10-Q 1 t1502524_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended September 30, 2015

  

 

 

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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 17,384,490 shares of common stock outstanding as of November 5, 2015.

 

 
   

  

BRIDGE BANCORP, INC.

 

PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 3
     
  Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 4
     
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 5
     
  Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 6
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 7
     
  Condensed Notes to 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 53
     
Item 1. Legal Proceedings 53
     
Item 1A. Risk Factors 53
     
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 54
     
Signatures   54

 

   

 

Item 1. Financial Statements
BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
(In thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2015   2014 
ASSETS          
Cash and due from banks  $60,916   $45,109 
Interest earning deposits with banks   44,962    6,621 
Total cash and cash equivalents   105,878    51,730 
           
Securities available for sale, at fair value   637,470    587,184 
Securities held to maturity (fair value of $224,287 and $216,289, respectively)   220,233    214,927 
Total securities   857,703    802,111 
           
Securities, restricted   14,969    10,037 
           
Loans held for investment   2,301,317    1,338,327 
Allowance for loan losses   (20,187)   (17,637)
Loans, net   2,281,130    1,320,690 
           
Premises and equipment, net   39,904    32,424 
Accrued interest receivable   9,025    6,425 
Goodwill   95,472    9,450 
Other intangible assets   9,011    842 
Bank owned life insurance   52,939    30,644 
Prepaid pension   5,924    4,927 
Other assets   35,358    19,244 
Total Assets  $3,507,313   $2,288,524 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Demand deposits  $1,045,834   $703,130 
Savings, NOW and money market deposits   1,549,853    989,287 
Certificates of deposit of $100 or more   177,759    83,071 
Other time deposits   132,055    58,291 
Total deposits   2,905,501    1,833,779 
           
Federal funds purchased       75,000 
Federal Home Loan Bank advances   112,842    138,327 
Repurchase agreements   26,158    36,263 
Subordinated debentures, net   78,338     
Junior subordinated debentures, net   15,876    15,873 
Other liabilities and accrued expenses   28,156    14,164 
Total Liabilities   3,166,871    2,113,406 
           
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:          
Authorized: 40,000,000 shares; 17,378,126 and 11,651,398 shares issued, respectively; 17,376,876 and 11,650,405 shares outstanding, respectively   174    117 
Surplus   277,657    118,846 
Retained earnings   68,260    64,547 
Less:  Treasury Stock at cost, 1,250 and 993 shares, respectively   (32)   (25)
    346,059    183,485 
Accumulated other comprehensive loss, net of income tax   (5,617)   (8,367)
Total Stockholders' Equity   340,442    175,118 
Total Liabilities and Stockholders' Equity  $3,507,313   $2,288,524 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 3 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of  Income (unaudited)
(In thousands, except per share amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Interest income:                    
Loans (including fee income)  $27,424   $14,995   $62,385   $42,377 
Mortgage-backed securities, CMOs and other asset-backed securities   2,842    2,687    7,877    7,927 
U.S. GSE securities   358    623    1,144    2,128 
State and municipal obligations   816    613    2,309    2,005 
Corporate bonds   211    195    580    560 
Deposits with banks   9    8    27    23 
Other interest and dividend income   84    98    309    287 
Total interest income   31,744    19,219    74,631    55,307 
                     
Interest expense:                    
Savings, NOW and money market deposits   1,222    808    2,827    2,446 
Certificates of deposit of $100 or more   280    203    687    587 
Other time deposits   234    111    477    327 
Federal funds purchased and repurchase agreements   82    149    320    418 
Federal Home Loan Bank advances   374    245    963    792 
Subordinated debentures   126        126     
Junior subordinated debentures   341    341    1,024    1,024 
Total interest expense   2,659    1,857    6,424    5,594 
                     
Net interest income   29,085    17,362    68,207    49,713 
Provision for loan losses   1,500    500    3,000    1,700 
Net interest income after provision for loan losses   27,585    16,862    65,207    48,013 
                     
Non-interest income:                    
Service charges on deposit accounts   977    765    2,693    2,442 
Fees for other customer services   963    806    2,349    2,081 
Net securities gains (losses)       9    (10)   (1,119)
Title fee income   425    400    1,380    1,183 
Other operating income   1,561    582    2,845    1,069 
Total non-interest income   3,926    2,562    9,257    5,656 
                     
Non-interest expense:                    
Salaries and employee benefits   9,976    6,656    25,056    19,274 
Occupancy and equipment   3,229    1,997    7,689    5,545 
Technology and communications   950    811    2,563    2,294 
Marketing and advertising   870    726    2,293    1,796 
Professional services   611    433    1,697    1,189 
FDIC assessments   472    318    1,091    952 
Acquisition costs and branch restructuring   904        9,283    4,734 
Amortization of other intangible assets   677    96    770    250 
Other operating expenses   1,684    1,057    4,275    3,197 
Total non-interest expense   19,373    12,094    54,717    39,231 
                     
Income before income taxes   12,138    7,330    19,747    14,438 
Income tax expense   4,248    2,459    6,631    4,843 
Net income  $7,890   $4,871   $13,116   $9,595 
Basic earnings per share  $0.45   $0.42   $0.94   $0.83 
Diluted earnings per share  $0.45   $0.42   $0.94   $0.83 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 4 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

   For the   For the 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Net Income  $7,890   $4,871   $13,116   $9,595 
Other comprehensive income:                    
Change in unrealized net gains\losses on securities available for sale, net of   reclassifications and deferred income taxes   2,351    (813)   3,152    6,777 
Adjustment to pension liability, net of reclassifications and deferred income taxes   54    (3)   216    (10)
Unrealized (losses) gains on cash flow hedge, net of deferred income taxes   (394)   242    (618)   (105)
Total other comprehensive income (loss)   2,011    (574)   2,750    6,662 
Comprehensive income  $9,901   $4,297   $15,866   $16,257 

 

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 per share amounts)

 

   Common
Stock
   Surplus   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
(Loss)
   Total 
Balance at January 1, 2015  $117   $118,846   $64,547   $(25)  $(8,367)  $175,118 
Net income             13,116              13,116 
Shares issued under the dividend reinvestment plan ("DRP")        541                   541 
Shares issued in the acquisition of Community National Bank ("CNB"),  net of offering costs (5,647,268 shares)   56    157,143                   157,199 
Stock awards granted and distributed   1    (225)        224          
Stock awards forfeited        82         (82)         
Vesting of stock awards                  (226)        (226)
Exercise of stock options        3         77         80 
Income tax effect of stock plans        49                   49 
Share based compensation expense        1,218                   1,218 
Cash dividend declared, $0.69 per share             (9,403)             (9,403)
Other comprehensive income, net of deferred income taxes                       2,750    2,750 
Balance at September 30, 2015  $174   $277,657   $68,260   $(32)  $(5,617)  $340,442 

 

   Common
Stock
   Surplus   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
(Loss)
   Total 
Balance at January 1, 2014  $113   $111,377   $61,441   $(235)  $(13,236)  $159,460 
Net income             9,595              9,595 
Shares issued under the dividend reinvestment plan ("DRP")        475                   475 
Shares issued in the acquisition of FNBNY Bancorp, net of   offering costs (240,598 shares)   2    5,946                   5,948 
Stock awards granted and distributed   1    (432)        431          
Stock awards forfeited        58         (58)         
Vesting of stock awards                  (147)        (147)
Exercise of stock options        (2)        9         7 
Income tax effect of stock plans        30                   30 
Share based compensation expense        916                   916 
Cash dividend declared, $0.69 per share             (7,971)             (7,971)
Other comprehensive income, net of deferred income taxes                       6,662    6,662 
Balance at September 30, 2014  $116   $118,368   $63,065   $   $(6,574)  $174,975 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 6 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Cash flows from operating activities:          
Net Income  $13,116   $9,595 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
   3,000    1,700 
Depreciation and (accretion) amortization   (3,180)   348 
Net amortization on securities   3,659    2,600 
Increase in cash surrender value of bank owned life insurance   (850)   (374)
Amortization of intangible assets   770    250 
Share based compensation expense   1,218    916 
Net securities losses   10    1,119 
Increase in accrued interest receivable   (2,600)   (819)
Small Business Administration (“SBA”) loans originated for sale   (2,372)    
Proceeds from sale of the guaranteed portion of SBA loans   2,699     
Gain on sale of the guaranteed portion of SBA loans   (270)    
Gain on sale of loans   (477)    
(Increase) decrease in other assets   (6,282)   3,344 
Increase in accrued expenses and other liabilities   7,569    2,893 
Net cash provided by operating activities   16,010    21,572 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (129,482)   (328,512)
Purchases of securities, restricted   (226,956)   (326,562)
Purchases of securities held to maturity   (20,699)   (41,310)
Proceeds from sales of securities available for sale   73,788    350,010 
Redemption of securities, restricted   226,696    325,596 
Maturities, calls and principal payments of securities available for sale   85,618    53,750 
Maturities, calls and principal payments of securities held to maturity   22,173    32,236 
Net increase in loans   (243,722)   (142,613)
Proceeds from loan sale   21,011     
Proceeds from sales of other real estate owned, net       2,242 
Purchase of bank owned life insurance       (20,000)
Purchase of premises and equipment   (3,563)   (3,951)
Net cash acquired in business combination   24,628    2,926 
Net cash used in investing activities   (170,508)   (96,188)
           
Cash flows from financing activities:          
Net increase in deposits   285,383    94,648 
Net decrease in federal funds purchased   (75,000)   (23,000)
Net (decrease) increase in FHLB advances   (60,705)   14,000 
Repayment of acquired unsecured debt       (1,450)
Net (decrease) increase in repurchase agreements   (10,104)   404 
Net proceeds from issuance of subordinated debentures   78,334     
Net proceeds from issuance of common stock   541    475 
Net proceeds from exercise of stock options   80    7 
Repurchase of surrendered stock from vesting of restricted stock awards   (226)   (147)
Excess tax benefit from share based compensation   49    30 
Cash dividends paid   (9,403)   (7,971)
Other, net   (303)   (192)
Net cash provided by financing activities   208,646    76,804 
           
Net increase in cash and cash equivalents   54,148    2,188 
Cash and cash equivalents at beginning of period   51,730    45,573 
Cash and cash equivalents at end of period  $105,878   $47,761 
           
Supplemental Information-Cash Flows:          
Cash paid for:          
Interest  $6,249   $5,508 
Income tax  $4,389   $883 
           
Noncash investing and financing activities:          
Securities which settled in the subsequent period  $   $4,235 
Transfers from portfolio loans to OREO  $   $577 
           
Acquisition of noncash assets and liabilities:          
Fair value of assets acquired  $874,875   $207,326 
Fair value of liabilities assumed  $828,022   $212,747 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 7 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

 

Bridge Bancorp, Inc. (the “Company”) is a bank holding company incorporated under the laws of the State of New York. The Company’s business currently consists of the operations of its wholly-owned subsidiary, The Bridgehampton National Bank (the “Bank”). The Bank’s operations include its real estate investment trust subsidiary, Bridgehampton Community, Inc. (“BCI”), a financial title insurance subsidiary, Bridge Abstract LLC (“Bridge Abstract”), and Bridge Financial Services, Inc. (“Bridge Financial Services”), an investment services subsidiary. In addition to the Bank, the Company has another subsidiary, Bridge Statutory Capital Trust II which was formed in 2009. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements.

 

The accompanying Unaudited Consolidated Financial Statements, which include the accounts of the Company and its wholly-owned subsidiary, the Bank, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Unaudited Consolidated Financial Statements included herein reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In preparing the interim financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reported periods. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified. Actual future results could differ significantly from those estimates. The annualized results of operations for the three and nine months ended September 30, 2015 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, 2014.

 

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.

 

The computation of EPS for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

   Three Months Ended,   Nine Months Ended, 
   September 30,   September 30, 
(In thousands, except per share data)  2015   2014   2015   2014 
Net Income  $7,890   $4,871   $13,116   $9,595 
Less: Dividends paid on and earnings allocated to participating securities   (149)   (119)   (295)   (218)
Income attributable to common stock  $7,741   $4,752   $12,821   $9,377 
                     
Weighted average common shares outstanding, including participating securities   17,426    11,674    13,901    11,616 
Less: weighted average participating securities   (330)   (284)   (315)   (276)
Weighted average common shares outstanding   17,096    11,390    13,586    11,340 
Basic earnings per common share  $0.45   $0.42   $0.94   $0.83 
                     
Income attributable to common stock  $7,741   $4,752   $12,821   $9,377 
                     
Weighted average common shares outstanding   17,096    11,390    13,586    11,340 
Weighted average common equivalent shares outstanding   6        4     
Weighted average common and equivalent shares outstanding   17,102    11,390    13,590    11,340 
Diluted earnings per common share  $0.45   $0.42   $0.94   $0.83 

 

 8 

  

There were 41,100 options outstanding at September 30, 2014 that were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of common stock and were, therefore, antidilutive. There were no stock options that were antidilutive at September 30, 2015. The $16.0 million in convertible trust preferred securities outstanding at September 30, 2015 and September 30, 2014 were not included in the computation of diluted earnings per share because the assumed conversion of the trust preferred securities was antidilutive.

 

3. STOCK BASED COMPENSATION PLANS

 

The Compensation Committee of the Board of Directors determines stock options and restricted stock awarded under the Bridge Bancorp, Inc. Equity Incentive Plan (“Plan”) and the Company accounts for this Plan under the FASB ASC No. 718 and 505. On May 4, 2012, the stockholders of the Company approved the Company’s 2012 Stock-Based Incentive Plan which supersedes the Bridge Bancorp, Inc. Equity Incentive Plan that was approved in 2006 (the “2006 Plan”). The plan provides for the grant of stock-based and other incentive awards to officers, employees and directors of the Company.

 

No new grants of stock options were awarded and no compensation expense was attributable to stock options for the nine months ended September 30, 2015 and September 30, 2014 because all stock options were vested.

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the exercise or reporting date. The intrinsic value of options exercised during the nine months ended September 30, 2015 and September 30, 2014, was $6,000 and $1,000, respectively. The intrinsic value of options outstanding and exercisable at September 30, 2015 and September 30, 2014 was $48,000 and $0, respectively.

 

A summary of the status of the Company’s stock options as of and for the nine months ended September 30, 2015 is as follows:

 

       Weighted Average   Weighted Average  Aggregate 
   Number of   Exercise   Remaining  Intrinsic 
(Dollars in thousands, except per share amounts)  Options   Price   Contractual Life  Value 
Outstanding, January 1, 2015   39,870   $25.63         
Granted                
Exercised   (4,777)   26.07         
Forfeited                
Expired   (2,131)  $30.60         
Outstanding, September 30, 2015   32,962   $25.25   1.161 years  $48 
Vested and Exercisable, September 30, 2015   32,962   $25.25   1.161 years  $48 

 

   Number of   Exercise 
Range of Exercise Prices  Options   Price 
   32,962   $25.25 
    32,962      

 

During the nine months ended September 30, 2015, restricted stock awards of 66,987 shares were granted. Of the 66,987 shares granted, 30,625 shares vest over seven years with a third vesting after years five, six and seven, 24,812 shares vest over five years with a third vesting after years three, four and five, 10,550 shares vest ratably over five years and the remaining 1,000 shares vest ratably over approximately two years. During the nine months ended September 30, 2014, restricted stock awards of 80,073 shares were granted. Of the 80,073 shares granted, 53,425 shares vest over seven years with a third vesting after years five, six and seven, 20,398 shares vest over five years with a third vesting after years three, four and five and the remaining 6,250 shares vest ratably over approximately two years. Compensation expense attributable to restricted stock awards was $328,000 and $932,000 for the three and nine months ended September 30, 2015, respectively, and $289,000 and $803,000 for the three and nine months ended September 30, 2014, respectively.

 

 9 

 

A summary of the status of the Company’s unvested restricted stock as of and for the nine months ended September 30, 2015 is as follows:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 1, 2015   248,444   $22.48 
Granted   66,987   $26.05 
Vested   (33,419)  $21.81 
Forfeited   (3,269)  $26.18 
Unvested, September 30, 2015   278,743   $23.37 

 

Effective for 2015, the Board revised the design of the Long Term Incentive Plan (“LTI Plan”) for Named Executive Officers (“NEOs”) to include performance based awards. The LTI Plan includes 60% performance vested awards based on 3-year relative Total Shareholder Return (“TSR”) to the proxy peer group and 40% time vested awards. The awards are in the form of restricted stock units and cliff vest after five years and require an additional two year holding period before the restricted stock units are delivered in shares of common stock. The Company recorded expenses of approximately $23,000 and $59,000 for the three and nine months ended September 30, 2015, respectively.

 

In April 2009, the Company adopted a Directors Deferred Compensation Plan. Under the Plan, independent directors may elect to defer all or a portion of their annual retainer fee in the form of restricted stock units. In addition, Directors receive a non-election retainer in the form of restricted stock units. These restricted stock units vest ratably over one year and have dividend rights but no voting rights. In connection with this Plan, the Company recorded expenses of approximately $115,000 and $227,000 for the three and nine months ended September 30, 2015, respectively, and $34,000 and $113,000 for the three and nine months ended September 30, 2014, respectively.

 

4. SECURITIES

 

The following table summarizes the amortized cost and fair value of the available for sale and held to maturity investment securities portfolio at September 30, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses therein:

 

   September 30, 2015 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $67,868   $145   $(71)  $67,942 
State and municipal obligations   86,351    775    (29)   87,097 
U.S. GSE residential mortgage-backed securities   154,546    1,093    (123)   155,516 
U.S. GSE residential collateralized mortgage obligations   235,025    1,456    (1,485)   234,996 
U.S. GSE commercial mortgage-backed securities   12,551    179    (24)   12,706 
U.S. GSE commercial collateralized mortgage obligations   29,185    124    (72)   29,237 
Other asset backed securities   24,247        (1,937)   22,310 
Corporate bonds   27,958    4    (296)   27,666 
Total available for sale   637,731    3,776    (4,037)   637,470 
                     
Held to maturity:                    
U.S. GSE securities   11,306    202        11,508 
State and municipal obligations   64,220    2,085    (56)   66,249 
U.S. GSE residential mortgage-backed securities   7,932    5    (45)   7,892 
U.S. GSE residential collateralized mortgage obligations   63,163    1,066    (157)   64,072 
U.S. GSE commercial mortgage-backed securities   23,151    468    (119)   23,500 
U.S. GSE commercial collateralized mortgage obligations   33,466    668    (119)   34,015 
Corporate Bonds   16,995    61    (5)   17,051 
Total held to maturity   220,233    4,555    (501)   224,287 
Total securities  $857,964   $8,331   $(4,538)  $861,757 

 

 10 

  

   December 31, 2014 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $97,560   $4   $(2,139)  $95,425 
State and municipal obligations   63,583    318    (208)   63,693 
U.S. GSE residential mortgage-backed securities   100,931    534    (40)   101,425 
U.S. GSE residential collateralized mortgage obligations   261,256    310    (2,967)   258,599 
U.S. GSE commercial mortgage-backed securities   3,016        (71)   2,945 
U.S. GSE commercial collateralized mortgage obligations   24,179    44    (141)   24,082 
Other asset backed securities   24,190        (1,153)   23,037 
Corporate Bonds   17,952    161    (135)   17,978 
Total available for sale   592,667    1,371    (6,854)   587,184 
                     
Held to maturity:                    
U.S. GSE securities   11,283    135    (41)   11,377 
State and municipal obligations   64,864    1,658    (98)   66,424 
U.S. GSE residential mortgage-backed securities   6,667        (97)   6,570 
U.S. GSE residential collateralized mortgage obligations   59,539    507    (862)   59,184 
U.S. GSE commercial mortgage-backed securities   13,213    233    (26)   13,420 
U.S. GSE commercial collateralized mortgage obligations   36,413    267    (431)   36,249 
Corporate bonds   22,948    139    (22)   23,065 
Total held to maturity   214,927    2,939    (1,577)   216,289 
Total securities  $807,594   $4,310   $(8,431)  $803,473 

 

The following table summarizes the amortized cost, fair value and maturities of the available for sale and held to maturity investment securities portfolio at September 30, 2015. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   September 30, 2015 
   Amortized   Fair 
(In thousands)  Cost   Value 
Maturity          
Available for sale:          
Within one year  $8,452   $8,478 
One to five years   83,370    83,682 
Five to ten years   109,855    110,129 
Beyond ten years   436,054    435,181 
Total  $637,731   $637,470 
           
Held to maturity:          
Within one year  $10,761   $10,778 
One to five years   33,660    34,043 
Five to ten years   62,417    64,486 
Beyond ten years   113,395    114,980 
Total  $220,233   $224,287 

 

 11 

  

Securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

   Less than 12 months   Greater than 12 months 
September 30, 2015      Unrealized       Unrealized 
(In thousands)  Fair Value   losses   Fair Value   losses 
Available for sale:                    
U.S. GSE securities  $   $   $25,172   $71 
State and municipal obligations   4,799    13    5,391    16 
U.S. GSE residential mortgage-backed securities   32,991    89    1,530    34 
U.S. GSE residential collateralized mortgage obligations   40,727    158    71,468    1,327 
U.S. GSE commercial mortgage-backed securities   2,741    24         
U.S. GSE commercial collateralized mortgage obligations   1,965    24    10,184    48 
Other asset backed securities   22,310    1,937         
Corporate bonds   19,854    146    4,850    150 
Total available for sale   125,387    2,391    118,595    1,646 
                     
Held to maturity:                    
U.S. GSE securities                
State and municipal obligations   7,580    56         
U.S. GSE residential mortgage-backed securities   5,699    45         
U.S. GSE residential collateralized mortgage obligations   2,715    16    16,127    141 
U.S. GSE commercial mortgage-backed securities   4,992    119         
U.S. GSE commercial collateralized mortgage obligations           3,870    119 
Corporate bonds           2,994    5 
Total held to maturity  $20,986   $236   $22,991   $265 

 

   Less than 12 months   Greater than 12 months 
December 31, 2014      Unrealized       Unrealized 
(In thousands)  Fair Value   losses   Fair Value   losses 
Available for sale:                    
U.S. GSE securities  $4,991   $8   $90,233   $2,131 
State and municipal obligations   12,330    79    14,592    129 
U.S. GSE residential mortgage-backed securities           1,554    40 
U.S. GSE residential collateralized mortgage obligations   60,126    349    122,179    2,618 
U.S. GSE commercial mortgage-backed securities           2,944    71 
U.S. GSE commercial collateralized mortgage obligations   13,830    108    4,636    33 
Other asset backed securities   23,038    1,153         
Corporate bonds   9,865    135         
Total available for sale   124,180    1,832    236,138    5,022 
                     
Held to maturity:                    
U.S. GSE securities           7,414    41 
State and municipal obligations   11,343    97    202    1 
U.S. GSE residential mortgage-backed securities           6,569    97 
U.S. GSE residential collateralized mortgage obligations   10,422    46    30,413    816 
U.S. GSE commercial mortgage-backed securities           4,188    26 
U.S. GSE commercial collateralized mortgage obligations   14,392    73    8,611    358 
Corporate bonds   3,978    22         
Total held to maturity  $40,135   $238   $57,397   $1,339 

 

 12 

  

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, 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 the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

At September 30, 2015, the majority of unrealized losses on both the available for sale and held to maturity securities are related to the Company’s U.S. GSE residential collateralized mortgage obligations and other asset backed securities. The decrease in fair value of these securities is attributable to changes in interest rates and not credit quality. The Company does not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery. Therefore, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

 

There were no proceeds from sales of securities with no gross gains or gross losses realized for the three months ended September 30, 2015. There were $73.8 million of proceeds from sales of securities with gross gains of approximately $0.5 million and gross losses of approximately $0.5 million realized for the nine months ended September 30, 2015. There were $115.3 million of proceeds from sales of securities with gross gains of approximately $0.5 million and gross losses of approximately $0.5 million realized for the three months ended September 30, 2014. There were $348.8 million of proceeds from sales of securities with gross gains of approximately $1.6 million and gross losses of approximately $2.4 million realized for the nine months ended September 30, 2014. Proceeds from calls of securities were $0.4 million and $0.3 million for the three months ended September 30, 2015 and 2014, respectively. Proceeds from calls of securities were $10.9 million and $2.8 million for the nine months ended September 30, 2015 and 2014, respectively

 

Securities having a fair value of approximately $488.2 million and $451.1 million at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and Federal Home Loan Bank and Federal Reserve Bank overnight borrowings. The Bank did not hold any trading securities during the nine months ended September 30, 2015 or the year ended December 31, 2014.

 

The Bank is a member of the Federal Home Loan Bank of New York (“FHLB”). 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 Federal Reserve Bank (“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 approximately $15.0 million and $10.0 million in FHLB, ACBB and FRB stock at September 30, 2015 and December 31, 2014. These amounts were reported as restricted securities in the consolidated balance sheets.

 

5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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.

 

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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.

 

Assets and liabilities measured on a recurring basis:

 

       Fair Value Measurements at 
       September 30, 2015 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  $67,942       $67,942     
State and municipal obligations   87,097         87,097      
U.S. GSE residential mortgage-backed securities   155,516         155,516      
U.S. GSE residential collateralized mortgage obligations   234,996         234,996      
U.S. GSE commercial mortgage-backed securities   12,706         12,706      
U.S. GSE commercial collateralized mortgage obligations   29,237         29,237      
Other asset backed securities   22,310         22,310      
Corporate bonds   27,666         27,666      
Total available for sale  $637,470        $637,470      
                     
Financial Liabilities:                    
Derivatives  $(1,993)       $(1,993)     

 

       Fair Value Measurements at 
       December 31, 2014 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  $95,425        $95,425      
State and municipal obligations   63,693         63,693      
U.S. GSE residential mortgage-backed securities   101,425         101,425      
U.S. GSE residential collateralized mortgage obligations   258,599         258,599      
U.S. GSE commercial mortgage-backed securities   2,945         2,945      
U.S. GSE commercial collateralized mortgage obligations   24,082         24,082      
Other asset backed securities   23,037         23,037      
Corporate bonds   17,978         17,978      
Total available for sale  $587,184        $587,184      
                     
Financial Liabilities:                    
Derivatives  $(943)       $(943)     

 

 14 

  

Assets measured at fair value on a non-recurring basis are summarized below:

 

       Fair Value Measurements at 
       September 30, 2015 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  $508           $508 

 

       Fair Value Measurements at 
       December 31, 2014 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  $558           $558 

 

Impaired loans with allocated allowance for loan losses at September 30, 2015, had a carrying amount of $0.5 million, which is made up of the outstanding balance of $0.5 million, net of a valuation allowance of $0.02 million. No additional provision for loan losses was necessary for the nine months ended September 30, 2015. Impaired loans with allocated allowance for loan losses at December 31, 2014, had a carrying amount of $0.5 million, which is made up of the outstanding balance of $0.7 million, net of a valuation allowance of $0.2 million. This resulted in an additional provision for loan losses of $0.2 million at December 31, 2014.

 

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

 

Cash and Due from Banks and Federal Funds Sold: Carrying amounts approximate fair value, since these instruments are either payable on demand or have short-term maturities. Cash on hand and non-interest due from bank accounts are Level 1 and interest bearing Cash Due from Banks and Federal Funds Sold are Level 2.

 

Securities Available for Sale and Held to Maturity: The estimated fair values are based on independent dealer quotations on nationally recognized securities exchanges, if available (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 (Level 2).

 

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

 

Derivatives: Represents interest rate swaps and the estimated fair values are based on valuation models using observable market data as of measurement date (Level 2).

 

Loans: The estimated fair values of real estate mortgage loans and other loans receivable are based on discounted cash flow calculations that use available market benchmarks when establishing discount factors for the types of loans resulting in a Level 3 classification. Exceptions may be made for adjustable rate loans (with resets of one year or less), which would be discounted straight to their rate index plus or minus an appropriate spread. All nonaccrual loans are carried at their current fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10.

 

Impaired Loans: 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 upon recent appraised values. The fair value of other real estate owned is also evaluated in accordance with current accounting guidance and determined based upon recent appraised values. 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

 

 15 

  

sales. All appraisals undergo a second review process to insure that the methodology employed and the values derived are accurate. 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 on a quarterly basis for additional impairment and adjusted accordingly.

 

Appraisals for collateral-dependent impaired loans are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, the Credit Administration 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 selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value 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 value of certificates of deposits are based on discounted cash flow calculations that use a replacement cost of funds approach to establishing discount rates for certificates of deposits maturities resulting in a Level 2 classification. Stated value is fair value for all other deposits resulting in a Level 1 classification.

 

Borrowed Funds: The estimated fair value of borrowed funds 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 2 classification.

 

Subordinated Debentures: The estimated fair value is derived using discounted cash flow methodology based on a spread to the London Interbank Offered Rate (“LIBOR”) curve at the time of issuance and assuming the debt was issued at PAR resulting in a Level 3 classification.

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

 

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 or 2 classification.

 

Off-Balance-Sheet Liabilities: The fair value of off-balance-sheet commitments to extend credit is estimated using fees currently charged to enter into similar agreements. The fair value is immaterial as of September 30, 2015 and December 31, 2014.

 

Fair value estimates are made at specific points in time and are based on existing on-and off-balance sheet financial instruments. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

 

 16 

  

The estimated fair values and recorded carrying amounts of the Bank’s financial instruments at September 30, 2015 and December 31, 2014 are as follows:

 

       Fair Value Measurements at     
       September 30, 2015 Using:     
           Significant         
       Quoted Prices In   Other   Significant     
       Active Markets for   Observable   Unobservable     
   Carrying   Identical Assets   Inputs   Inputs     
(In thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets:                         
Cash and due from banks  $60,919   $60,919   $   $   $60,919 
Interest bearing deposits with banks   44,962        44,962        44,962 
Securities available for sale   637,470        637,470        637,470 
Securities restricted   14,969     n/a      n/a      n/a      n/a  
Securities held to maturity   220,223        224,287        224,287 
Loans, net   2,281,130            2,289,612    2,289,612 
Accrued interest receivable   9,025        3,106    5,919    9,025 
                          
Financial liabilities:                         
Certificates of deposit   309,814         311,588        311,588 
Demand and other deposits   2,595,687    2,595,687            2,595,687 
Federal Home Loan Bank term advances   112,842         115,084        115,084 
Repurchase agreements   26,573        26,941        26,941 
Subordinated Debentures   78,338            80,065    80,065 
Junior Subordinated Debentures   15,876            16,977    16,977 
Derivatives   1,993        1,993        1,993 
Accrued interest payable   483    93    390        483 

 

       Fair Value Measurements at     
       December 31, 2014 Using:     
           Significant         
       Quoted Prices In   Other   Significant     
       Active Markets for   Observable   Unobservable     
   Carrying   Identical Assets   Inputs   Inputs     
(In thousands)  Amount   (Level 1)   (Level 2)   (Level 3)   Total 
Financial assets:                         
Cash and due from banks  $45,109   $45,109   $   $   $45,109 
Interest bearing deposits with banks   6,621        6,621        6,621 
Securities available for sale   587,184        587,184        587,184 
Securities restricted   10,037     n/a      n/a      n/a      n/a  
Securities held to maturity   214,927        216,289        216,289 
Loans, net   1,320,690            1,317,625    1,317,625 
Accrued interest receivable   6,425        2,721    3,704    6,425 
                          
Financial liabilities:                         
Certificates of deposit   141,362         142,264        142,264 
Demand and other deposits   1,692,417    1,692,417            1,692,417 
Federal funds purchased   75,000    75,000            75,000 
Federal Home Loan Bank term advances   138,327    98,070    40,165        138,235 
Repurchase agreements   36,263        36,991        36,991 
Junior Subordinated Debentures   16,002            16,528    16,528 
Derivatives   943        943        943 
Accrued interest payable   308    77    231        308 

 

 17 

 

6. LOANS

 

The following table sets forth the major classifications of loans:

 

   September 30, 2015   December 31, 2014 
(In thousands)        
Commercial real estate mortgage loans  $1,029,729   $595,397 
Multi-family mortgage loans   298,910    218,985 
Residential real estate mortgage loans   384,452    156,156 
Commercial, financial, and agricultural loans   473,814    291,743 
Real estate-construction and land loans   93,667    63,556 
Installment/consumer loans   17,667    10,124 
Total loans   2,298,239    1,335,961 
Net deferred loan costs and fees   3,078    2,366 
    2,301,317    1,338,327 
Allowance for loan losses   (20,187)   (17,637)
Net loans  $2,281,130   $1,320,690 

 

On June 19, 2015, the Company completed the acquisition of Community National Bank (“CNB”) resulting in the addition of $735.6 million of acquired loans recorded at their fair value. There were approximately $706.2 million of acquired CNB loans remaining as of September 30, 2015

 

On February 14, 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 $38.0 million of acquired FNBNY loans remaining as of September 30, 2015.

 

Lending Risk

 

The principal business of the Bank is lending, primarily in commercial real estate mortgage loans, multi-family mortgage loans, residential real estate mortgage loans, construction loans, home equity loans, commercial and industrial loans, land loans and consumer loans. The Bank considers its primary lending area to be Nassau and Suffolk Counties located on Long Island and a substantial portion of the Bank’s loans are secured by real estate in this area. Accordingly, the ultimate collectibility of such a loan portfolio is susceptible to changes in market and economic conditions in this region.

 

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 generally located largely in our 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 $0.25 million 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 5 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 maybe 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 made to and 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.

 

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Commercial, Industrial and Agricultural Loans

 

Loans in this classification are made to businesses. 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 can 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. Credit risk is affected by construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by us.

 

Installment and Consumer Loans

 

Loans in this classification may be either secured or unsecured and 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 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:

 

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 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 at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

 

 19 

  

The following table represents loans by class categorized by internally assigned risk grades as of September 30, 2015 and December 31, 2014:

 

   Grades: 
September 30, 2015  Pass   Special Mention   Substandard   Doubtful   Total 
(In thousands)                         
Commercial real estate:                         
Owner occupied  $461,748   $3,266   $3,861   $   $468,875 
Non-owner occupied   557,212    560    3,082        560,854 
Multi-Family   298,899    3    8        298,910 
Residential real estate:                         
Residential mortgage   316,175        852        317,027 
Home equity   66,090    366    969        67,425 
Commercial:                          
Secured   121,330    161    2,125        123,616 
Unsecured   343,822    3,426    2,950        350,198 
Real estate construction and land loans   93,667                93,667 
Installment/consumer loans   17,567        100        17,667 
Total loans  $2,276,510   $7,782   $13,947   $   $2,298,239 

 

   Grades: 
December 31, 2014  Pass   Special Mention   Substandard   Doubtful   Total 
(In thousands)                         
Commercial real estate:                         
Owner occupied  $243,512   $7,133   $5,963   $   $256,608 
Non-owner occupied   334,790    171    3,828        338,789 
Multi-Family   217,855    202    928        218,985 
Residential real estate:                         
Residential mortgage   88,405        1,613         90,018 
Home equity   64,994    212    932         66,138 
Commercial:                         
Secured   91,007    621    2,339        93,967 
Unsecured   191,942    4,168    1,666        197,776 
Real estate construction and land loans   63,190        366        63,556 
Installment/consumer loans   9,921    100    103        10,124 
Total loans  $1,305,616   $12,607   $17,738   $   $1,335,961 

 

 20 

  

Past Due and Nonaccrual Loans

 

The following table represents the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans, as defined by ASC 310-10:

 

September 30, 2015  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 
(In thousands)                                   
Commercial real estate:                                   
Owner occupied  $168   $   $1,450   $546   $2,164   $466,711    468,875 
Non-owner occupied   102                102    560,752    560,854 
Multi-Family                       298,910    298,910 
Residential real estate:                                   
Residential mortgages   1,607    87        64    1,758    315,269    317,027 
Home equity   98    41    158    719    1,016    66,409    67,425 
Commercial and Industrial:                                   
Secured       300    176        476    123,140    123,616 
Unsecured   15    219    2,338    69    2,641    347,557    350,198 
Real estate construction and land loans                       93,667    93,667 
Installment/consumer loans   10                10    17,657    17,667 
Total loans  $2,000   $647   $4,122   $1,398   $8,167   $2,290,072   $2,298,239 

 

December 31, 2014  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 
(In thousands)                                   
Commercial real estate:                                   
Owner occupied  $   $184   $   $595   $779   $255,829    256,608 
Non-owner occupied   181        10    10    201    338,588    338,789 
Multi-Family                       218,985    218,985 
Residential real estate:                                   
Residential mortgages               143    143    89,875    90,018 
Home equity   919        134    374    1,427    64,711    66,138 
Commercial and Industrial:                                   
Secured                       93,967    93,967 
Unsecured   25            222    247    197,529    197,776 
Real estate construction and land loans                       63,556    63,556 
Installment/consumer loans   1            3    4    10,120    10,124 
Total loans  $1,126   $184   $144   $1,347   $2,801   $1,333,160   $1,335,961 

 

At September 30, 2015, there were $1.6 million of CNB acquired loans 30-59 days past due and $0.5 million 60-89 days past due. There were no FNBNY loans 30-59 days or 60-89 days past due at September 30, 2015 and December 31, 2014. Loans 90 days or more past due that are still accruing interest primarily represent PCI loans acquired from CNB and FNBNY which were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and expect 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.

 

 21 

  

Impaired Loans

 

As of September 30, 2015 and December 31, 2014, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $3.1 million and $6.2 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 troubled debt restructured (“TDR”) loans. 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 upon 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. These methods of fair value measurement for impaired loans are considered level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

 

For individually impaired loans, the following tables set forth by class of loans at September 30, 2015 and December 31, 2014 the recorded investment, unpaid principal balance and related allowance.  The tables also set forth the average recorded investment of individually impaired loans and interest income recognized while the loans were impaired during the nine months and three months ended September 30, 2015 and 2014:

 

   September 30, 2015   Nine Months Ended
September 30, 2015
   Three Months Ended
September 30, 2015
 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
(In thousands)                                   
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $694   $1,186   $   $720   $8   $702   $3 
Non-owner occupied   934    934        942    46    936    15 
Residential real estate:                                   
Residential mortgages   64    74        67        65     
Home equity   732    951        636        734     
Commercial:                                   
Secured   110    110        91    4    111    2 
Total with no related allowance recorded   2,534    3,255        2,456    58    2,548    20 
                                    
With an allowance recorded:                                   
Commercial real estate - Non-owner occupied   319    319    21    321    11    319    4 
Commercial Unsecured   212    212    2    231    13    211    4 
Total with an allowance recorded:   531    531    23    552    24    530    8 
                                    
Total:                                   
Commercial real estate:                                   
Owner occupied   694    1,186        720    8    702    3 
Non-owner occupied   1,253    1,253    21    1,263    57    1,255    19 
Residential real estate:                                   
Residential mortgages   64    74        67        65     
Home equity   732    951        636        734     
Commercial:                                   
Secured   110    110        91    4    111    2 
Unsecured   212    212    2    231    13    211    4 
Total  $3,065   $3,786   $23   $3,008   $82   $3,078   $28 

 

 22 

  

   December 31, 2014   Nine Months Ended
September 30, 2014
   Three Months Ended
September 30, 2014
 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest 
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 
(In thousands)                            
With no related allowance recorded:                                   
Commercial real estate:                                   
Owner occupied  $3,562   $3,707   $   $4,010   $85   $3,909   $28 
Non-owner occupied   1,251    1,568        964    48    959    16 
Residential real estate:                                   
Residential mortgages   143    231        834        815     
Home equity   169    377        691        651     
Commercial:                                   
Secured   345    345        356    19    351    6 
Unsecured               177    9    196    3 
Total with no related allowance recorded   5,470    6,228       $7,032   $161   $6,881   $53 
                                    
With an allowance recorded:                                   
Commercial real estate - Non-owner occupied   323    323    23                 
Residential real estate - Residential mortgage                            
Residential real estate - Home equity   72    89    72    76        74     
Commercial-Unsecured   337    339    79                 
Total with an allowance recorded:   732    751    174    76        74     
                                    
Total:                                   
Commercial real estate:                                   
Owner occupied   3,562    3,707        4,010    85    3,909    28 
Non-owner occupied   1,574    1,891    23    964    48    959    16 
Residential real estate:                                   
Residential mortgages   143    231        834        815     
Home equity   241    466    72    767        725     
Commercial:                                   
Secured   345    345        356    19    351    6 
Unsecured   337    339    79    177    9    196    3 
Total  $6,202   $6,979   $174   $7,108   $161   $6,955   $53 

 

The Bank had no other real estate owned at September 30, 2015 and December 31, 2014, respectively.

 

Troubled Debt Restructurings

 

The terms of certain loans were modified and are considered TDRs. The modification of the terms of such loans included 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 a loan 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. This evaluation is performed under the Company’s internal underwriting policy.

 

During the nine months ended September 30, 2015, the Bank modified two commercial loans as TDRs with pre and post modification balances totaling $0.1 million. During the nine months ended September 30, 2014 there were no loans modified as TDRs. There were no loans modified as TDRs during the three months ended September 30, 2015 or September 30, 2014.

 

There were no charge offs relating to TDRs during the nine months ended September 30, 2015 or September 30, 2014. There were no loans modified as TDRs for which there was a payment default within twelve months following the modification for the nine months

 

 23 

  

ended September 30, 2015 and September 30, 2014, respectively. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

 

As of September 30, 2015 and December 31, 2014, the Company had $0.4 million and $0.5 million, respectively of nonaccrual TDR loans and $1.7 million and $5.0 million, respectively of performing TDRs. At September 30, 2015 and December 31, 2014, total nonaccrual TDR loans are secured with collateral that has an appraised value of $1.0 million and $2.3 million, respectively. Furthermore, the Bank has no commitment to lend additional funds to these debtors.

 

The terms of certain other loans were modified during the quarter ended September 30, 2015 that did not meet the definition of a TDR. These loans have a total recorded investment as of September 30, 2015 of $1.8 million. The modification of these loans involved a modification of the terms of loans to borrowers who were not experiencing financial difficulties.

 

Acquired Loans

 

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

 

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

 

1.The loans were acquired in a business combination;
2.The acquisition of the loans will result in recognition of a discount attributable, at least in part, to credit quality; and
3.The loans are not subsequently accounted for at fair value

 

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

 

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

 

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

 

At the acquisition date, the purchased credit impaired 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 ($11.9 million) represented the non-accretable difference. The difference between the expected cash flows and fair value ($6.6) million represented the initial accretable yield. At September 30, 2015, the contractually required principal and interest payments receivable of the purchased credit impaired loans was $17.4 million with a remaining non-accretable difference of $1.7 million.

 

At the acquisition date, the purchased credit impaired loans acquired as part of the CNB acquisition had contractually required principal and interest payments receivable of $8.2 million; expected cash flows of $3.0 million; and a fair value (initial carrying amount) of $2.7 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows ($5.2 million)

 

 24 

  

represented the non-accretable difference. The difference between the expected cash flows and fair value ($0.3) million represented the initial accretable yield. At September 30, 2015, the contractually required principal and interest payments receivable of the purchased credit impaired loans was $8.2 million with a remaining non-accretable difference of $5.2 million. Considering the closing date of the transaction, the amounts presented are preliminary and subject to adjustment as fair value assessments are finalized. Refer to Note 14. “Business Combinations,” for details related to the CNB acquisition.

 

The following table summarizes the activity in the accretable yield for the purchased credit impaired loans:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
(In thousands)                
Balance at beginning of period  $7,530   $7,614   $8,432   $ 
Accretable discount arising from acquisition of PCI loans           259    6,458 
Accretion   (658)   (437)   (3,316)   (1,213)
Reclassification from (to) nonaccretable difference during the period   654    (1,120)   2,151    812 
Accretable discount at end of period  $7,526   $6,057   $7,526   $6,057 

 

7. ALLOWANCE FOR LOAN LOSSES

 

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

 

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 Accounting Standard Codification (“ASC”) No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectibility in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to our policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectibility of a loan is not reasonably assured. These assumptions and judgments 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 our 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, multi-family mortgage loans, home equity loans, residential real estate mortgages, commercial and industrial loans, real estate construction and land loans and consumer loans. The determination of the adequacy of the valuation allowance is a process that takes into consideration a variety of factors. The Bank has developed a range of valuation allowances necessary to adequately provide for probable incurred losses inherent in each pool of loans. We consider our own charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, we evaluate and consider the 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, we evaluate and consider the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

 25 

  

For purchased credit impaired 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 purchased credit impaired 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 and 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 purchased credit impaired loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

 

The Credit Risk Management Committee is comprised of Bank management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the Credit Risk Management Committee, based on its risk assessment of the entire portfolio. Each quarter, members of the Credit Risk Management Committee meet with the Credit Risk Committee of the Board to review credit risk trends and the adequacy of the allowance for loan losses. Based on the Credit Risk Management Committee’s review of the classified loans and the overall allowance levels as they relate to the loan portfolio at September 30, 2015, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

 

The following table represents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, as defined under ASC 310-10, and based on impairment method as of September 30, 2015 and December 31, 2014. Additionally, the following tables represent the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2015 and 2014, and the year ended December 31, 2014, by portfolio segment, as defined under ASC 310-10. The loan segment represents the categories that the Bank develops to determine its allowance for loan losses.

 

 

   For the Three Months Ended September 30, 2015 
(In thousands)  Commercial
Real Estate
Mortgage
Loans
   Multi-
Family
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Financial and
Agricultural
Loans
   Real Estate
Construction
and Land
Loans
   Installment/
Consumer
Loans
   Total 
Allowance for Loan Losses:                                   
Beginning balance  $7,166   $3,015   $1,989   $5,273   $1,236   $139   $18,818 
Charge-offs           (149)               (149)
Recoveries               17        1    18 
Provision   477    83    164    606    125    45    1,500 
Ending Balance  $7,643   $3,098   $2,004   $5,896   $1,361   $185   $20,187 

 

 26 

  

   For the Nine Months Ended September 30, 2015 
   Commercial
Real Estate
Mortgage
Loans
   Multi-
Family
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Financial and
Agricultural
Loans
   Real Estate
Construction
and Land
Loans
   Installment/
Consumer
Loans
   Total 
(In thousands)                            
Allowance for Loan Losses:                                   
Beginning balance  $6,994   $2,670   $2,208   $4,526   $1,104   $135   $17,637 
Charge-offs           (149)   (530)       (2)   (681)
Recoveries           78    147        6    231 
Provision   649    428    (133)   1,753    257    46    3,000 
Ending Balance  $7,643   $3,098   $2,004   $5,896   $1,361   $185   $20,187 
                                    
Ending balance: individually evaluated for impairment  $21   $   $   $2   $   $   $23 
                                    
Ending balance: collectively evaluated for impairment  $7,622   $3,098   $2,004   $5,894   $1,361   $185   $20,164 
                                    
Ending balance: loan acquired with deteriorated credit quality  $   $   $   $   $   $   $ 
                                    
Loans  $1,029,729   $298,910   $384,452   $473,814   $93,667   $17,667   $2,298,239 
                                    
Ending balance: individually evaluated for impairment  $1,947   $   $796   $322   $   $   $3,065 
                                    
Ending balance: collectively evaluated for impairment  $1,023,395   $298,910   $382,422   $467,227   $93,667   $17,667   $2,283,288 
                                    
Ending balance: loans acquired with deteriorated credit quality(1)  $4,387   $   $1,234   $6,265   $   $   $11,886 

 

(1) Includes loans acquired on June 19, 2015 from CNB, on February 14, 2014 from FNBNY and on May 27, 2011 from HSB.

 

 27 

  

   Year Ended December 31, 2014 
   Commercial
Real Estate
Mortgage
Loans
   Multi-
Family
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Financial and
Agricultural
Loans
   Real Estate
Construction
and Land
Loans
   Installment/
Consumer
Loans
   Total 
(In thousands)                            
Allowance for Loan Losses:                                   
Beginning balance  $6,279   $1,597   $2,712   $4,006   $1,206   $201   $16,001 
Charge-offs   (461)       (257)   (104)       (2)   (824)
Recoveries           170    87        3    260 
Provision   1,176    1,073    (417)   537    (102)   (67)   2,200 
Ending Balance  $6,994   $2,670   $2,208   $4,526   $1,104   $135   $17,637 
                                    
Ending balance: individually evaluated for impairment  $23   $   $72   $79   $   $   $174 
                                    
Ending balance: collectively evaluated for impairment  $6,971   $2,670   $2,136   $4,447   $1,104   $135   $17,463 
                                    
Ending balance: loan acquired with deteriorated credit quality  $   $   $   $   $   $   $ 
                                    
Loans  $595,397   $218,985   $156,156   $291,743   $63,556   $10,124   $1,335,961 
                                    
Ending balance: individually evaluated for impairment  $5,136   $   $383   $682   $   $   $6,201 
                                    
Ending balance: collectively evaluated for impairment  $582,946   $218,985   $154,897   $286,368   $63,556   $10,124   $1,316,876 
                                    
Ending balance: loans acquired with deteriorated credit quality(1)  $7,315   $   $876   $4,693   $   $   $12,884 

 

(1) Includes loans acquired on February 14, 2014 from FNBNY and on May 27, 2011 from HSB.

 

   For the Three Months Ended September 30, 2014 
   Commercial
Real Estate
Mortgage
Loans
   Multi-
Family
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Financial and
Agricultural
Loans
   Real Estate
Construction
and Land
Loans
   Installment/
Consumer
Loans
   Total 
(In thousands)                            
Allowance for Loan Losses:                                   
Beginning balance  $6,675   $2,097   $2,525   $4,190   $1,035   $158   $16,680 
Charge-offs   (50)       (134)   (5)       (1)   (190)
Recoveries           12    15            27 
Provision   248    352    (29)   46    (93)   (24)   500 
Ending Balance  $6,873   $2,449   $2,374   $4,246   $942   $133   $17,017 

 

 28 

 

  

   For the Nine Months Ended September 30, 2014 
   Commercial
Real Estate
Mortgage
Loans
   Multi-
Family
   Residential
Real Estate
Mortgage
Loans
   Commercial,
Financial
and
Agricultural
Loans
   Real Estate
Construction
and Land
Loans
   Installment/
Consumer
Loans
   Total 
(In thousands)                                   
Allowance for Loan Losses:                                   
Beginning balance  $6,279   $1,597   $2,712   $4,006   $1,206   $201   $16,001 
Charge-offs   (460)       (184)   (103)       (2)   (749)
Recoveries           32    32        1    65 
Provision   1,054    852    (186)   311    (264)   (67)   1,700 
Ending Balance  $6,873   $2,449   $2,374   $4,246   $942   $133   $17,017 

 

8. EMPLOYEE BENEFITS

 

The Bank maintains a noncontributory pension plan covering all eligible employees. The Bank uses a December 31st measurement date for this plan in accordance with FASB ASC 715-30 “Compensation – Retirement Benefits – Defined Benefit Plans – Pension.” During 2012, the Company amended the pension plan 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”). The SERP provides benefits to certain employees, as recommended by the Compensation Committee of the Board of Directors and approved by the full Board of Directors, whose benefits under the pension plan are limited by the applicable provisions of the Internal Revenue Code. The benefit under the SERP is equal to the additional amount the employee would be entitled to under the Pension Plan and the 401(k) Plan in the absence of such Internal Revenue Code limitations. The assets of the SERP are held in a rabbi trust to maintain the tax-deferred status of the plan and are subject to the general, unsecured creditors of the Company. As a result, the assets of the trust are reflected on the Consolidated Balance Sheets of the Company.

 

There were $1.0 million of contributions made to the pension plan during the nine months ended September 30, 2015. There were no contributions to the SERP during the nine months ended September 30, 2015. In accordance with the SERP, a retired executive received a distribution from the Plan totaling $84,000 during the nine months ended September 30, 2015.

 

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.

 

The following table sets forth the components of net periodic benefit cost and other amounts recognized in Other Comprehensive Income:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   Pension Benefits   SERP Benefits   Pension Benefits   SERP Benefits 
(In thousands)  2015   2014   2015   2014   2015   2014   2015   2014 
Service cost  $286   $229   $42   $33   $848   $681   $126   $98 
Interest cost   178    161    23    22    529    479    68    66 
Expected return on plan assets   (463)   (411)           (1,375)   (1,219)        
Amortization of net loss   95    7    8        281    20    24     
Amortization of unrecognized prior service cost   (19)   (19)           (58)   (58)        
Amortization of unrecognized transition obligation           7    7            21    21 
Net periodic benefit cost (credit)  $77   $(33)  $80   $62   $225   $(97)  $239   $185 

 

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9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

At September 30, 2015, September 30, 2014 and December 31, 2014, securities sold under agreements to repurchase totaled $26.2 million, $11.8 million, and $36.3 million, respectively, and were secured by U.S. GSE, residential mortgage-backed securities and residential collateralized mortgage obligations with a carrying amount of $29.3 million, $14.4 million and $40.3 million, respectively.

 

Securities sold under agreements to repurchase are financing arrangements with $26.2 million maturing during the fourth quarter of 2015. At maturity, the securities underlying the agreements are returned to the Company. Information concerning the securities sold under agreements to repurchase is summarized as follows:

 

   For the Nine Months Ended   For the Year Ended 
(Dollars in thousands)  September 30, 2015   September 30, 2014   December 31, 2014 
Average daily balance  $28,233   $11,581   $14,185 
Average interest rate   0.64%   3.21%   2.71%
Maximum month-end balance  $36,230   $12,045   $36,879 
Weighted average interest rate   0.64%   3.18%   2.67%

 

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 our policies, eligible counterparties are defined and monitored to minimize our exposure.

 

10. FEDERAL HOME LOAN BANK ADVANCES

 

The following table sets forth the contractual maturities and weighted average interest rates of FHLB advances for each of the next five years and the period thereafter at September 30, 2015 and December 31, 2014:

 

   September  30, 2015 
Contractual Maturity  Amount   Weighted
Average Rate
 
(Dollars in thousands)        
Overnight  $     
           
2015   50,000    0.46%
2016   14,659    0.61%
2017   19,159    0.74%
2018   25,868    1.04%
2019   3,186    1.09%
    112,842    0.67%
   $112,842    0.67%

 

   December 31, 2014 
Contractual Maturity  Amount   Weighted
Average Rate
 
(Dollars in thousands)          
Overnight  $69,000    0.32%
           
2015   41,508    0.37%
2016   11,703    0.69%
2017        
2018   16,116    1.00%
    69,327    0.57%
   $138,327    0.44%

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $578.0 million and $385.2 million of residential and commercial mortgage loans under a blanket lien arrangement at September 30, 2015 and December 31, 2014, respectively. The Company is eligible to borrow up to a total of $1.0 billion at September 30, 2015.

 

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11. BORROWED FUNDS

 

Subordinated Debentures

 

In September 2015, the Company issued $80 million in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”). $40 million of the Notes 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 million of the Notes 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 Notes 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 (the "TPS”), through its wholly-owned subsidiary, Bridge Statutory Capital Trust II. The TPS have a liquidation amount of $1,000 per security and are convertible into our common stock, at an effective conversion price of $31 per share. The TPS mature in 30 years but are callable by the Company at par any time after September 30, 2014.

 

The Company issued $16.0 million of junior subordinated debentures (the “Debentures”) to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities sold by the trust. In accordance with current accounting guidance, the trust is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability. The Debentures bear interest at a fixed rate equal to 8.50% and mature on December 31, 2039. Consistent with regulatory requirements, the interest payments may be deferred for up to five years, and are cumulative. The Debentures have the same prepayment provisions as the TPS.

 

The Debentures are included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations

 

12. DERIVATIVES

 

Cash Flow Hedges of Interest Rate Risk

 

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts 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 $75.0 million as of September 30, 2015 and 2014, respectively, and December 31, 2014 were designated as cash flow hedges of certain Federal Home Loan Bank 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 presents summary information about the interest rate swaps designated as cash flow hedges:

 

   Nine Months Ended   Year Ended 
(Dollars in thousands)  September 30, 2015   September 30, 2014   December 31, 2014 
Notional amounts  $75,000   $75,000   $75,000 
Weighted average pay rates   1.66%   1.39%   1.39%
Weighted average receive rates   0.31%   0.23%   0.24%
Weighted average maturity   3.11 years    4.11 years    3.86 years 
Unrealized losses  $(1,993)  $(338)  $(943)

 

Interest expense recorded on these swap transactions totaled $175,000 and $485,000 for the three and nine months ended September 30, 2015, respectively and $118,000 and $351,000 for the three and nine months ended September 30, 2014, respectively, and is reported as a component of interest expense on FHLB Advances.

 

 31 

  

The following table presents the net gains (losses) recorded, net of income tax, in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the nine months ended September 30, 2015 and September 30, 2014:

 

   2015 
   Amount of gain   Amount of gain   Amount of gain (loss) 
   (loss) recognized   (loss) reclassified   recognized in other 
   in OCI   from OCI to   Non-interest income 
(In thousands)  (Effective Portion)   interest income   (Ineffective Portion) 
Interest rate contracts  $(1,187)  $   $ 

 

   2014 
   Amount of gain   Amount of gain   Amount of gain (loss) 
   (loss) recognized   (loss) reclassified   recognized in other 
   in OCI   from OCI to   Non-interest income 
(In thousands)  (Effective Portion)   interest income   (Ineffective Portion) 
Interest rate contracts  $(204)  $   $ 

 

The following table reflects the cash flow hedge included in the Consolidated Balance Sheets:

 

   September 30, 2015   December 31, 2014 
   Notional   Fair   Notional   Fair 
(In thousands)  Amount   Value   Amount   Value 
Included in other assets (liabilities):                    
Interest rate swaps related to FHLB Advances  $50,000   $(1,214)  $40,000   $(248)
Forward starting interest rate swap related to repurchase agreements           10,000    (445)
Forward starting interest rate swap related to FHLB advances   25,000    (779)   25,000    (250)

 

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:

 

   Nine Months Ended   Year Ended 
(Dollars in thousands)  September 30, 2015   September 30, 2014   December 31, 2014 
Notional amounts  $56,586   $11,175   $11,175 
Weighted average pay rates   3.35%   3.27%   3.28%
Weighted average receive rates   3.35%   3.27%   3.28%
Weighted average maturity   15.84 years    9.89 years    9.64 years 
Fair value of combined interest rate swaps  $   $   $ 

 

 32 

  

13. OTHER COMPREHENSIVE INCOME (LOSS)

 

Other comprehensive income (loss) components and related income tax effects were as follows:

 

   Three Months Ended   Nine Months Ended 
(In thousands)  September 30,
2015
   September 30,
2014
   September 30,
2015
   September 30,
2014
 
Unrealized holding (losses) gains on available for sale securities  $3,950   $(1,338)  $5,212   $10,118 
Reclassification adjustment for (gains) losses realized in income       (9)   10    1,119 
Income tax effect   (1,599)   534    (2,070)   (4,460)
Net change in unrealized (losses) gains on available for sale securities   2,351    (813)   3,152    6,777 
                     
Reclassification adjustment for amortization realized in income   90    (5)   269    (17)
Income tax effect   (36)   2    (53)   7 
Net change in post-retirement obligation   54    (3)   216    (10)
                     
Change in fair value of derivatives used for cash flow hedges   (661)   402    (1,050)   (174)
Reclassification adjustment for gains realized in income                
Income tax effect   267    (160)   432    69 
Net change in unrealized losses on cash flow hedge   (394)   242    (618)   (105)
                     
Total  $2,011   $(574)  $2,750   $6,662 

 

The following is a summary of the accumulated other comprehensive income balances, net of income tax:

 

   Balance as of       Balance as of 
   December 31,   Current Period   September 30, 
(In thousands)  2014   Change   2015 
Unrealized (losses) gains on available for sale securities  $(3,307)  $3,152   $(155)
Unrealized (losses) gains on pension benefits   (4,491)   216    (4,275)
Unrealized losses on cash flow hedges   (569)   (618)   (1,187)
Total  $(8,367)  $2,750   $(5,617)

 

The following represents the reclassifications out of accumulated other comprehensive income for the three and nine months ended September 30, 2015 and 2014:

 

                  
   Three Months Ended   Nine Months Ended   Affected Line Item
(In thousands)  September 30,
2015
   September 30,
2014
   September 30,
2015
   September 30,
2015
   in the Consolidated
Statements of Income
Unrealized gains (losses) on available for sale securities:                       
Realized losses on sale of available for sale securities  $   $9   $(10)  $(1,119)  Net securities losses
Income tax effect       (4)   4    444   Income tax expense
Net of income tax  $   $5   $(6)  $(675)   
                        
Amortization of defined benefit pension plan and the defined benefit plan component of the SERP:             
Prior service credit (cost)  $19   $19   $57   $58   Salaries and employee benefits
Transition obligation   (7)   (7)   (21)   (21)  Salaries and employee benefits
Actuarial losses   (102)   (7)   (305)   (20)  Salaries and employee benefits
   $(90)  $5   $(269)  $17    
Income tax effect   36    (2)   53    (7)  Income tax expense
Net of income tax  $(54)  $3   $(216)  $10    
                        
Total reclassifications, net of tax  $(54)  $8   $(222)  $(665)   

 

 33 

  

14. BUSINESS COMBINATIONS

 

On June 19, 2015, the Company acquired Community National Bank (“CNB”) at a purchase price of $157.5 million, issued an aggregate of 5.647 million Bridge Bancorp common shares in exchange for all the issued and outstanding common stock of CNB and recorded goodwill of $86.0 million, which is not deductible for tax purposes. At acquisition, CNB had total acquired assets on a fair value basis of $899.5 million, with loans of $735.6 million, investment securities of $90.1 million and deposits of $786.9 million. The transaction expanded the Company’s geographic footprint across Long Island including Nassau County, Queens and into New York City. It complements the Bank’s existing branch network and enhances asset generation capabilities. The expanded branch network allows the Bank to serve a greater portion of the Long Island and metropolitan marketplace through a network of 40 branches.

 

The acquisition was accounted for under the acquisition method of accounting in accordance with FASB ASC 805, “Business Combinations.” Accordingly, the assets acquired and liabilities assumed were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. The operating results of the Company for the nine month period ended September 30, 2015 includes the operating results of CNB since the acquisition date of June 19, 2015.

 

The following summarizes the preliminary fair value of the assets acquired and liabilities assumed on June 19, 2015:

 

       Measurement     
   As Initially   Period     
(In thousands)  Reported   Adjustments   As Adjusted 
Cash and due from banks  $24,628   $   $24,628 
Securities   90,109        90,109 
Loans   736,348    (768)   735,580 
Bank Owned Life Insurance   21,445        21,445 
Premises and equipment   6,398        6,398 
Other intangible assets   6,698        6,698 
Other assets   14,484    161    14,645 
Total Assets Acquired  $900,110   $(607)  $899,503 
                
Deposits  $786,853   $   $786,853 
Federal Home Loan Bank term advances   35,581        35,581 
Other liabilities and accrued expenses   5,647    (59)   5,588 
Total Liabilities Assumed  $828,081   $(59)  $828,022 
                
Net Assets Acquired   72,029    (548)   71,481 
Consideration Paid   157,503        157,503 
Goodwill Recorded on Acquisition  $85,474   $548   $86,022 

 

Considering the closing date of the transaction, the above fair values and accruals for acquisition costs are preliminary and subject to adjustment as fair value assessments and estimated acquisition costs are finalized. In accordance with FASB ASC 805-10 (Subtopic 25-15), the Company has up to one year from date of acquisition to complete this assessment.