2018   2017 
Net income  $12,073   $9,171 
Other comprehensive (loss) income:          
Change in unrealized net (losses) gains on securities available for sale, net of reclassifications and deferred income taxes   (6,088)   1,010 
Adjustment to pension liability, net of reclassifications and deferred income taxes   67    97 
Unrealized gains on cash flow hedges, net of reclassifications and deferred income taxes   2,051    174 
Total other comprehensive (loss) income   (3,970)   1,281 
Comprehensive income  $8,103   $10,452 

 

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 January 1, 2018  $197   $347,691   $96,547   $(296)  $(14,939)  $429,200 
Net income             12,073              12,073 
Shares issued under the dividend reinvestment plan        232                   232 
Stock awards granted and distributed   1    (307)        306         - 
Stock awards forfeited        20         (20)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (426)        (426)
Share based compensation expense        784                   784 
Cash dividend declared, $0.23 per share             (4,570)             (4,570)
Other comprehensive loss, net of deferred income taxes                       (3,970)   (3,970)
Balance at March 31, 2018  $198   $348,420   $104,050   $(436)  $(18,909)  $433,323 

 

   Common
Stock
   Surplus   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Loss
   Total 
Balance at January 1, 2017  $191   $329,427   $91,594   $(161)  $(13,064)  $407,987 
Net income             9,171              9,171 
Shares issued under the dividend reinvestment plan        222                   222 
Shares issued for trust preferred securities conversions (529,292 shares)   5    14,944                   14,949 
Stock awards granted and distributed   1    (374)        373         - 
Stock awards forfeited        13         (13)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (221)        (221)
Share based compensation expense        610                   610 
Cash dividend declared, $0.23 per share             (4,541)             (4,541)
Other comprehensive income, net of deferred income taxes                       1,281    1,281 
Balance at March 31, 2017  $197   $344,842   $96,224   $(22)  $(11,783)  $429,458 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 6 

 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   Three Months Ended 
   March 31, 
   2018   2017 
Cash flows from operating activities:          
Net income  $12,073   $9,171 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   800    800 
Depreciation and amortization of premises and equipment   933   948
Net (accretion) and other amortization   (1,033)   (2,338)
Net amortization on securities   1,302    1,692 
Increase in cash surrender value of bank owned life insurance   (546)   (560)
Amortization of intangible assets   246    279 
Share based compensation expense   784    610 
Increase in accrued interest receivable   (255)   (26)
Small Business Administration ("SBA") loans originated for sale   (4,281)   (5,644)
Proceeds from sale of the guaranteed portion of SBA loans   4,744    6,303 
Gain on sale of the guaranteed portion of SBA loans   (371)   (543)
Decrease (increase) in other assets   1,253    (836)
Decrease in accrued expenses and other liabilities   (479)   (336)
Net cash provided by operating activities   15,170    9,520 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (525)   (30,421)
Purchases of securities, restricted   (342,405)   (246,765)
Purchases of securities held to maturity   -    (1,012)
Redemption of securities, restricted   341,559    246,259 
Maturities, calls and principal payments of securities available for sale   24,715    29,945 
Maturities, calls and principal payments of securities held to maturity   4,558    8,975 
Net increase in loans   (98,217)   (55,171)
Purchase of premises and equipment   (1,320)   (809)
Net cash used in investing activities   (71,635)   (48,999)
           
Cash flows from financing activities:          
Net increase in deposits   96,712    56,874 
Net decrease in federal funds purchased   (50,000)   (50,000)
Net increase (decrease) in Federal Home Loan Bank advances   18,787    (5,410)
Repayment of junior subordinated debentures   -    (352)
Net (decrease) increase in repurchase agreements   (5)   33 
Net proceeds from issuance of common stock   232    222 
Repurchase of surrendered stock from vesting of restricted stock awards   (426)   (221)
Cash dividends paid   (4,570)   (4,541)
Net cash provided by (used in) financing activities   60,730    (3,395)
           
Net increase (decrease) in cash and cash equivalents   4,265    (42,874)
Cash and cash equivalents at beginning of period   94,747    113,838 
Cash and cash equivalents at end of period  $99,012   $70,964 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $7,963   $6,008 
Income taxes  $261   $- 
           
Non-cash investing and financing activities:          
Securities which settled in the subsequent period  $-   $3,080 
Conversion of junior subordinated debentures  $-   $15,350 
Transfers from portfolio loans to other real estate owned  $175   $- 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

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BRIDGE BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

 

Bridge Bancorp, Inc. (the “Registrant” or “Company”), is a registered bank holding company for BNB Bank (the “Bank”), which was formerly known as The Bridgehampton National Bank prior to the Bank’s conversion to a New York chartered commercial bank in December 2017. The Registrant was incorporated under the laws of the State of New York in 1988, at the direction of the Board of Directors of the Bank for the purpose of becoming a bank holding company pursuant to a plan of reorganization under which the former shareholders of the Bank became the shareholders of the Company. Since commencing business in March 1989, after the reorganization, the Registrant has functioned primarily as the holder of all of the Bank’s common stock. In May 1999, the Bank established a real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”), as an operating subsidiary. The assets transferred to BCI are viewed by the bank regulators as part of the Bank’s assets in consolidation. The operations of the Bank also include Bridge Abstract LLC (“Bridge Abstract”), a wholly owned subsidiary of the Bank, which is a broker of title insurance services and Bridge Financial Services LLC (“Bridge Financial Services”), an investment services subsidiary that was formed in March 2014. The Company formed Bridge Statutory Capital Trust II (the “Trust”) as a subsidiary in 2009, which sold $16.0 million of 8.5% cumulative convertible Trust Preferred Securities (the “Trust Preferred Securities”) in a private placement to accredited investors. The Trust Preferred Securities 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 months ended March 31, 2018 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, 2017.

 

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.

 

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The following table presents the computation of EPS for the three months ended March 31, 2018 and 2017:

 

   Three Months Ended 
   March 31, 
(In thousands, except per share data)  2018   2017 
Net income  $12,073   $9,171 
Dividends paid on and earnings allocated to participating securities   (253)   (178)
Income attributable to common stock  $11,820   $8,993 
           
Weighted average common shares outstanding, including participating securities   19,834    19,669 
Weighted average participating securities   (421)   (392)
Weighted average common shares outstanding   19,413    19,277 
Basic earnings per common share  $0.61   $0.47 
           
Income attributable to common stock  $11,820   $8,993 
           
Weighted average common shares outstanding   19,413    19,277 
Incremental shares from assumed conversions of options and restricted stock units   25    19 
Weighted average common and equivalent shares outstanding   19,438    19,296 
Diluted earnings per common share  $0.61   $0.47 

 

There were 47,393 stock options outstanding at March 31, 2018 that were not included in the computation of diluted earnings per share for the three months ended March 31, 2018 because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive. There were no stock options outstanding at March 31, 2017.

 

There were 21,693 and 19,957 restricted stock units that were antidilutive for the three months ended March 31, 2018 and 2017, respectively.

 

3. STOCK BASED COMPENSATION PLANS

 

The Bridge Bancorp, Inc. 2012 Stock-Based Incentive Plan (“2012 SBIP”) provides for the grant of stock-based and other incentive awards to officers, employees and directors of the Company. The 2012 SBIP superseded the Bridge Bancorp, Inc. 2006 Equity Incentive Plan. The number of shares of common stock of Bridge Bancorp, Inc. available for stock-based awards under the 2012 SBIP is 525,000 plus 278,385 shares that were remaining under the 2006 Equity Incentive Plan. Of the total 803,385 shares of common stock approved for issuance under the 2012 SBIP, 290,494 shares remain available for issuance at March 31, 2018, including shares that may be granted in the form of stock options, restricted stock awards (“RSAs”), or restricted stock units (“RSUs”).

 

The Compensation Committee of the Board of Directors determines awards under the 2012 SBIP. The Company accounts for the 2012 SBIP under FASB ASC No. 718.

 

Stock Options

 

Stock options may be either incentive stock options, which bestow certain tax benefits on the optionee, or non-qualified stock options, not qualifying for such benefits. All options have an exercise price that is not less than the market value of the Company’s common stock on the date of the grant.

 

The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the exercise or reporting date.

 

During the three months ended March 31, 2018, in accordance with the Long Term Incentive Plan (“LTI Plan”) for Named Executive Officers (“NEOs”), the Company granted 47,393 stock options. All of the stock options granted vest ratably over three years. The estimated weighted-average grant-date fair value of all stock options granted in the three months ended March 31, 2018 was $6.52 per stock option, using the Black-Scholes option-pricing model with assumptions as follows: dividend yield of 2.80%; expected volatility

 

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rate of 27.53%; risk-free interest rate of 2.67%; and expected option life of 6.5 years. There were no stock options granted during the three months ended March 31, 2017.

 

Compensation expense attributable to stock options was $13 thousand for the three months ended March 31, 2018. There was no compensation expense attributable to stock options for the three months ended March 31, 2017 because there were no stock options outstanding as of March 31, 2017 and December 31, 2016. As of March 31, 2018, there was $296 thousand of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of 2.9 years.

 

The following table summarizes the status of the Company’s stock options as of and for the three months ended March 31, 2018:

 

           Weighted     
       Weighted   Average     
   Number   Average   Remaining   Aggregate 
   of   Exercise   Contractual   Intrinsic 
(Dollars in thousands, except per share amounts)  Options   Price   Life   Value 
Outstanding, January 1, 2018   -   $-           
Granted   47,393    36.19           
Outstanding, March 31, 2018   47,393   $36.19    9.9 years   $- 
Vested and Exercisable, March 31, 2018   -   $-   $-   $- 

 

   Number of   Weighted
Average
 
Range of Exercise Prices  Options   Exercise Price 
$36.19   47,393   $36.19 
    47,393   $36.19 

 

Restricted Stock Awards

 

The Company’s RSAs are shares of the Company’s common stock that are forfeitable and are subject to restrictions on transfer prior to the vesting date. RSAs are forfeited if the award holder departs the Company before vesting. RSAs carry dividend and voting rights from the date of grant. The vesting of time-vested RSAs depends upon the award holder continuing to render services to the Company. The Company’s performance-based RSAs vest subject to the achievement of the Company’s 2018 corporate goals.

 

The following table summarizes the unvested RSA activity for the three months ended March 31, 2018:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2018   317,692   $27.16 
Granted   77,682    33.03 
Vested   (47,916)   23.26 
Forfeited   (650)   31.06 
Unvested, March 31, 2018   346,808   $29.01 

 

During the three months ended March 31, 2018, the Company granted a total of 77,682 RSAs. Of the 77,682 RSAs granted, 39,750 time-vested RSAs vest ratably over five years, 12,815 time-vested RSAs vest ratably over three years, and 25,117 performance-based RSAs vest ratably over two years, subject to the achievement of the Company’s 2018 corporate goals.

 

Compensation expense attributable to RSAs was $536 thousand and $413 thousand for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $7.0 million of total unrecognized compensation cost related to non-vested RSAs. The cost is expected to be recognized over a weighted-average period of 3.7 years.

 

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Restricted Stock Units

 

Long Term Incentive Plan

 

During the three months ended March 31, 2018, in accordance with the LTI Plan for NEOs, the Company granted 21,693 RSUs. Of the 21,693 RSUs granted, 12,522 time-vested RSUs vest ratably over five years and 9,171 performance-based RSUs vest subject to the achievement of the Company’s three-year corporate goal for the years 2018, 2019 and 2020.

 

The following table summarizes the unvested NEO RSU activity for the three months ended March 31, 2018:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2018   68,776   $24.46 
Granted   21,693    33.23 
Reinvested dividends   460    24.46 
Forfeited   (13,333)   21.85 
Unvested, March 31, 2018   77,596   $27.36 

 

Compensation expense attributable to LTI Plan RSUs was $101 thousand and $69 thousand for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, there was $1.6 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 3.7 years.

 

Directors Plan

 

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 RSUs. In addition, directors receive a non-election retainer in the form of RSUs. These RSUs 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 thousand and $128 thousand in connection with these RSUs for the three months ended March 31 2018 and 2017, respectively.

 

 11 

 

 

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 March 31, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses therein:

 

   March 31, 2018 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $57,995   $-   $(1,957)  $56,038 
State and municipal obligations   86,127    54    (1,335)   84,846 
U.S. GSE residential mortgage-backed securities   181,005    4    (5,442)   175,567 
U.S. GSE residential collateralized mortgage obligations   300,907    -    (10,233)   290,674 
U.S. GSE commercial mortgage-backed securities   5,976    -    (120)   5,856 
U.S. GSE commercial collateralized mortgage obligations   48,370    -    (1,878)   46,492 
Other asset backed securities   24,250    -    (849)   23,401 
Corporate bonds   46,000    -    (2,818)   43,182 
Total available for sale   750,630    58    (24,632)   726,056 
                     
Held to maturity:                    
State and municipal obligations   58,511    586    (260)   58,837 
U.S. GSE residential mortgage-backed securities   10,988    -    (433)   10,555 
U.S. GSE residential collateralized mortgage obligations   52,603    137    (1,153)   51,587 
U.S. GSE commercial mortgage-backed securities   22,751    -    (719)   22,032 
U.S. GSE commercial collateralized mortgage obligations   31,236    -    (1,370)   29,866 
Total held to maturity   176,089    723    (3,935)   172,877 
Total securities  $926,719   $781   $(28,567)  $898,933 

 

   December 31, 2017 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $57,994   $-   $(1,180)  $56,814 
State and municipal obligations   87,582    259    (819)   87,022 
U.S. GSE residential mortgage-backed securities   189,705    29    (2,833)   186,901 
U.S. GSE residential collateralized mortgage obligations   314,390    16    (7,016)   307,390 
U.S. GSE commercial mortgage-backed securities   6,017    2    (40)   5,979 
U.S. GSE commercial collateralized mortgage obligations   49,965    -    (1,249)   48,716 
Other asset backed securities   24,250    -    (849)   23,401 
Corporate bonds   46,000    -    (2,307)   43,693 
Total available for sale   775,903    306    (16,293)   759,916 
                     
Held to maturity:                    
State and municipal obligations   60,762    972    (64)   61,670 
U.S. GSE residential mortgage-backed securities   11,424    -    (261)   11,163 
U.S. GSE residential collateralized mortgage obligations   54,250    244    (666)   53,828 
U.S. GSE commercial mortgage-backed securities   22,953    77    (438)   22,592 
U.S. GSE commercial collateralized mortgage obligations   31,477    -    (845)   30,632 
Total held to maturity   180,866    1,293    (2,274)   179,885 
Total securities  $956,769   $1,599   $(18,567)  $939,801 

 

 12 

 

 

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 March 31, 2018. 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.

 

   March 31, 2018 
       Estimated 
(In thousands)  Amortized Cost   Fair Value 
Maturity        
Available for sale:          
Within one year  $9,807   $9,785 
One to five years   90,205    88,221 
Five to ten years   125,146    120,265 
Beyond ten years   525,472    507,785 
Total  $750,630   $726,056 
           
Held to maturity:          
Within one year  $2,878   $2,873 
One to five years   31,208    31,046 
Five to ten years   55,680    55,269 
Beyond ten years   86,323    83,689 
Total  $176,089   $172,877 

 

The following tables summarize securities with gross unrealized losses at March 31, 2018 and December 31, 2017, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position:

 

   March 31, 2018 
   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  $-   $-   $56,038   $(1,957)
State and municipal obligations   51,188    (630)   29,283    (705)
U.S. GSE residential mortgage-backed securities   91,424    (2,353)   80,300    (3,089)
U.S. GSE residential collateralized mortgage obligations   78,440    (1,748)   212,234    (8,485)
U.S. GSE commercial mortgage-backed securities   5,856    (120)   -    - 
U.S. GSE commercial collateralized mortgage obligations   252    -    46,240    (1,878)
Other asset backed securities   -    -    23,401    (849)
Corporate bonds   13,281    (719)   29,901    (2,099)
Total available for sale   240,441    (5,570)   477,397    (19,062)
                     
Held to maturity:                    
State and municipal obligations   23,435    (255)   1,005    (5)
U.S. GSE residential mortgage-backed securities   1,276    (32)   9,279    (401)
U.S. GSE residential collateralized mortgage obligations   24,359    (358)   20,142    (795)
U.S. GSE commercial mortgage-backed securities   13,975    (276)   8,057    (443)
U.S. GSE commercial collateralized mortgage obligations   10,116    (324)   19,750    (1,046)
Total held to maturity  $73,161   $(1,245)  $58,233   $(2,690)

 

 13 

 

 

   December 31, 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  $-   $-   $56,815   $(1,180)
State and municipal obligations   35,350    (301)   28,165    (518)
U.S. GSE residential mortgage-backed securities   107,408    (1,153)   69,571    (1,680)
U.S. GSE residential collateralized mortgage obligations   77,705    (759)   224,932    (6,257)
U.S. GSE commercial mortgage-backed securities   2,345    (40)   -    - 
U.S. GSE commercial collateralized mortgage obligations   452    (1)   48,264    (1,248)
Other asset backed securities   -    -    23,401    (849)
Corporate bonds   13,588    (412)   30,105    (1,895)
Total available for sale   236,848    (2,666)   481,253    (13,627)
                     
Held to maturity:                    
State and municipal obligations   7,709    (57)   1,009    (7)
U.S. GSE residential mortgage-backed securities   1,359    (16)   9,804    (245)
U.S. GSE residential collateralized mortgage obligations   21,329    (94)   21,112    (572)
U.S. GSE commercial mortgage-backed securities   8,789    (121)   8,303    (317)
U.S. GSE commercial collateralized mortgage obligations   10,341    (116)   20,290    (729)
Total held to maturity  $49,527   $(404)  $60,518   $(1,870)

 

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 March 31, 2018, 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 Aa1 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 March 31, 2018.

 

 14 

 

 

Sales and Calls of Securities

 

There were no proceeds from sales of securities for the three months ended March 31, 2018 and 2017. There were no proceeds from calls of securities for the three months ended March 31, 2018. There were $0.2 million of proceeds from calls of securities for the three months ended March 31, 2017.

 

Pledged Securities

 

Securities having a fair value of $570.0 million and $513.5 million at March 31, 2018 and December 31, 2017, 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 three months ended March 31, 2018 or the year ended December 31, 2017.

 

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 $36.2 million and $35.3 million in FHLB, ACBB and FRB stock at March 31, 2018 and December 31, 2017, respectively. These amounts were reported as restricted securities in the consolidated balance sheets.

 

5. FAIR VALUE

 

As described in Note 14. Recent Accounting Pronouncements, during the first quarter of 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The Company adopted the amended guidance that requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

 

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.

 

 15 

 

 

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

 

   March 31, 2018 
       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  $56,038         $56,038         
State and municipal obligations   84,846         84,846      
U.S. GSE residential mortgage-backed securities   175,567         175,567      
U.S. GSE residential collateralized mortgage obligations   290,674         290,674      
U.S. GSE commercial mortgage-backed securities   5,856         5,856      
U.S. GSE commercial collateralized mortgage obligations   46,492         46,492      
Other asset backed securities   23,401         23,401      
Corporate bonds   43,182         43,182      
Total available for sale securities  $726,056        $726,056      
Derivatives  $7,374        $7,374      
                     
Financial liabilities:                    
Derivatives  $1,759        $1,759      

 

   December 31, 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  $56,814           $56,814         
State and municipal obligations   87,022         87,022      
U.S. GSE residential mortgage-backed securities   186,901         186,901      
U.S. GSE residential collateralized mortgage obligations   307,390         307,390      
U.S. GSE commercial mortgage-backed securities   5,979         5,979      
U.S. GSE commercial collateralized mortgage obligations   48,716         48,716      
Other asset backed securities   23,401         23,401      
Corporate bonds   43,693         43,693      
Total available for sale securities  $759,916        $759,916      
Derivatives  $4,546        $4,546      
                     
Financial liabilities:                    
Derivatives  $1,823        $1,823      

 

 16 

 

  

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

 

   March 31, 2018 
       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  $-               $- 
Other real estate owned  $175             $175 

 

   December 31, 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  $-               $- 
Other real estate owned  $-             $- 

 

Impaired loans with an allocated allowance for loan losses at March 31, 2018 had a carrying amount of zero, which is made up of the outstanding balance of $1.7 million, net of a valuation allowance of $1.7 million. Impaired loans with an allocated allowance for loan losses at December 31, 2017 had a carrying amount of zero, which is made up of the outstanding balance of $1.7 million, net of a valuation allowance of $1.7 million. This resulted in an additional provision for loan losses of $1.7 million that is included in the amount reported on the Consolidated Statements of Income for the year ended December 31, 2017.

 

Other real estate owned at March 31, 2018 had a carrying amount of $0.2 million with no valuation allowance recorded. Accordingly, there was no additional provision for loan losses included in the amount reported on the Consolidated Statements of Income. There was no other real estate owned at December 31, 2017.

 

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.

 

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.

 

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.

  

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.

 

 17 

 

 

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.

 

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 March 31, 2018 and December 31, 2017.

 

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.

 

 18 

 

  

The following tables summarize the estimated fair values and recorded carrying amounts of the Company’s financial instruments at March 31, 2018 and December 31, 2017:

 

   March 31, 2018 
       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  $50,588   $50,588   $   $   $50,588 
Interest earning deposits with banks   48,424    48,424            48,424 
Securities available for sale   726,056        726,056        726,056 
Securities restricted   36,195    n/a    n/a    n/a    n/a 
Securities held to maturity   176,089        172,877        172,877 
Loans, net   3,169,085            3,161,561    3,161,561 
Derivatives   7,374        7,374        7,374 
Accrued interest receivable   11,907        3,424    8,483    11,907 
                          
Financial liabilities:                         
Certificates of deposit   282,747        280,060        280,060 
Demand and other deposits   3,148,498    3,148,498            3,148,498 
Federal Home Loan Bank advances   520,092    227,000    287,439        514,439 
Repurchase agreements   872        872        872 
Subordinated debentures   78,676        75,661        75,661 
Derivatives   1,759        1,759        1,759 
Accrued interest payable   436        436        436 

 

 19 

 

  

   December 31, 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  $76,614   $76,614   $-   $-   $76,614 
Interest earning deposits with banks   18,133    18,133    -    -    18,133 
Securities available for sale   759,916    -    759,916    -    759,916 
Securities restricted   35,349    n/a    n/a    n/a    n/a 
Securities held to maturity   180,866    -    179,885    -    179,885 
Loans, net   3,071,045    -    -    3,010,023    3,010,023 
Derivatives   4,546    -    4,546    -    4,546 
Accrued interest receivable   11,652    -    3,211    8,441    11,652 
                          
Financial liabilities:                         
Certificates of deposit   222,364    -    220,775    -    220,775 
Demand and other deposits   3,112,179    3,112,179    -    -    3,112,179 
Federal funds purchased   50,000    50,000    -    -    50,000 
Federal Home Loan Bank advances   501,374    185,000    313,558    -    498,558 
Repurchase agreements   877    -    877    -    877 
Subordinated debentures   78,641    -    77,933    -    77,933 
Derivatives   1,823    -    1,823    -    1,823 
Accrued interest payable   1,574    -    1,574    -    1,574 

 

6. LOANS

 

The following table sets forth the major classifications of loans:

 

(In thousands)  March 31, 2018   December 31, 2017 
Commercial real estate mortgage loans  $1,339,992   $1,293,906 
Multi-family mortgage loans   601,747    595,280 
Residential real estate mortgage loans   493,153    464,264 
Commercial, industrial and agricultural loans   638,711    616,003 
Real estate construction and land loans   104,496    107,759 
Installment/consumer loans   19,078    21,041 
Total loans   3,197,177    3,098,253 
Net deferred loan costs and fees   4,720    4,499 
Total loans held for investment   3,201,897    3,102,752 
Allowance for loan losses   (32,812)   (31,707)
Loans, net  $3,169,085   $3,071,045 

 

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 $331.4 million and $359.4 million of acquired CNB loans remaining as of March 31, 2018 and December 31, 2017, 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 $15.3 million and $15.4 million of acquired FNBNY loans remaining as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017:

 

   March 31, 2018 
(In thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Commercial real estate:                         
Owner occupied  $461,080   $1,822   $20,293   $-   $483,195 
Non-owner occupied   844,249    8,019    4,529    -    856,797 
Multi-family   601,747    -    -    -    601,747 
Residential real estate:                         
Residential mortgage   421,767    5,902    287    -    427,956 
Home equity   63,161    1,240    796    -    65,197 
Commercial and industrial:                         
Secured   89,564    12,907    13,598    -    116,069 
Unsecured   502,073    12,459    8,110    -    522,642 
Real estate construction and land loans   104,181    -    315    -    104,496 
Installment/consumer loans   19,064    14    -    -    19,078 
Total loans  $3,106,886   $42,363   $47,928   $-   $3,197,177 

 

At March 31, 2018, there were $0.4 million and $1.6 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, 2017 
(In thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Commercial real estate:                         
Owner occupied  $451,264   $1,796   $19,589   $-   $472,649 
Non-owner occupied   808,612    8,056    4,589    -    821,257 
Multi-family   595,280    -    -    -    595,280 
Residential real estate:                         
Residential mortgage   393,029    4,854    290    -    398,173 
Home equity   64,601    698    792    -    66,091 
Commercial and industrial:                         
Secured   86,116    12,637    13,560    -    112,313 
Unsecured   485,598    14,553    3,539    -    503,690 
Real estate construction and land loans   107,440    -    319    -    107,759 
Installment/consumer loans   21,020    16    5    -    21,041 
Total loans  $3,012,960   $42,610   $42,683   $-   $3,098,253 

 

At December 31, 2017, there were $0.4 million and $1.6 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.

 

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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 March 31, 2018 and December 31, 2017 by class of loans, as defined by FASB ASC 310-10:

 

   March 31, 2018 
(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  $1,450   $-   $-   $2,192   $3,642   $479,553   $483,195 
Non-owner occupied   -    -    1,143    425    1,568    855,229    856,797 
Multi-family   -    -    -    -    -    601,747    601,747 
Residential real estate:                                   
Residential mortgages   1,386    -    1,017    393    2,796    425,160    427,956 
Home equity   575    -    280    261    1,116    64,081    65,197 
Commercial and industrial:                                   
Secured   343    -    225    570    1,138    114,931    116,069 
Unsecured   688    47    -    2,078    2,813    519,829    522,642 
Real estate construction and land loans   -    -    -    152    152    104,344    104,496 
Installment/consumer loans   17    -    -    -    17    19,061    19,078 
Total loans  $4,459   $47   $2,665   $6,071   $13,242   $3,183,935   $3,197,177 

 

   December 31, 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  $284   $-   $175   $2,205   $2,664   $469,985   $472,649 
Non-owner occupied   -    -    1,163    -    1,163    820,094    821,257 
Multi-family   -    -    -    -    -    595,280    595,280 
Residential real estate:                                   
Residential mortgages   2,074    398    -    401    2,873    395,300    398,173 
Home equity   329    -    271    161    761    65,330    66,091 
Commercial and industrial:                                   
Secured   113    41    225    570    949    111,364    112,313 
Unsecured   18    35    -    3,618    3,671    500,019    503,690 
Real estate construction and land loans   -    281    -    -    281    107,478    107,759 
Installment/consumer loans   36    5    -    -    41    21,000    21,041 
Total loans  $2,854   $760   $1,834   $6,955   $12,403   $3,085,850   $3,098,253 

 

There were $1.6 million and $2.4 million of acquired loans that were 30-89 days past due at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $27.1 million and $22.5 million, respectively. The increase in impaired loans was attributable to troubled debt restructurings ("TDRs”) during the 2018 first quarter, partially offset by a decrease in non-accrual loans. During the three months ended March 31, 2018, the Bank modified certain commercial and industrial TDRs totaling $6.7 million. 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

 

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the fair value of the loan. The 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 March 31, 2018 and December 31, 2017 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 months ended March 31, 2018 and 2017:

 

   March 31, 2018   Three Months Ended
March 31, 2018
 
(In thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                         
Commercial real estate:                         
Owner occupied  $2,073   $2,073   $-   $2,073   $- 
Non-owner occupied   9,243    9,243    -    8,973    76 
Residential real estate:                         
Residential mortgages   -    -    -    -    - 
Home equity   100    100    -    100    - 
Commercial and industrial:                         
Secured   8,727    9,373    -    8,744    56 
Unsecured   5,203    5,203    -    4,932    37 
Total with no related allowance recorded  $25,346   $25,992   $-   $24,822   $169 
                          
With an allowance recorded:                         
Commercial real estate:                         
Owner occupied  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Residential real estate:                         
Residential mortgages   -    -    -    -    - 
Home equity   -    -    -    -    - 
Commercial and industrial:                         
Secured   -    -    -    -    - 
Unsecured   1,708    3,235    1,708    1,708    - 
Total with an allowance recorded  $1,708   $3,235   $1,708   $1,708   $- 
                          
Total:                         
Commercial real estate:                         
Owner occupied  $2,073   $2,073   $-   $2,073   $- 
Non-owner occupied   9,243    9,243    -    8,973    76 
Residential real estate:                         
Residential mortgages   -    -    -    -    - 
Home equity   100    100    -    100    - 
Commercial and industrial:                         
Secured   8,727    9,373    -    8,744    56 
Unsecured   6,911    8,438    1,708    6,640    37 
Total  $27,054   $29,227   $1,708   $26,530   $169 

 

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   December 31, 2017   Three Months Ended
March 31, 2017
 
(In thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
With no related allowance recorded:                         
Commercial real estate:                         
Owner occupied  $2,073   $2,073   $-   $158   $2 
Non-owner occupied   9,089    9,089    -    604    18 
Residential real estate:                         
Residential mortgages   -    -    -    4,139    79 
Home equity   100    100    -    131    - 
Commercial and industrial:                         
Secured   7,368    8,013    -    270    8 
Unsecured   2,154    2,408    -    196    5 
Total with no related allowance recorded  $20,784   $21,683   $-   $5,498   $112 
                          
With an allowance recorded:                         
Commercial real estate:                         
Owner occupied  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Residential real estate:                         
Residential mortgages   -    -    -    -    - 
Home equity   -    -    -    -    - 
Commercial and industrial:                         
Secured   -    -    -    -    - 
Unsecured   1,708    3,235    1,708    32    1 
Total with an allowance recorded  $1,708   $3,235   $1,708   $32   $1 
                          
Total:                         
Commercial real estate:                         
Owner occupied  $2,073   $2,073   $-   $158   $2 
Non-owner occupied   9,089    9,089    -    604    18 
Residential real estate:                         
Residential mortgages   -    -    -    4,139    79 
Home equity   100    100    -    131    - 
Commercial and industrial:                         
Secured   7,368    8,013    -    270    8 
Unsecured   3,862    5,643    1,708    228    6 
Total  $22,492   $24,918   $1,708   $5,530   $113 

 

The Bank had one other real estate owned, consisting of $0.2 million at March 31, 2018 compared to none at December 31, 2017.

 

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.

 

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During the three months ended March 31, 2018, the Bank modified six commercial and industrial loans totaling $6.7 million as TDRs compared to two commercial real estate loans as TDRs totaling $7.8 million for the three months ended March 31, 2017. 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 three months ended March 31, 2018 and 2017, there were no charge-offs relating to TDRs and there were no loans modified as TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

 

As of March 31, 2018 and December 31, 2017, the Company had $32 thousand and $5 thousand, respectively, of nonaccrual TDRs and $23.2 million and $16.7 million, respectively, of performing TDRs. At March 31, 2018 and December 31, 2017, nonaccrual TDRs were unsecured. The Bank has no commitment to lend additional funds to these debtors.

 

The terms of certain other loans were modified during the three months ended March 31, 2018 that did not meet the definition of a TDR. These loans have a total recorded investment at March 31, 2018 of $3.6 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.

 

At the acquisition date, the purchased credit impaired (“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 March 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $3.9 million and $2.6 million, respectively, with a remaining non-accretable difference of $0.7 million. At December 31, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $4.0 million and $2.4 million, respectively, with a remaining non-accretable difference of $0.7 million.

 

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 March 31, 2018, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $1.5 million and $0.2 million, respectively, with a remaining non-accretable difference of $1.0 million. At December 31, 2017, the contractually required principal and interest payments receivable and carrying amount of the PCI loans was $7.6 million and $1.0 million, respectively, with a remaining non-accretable difference of $5.3 million.

 

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

 

   Three Months Ended 
   March 31, 
(In thousands)  2018   2017 
Balance at beginning of period  $2,151   $6,915 
Accretion   (1,033)   (1,857)
Reclassification (to) from nonaccretable difference during the period   (161)   275 
Accretable discount at end of period  $957   $5,333 

 

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7. ALLOWANCE FOR LOAN LOSSES

 

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 March 31, 2018 and December 31, 2017. The tables include loans acquired from CNB and FNBNY.

  

   March 31, 2018 
(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  $-   $-   $-   $1,708   $-   $-   $1,708 
Collectively evaluated for impairment   11,334    3,002    3,495    12,347    821    105    31,104 
Loans acquired  with deteriorated credit quality   -    -    -    -    -    -    - 
Total allowance for loan losses  $11,334   $3,002   $3,495   $14,055   $821   $105   $32,812 
                                    
Loans:                                   
Individually evaluated for impairment  $11,316   $-   $100   $15,638   $-   $-   $27,054 
Collectively evaluated for impairment   1,328,676    599,964    492,454    622,646    104,496    19,078    3,167,314 
Loans acquired  with deteriorated credit quality   -    1,783    599    427    -    -    2,809 
Total loans  $1,339,992   $601,747   $493,153   $638,711   $104,496   $19,078   $3,197,177 

 

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   December 31, 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  $-   $-   $-   $1,708   $-   $-   $1,708 
Collectively  evaluated for impairment   11,048    4,521    2,438    11,130    740    122    29,999 
Loans acquired  with deteriorated credit quality   -    -    -    -    -    -    - 
Total allowance for loan losses  $11,048   $4,521   $2,438   $12,838   $740   $122   $31,707 
                                    
Loans:                                   
Individually  evaluated for impairment  $11,162   $-   $100   $11,230   $-   $-   $22,492 
Collectively evaluated for impairment   1,281,837    593,645    463,575    604,329    107,759    21,041    3,072,186 
Loans acquired  with deteriorated credit quality   907    1,635    589    444    -    -    3,575 
Total loans  $1,293,906   $595,280   $464,264   $616,003   $107,759   $21,041   $3,098,253 

 

The following tables represent the changes in the allowance for loan losses for the three months ended March 31, 2018, and 2017, 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 March 31, 2018 
               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  $11,048   $4,521   $2,438   $12,838   $740   $122   $31,707 
Charge-offs   -    -    -    -    -    -    - 
Recoveries   -    -    1    304    -    -    305 
Provision   286    (1,519)   1,056    913    81    (17)   800 
Ending balance  $11,334   $3,002   $3,495   $14,055   $821   $105   $32,812 

 

   Three Months Ended March 31, 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   -    -    -    (95)   -    -    (95)
Recoveries   -    -    1    7    -    1    9 
Provision   (868)   216    (81)   1,449    103    (19)   800 
Ending balance  $8,357   $6,480   $1,415   $9,198   $1,058   $110   $26,618 

  

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8. PENSION AND POSTRETIREMENT PLANS

 

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 no contributions to the pension plan during the three months ended March 31, 2018 and 2017. There were no contributions to the SERP during the three months ended March 31, 2018 and 2017, respectively. In accordance with the SERP, a retired executive received a distribution from the plan totaling $28 thousand during the three months ended March 31, 2018 and 2017, 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.

 

As described in Note 14. Recent Accounting Pronouncements, during the first quarter of 2018, the Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The Company adopted the guidance in the first quarter of 2018 using the practical expedient that permits an employer to use the amounts disclosed in its pension and postretirement benefit plan note for prior comparative periods as the estimation basis for applying retrospective presentation adjustments. The adoption of this Update resulted in the reclassification of $196 thousand of net periodic benefit credit components other than service cost from salaries and employee benefits expense to other operating expense for the three months ended March 31, 2017. The Company’s service cost component is reported in the Company’s income statement in salaries and employee benefits, which is the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. All other components of net periodic benefit credit are reported in the other operating expenses income statement line. The change in presentation did not impact the Company’s operating results or financial condition.

 

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

 

   Three Months Ended March 31, 
   Pension Benefits   SERP Benefits 
(In thousands)  2018   2017   2018   2017 
Service cost  $325   $293   $73   $53 
Interest cost   197    184    32    26 
Expected return on plan assets   (625)   (520)   -    - 
Amortization of net loss   83    113    30    13 
Amortization of prior service credit   (19)   (19)   -    - 
Amortization of transition obligation   -    -    1    7 
Net periodic benefit (credit) cost  $(39)  $51   $136   $99 

  

9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

Securities sold under agreements to repurchase totaled $0.9 million at March 31, 2018 and December 31, 2017. The repurchase agreements were collateralized by investment securities, of which 51% were U.S. GSE residential collateralized mortgage obligations and 49% were U.S. GSE residential mortgage-backed securities with a carrying amount of $1.7 million at March 31, 2018, and 52% were U.S. GSE residential collateralized mortgage obligations and 48% were U.S. GSE residential mortgage-backed securities with a carrying amount of $1.8 million at December 31, 2017.

 

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Securities sold under agreements to repurchase are financing arrangements with $0.9 million maturing during the second quarter of 2018. 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.

 

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 two years at March 31, 2018 and December 31, 2017:

 

   March 31, 2018 
(Dollars in thousands)  Amount   Weighted
Average Rate
 
Contractual Maturity          
Overnight  $227,000    2.00%
           
2018   292,014    2.03%
2019   1,078    0.88%
    293,092    2.02%
Total FHLB advances  $520,092    2.01%

 

   December 31, 2017 
(Dollars in thousands)  Amount   Weighted
Average Rate
 
Contractual Maturity          
Overnight  $185,000    1.53%
           
2018   315,083    1.59%
2019   1,291    0.94%
    316,374    1.59%
Total FHLB advances  $501,374    1.57%

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $1.3 billion and $1.2 billion of residential and commercial mortgage loans under a blanket lien arrangement at March 31, 2018 and December 31, 2017, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $1.4 billion at March 31, 2018.

 

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 $78.7 million and $78.6 million at March 31, 2018 and December 31, 2017, 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.

 

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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 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 at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017:

 

(Dollars in thousands)  March 31, 2018   December 31, 2017 
Notional amounts  $290,000   $290,000 
Weighted average pay rates   1.78%   1.78%
Weighted average receive rates   2.16%   1.61%
Weighted average maturity   2.39 years    2.64 years 

 

Interest expense recorded on these swap transactions totaled $65 thousand and $275 thousand for the three months ended March 31, 2018 and 2017, 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 three months ended March 31, 2018, the Company had $65 thousand of reclassifications to interest expense. During the next twelve months, the Company estimates that $1.5 million will be reclassified as a decrease 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 months ended March 31, 2018 and 2017:

 

           Amount of loss 
   Amount of gain   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 March 31, 2018  $2,827   $(65)  $- 
Three months ended March 31, 2017  $25   $(275)  $- 

 

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

 

   March 31, 2018   December 31, 2017 
       Fair   Fair       Fair   Fair 
  Notional   Value   Value   Notional   Value   Value 
(In thousands)  Amount   Asset   Liability   Amount   Asset   Liability 
Included in other assets/(liabilities):                              
Interest rate swaps related to FHLB advances  $290,000   $5,747   $(131)  $290,000   $3,133   $(410)

 

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 March 31, 2018 and December 31, 2017:

 

(Dollars in thousands)  March 31, 2018   December 31, 2017 
Notional amounts  $171,112   $147,967 
Weighted average pay rates   4.14%   3.96%
Weighted average receive rates   4.14%   3.96%
Weighted average maturity   12.08 years    12.37 years 
Fair value of combined interest rate swaps  $-   $- 

 

Credit-Risk-Related Contingent Features

 

As of March 31, 2018, the termination value of derivatives in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.5 million, while there were no derivatives in a net liability position. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. If the termination value of derivatives is a net asset position, the counterparty is required to post collateral against its obligations to the Company under the agreements. However, if the termination value of derivatives is a net liability position, the Company is required to post collateral to the counterparty. At March 31, 2018, the Company received collateral of $6.6 million from its counterparties under the agreements in a net asset position and did not post collateral. If the Company had breached any of these provisions at March 31, 2018, it could have been required to settle its obligations under the agreements at the termination value.

 

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13. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

 

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

 

   Three Months Ended 
(In thousands)  March 31, 2018   March 31, 2017 
Unrealized holding (losses) gains on available for sale securities  $(8,587)  $1,616 
Income tax effect   2,499    (606)
Net change in unrealized (losses) gains on available for sale securities   (6,088)   1,010 
           
Reclassification adjustment for amortization realized in income   95    114 
Income tax effect   (28)   (17)
Net change in post-retirement obligation   67    97 
           
Change in fair value of derivatives used for cash flow hedges   2,827    25 
Reclassification adjustment for losses realized in income   65    275 
Income tax effect   (841)   (126)
Net change in unrealized gains on cash flow hedges   2,051    174 
           
Other comprehensive (loss) income  $(3,970)  $1,281 

 

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, 2017   Income   March 31, 2018 
Unrealized losses on available for sale securities  $(11,337)  $(6,088)  $(17,425)
Unrealized (losses) gain on pension benefits   (5,533)   67    (5,466)
Unrealized gains on cash flow hedges   1,931    2,051    3,982 
Accumulated other comprehensive loss, net of income taxes  $(14,939)  $(3,970)  $(18,909)

 

The following represents the reclassifications out of accumulated other comprehensive (loss) income for the three months ended March 31, 2018 and 2017:

 

   Three Months Ended   Affected Line Item
   March 31,   March 31,   in the Consolidated
(In thousands)  2018   2017   Statements of Income
        
Amortization of defined benefit pension  plan and defined benefit plan component of the SERP:             
Prior service credit  $19   $19   Other operating expenses
Transition obligation   (1)   (7)  Other operating expenses
Actuarial losses   (113)   (126)  Other operating expenses
Realized losses on cash flow hedges   (65)   (275)  Interest expense
Total reclassifications, before income taxes   (160)   (389)   
Income tax benefit   47    159   Income tax expense
Total reclassifications, net of income taxes  $(113)  $(230)   

  

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14. RECENT ACCOUNTING PRONOUNCEMENTS

 

Adoption of Accounting Standards Effective in 2018

 

Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606)

On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively, Accounting Standards Codification 606 (“ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as other real estate owned. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The majority of the Company’s revenues come from interest income and other sources that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented in services charges and other fees within non-interest income and are recognized as revenue as the Company satisfies its obligations to its customers.

 

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment to retained earnings was recorded at January 1, 2018.

 

The Company evaluated its customer contracts, which are typically day-to-day contracts where each day represents a renewal of the contract. The Company’s revenue streams accounted for under ASC 606 primarily consist of service charges on deposit accounts and fees for other customer services. The Company’s revenues from transaction-based fees, such as overdraft fees, ATM use fees, stop payment charges, and ACH fees are recognized at the time the transaction is executed, which is the point in time the Company fulfills the customer’s request and satisfies the performance obligation. Account maintenance fees, which relate primarily to monthly service charges, are earned over the course of the month, representing the same period over which the Company satisfies the performance obligation. The Company earns revenues from interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions are recognized daily, concurrently with the services provided to the cardholder. As a result of the Company’s assessment ASC 606, there is no change in the amount and timing of revenue recognized in the first quarter of 2018.

 

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB amended existing guidance that requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. ASU 2016-01 requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). ASU 2016-01 eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These amendments are effective for public business entities for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition; however, it did impact the fair value disclosures included in Note 5.

 

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The line item used in the income statement to present the other components of net benefit cost must be disclosed. Additionally, only the service cost component of net benefit cost is eligible for capitalization, if applicable. For public business entities, like the Company, ASU 2017-07 was effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement. The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The amendment requires disclosure that the practical expedient was used. The Company adopted the guidance in the first quarter of 2018 using the practical expedient for prior comparative periods. The change in presentation did not impact the Company’s operating results or financial condition. Refer to Note 8. Pension and Postretirement Plans for further details of the components of net periodic benefit cost.

 

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ASU 2017-09, Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting

In May 2017, the FASB provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-09. The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. The adoption of ASU 2017-09 did not impact the Company’s Consolidated Financial Statements.

 

Standards Effective in 2019

 

ASU 2016-02, Leases (Topic 842)

In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, the lessor accounting model and Topic 606, Revenue from Contracts with Customers. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of ASU 2016-02 on the consolidated financial statements. Based on leases outstanding at March 31, 2018, the Company does not expect the updates to have a material impact on the income statement, but does anticipate the adoption of ASU 2016-02 will result in an increase in the Company’s Consolidated Balance Sheets as a result of recognizing right-of-use assets and lease liabilities.

 

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB provided guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments also simplify the application of the hedge accounting guidance. The amendments in the Update better align an entity’s risk management activities and financial reporting for hedging relationships through changes in both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the consolidated balance sheet as of the date of adoption. While the Company continues to assess all potential impacts of the standard, ASU 2017-12 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

Standards Effective in 2020

 

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held-to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor. For public business entities that meet the definition of an SEC filer, like the Company, the standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may early adopt for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 in the first quarter of 2020 using the required modified retrospective method with a cumulative effect adjustment as of the beginning of the reporting period. The Company has created a cross-functional committee responsible for evaluating the impact of adopting ASU 2016-13, assessing data and system needs, and implementing required changes to loss estimation methods under the CECL model. The Company cannot yet determine the overall impact this guidance will have on the Company’s Consolidated Financial Statements.

 

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ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities that are an SEC filer, like the Company, for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments should be applied prospectively. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments. The adoption of ASU 2017-04 is not expected to have a material effect on the Company’s Consolidated Financial Statements.

 

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

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

This report may contain statements relating to the future results of the Company (including certain projections and business trends) that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements, in addition to historical information, which involve risk and uncertainties, are based on the beliefs, assumptions and expectations of management of the Company. Words such as “expects,” “believes,” “should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,” “outlook,” “predict,” “project,” “would,” “estimated,” “assumes,” “likely,” and variations of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title insurance subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. The Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

 

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demand for loan products; demand for financial services; competition; the Company’s ability to successfully integrate acquired entities; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines; changes in real estate values; expanded regulatory requirements as a result of the Dodd-Frank Act, which could adversely affect operating results; and the “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

 

Overview

 

Who The Company Is and How It Generates Income

 

Bridge Bancorp, Inc., a New York corporation, is a bank holding company formed in 1989. On a parent-only basis, the Company has had minimal results of operations. The Company is dependent on dividends from its wholly owned subsidiary, BNB Bank, its own earnings, additional capital raised, and borrowings as sources of funds. The information in this report reflects principally the financial condition and results of operations of the Bank. The Bank’s results of operations are primarily dependent on its net interest income, which is the difference between interest income on loans and investments and interest expense on deposits and borrowings. The Bank also generates non-interest income, such as fee income on deposit accounts and merchant credit and debit card processing programs, investment services, income from its title insurance subsidiary, and net gains on sales of securities and loans. The level of its non-interest expenses, such as salaries and benefits, occupancy and equipment costs, other general and administrative expenses, expenses from its title insurance subsidiary, and income tax expense, further affects the Bank’s net income. Certain reclassifications have been made to prior year amounts and the related discussion and analysis to conform to the current year presentation. These reclassifications did not have an impact on net income or total stockholders’ equity.

 

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Principal Products and Services and Locations of Operations

 

The Bank was established in 1910 and is headquartered in Bridgehampton, New York. During 2017, the Bank conducted a branch rationalization study analyzing branch performance and market opportunities. As a result of the study, and in an effort to increase efficiency and remove branch redundancy, the Bank closed six locations in the first quarter of 2018. The branches closed in Suffolk County, New York are located in Cutchogue, Center Moriches, and Melville, and the branches closed in Nassau County, New York are located in Massapequa, New Hyde Park and Hewlett. The Bank now operates thirty-eight branches in its primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including thirty-five in Suffolk and Nassau Counties, two in Queens and one in Manhattan. For over a century, the Bank has maintained its focus on building customer relationships in its market area. The mission of the Bank is to grow through the provision of exceptional service to its customers, its employees, and the community. The Bank strives to achieve excellence in financial performance and build long-term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities in its market area. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) multi-family mortgage loans; (3) residential mortgage loans; (4) secured and unsecured commercial and consumer loans; (5) home equity loans; (6) construction loans; (7) FHLB, FNMA, GNMA and FHLMC mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8) New York State and local municipal obligations; and (9) U.S. government sponsored entity (“U.S. GSE”) securities. The Bank also offers the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) programs, providing multi-millions of dollars of Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits to its customers. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, and individual retirement accounts as well as investment services through Bridge Financial Services, which offers a full range of investment products and services through a third party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. The Bank’s customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

 

Significant Recent Events

 

Charter Conversion and Branch Rationalization

 

In the fourth quarter 2017, the Company executed on two major initiatives: identifying and executing a branch rationalization strategy and the finalization of the Bank’s charter conversion from a national bank to a New York chartered commercial bank effective December 31, 2017. In connection with its charter conversion, the Bank obtained approval from the Federal Reserve Bank of New York to remain a member bank of the Federal Reserve System. Following an assessment of the Company’s branch network to ensure it is covering its markets efficiently, the Company identified six branches that it closed in the first quarter of 2018. As a result, the Company recorded a restructuring charge of $8.0 million in the fourth quarter 2017, with $7.7 million attributable to existing lease obligations, employee severance, and other related branch charges. The impact on pre-tax income for the year ending December 31, 2018, in the form of cost savings is expected to be $4.0 million, with an expected payback period of no more than 24 months.

 

Quarterly Highlights

 

·Net income for the first quarter of 2018 was $12.1 million and $0.61 per diluted share, compared to $9.2 million and $0.47 per diluted share for the first quarter of 2017.

 

·Net interest income increased to $34.5 million for the first quarter of 2018 compared to $30.5 million in 2017.

 

·Net interest margin was 3.40% the first quarter of 2018 compared to 3.36% for the 2017 period.

 

·Loans held for investment at March 31, 2018 totaled $3.2 billion, an increase of $99.1 million, or 3.2%, from December 31, 2017 and an increase of $544.4 million, or 20.5%, over March 31, 2017.

 

·Total assets of $4.5 billion at March 31, 2018, increased $70.6 million compared to December 31, 2017 and increased $435.6 million compared to March 31, 2017.

 

·Deposits of $3.4 billion at March 31, 2018, increased $96.7 million over December 31, 2017 and increased $448.4 million compared to March 31 2017.

 

·Allowance for loan losses was 1.02% of loans at March 31, 2018 and December 31, 2017.

 

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·A cash dividend of $0.23 per share was declared in April 2018 for the first quarter.

 

Challenges and Opportunities

 

In March 2018, in view of realized and expected labor market conditions and inflation, the Federal Open Market Committee (“FOMC”) decided to raise the target range for the federal funds rate to 1.50 to 1.75 percent. The FOMC’s stance on monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to two percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the FOMC will assess realized and expected economic conditions relative to its objectives of maximum employment and two percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The FOMC will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The FOMC stated its expectation that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

 

Interest rates have been at or near historic lows for an extended period of time. Growth and service strategies have the potential to offset the compression on the net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2010, the Bank has opened fourteen branches, including one in September 2017 in Astoria, New York, two in April 2017 in Riverhead and East Moriches, New York, and one in March 2017 in Sag Harbor, New York. The Bank has also grown through acquisitions including the June 2015 acquisition of Community National Bank (“CNB”), the February 2014 acquisition of First National Bank of New York (“FNBNY”), and the May 2011 acquisition of Hamptons State Bank (“HSB”). Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships. Recent and pending acquisitions of local competitors may also provide additional growth opportunities.

 

The Bank continues to face challenges associated with ever-increasing regulations and the current low interest rate environment. Over time, additional rate increases should provide some relief to net interest margin compression as new loans are funded and securities are reinvested at higher rates. However, in the short term, the fair value of available for sale securities declines when rates increase, resulting in net unrealized losses and a reduction in stockholders’ equity. Strategies for managing for the eventuality of higher rates have a cost. Extending liability maturities or shortening the term of assets increases interest expense and reduces interest income. An additional method for managing in a higher rate environment is to grow stable core deposits, requiring continued investment in people, technology and branches. Over time, the costs of these strategies should provide long-term benefits.

 

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

 

Corporate objectives include: leveraging the Bank’s branch network to build customer relationships and grow loans and deposits; focusing on opportunities and processes that continue to enhance the customer experience at the Bank; improving operational efficiencies and prudent management of non-interest expense; and maximizing non-interest income. Management believes there remain opportunities to grow its franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long-term shareholder value. The ability to attract, retain, train and cultivate employees at all levels of the Company remains significant to meeting corporate objectives. The Company has made great progress toward the achievement of these objectives, and avoided many of the problems facing other financial institutions. This is a result of maintaining discipline in its underwriting, expansion strategies, investing and general business practices. The Company has capitalized on opportunities presented by the market and diligently seeks opportunities to grow and strengthen the franchise. The Company recognizes the potential risks of the current economic environment and will monitor the impact of market events as management evaluates loans and investments and considers growth initiatives. Management and the Board have built a solid foundation for growth and the Company is positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

 

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Critical Accounting Policies

 

Allowance for Loan Losses

 

Management considers the accounting policy on the allowance for loan losses to be the most critical and requires complex management judgment. The judgments made regarding the allowance for loan losses can have a material effect on the results of operations of the Company.

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

 

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB 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.

 

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

 

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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 March 31, 2018 and December 31, 2017, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

Net Income

 

Net income for the three months ended March 31, 2018 was $12.1 million and $0.61 per diluted share as compared to $9.2 million and $0.47 per diluted share for the same period in 2017.   Changes in net income for the three months ended March 31, 2018 compared to March 31, 2017 include: (i) a $4.1 million, or 13.4%, increase in net interest income; (ii) a $2.3 million, or 11.3%, increase in non-interest expense; and (iii) a $1.1 million, or 26.3%, decrease in income tax expense.

 

Analysis of Net Interest Income

 

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

 

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for those periods on a tax equivalent basis based on the U.S. federal statutory tax rate. The Tax Act lowered the U.S. federal statutory tax rate from 35% to 21% effective as of January 1, 2018. The Company’s tax equivalent adjustment to interest income decreased in the first quarter of 2018 as a result of the lower federal statutory tax rate in 2018. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances and include nonaccrual loans. The yields and costs include fees and costs, which are considered adjustments to yields. Interest on nonaccrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

 

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   Three Months Ended March 31, 
   2018   2017 
           Average           Average 
   Average       Yield/   Average       Yield/ 
(Dollars in thousands)  Balance   Interest   Cost   Balance   Interest   Cost 
Interest earning assets:                              
Loans, net (1)(2)  $3,127,900   $35,660    4.62%  $2,587,999   $29,478    4.62%
Mortgage-backed securities, CMOs and other asset-backed securities   686,539    3,724    2.20    749,521    3,817    2.07 
Taxable securities   199,688    1,492    3.03    227,537    1,499    2.67 
Tax exempt securities (2)   83,065    564    2.75    94,472    724    3.11 
Deposits with banks   23,108    90    1.58    21,411    46    0.87 
Total interest earning assets (2)   4,120,300    41,530    4.09    3,680,940    35,564    3.92 
Non interest earning assets:                              
Cash and due from banks   67,222              66,316           
Other assets   287,671              280,511           
Total assets  $4,475,193             $4,027,767           
                               
Interest bearing liabilities:                              
Savings, NOW and money market deposits  $1,843,025   $2,514    0.55%  $1,634,627   $1,551    0.38%
Certificates of deposit of $100,000 or more   155,649    517    1.35    128,042    379    1.20 
Other time deposits   66,371    195    1.19    79,334    178    0.91 
Federal funds purchased and repurchase agreements   151,647    606    1.62    143,565    316    0.89 
Federal Home Loan Bank advances   428,247    1,858    1.76    404,252    1,149    1.15 
Subordinated debentures   78,653    1,135    5.85    78,514    1,135    5.86 
Junior subordinated debentures   -    -    -    2,710    48    7.18 
Total interest bearing liabilities   2,723,592    6,825    1.02    2,471,044    4,756    0.78 
Non-interest bearing liabilities:                              
Demand deposits   1,262,989              1,094,786           
Other liabilities   37,838              30,464           
Total liabilities   4,024,419              3,596,294           
Stockholders' equity   450,774              431,473           
Total liabilities and stockholders' equity  $4,475,193             $4,027,767           
                               
Net interest income/interest rate spread (2)(3)        34,705    3.07%        30,808    3.14%
                               
Net interest earning assets/net interest margin (2)(4)  $1,396,708         3.42%  $1,209,896         3.39%
                               
Tax equivalent adjustment        (166)   (0.02)        (347)   (0.03)
                               
Net interest income/net interest margin (4)       $34,539    3.40%       $30,461    3.36%
                               
Ratio of interest earning assets to interest bearing liabilities             151.28%             148.96%

 

(1)Amounts are net of deferred origination costs/(fees) and the allowance for loan losses.
(2)Presented on a tax equivalent basis based on the U.S. statutory rate of 21% and 35% for the three months ended March 31, 2018 and 2017, respectively.
(3)Net interest rate spread represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.
(4)Net interest margin represents net interest income divided by average interest earning assets.

 

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Rate/Volume Analysis

 

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

 

   Three Months Ended 
   March 31, 2018 Over 2017 
   Changes Due To 
(In thousands)  Volume   Rate   Net Change 
Interest income on interest earning assets:               
Loans, net (1)(2)  $6,182   $-   $6,182 
Mortgage-backed securities, CMOs and other asset-backed securities   (1,168)   1,075    (93)
Taxable securities   (783)   776    (7)
Tax exempt securities (2)   (82)   (78)   (160)
Deposits with banks   4    40    44 
Total interest income on interest earning assets (2)   4,153    1,813    5,966 
                
Interest expense on interest bearing liabilities:               
Savings, NOW and money market deposits   214    749    963 
Certificates of deposit of $100,000 or more   87    51    138 
Other time deposits   (148)   165    17 
Federal funds purchased and repurchase agreements   19    271    290 
Federal Home Loan Bank advances   71    638    709 
Subordinated debentures   8    (8)   - 
Junior subordinated debentures   (48)   -    (48)
Total interest expense on interest bearing liabilities   203    1,866    2,069 
Net interest income (2)  $3,950   $(53)  $3,897 

 

(1)Amounts are net of deferred origination costs/(fees) and the allowance for loan losses.
(2)Presented on a tax equivalent basis based on the U.S. statutory rate of 21% and 35% for the three months ended March 31, 2018 and 2017, respectively.

 

Analysis of Net Interest Income for the Three Months Ended March 31, 2018 and 2017

 

Net interest income was $34.5 million for the three months ended March 31, 2018 compared to $30.5 million for the three months ended March 31, 2017. Average net interest earning assets increased $186.8 million to $1.4 billion for the three months ended March 31, 2018 compared to $1.2 billion for the three months ended March 31, 2017. The increase in average net interest earning assets reflects organic growth in loans, partially offset by increases in average deposits and average borrowings. The net interest margin increased to 3.40% for the three months ended March 31, 2018 compared to 3.36% for the three months ended March 31, 2017. The increase in the net interest margin for 2018 compared to 2017 reflects the higher average yield on interest earning assets primarily due to loan portfolio growth, partially offset by higher overall funding costs due in part to the Fed Funds rate increases in the year ended December 31, 2017 and March 2018.

 

Interest income increased $6.2 million, or 17.5%, to $41.4 million for the three months ended March 31, 2018 from $35.2 million for the same period in 2017, as average interest earning assets increased $439.4 million, or 11.9%, to $4.1 billion for the three months ended March 31, 2018 compared to $3.7 billion for the same period in 2017. The increase in average interest earning assets for the three months ended March 31, 2018 compared to 2017 reflects organic growth in loans. The tax adjusted average yield on interest earning assets was 4.09% for the quarter ended March 31, 2018 compared to 3.92% for the quarter ended March 31, 2017.

 

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Interest income on loans increased $6.2 million to $35.6 million for the three months ended March 31, 2018 over 2017, due to growth in the loan portfolio. For the three months ended March 31, 2018, average loans grew by $539.9 million, or 20.9%, to $3.1 billion as compared to $2.6 billion for the same period in 2017. The increase in average loans was the result of organic growth in commercial real estate mortgage loans, residential mortgage loans, commercial and industrial loans, multi-family mortgage loans, and real estate construction and land loans. The tax adjusted yield on average loans was 4.62% for the first quarter of 2018 and 2017. The Bank remains committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

 

Interest income on investment securities was $5.7 million for the three months ended March 31, 2018 and $5.8 million for the three months ended March 31, 2017. Interest income on securities included net amortization of premiums on securities of $1.3 million for the three months ended March 31, 2018 compared to $1.7 million for the same period in 2017. For the three months ended March 31, 2018, average total investments decreased by $102.2 million, or 9.5%, to $1.0 billion as compared to $1.1 billion for the same period in 2017. The tax adjusted average yield on total securities was 2.42% for the three months ended March 31, 2018 and 2.29% for the three months ended March 31, 2017.

 

Total interest expense increased to $6.8 million for the three months ended March 31, 2018 as compared to $4.8 million for the same period in 2017. The increase in interest expense for the three months ended March 31, 2018 is a result of the increase in the cost of average interest bearing liabilities coupled with an increase in average interest bearing liabilities. The cost of average interest bearing liabilities was 1.02% for the three months ended March 31, 2018 and 0.78% for the three months ended March 31, 2017. The increase in the cost of average interest bearing liabilities is primarily due to higher overall funding costs due in part to the Fed Funds rate increases in March 2017, June 2017, December 2017 and March 2018. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, an increase in short term interest rates initially results in a decrease in net interest income.  The Company began extending the terms of certain matured borrowings at the end of the 2017 first quarter in anticipation of further Fed Funds rate increases. Additionally, the large percentages of deposits in money market accounts reprice at short-term market rates, making the balance sheet more liability sensitive. The Bank continues its prudent management of deposit pricing. Average total interest bearing liabilities increased $252.5 million, or 10.2%, to $2.7 billion for the three months ended March 31, 2018 compared to $2.5 billion for the same period in 2017 due to increases in both average deposits and average borrowings.

 

For the three months ended March 31, 2018, average total deposits increased by $391.2 million to $3.3 billion as compared to average total deposits of $2.9 billion for the three months ended March 31, 2017 due to increases in average savings, NOW and money market accounts, average demand deposits, and average certificates of deposit. The average balance of savings, NOW and money market accounts increased $208.4 million, or 12.7%, to $1.8 billion for the three months ended March 31, 2018 compared to $1.6 billion for the three months ended March 31, 2017. The cost of average savings, NOW and money market deposits was 0.55% for the 2018 first quarter compared to 0.38% for the 2017 first quarter. Average demand deposits increased $168.2 million, or 15.4%, to $1.3 billion for the three months ended March 31, 2018 as compared to $1.1 billion for the same period in 2017. Average balances in certificates of deposit increased $14.6 million, or 7.1%, to $222.0 million for the three months ended March 31, 2018 compared to $207.4 million for the three months ended March 31, 2017. The cost of average certificates of deposit increased to 1.30% for the three months ended March 31, 2018 compared to 1.09% for the same period in 2017. Average public fund deposits comprised 18.0% of total average deposits during the 2018 first quarter and 18.5% for the 2017 first quarter.

 

Average federal funds purchased and repurchase agreements increased $8.1 million, or 5.6%, to $151.6 million for the three months ended March 31, 2018 compared to $143.6 million for the same period in 2017. The cost of average federal funds purchased and repurchase agreements was 1.62% for the 2018 first quarter compared to 0.89% for the 2017 first quarter. Average FHLB advances increased $24.0 million, or 5.9%, to $428.2 million for the three months ended March 31, 2018 compared to $404.3 million for the three months ended March 31, 2017. Average junior subordinated debentures for the three months ended March 31, 2018 was zero compared to $2.7 million for the same period in 2017. The junior subordinated debentures were redeemed in January 2017.

 

Provision and Allowance for Loan Losses

 

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

 

Based on the Company’s continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, a provision for loan losses of $0.8 million was recorded during the three months ended March 31, 2018 and 2017. Net recoveries were $0.3 million for the quarter ended March 31, 2018 compared to net charge-offs of $0.1 million for the quarter ended March 31, 2017. The ratio of the allowance for loan losses to nonaccrual loans was 540%, 456% and 2,118%, at March

 

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31, 2018, December 31, 2017, and March 31, 2017, respectively. The allowance for loan losses increased to $32.8 million at March 31, 2018 as compared to $31.7 million at December 31, 2017 and $26.6 million at March 31, 2017. The allowance as a percentage of total loans was 1.02% at March 31, 2018, compared to 1.02% at December 31, 2017 and 1.00% at March 31, 2017. The increase in the allowance for loan losses from December 31, 2017 reflects loan portfolio growth, coupled with an increase in substandard loans. The increase in the allowance for loan losses from March 31, 2017 reflects portfolio growth, coupled with an increase in specific reserves on impaired loans and the impact of the significant increase in charge-offs experienced during the 2017 fourth quarter. Management continues to carefully monitor the loan portfolio as well as real estate trends in Nassau and Suffolk Counties and the New York City boroughs.

 

Loans totaling $90.3 million, or 2.8%, of total loans at March 31, 2018 were categorized as classified loans compared to $85.3 million, or 2.8%, at December 31, 2017 and $95.7 million, or 3.6%, at March 31, 2017. Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans because management has information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed at least quarterly.

 

At March 31, 2018, $34.7 million of classified loans were commercial real estate (“CRE”) loans. Of the $34.7 million of CRE loans, $30.1 million were current and $4.6 million were past due. At March 31, 2018, $8.2 million of classified loans were residential real estate loans, with $7.3 million current and $0.9 million past due. Commercial, industrial, and agricultural loans represented $47.1 million of classified loans, with $44.2 million current and $2.9 million past due. Taxi medallion loans represented $24.5 million of the classified commercial, industrial and agricultural loans at March 31, 2018. All of the Bank’s taxi medallion loans are collateralized by New York City – Manhattan medallions and have personal guarantees. All taxi medallion loans were current as of March 31, 2018 except one which was nonaccrual.  No new originations of taxi medallion loans are currently planned and management expects these balances to decline through amortization and pay-offs. There was $0.3 million of classified real estate construction and land loans, all of which are current.

 

CRE loans, including multi-family loans, represented $1.9 billion, or 60.7%, of the total loan portfolio at March 31, 2018 compared to $1.9 billion, or 61.0%, at December 31, 2017 and $1.6 billion, or 59.1%, at March 31, 2017. The Bank’s underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, the Bank’s underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%. The Bank considers charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on commercial real estate values when evaluating the appropriate level of the allowance for loan losses.

 

As of March 31, 2018 and December 31, 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $27.1 million and $22.5 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and 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 less costs to sell 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 the collateral less costs to sell 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 increase in impaired loans from December 31, 2017 was attributable to TDRs during the 2018 first quarter, partially offset by a decrease in non-accrual loans. During the three months ended March 31, 2018, the Bank modified certain commercial and industrial loans as TDRs totaling $6.7 million. These TDR loans are current and are classified as performing TDRs at March 31, 2018.

 

Nonaccrual loans were $6.1 million, or 0.19%, of total loans at March 31, 2018, and $7.0 million, or 0.22%, of total loans at December 31, 2017. TDRs represent $32 thousand of the nonaccrual loans at March 31, 2018 compared to $5 thousand at December 31, 2017.

 

The Bank’s other real estate owned at March 31, 2018 was $0.2 million, consisting of one property, compared to none at December 31, 2017.

 

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

 

   Three Months Ended 
(In thousands)  March 31, 2018   March 31, 2017 
Beginning balance  $31,707   $25,904 
Charge-offs:          
Residential real estate mortgage loans   -    - 
Commercial, industrial and agricultural loans   -    (95)
Installment/consumer loans   -    - 
Total   -    (95)
Recoveries:          
Commercial real estate mortgage loans   -    - 
Residential real estate mortgage loans   1    1 
Commercial, industrial and agricultural loans   304    7 
Installment/consumer loans   -    1 
Total   305    9 
Net recoveries (charge-offs)   305    (86)
Provision for loan losses charged to operations   800    800 
Ending balance  $32,812   $26,618 

 

Allocation of Allowance for Loan Losses

 

The following table sets forth the allocation of the total allowance for loan losses by loan classification at the dates indicated:

 

   March 31, 2018   December 31, 2017 
       Percentage of Loans       Percentage of Loans 
(Dollars in thousands)  Amount   to Total Loans   Amount   to Total Loans 
Commercial real estate mortgage loans  $11,334    41.9%  $11,048    41.7%
Multi-family mortgage loans   3,002    18.8    4,521    19.2 
Residential real estate mortgage loans   3,495    15.4    2,438    15.0 
Commercial, industrial & agricultural loans   14,055    20.0    12,838    19.9 
Real estate construction and land loans   821    3.3    740    3.5 
Installment/consumer loans   105    0.6    122    0.7 
Total  $32,812    100.0%  $31,707    100.0%

 

Non-Interest Income

 

For the three months ended March 31, 2018, total non-interest income was $4.1 million, unchanged compared to the three months ended March 31, 2017, reflecting a lower gain on sale of Small Business Administration (“SBA”) loans of $0.2 million, partially offset by a $0.1 million increase in service charges and other fees and a $0.1 million increase in other operating income.

 

Non-Interest Expense

 

Total non-interest expense increased $2.3 million to $22.6 million during the three months ended March 31, 2018 compared to $20.3 million over the same period in 2017. The increase was primarily due to higher salaries and benefits, professional services, technology and communications, other operating expenses, FDIC assessments, and marketing and advertising, partially offset by lower occupancy and equipment and amortization of intangible assets.  

 

Salaries and benefits increased $1.3 million to $12.8 million for the three months ended March 31, 2018 compared to $11.5 million for the same period in 2017. The increase in salaries and benefits in the first quarter of 2018 versus the first quarter of 2017 is primarily due to additional staff related to business development and risk management. Occupancy and equipment decreased $0.2 million to $3.2 million for the three months ended March 31, 2018 compared to $3.4 million for the same period in 2017. The decrease in occupancy and equipment expense in the first quarter of 2018 versus the first quarter of 2017 reflects the cost savings related to the execution of the Company’s branch rationalization strategy. Professional services increased $0.4 million to $1.2 million for the three months ended March 31, 2018, compared to $0.8 million for the same period in 2017. Technology and communications increased $0.3 million to $1.6 million for the three months ended March 31, 2018 compared to $1.3 million for the same period in the prior year. Other operating expenses increased $0.2 million to $2.0 million for the three months ended March 31, 2018 compared to $1.8 million for the same period in 2017. FDIC assessments increased to $0.5 million for the three months ended March 31, 2018 from $0.3 million for the same period

 

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in 2017. Marketing and advertising were $1.0 million for the three months ended March 31, 2018 compared to $0.9 million for the same period in 2017. Amortization of other intangible assets was $0.2 million compared to $0.3 million for the same period in 2017.

 

Income Taxes

 

Income tax expense was $3.2 million for the three months ended March 31, 2018 compared to $4.3 million for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 was 20.9% compared to 32.0% for the same period last year. The decrease in effective tax rate in 2018 compared to 2017 was due to the enactment of the Tax Act in the fourth quarter of 2017.

 

Financial Condition

 

Total assets of the Company increased $70.6 million to $4.5 billion at March 31, 2018 compared to December 31, 2017. Cash and cash equivalents increased $4.3 million, or 4.5%, to $99.0 million at March 31, 2018 compared to $94.7 million at December 31, 2017. Total securities decreased $37.8 million to $938.3 million at March 31, 2018 compared to December 31, 2017. Net loans increased $98.0 million, or 3.2%, to $3.2 billion compared to December 31, 2017. The ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality, remains a strong focus of management. Total deposits increased $96.7 million to $3.4 billion at March 31, 2018, compared to $3.3 billion at December 31, 2017. Savings, NOW and money market deposits increased $151.0 million to $1.9 billion at March 31, 2018 from $1.8 billion at December 31, 2017. Certificates of deposit increased $60.4 million to $282.7 million at March 31, 2018 from $222.4 million at December 31, 2017. Demand deposits decreased $114.7 million to $1.2 billion as of March 31, 2018 compared to $1.3 billion at December 31, 2017. Federal funds purchased were zero at March 31, 2018 compared to $50.0 million at December 31, 2017. Federal Home Loan Bank advances increased $18.7 million to $520.1 million at March 31, 2018 compared to $501.4 million at December 31, 2017.

 

Stockholders’ equity was $433.3 million at March 31, 2018, an increase of $4.1 million, or 1.0%, from December 31, 2017, primarily due to net income of $12.1 million, share based compensation of $0.8 million, and proceeds from the issuance of shares of common stock under the dividend reinvestment plan of $0.2 million, partially offset by $4.6 million in dividends and an increase in accumulated other comprehensive loss, net of deferred income taxes, of $4.0 million. In April 2018, the Company declared a quarterly dividend of $0.23 per share and continues its long-term trend of uninterrupted dividends.

 

Liquidity

 

The objective of liquidity management is to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for Company growth or earnings enhancement. Liquidity management addresses the ability of the Company to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.

 

The Company’s principal sources of liquidity included cash and cash equivalents of $6.2 million as of March 31, 2018, and dividend capabilities from the Bank. Cash available for distribution of dividends to shareholders of the Company is primarily derived from dividends paid by the Bank to the Company. For the three months ended March 31, 2018, the Bank paid $5.0 million in cash dividends to the Company. Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank’s net income of that year combined with its retained net income of the preceding two years. As of March 31, 2018, the Bank has $56.2 million of retained net income available for dividends to the Company. In the event that the Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs. The Company did not make any capital contributions to the Bank during the three months ended March 31, 2018.

 

The Bank’s most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent on the Bank’s operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit outflows, loans, and asset and liability management objectives. Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

 

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The Bank’s Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. At March 31, 2018, the Bank had aggregate lines of credit of $380.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $360.0 million is available on an unsecured basis. As of March 31, 2018, the Bank had no overnight borrowings outstanding under these lines. The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As of March 31, 2018, the Bank had $227.0 million outstanding in FHLB overnight borrowings and $293.1 million outstanding in FHLB term borrowings. As of December 31, 2017, the Bank had $185.0 million outstanding in FHLB overnight borrowings and $316.4 million outstanding in FHLB term borrowings. The Bank had $0.9 million at March 31, 2018 and December 31, 2017, of securities sold under agreements to repurchase outstanding with customers and nothing outstanding with brokers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As of March 31, 2018, the Bank had $105.0 million outstanding in brokered certificates of deposit and $170.0 million outstanding in brokered money market accounts. As of December 31, 2017, the Bank had $44.9 million outstanding in brokered certificates of deposit and $163.2 million outstanding in brokered money market accounts.

 

Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually. Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company’s operating requirements. The Bank’s liquidity levels are affected by the use of short term and wholesale borrowings and the amount of public funds in the deposit mix. Excess short-term liquidity is invested in overnight federal funds sold or in an interest earning account at the FRB.