10-Q 1 tv499707_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended June 30, 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 19,785,248 shares of common stock outstanding as of July 31, 2018.

 

 

 

 

 

BRIDGE BANCORP, INC.

 

PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 3
     
  Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 4
     
  Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 5
     
  Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 6
     
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 52
     
Item 4. Controls and Procedures 53
     
PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 54
     
Item 1A. Risk Factors 54
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
     
Item 3. Defaults Upon Senior Securities 54
     
Item 4. Mine Safety Disclosures 54
     
Item 5. Other Information 54
     
Item 6. Exhibits 55
     
Signatures   55

 

 2 

 

  

Item 1. Financial Statements

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

 

   June 30,   December 31, 
   2018   2017 
   (unaudited)     
Assets          
Cash and due from banks  $74,255   $76,614 
Interest earning deposits with banks   31,636    18,133 
Total cash and cash equivalents   105,891    94,747 
           
Securities available for sale, at fair value   659,076    759,916 
Securities held to maturity (fair value of $165,606 and $179,885, respectively)   169,717    180,866 
Total securities   828,793    940,782 
           
Securities, restricted   26,747    35,349 
           
Loans held for sale   6,338    - 
           
Loans held for investment   3,180,676    3,102,752 
Allowance for loan losses   (31,652)   (31,707)
Loans, net   3,149,024    3,071,045 
           
Premises and equipment, net   36,043    33,505 
Accrued interest receivable   11,625    11,652 
Goodwill   105,950    105,950 
Other intangible assets   4,866    5,214 
Prepaid pension   10,141    9,936 
Bank owned life insurance   88,594    87,493 
Other real estate owned   175    - 
Other assets   40,598    34,329 
Total assets  $4,414,785   $4,430,002 
           
Liabilities          
Demand deposits  $1,307,325   $1,338,701 
Savings, NOW and money market deposits   1,919,653    1,773,478 
Certificates of deposit of $100,000 or more   119,774    158,584 
Other time deposits   206,445    63,780 
Total deposits   3,553,197    3,334,543 
           
Federal funds purchased   -    50,000 
Repurchase agreements   1,437    877 
Federal Home Loan Bank advances   300,863    501,374 
Subordinated debentures, net   78,711    78,641 
Other liabilities and accrued expenses   40,822    35,367 
Total liabilities   3,975,030    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; 19,798,989 and 19,719,575 shares issued, respectively; and 19,785,889 and 19,709,360 shares outstanding, respectively)   198    197 
Surplus   349,538    347,691 
Retained earnings   106,206    96,547 
Treasury stock at cost, 13,100 and 10,215 shares, respectively   (441)   (296)
    455,501    444,139 
Accumulated other comprehensive loss, net of income taxes   (15,746)   (14,939)
Total stockholders' equity   439,755    429,200 
Total liabilities and stockholders' equity  $4,414,785   $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   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Interest income:                    
Loans (including fee income)  $35,770   $30,252   $71,383   $59,635 
Mortgage-backed securities, CMOs and other asset-backed securities   3,825    3,898    7,549    7,715 
U.S. GSE securities   243    301    522    601 
State and municipal obligations   747    1,010    1,559    2,005 
Corporate bonds   358    293    713    583 
Deposits with banks   106    71    196    117 
Other interest and dividend income   502    409    993    795 
Total interest income   41,551    36,234    82,915    71,451 
                     
Interest expense:                    
Savings, NOW and money market deposits   3,438    1,812    5,952    3,363 
Certificates of deposit of $100,000 or more   582    431    1,099    810 
Other time deposits   493    179    688    357 
Federal funds purchased and repurchase agreements   57    355    1,172    671 
Federal Home Loan Bank advances   1,917    1,529    3,266    2,678 
Subordinated debentures   1,135    1,135    2,270    2,270 
Junior subordinated debentures   -    -    -    48 
Total interest expense   7,622    5,441    14,447    10,197 
                     
Net interest income   33,929    30,793    68,468    61,254 
Provision for loan losses   400    950    1,200    1,750 
Net interest income after provision for loan losses   33,529    29,843    67,268    59,504 
                     
Non-interest (loss) income:                    
Service charges and other fees   2,562    2,220    4,725    4,270 
Net securities losses   (7,921)   -    (7,921)   - 
Title fee income   450    541    955    1,091 
Gain on sale of loans   322    -    322    - 
Gain on sale of Small Business Administration loans   691    799    1,062    1,342 
BOLI income   555    567    1,101    1,127 
Other operating income   763    382    1,291    801 
Total non-interest (loss) income   (2,578)   4,509    1,535    8,631 
                     
Non-interest expense:                    
Salaries and employee benefits   13,055    11,592    25,867    23,092 
Occupancy and equipment   3,205    3,439    6,448    6,837 
Technology and communications   1,568    1,390    3,211    2,725 
Marketing and advertising   1,240    1,577    2,202    2,488 
Professional services   881    642    2,093    1,423 
FDIC assessments   436    332    900    643 
Amortization of other intangible assets   242    274    488    553 
Other operating expenses   1,880    1,760    3,896    3,541 
Total non-interest expense   22,507    21,006    45,105    41,302 
                     
Income before income taxes   8,444    13,346    23,698    26,833 
Income tax expense   1,701    4,505    4,882    8,821 
Net income  $6,743   $8,841   $18,816   $18,012 
Basic earnings per share  $0.34   $0.45   $0.95   $0.91 
Diluted earnings per share  $0.34   $0.45   $0.95   $0.91 

 

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   Six Months Ended 
   June 30,   June 30, 
   2018   2017   2018   2017 
Net income  $6,743   $8,841   $18,816   $18,012 
Other comprehensive income (loss):                    
Change in unrealized net gains (losses) on securities available for sale, net of reclassifications and deferred income taxes   2,616    1,533    (3,472)   2,543 
Adjustment to pension liability, net of reclassifications and deferred income taxes   68    66    135    163 
Unrealized gains (losses) on cash flow hedges, net of reclassifications and deferred income taxes   479    (547)   2,530    (373)
Total other comprehensive income (loss)   3,163    1,052    (807)   2,333 
Comprehensive income  $9,906   $9,893   $18,009   $20,345 

 

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             18,816              18,816 
Shares issued under the dividend reinvestment plan        468                   468 
Stock awards granted and distributed   1    (523)        522         - 
Stock awards forfeited        115         (115)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (552)        (552)
Share based compensation expense        1,787                   1,787 
Cash dividend declared, $0.46 per share             (9,157)             (9,157)
Other comprehensive loss, net of deferred income taxes                       (807)   (807)
Balance at June 30, 2018  $198   $349,538   $106,206   $(441)  $(15,746)  $439,755 

 

   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             18,012              18,012 
Shares issued under the dividend reinvestment plan        469                   469 
Shares issued for trust preferred securities conversions (529,292 shares)   5    14,944                   14,949 
Stock awards granted and distributed   1    (416)        415         - 
Stock awards forfeited        20         (20)        - 
Repurchase of surrendered stock from vesting of restricted stock awards                  (264)        (264)
Share based compensation expense        1,324                   1,324 
Cash dividend declared, $0.46 per share             (9,103)             (9,103)
Other comprehensive income, net of deferred income taxes                       2,333    2,333 
Balance at June 30, 2017  $197   $345,768   $100,503   $(30)  $(10,731)  $435,707 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 6 

 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   Six Months Ended 
   June 30, 
   2018   2017 
Cash flows from operating activities:          
Net income  $18,816   $18,012 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,200    1,750 
Depreciation and amortization of premises and equipment   1,897    1,900 
Net (accretion) and other amortization   (1,444)   (3,949)
Net amortization on securities   2,507    3,291 
Increase in cash surrender value of bank owned life insurance   (1,101)   (1,127)
Amortization of intangible assets   488    553 
Share based compensation expense   1,787    1,324 
Net securities losses   7,921    - 
Decrease in accrued interest receivable   27    504 
Small Business Administration ("SBA") loans originated for sale   (19,446)   (14,483)
Proceeds from sale of the guaranteed portion of SBA loans   14,417    16,123 
Gain on sale of the guaranteed portion of SBA loans   (1,062)   (1,342)
Gain on sale of loans   (322)   - 
Decrease (increase) in other assets   279    (2,203)
Increase in accrued expenses and other liabilities   2,929    3,636 
Net cash provided by operating activities   28,893    23,989 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (194,835)   (73,916)
Purchases of securities, restricted   (481,422)   (303,890)
Purchases of securities held to maturity   (1,000)   (2,031)
Proceeds from sales of securities available for sale   230,372    - 
Redemption of securities, restricted   490,024    299,814 
Maturities, calls and principal payments of securities available for sale   50,431    59,170 
Maturities, calls and principal payments of securities held to maturity   11,696    20,756 
Net increase in loans   (118,281)   (192,825)
Proceeds from loan sale   40,133    - 
Purchase of premises and equipment   (4,435)   (1,685)
Net cash provided by (used in) investing activities   22,683    (194,607)
           
Cash flows from financing activities:          
Net increase in deposits   218,676    133,646 
Net decrease in federal funds purchased   (50,000)   (50,000)
Net (decrease) increase in Federal Home Loan Bank advances   (200,427)   67,479 
Repayment of junior subordinated debentures   -    (352)
Net increase in repurchase agreements   560    57 
Net proceeds from issuance of common stock   468    469 
Repurchase of surrendered stock from vesting of restricted stock awards   (552)   (264)
Cash dividends paid   (9,157)   (9,103)
Net cash (used in) provided by financing activities   (40,432)   141,932 
           
Net increase (decrease) in cash and cash equivalents   11,144    (28,686)
Cash and cash equivalents at beginning of period   94,747    113,838 
Cash and cash equivalents at end of period  $105,891   $85,152 
           
Supplemental disclosure of cash flow information:          
Cash paid for:          
Interest  $14,382   $10,498 
Income taxes  $2,471   $165 
           
Non-cash investing and financing activities:          
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.

 

 7 

 

 

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 six months ended June 30, 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.

 

 8 

 

  

The following table presents the computation of EPS for the three and six months ended June 30, 2018 and 2017:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(In thousands, except per share data)  2018   2017   2018   2017 
Net income  $6,743   $8,841   $18,816   $18,012 
Dividends paid on and earnings allocated to participating securities   (148)   (182)   (405)   (360)
Income attributable to common stock  $6,595   $8,659   $18,411   $17,652 
                     
Weighted average common shares outstanding, including participating securities   19,884    19,781    19,859    19,725 
Weighted average participating securities   (445)   (410)   (433)   (401)
Weighted average common shares outstanding   19,439    19,371    19,426    19,324 
Basic earnings per common share  $0.34   $0.45   $0.95   $0.91 
                     
Income attributable to common stock  $6,595   $8,659   $18,411   $17,652 
Impact of assumed conversions - interest on 8.5% trust preferred securities   -    -    -    32 
Income attributable to common stock including assumed conversions  $6,595   $8,659   $18,411   $17,684 
                     
Weighted average common shares outstanding   19,439    19,371    19,426    19,324 
Incremental shares from assumed conversions of options and restricted stock units   29    23    27    20 
Incremental shares from assumed conversions of 8.5% trust preferred securities   -    -    -    35 
Weighted average common and equivalent shares outstanding   19,468    19,394    19,453    19,379 
Diluted earnings per common share  $0.34   $0.45   $0.95   $0.91 

 

There were 47,393 stock options outstanding at June 30, 2018 that were not included in the computation of diluted earnings per share for the three and six months ended June 30, 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 June 30, 2017.

 

There were no restricted stock units that were antidilutive for the three months ended June 30, 2018 and 2017. There were zero and 20,084 restricted stock units that were antidilutive for the six months ended June 30, 2018 and 2017, respectively.

 

The $15.7 million in trust preferred securities outstanding at December 31, 2016 were redeemed effective January 18, 2017 and therefore were not included in the computation of diluted earnings per share for the three months ended June 30, 2017, but were dilutive for the six months ended June 30, 2017 and therefore were included in the computation of diluted earnings per share for that period.

 

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, 273,585 shares remain available for issuance at June 30, 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.

 

 9 

 

  

During the six months ended June 30, 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 six months ended June 30, 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 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 six months ended June 30, 2017.

 

Compensation expense attributable to stock options was $26 thousand and $39 thousand for the three and six months ended June 30, 2018, respectively. There was no compensation expense attributable to stock options for the six months ended June 30, 2017 because there were no stock options outstanding as of June 30, 2017 and December 31, 2016. As of June 30, 2018, there was $270 thousand of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of 2.6 years.

 

The following table summarizes the status of the Company’s stock options as of and for the six months ended June 30, 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, June 30, 2018   47,393   $36.19    9.6 years   $- 
Vested and Exercisable, June 30, 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 six months ended June 30, 2018:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2018   317,692   $27.16 
Granted   82,982    33.00 
Vested   (58,233)   23.90 
Forfeited   (3,766)   30.48 
Unvested, June 30, 2018   338,675   $29.12 

 

During the six months ended June 30, 2018, the Company granted a total of 82,982 RSAs. Of the 82,982 RSAs granted, 44,750 time-vested RSAs vest ratably over five years, 13,115 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. As of June 30, 2018, there were 338,675 unvested RSAs consisting of 314,175 time-vested RSAs and 24,500 performance-based RSAs.

 

Compensation expense attributable to RSAs was $717 thousand and $1.3 million for the three and six months ended June 30, 2018, respectively, and $503 thousand and $916 thousand for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, 

 

 10 

 

  

there was $6.4 million of total unrecognized compensation cost related to non-vested RSAs. The cost is expected to be recognized over a weighted-average period of 3.5 years.

 

Restricted Stock Units

 

Long Term Incentive Plan

 

An RSU is an award that is denominated in shares of the Company’s common stock on the date of grant and is similar to an RSA award, except no shares of the Company’s common stock are actually issued to the award recipient on the date of grant of an RSU. RSUs are subject to a time-based vesting schedule or the satisfaction of performance conditions, and are settled in shares of the Company’s common stock. RSUs do not provide voting rights and RSUs may provide dividend equivalent rights from the date of grant.

 

During the six months ended June 30, 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 six months ended June 30, 2018:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2018   68,776   $24.46 
Granted   21,693    33.23 
Reinvested dividends   987    26.01 
Forfeited   (13,333)   21.85 
Unvested, June 30, 2018   78,123   $27.36 

 

Compensation expense attributable to LTI Plan RSUs was $119 thousand and $220 thousand for the three and six months ended June 30, 2018, respectively, and $79 thousand and $148 thousand in connection with these awards for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, there was $1.5 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 3.5 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 $140 thousand and $275 thousand in connection with these RSUs for the three and six months ended June 30, 2018, respectively, and $132 thousand and $260 thousand for the three and six months ended June 30, 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 June 30, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses therein:

 

   June 30, 2018 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $29,996   $-   $(1,258)  $28,738 
State and municipal obligations   38,423    50    (525)   37,948 
U.S. GSE residential mortgage-backed securities   101,884    -    (3,688)   98,196 
U.S. GSE residential collateralized mortgage obligations   340,978    6    (8,937)   332,047 
U.S. GSE commercial mortgage-backed securities   3,584    -    (67)   3,517 
U.S. GSE commercial collateralized mortgage obligations   94,845    -    (2,438)   92,407 
Other asset backed securities   24,250    -    (727)   23,523 
Corporate bonds   46,000    -    (3,300)   42,700 
Total available for sale   679,960    56    (20,940)   659,076 
                     
Held to maturity:                    
State and municipal obligations   57,350    497    (481)   57,366 
U.S. GSE residential mortgage-backed securities   10,441    -    (451)   9,990 
U.S. GSE residential collateralized mortgage obligations   51,026    81    (1,318)   49,789 
U.S. GSE commercial mortgage-backed securities   20,626    -    (897)   19,729 
U.S. GSE commercial collateralized mortgage obligations   30,274    -    (1,542)   28,732 
Total held to maturity   169,717    578    (4,689)   165,606 
Total securities  $849,677   $634   $(25,629)  $824,682 

 

   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 June 30, 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.

 

   June 30, 2018 
       Estimated 
(In thousands)  Amortized Cost   Fair Value 
Maturity          
Available for sale:          
Within one year  $8,029   $8,016 
One to five years   24,616    24,104 
Five to ten years   90,038    85,462 
Beyond ten years   557,277    541,494 
Total  $679,960   $659,076 
           
Held to maturity:          
Within one year  $3,377   $3,376 
One to five years   30,563    30,374 
Five to ten years   51,321    50,491 
Beyond ten years   84,456    81,365 
Total  $169,717   $165,606 

 

The following tables summarize securities with gross unrealized losses at June 30, 2018 and December 31, 2017, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position:

 

   June 30, 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  $-   $-   $28,739   $(1,258)
State and municipal obligations   22,612    (318)   10,404    (207)
U.S. GSE residential mortgage-backed securities   39,156    (1,267)   59,040    (2,421)
U.S. GSE residential collateralized mortgage obligations   189,200    (2,329)   132,871    (6,608)
U.S. GSE commercial mortgage-backed securities   3,518    (67)   -    - 
U.S. GSE commercial collateralized mortgage obligations   47,103    (326)   45,304    (2,112)
Other asset backed securities   -    -    23,523    (727)
Corporate bonds   12,930    (1,069)   29,769    (2,231)
 Total available for sale   314,519    (5,376)   329,650    (15,564)
                     
Held to maturity:                    
State and municipal obligations   28,822    (437)   2,396    (44)
U.S. GSE residential mortgage-backed securities   1,205    (35)   8,784    (416)
U.S. GSE residential collateralized mortgage obligations   23,685    (492)   19,392    (826)
U.S. GSE commercial mortgage-backed securities   11,857    (388)   7,871    (509)
U.S. GSE commercial collateralized mortgage obligations   9,489    (400)   19,244    (1,142)
Total held to maturity  $75,058   $(1,752)  $57,687   $(2,937)

 

 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 June 30, 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 Aa3 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 June 30, 2018.

 

Sales and Calls of Securities

 

There were $230.4 million of proceeds from sales of securities with gross losses of $7.9 million realized for the three and six months ended June 30, 2018. There were no proceeds from sales of securities for the three and six months ended June 30, 2017. There were $0.9 million and $1.9 million of proceeds from calls of securities for the three and six months ended June 30, 2018, respectively. There were no proceeds from calls of securities for the three and six months ended June 30, 2017.

 

 14 

 

  

Pledged Securities

 

Securities having a fair value of $366.4 million and $513.5 million at June 30, 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 six months ended June 30, 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 $26.7 million and $35.3 million in FHLB, ACBB and FRB stock at June 30, 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:

 

   June 30, 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  $28,738       $28,738     
State and municipal obligations   37,948         37,948      
U.S. GSE residential mortgage-backed securities   98,196         98,196      
U.S. GSE residential collateralized mortgage obligations   332,047         332,047      
U.S. GSE commercial mortgage-backed securities   3,517         3,517      
U.S. GSE commercial collateralized mortgage obligations   92,407         92,407      
Other asset backed securities   23,523         23,523      
Corporate bonds   42,700         42,700      
Total available for sale securities  $659,076        $659,076      
Derivatives  $8,743        $8,743      
                     
Financial liabilities:                    
Derivatives  $2,451        $2,451      

 

   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:

 

   June 30, 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  $-           $- 

 

There were no impaired loans with an allocated allowance for loan losses at June 30, 2018. 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 June 30, 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.

 

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.

 

 17 

 

 

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 June 30, 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 June 30, 2018 and December 31, 2017:

 

   June 30, 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  $74,255   $74,255   $   $   $74,255 
Interest earning deposits with banks   31,636    31,636            31,636 
Securities available for sale   659,076        659,076        659,076 
Securities restricted   26,747    n/a    n/a    n/a    n/a 
Securities held to maturity   169,717        165,606        165,606 
Loans held for sale   6,338        6,852        6,852 
Loans, net   3,149,024            3,129,139    3,129,139 
Derivatives   8,743        8,743        8,743 
Accrued interest receivable   11,625        2,881    8,744    11,625 
                          
Financial liabilities:                         
Certificates of deposit   326,219        323,551        323,551 
Demand and other deposits   3,226,978    3,226,978            3,226,978 
Federal Home Loan Bank advances   300,863    10,000    284,531        294,531 
Repurchase agreements   1,437        1,437        1,437 
Subordinated debentures   78,711        74,913        74,913 
Derivatives   2,451        2,451        2,451 
Accrued interest payable   1,639        1,639        1,639 

 

 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)  June 30, 2018   December 31, 2017 
Commercial real estate mortgage loans  $1,327,947   $1,293,906 
Multi-family mortgage loans   570,670    595,280 
Residential real estate mortgage loans   510,303    464,264 
Commercial, industrial and agricultural loans   629,906    616,003 
Real estate construction and land loans   116,899    107,759 
Installment/consumer loans   20,051    21,041 
Total loans   3,175,776    3,098,253 
Net deferred loan costs and fees   4,900    4,499 
Total loans held for investment   3,180,676    3,102,752 
Allowance for loan losses   (31,652)   (31,707)
Loans, net  $3,149,024   $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 $303.8 million and $359.4 million of acquired CNB loans remaining as of June 30, 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 $13.2 million and $15.4 million of acquired FNBNY loans remaining as of June 30, 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

 

 20 

 

  

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:

 

 21 

 

 

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 June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
(In thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Commercial real estate:                         
Owner occupied  $464,708   $835   $18,109   $-   $483,652 
Non-owner occupied   841,338    -    2,957    -    844,295 
Multi-family   570,670    -    -    -    570,670 
Residential real estate:                         
Residential mortgage   432,515    8,558    861    -    441,934 
Home equity   66,433    1,235    701    -    68,369 
Commercial and industrial:                         
Secured   95,758    10,386    13,309    -    119,453 
Unsecured   491,851    12,422    6,180    -    510,453 
Real estate construction and land loans   116,588    -    311    -    116,899 
Installment/consumer loans   20,039    12    -         20,051 
Total loans  $3,099,900   $33,448   $42,428   $-   $3,175,776 

 

At June 30, 2018, there were $0.4 million and $0.8 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.

 

 22 

 

  

Past Due and Nonaccrual Loans

 

The following tables represent the aging of the recorded investment in past due loans as of June 30, 2018 and December 31, 2017 by class of loans, as defined by FASB ASC 310-10:

 

   June 30, 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  $532   $-   $-   $382   $914   $482,738   $483,652 
Non-owner occupied   415    -    -    -    415    843,880    844,295 
Multi-family   -    -    -    -    -    570,670    570,670 
Residential real estate:                                   
Residential mortgages   1,231    -    619    41    1,891    440,043    441,934 
Home equity   458    557    289    161    1,465    66,904    68,369 
Commercial and industrial:                                   
Secured   141    41    26    573    781    118,672    119,453 
Unsecured   990    -    -    274    1,264    509,189    510,453 
Real estate construction and land loans   -    -    -    152    152    116,747    116,899 
Installment/consumer loans   1    25    -    16    42    20,009    20,051 
Total loans  $3,768   $623   $934   $1,599   $6,924   $3,168,852   $3,175,776 

 

   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 $1.3 million and $2.4 million of acquired loans that were 30-89 days past due at June 30, 2018 and December 31, 2017, respectively.

 

Impaired Loans

 

At June 30, 2018 and December 31, 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $15.3 million and $22.5 million, respectively. The decrease in impaired loans was attributable to the payoff of certain troubled debt restructurings ("TDRs”), partially offset by new TDRs during the six months ended June 30, 2018, coupled with a decrease in non-accrual loans due to the charge-off of one loan and sales and payoffs. During the six months ended June 30, 2018, the Bank modified certain commercial and industrial TDRs totaling $6.8 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 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.

 

 23 

 

  

The following tables set forth the recorded investment, unpaid principal balance and related allowance by class of loans at June 30, 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 and six months ended June 30, 2018 and 2017:

 

   June 30, 2018   Three Months Ended
June 30, 2018
   Six Months Ended
June 30, 2018
 
(In thousands)  Recorded 
Investment
   Unpaid 
Principal Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $287   $289   $-   $184   $-   $92   $- 
Non-owner occupied   1,162    1,162    -    1,163    7    1,168    8 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   8,685    9,332    -    8,702    58    8,723    114 
Unsecured   5,166    5,166    -    5,178    39    5,055    76 
Total with no related allowance recorded  $15,300   $15,949   $-   $15,227   $104   $15,038   $198 
                                    
With an allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    -    -    - 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   -    -    -    -    -    -    - 
Unsecured   -    -    -    -    -    -    - 
Total with an allowance recorded  $-   $-   $-   $-   $-   $-   $- 
                                    
Total:                                   
Commercial real estate:                                   
Owner occupied  $287   $289   $-   $184   $-   $92   $- 
Non-owner occupied   1,162    1,162    -    1,163    7    1,168    8 
Residential real estate:                                   
Residential mortgages   -    -    -    -    -    -    - 
Home equity   -    -    -    -    -    -    - 
Commercial and industrial:                                   
Secured   8,685    9,332    -    8,702    58    8,723    114 
Unsecured   5,166    5,166    -    5,178    39    5,055    76 
Total  $15,300   $15,949   $-   $15,227   $104   $15,038   $198 

 

 24 

 

  

   December 31, 2017   Three Months Ended
June 30, 2017
   Six Months Ended
 June 30, 2017
 
(In thousands)  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $2,073   $2,073   $-   $302   $3   $309   $5 
Non-owner occupied   9,089    9,089    -    8,944    101    5,075    198 
Residential real estate:                                   
Residential mortgages   -    -    -    535    -    498    - 
Home equity   100    100    -    260    3    261    3 
Commercial and industrial:                                   
Secured   7,368    8,013    -    1,491    53    1,015    61 
Unsecured   2,154    2,408    -    400    3    396    8 
Total with no related allowance recorded  $20,784   $21,683   $-   $11,932   $163   $7,554   $275 
                                    
With an allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $-   $-   $-   $-   $-   $-   $- 
Non-owner occupied   -    -    <