10-Q 1 t1601233_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended March 31, 2016

 

 

 

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 17,458,781 shares of common stock outstanding as of May 6, 2016.

 

 

 

  

 

 

BRIDGE BANCORP, INC.

 

PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
  Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 3
     
  Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015 5
     
  Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2016 and 2015 6
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 7
     
  Condensed Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 48
     
Item 4. Controls and Procedures 49
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 49
     
Item 1A. Risk Factors 49
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 50
     
Item 3. Defaults Upon Senior Securities 50
     
Item 4. Mine Safety Disclosures 50
     
Item 5. Other Information 50
     
Item 6. Exhibits 50
     
Signatures   51

 

 2 

 

Item 1. Financial Statements

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

(In thousands, except share and per share amounts)

 

   March 31,   December 31, 
   2016   2015 
ASSETS          
Cash and due from banks  $44,797   $79,750 
Interest earning deposits with banks   22,411    24,808 
Total cash and cash equivalents   67,208    104,558 
           
Securities available for sale, at fair value   883,626    800,203 
Securities held to maturity (fair value of $223,535 and $210,003, respectively)   218,278    208,351 
Total securities   1,101,904    1,008,554 
           
Securities, restricted   24,865    24,788 
           
Loans held for investments   2,481,247    2,410,774 
Allowance for loan losses   (21,799)   (20,744)
Loans, net   2,459,448    2,390,030 
           
Premises and equipment, net   34,828    39,595 
Accrued interest receivable   9,982    9,270 
Goodwill   105,950    98,445 
Other intangible assets   7,707    8,376 
Prepaid pension   6,015    6,047 
Bank owned life insurance   53,685    53,314 
Other real estate owned   -    250 
Other assets   41,964    38,732 
Total Assets  $3,913,556   $3,781,959 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Demand deposits  $1,052,864   $1,156,882 
Savings, NOW and money market deposits   1,619,970    1,393,888 
Certificates of deposit of $100,000 or more   150,651    167,750 
Other time deposits   116,927    125,105 
Total deposits   2,940,412    2,843,625 
           
Federal Funds Purchased   135,000    120,000 
Federal Home Loan Bank term advances   299,174    297,507 
Repurchase agreements   50,965    50,891 
Subordinated debentures   78,397    78,363 
Junior subordinated debentures   15,879    15,878 
Other liabilities and accrued expenses   42,791    34,567 
Total Liabilities   3,562,618    3,440,831 
           
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; 17,460,529 and 17,388,918 shares issued, respectively; 17,448,727 and 17,388,918 shares outstanding, respectively   175    174 
Surplus   279,099    278,333 
Retained earnings   76,852    72,243 
Less:  Treasury Stock at cost, 11,802 and 0 shares, respectively   (331)   - 
    355,795    350,750 
Accumulated other comprehensive loss, net of income tax   (4,857)   (9,622)
Total Stockholders' Equity   350,938    341,128 
Total Liabilities and Stockholders' Equity  $3,913,556   $3,781,959 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements

 

 3 

 

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)

 

   Three Months Ended 
   March 31, 
   2016   2015 
Interest income:          
Loans (including fee income)  $27,949   $16,490 
Mortgage-backed securities, CMOs and other asset-backed securities   3,849    2,567 
U.S. GSE securities   356    405 
State and municipal obligations   894    746 
Corporate Bonds   277    185 
Deposits with banks   37    7 
Other interest and dividend income   245    107 
Total interest income   33,607    20,507 
           
Interest expense:          
Savings, NOW and money market deposits   1,278    773 
Certificates of deposit of $100,000 or more   215    190 
Other time deposits   194    112 
Federal funds purchased and repurchase agreements   185    146 
Federal Home Loan Bank advances   827    250 
Subordinated debentures   1,135    - 
Junior subordinated debentures   341    341 
Total interest expense   4,175    1,812 
           
Net interest income   29,432    18,695 
Provision for loan losses   1,250    800 
Net interest income after provision for loan losses   28,182    17,895 
           
Non interest income:          
Service charges on deposit accounts   1,073    853 
Fees for other customer services   919    598 
Net securities gains (losses)   66    (10)
Title fee income   477    463 
Other operating income   1,460    900 
Total non interest income   3,995    2,804 
           
Non interest expense:          
Salaries and employee benefits   10,537    7,523 
Occupancy and equipment   2,924    2,203 
Technology and communications   1,085    790 
Marketing and advertising   757    573 
Professional services   1,008    521 
FDIC assessments   508    311 
Acquisition costs   (270)   175 
Amortization of other intangible assets   676    48 
Other operating expenses   1,682    1,166 
Total non interest expense   18,907    13,310 
           
Income before income taxes   13,270    7,389 
Income tax expense   4,644    2,626 
Net income  $8,626   $4,763 
Basic earnings per share  $0.49   $0.41 
Diluted earnings per share  $0.49   $0.41 

 

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 
   Three Months Ended 
   March 31, 
   2016   2015 
Net Income  $8,626   $4,763 
Other comprehensive income:          
Change in unrealized net gains on securities available for sale, net of reclassifications and deferred income taxes   5,757    2,966 
Adjustment to pension liability, net of reclassifications and deferred income taxes   61    54 
Unrealized losses on cash flow hedge, net of reclassifications and deferred income taxes   (1,053)   (420)
Total other comprehensive income   4,765    2,600 
Comprehensive income  $13,391   $7,363 

 

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, 2016  $174   $278,333   $72,243   $-   $(9,622)  $341,128 
Net income             8,626              8,626 
Shares issued under the dividend reinvestment plan ("DRP")        221                   221 
Stock awards granted and distributed   1    (11)        10         - 
Stock awards forfeited        50         (50)        - 
Vesting of stock awards                  (291)        (291)
Share based compensation expense        506                   506 
Cash dividend declared, $0.23 per share             (4,017)             (4,017)
Other comprehensive income, net of deferred income taxes                       4,765    4,765 
Balance at March 31, 2016  $175   $279,099   $76,852   $(331)  $(4,857)  $350,938 

 

   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             4,763              4,763 
Shares issued under the dividend reinvestment plan ("DRP")        169                   169 
Stock awards granted and distributed        (43)        43         - 
Vesting of stock awards                  (210)        (210)
Income tax effect of stock plans        48                   48 
Share based compensation expense        350                   350 
Cash dividend declared, $0.23 per share             (2,687)             (2,687)
Other comprehensive income, net of deferred income taxes                       2,600    2,600 
Balance at March 31, 2015  $117   $119,370   $66,623   $(192)  $(5,767)  $180,151 

 

See accompanying condensed notes to the Unaudited Consolidated Financial Statements.

 

 6 

  

BRIDGE BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

   Three Months Ended 
   March 31, 
   2016   2015 
Cash flows from operating activities:          
Net Income  $8,626   $4,763 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,250    800 
Depreciation and (accretion)   (1,294)   (645)
Net amortization on securities   1,464    1,038 
Increase in cash surrender value of bank owned life insurance   (371)   (230)
Amortization of intangible assets   676    48 
Share based compensation expense   506    350 
Excess tax benefit from share based compensation   97    - 
Net securities (gains) losses   (66)   10 
(Increase) decrease in accrued interest receivable   (712)   36 
Small Business Administration ("SBA") loans originated for sale   (1,170)   - 
Proceeds from sale of the guaranteed portion of SBA loans   1,310    - 
Gain on sale of the guaranteed portion of SBA loans   (114)   - 
Decrease (increase) decrease in other assets   1,360    (502)
Decrease in accrued expenses and other liabilities   (2,223)   (996)
Net cash provided by operating activities   9,339    4,672 
           
Cash flows from investing activities:          
Purchases of securities available for sale   (145,053)   (37,811)
Purchases of securities, restricted   (23,445)   (34,875)
Purchases of securities held to maturity   (21,329)   - 
Proceeds from sales of securities available for sale   28,705    73,788 
Redemption of securities, restricted   23,368    36,293 
Maturities, calls and principal payments of securities available for sale   46,817    25,281 
Maturities, calls and principal payments of securities held to maturity   11,185    3,052 
Net increase in loans   (76,145)   (65,656)
Proceeds from loan sale   -    1,861 
Proceeds from sales of other real estate owned, net   278    - 
Purchase of premises and equipment   (960)   (1,064)
Net cash (used in) provided by investing activities   (156,579)   869 
           
Cash flows from financing activities:          
Net increase in deposits   97,110    5,704 
Net increase in federal funds purchased   15,000    30,000 
Net increase (decrease) in FHLB advances   1,793    (31,499)
Net increase (decrease) in repurchase agreements   74    (10,019)
Net proceeds from issuance of common stock   221    169 
Repurchase of surrendered stock from vesting of restricted stock awards   (291)   (210)
Excess tax benefit from share based compensation   -    48 
Cash dividends paid   (4,017)   (2,687)
Net cash provided by (used in) financing activities   109,890    (8,494)
           
Net increase in cash and cash equivalents   (37,350)   (2,953)
Cash and cash equivalents at beginning of period   104,558    51,730 
Cash and cash equivalents at end of period  $67,208   $48,777 
           
Supplemental Information-Cash Flows:          
Cash paid for:          
Interest  $5,251   $1,842 
Income tax  $1,970   $1,260 
           
Noncash investing and financing activities:          
Securities which settled in the subsequent period  $5,400   $- 

 

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 months ended March 31, 2016 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, 2015.

 

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 months ended March 31, 2016 and 2015 is as follows:

 

   Three months ended, 
   March 31, 
(In thousands, except per share data)  2016   2015 
Net Income  $8,626   $4,763 
Less: Dividends paid on and earnings allocated to participating securities   (170)  $(118)
Income attributable to common stock  $8,456   $4,645 
           
Weighted average common shares outstanding, including participating securities   17,479    11,720 
Less: weighted average participating securities   (353)   (301)
Weighted average common shares outstanding   17,126    11,419 
Basic earnings per common share  $0.49   $0.41 
           
Income attributable to common stock  $8,456   $4,645 
           
Weighted average common shares outstanding   17,126    11,419 
Weighted average common equivalent shares outstanding   11    1 
Weighted average common and equivalent shares outstanding   17,137    11,420 
Diluted earnings per common share  $0.49   $0.41 

 

 8 

  

There were no stock options that were antidilutive at March 31, 2016. There were 37,739 options outstanding at March 31, 2015 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. The $16.0 million in convertible trust preferred securities outstanding at March 31, 2016 and March 31, 2015, 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 three months ended March 31, 2016 and March 31, 2015 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 first quarter of 2016 and 2015 was $15,000 and $0, respectively. The intrinsic value of options outstanding and exercisable at March 31, 2016 and March 31, 2015 was $103,000 and $20,000, respectively.

 

A summary of the status of the Company’s stock options as of and for the three months ended March 31, 2016 is as follows:

 

           Weighted     
       Weighted   Average     
   Number   Average   Remaining   Aggregate 
   of   Exercise   Contractual   Intrinsic 
(Dollars in thousands, except per share amounts)  Options   Price   Life   Value 
Outstanding, January 1,  2016   23,725   $25.25           
Granted   -    -           
Exercised   (4,000)  $25.25           
Forfeited   -    -           
Expired   -    -           
Outstanding, March 31,  2016   19,725   $25.25    0.66 years   $103 
Vested and Exercisable, March 31, 2016   19,725   $25.25    0.66 years   $103 

 

   Number of   Exercise 
Range of Exercise Prices  Options   Price 
   19,725   $25.25 
    19,725      

 

During the three months ended March 31, 2016, restricted stock awards of 63,709 shares were granted. Of the 63,709 shares granted, 36,000 shares vest over seven years with a third vesting after years five, six and seven, 27,209 shares vest over five years with a third vesting after years three, four and five, and 500 shares vest ratably over three years. During the three months ended March 31, 2015, restricted stock awards of 55,437 shares were granted. Of the 55,437 shares granted, 30,625 shares vest over seven years with a third vesting after years five, six and seven and 24,812 shares vest over five years with a third vesting after years three, four and five. Compensation expense attributable to restricted stock awards was $351,000 and $302,000 for the three months ended March 31, 2016 and 2015, respectively.

 

 9 

  

A summary of the status of the Company’s unvested restricted stock as of and for the three months ended March 31, 2016 is as follows:

 

       Weighted 
       Average Grant-Date 
   Shares   Fair Value 
Unvested, January 31, 2016   281,076   $23.46 
Granted   63,709   $27.80 
Vested   (34,927)  $21.70 
Forfeited   (2,079)  $23.83 
Unvested, March 31, 2016   307,779   $24.55 

 

Effective in 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 expense of approximately $40,000 and $14,000 in connection with these awards for the three months ended March 31, 2016 and 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 $34,000 for the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and December 31, 2015 and the corresponding amounts of unrealized gains and losses therein:

 

   March 31, 2016 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $67,242   $82   $(18)  $67,306 
State and municipal obligations   102,417    1,346    (84)   103,679 
U.S. GSE residential mortgage-backed securities   214,827    1,775    (78)   216,524 
U.S. GSE residential collateralized mortgage obligations   360,008    1,663    (808)   360,863 
U.S. GSE commercial mortgage-backed securities   12,432    224    -    12,656 
U.S. GSE commercial collateralized mortgage obligations   68,741    449    (129)   69,061 
Other asset backed securities   24,250    -    (1,940)   22,310 
Corporate bonds   32,000    103    (876)   31,227 
Total available for sale   881,917    5,642    (3,933)   883,626 
                     
Held to maturity:                    
U.S. GSE securities   -    -    -    - 
State and municipal obligations   63,326    2,620    -    65,946 
U.S. GSE residential mortgage-backed securities   12,393    34    (13)   12,414 
U.S. GSE residential collateralized mortgage obligations   63,969    1,544    (66)   65,447 
U.S. GSE commercial mortgage-backed securities   29,291    512    (81)   29,722 
U.S. GSE commercial collateralized mortgage obligations   38,299    821    (147)   38,973 
Corporate bonds   11,000    33    -    11,033 
Total held to maturity   218,278    5,564    (307)   223,535 
Total securities  $1,100,195   $11,206   $(4,240)  $1,107,161 

 

 10 

  

   December 31, 2015 
       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Fair 
(In thousands)  Cost   Gains   Losses   Value 
Available for sale:                    
U.S. GSE securities  $63,238   $-   $(564)  $62,674 
State and municipal obligations   87,830    427    (322)   87,935 
U.S. GSE residential mortgage-backed securities   201,297    237    (1,270)   200,264 
U.S. GSE residential collateralized mortgage obligations   321,253    513    (3,888)   317,878 
U.S. GSE commercial mortgage-backed securities   12,491    7    (80)   12,418 
U.S. GSE commercial collateralized mortgage obligations   64,809    9    (620)   64,198 
Other asset backed securities   24,250    -    (1,879)   22,371 
Corporate bonds   33,000    -    (535)   32,465 
Total available for sale   808,168    1,193    (9,158)   800,203 
                     
Held to maturity:                    
U.S. GSE securities   7,466    1    -    7,467 
State and municipal obligations   64,878    1,715    (113)   66,480 
U.S. GSE residential mortgage-backed securities   7,609    -    (106)   7,503 
U.S. GSE residential collateralized mortgage obligations   60,933    617    (498)   61,052 
U.S. GSE commercial mortgage-backed securities   23,056    210    (313)   22,953 
U.S. GSE commercial collateralized mortgage obligations   33,409    282    (185)   33,506 
Corporate bonds   11,000    42    -    11,042 
Total held to maturity   208,351    2,867    (1,215)   210,003 
Total securities  $1,016,519   $4,060   $(10,373)  $1,010,206 

 

The following table summarizes the amortized cost, fair value and maturities of the available for sale and held to maturity investment securities portfolio at March 31, 2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   March 31, 2016 
   Amortized   Fair 
(In thousands)  Cost   Value 
Maturity          
Available for sale:          
Within one year  $10,507   $10,521 
One to five years   90,049    90,378 
Five to ten years   128,043    128,594 
Beyond ten years   653,318    654,133 
Total  $881,917   $883,626 
           
Held to maturity:          
Within one year  $4,910   $4,926 
One to five years   31,088    31,457 
Five to ten years   62,414    65,077 
Beyond ten years   119,866    122,075 
Total  $218,278   $223,535 

 

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Securities with unrealized losses at March 31, 2016 and December 31, 2015, 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 
March 31, 2016      Unrealized       Unrealized 
(In thousands)  Fair Value   losses   Fair Value   losses 
Available for sale:                    
U.S. GSE securities  $29,231   $18   $-   $- 
State and municipal obligations   16,528    81    4,586    3 
U.S. GSE residential mortgage-backed securities   26,843    53    10,494    25 
U.S. GSE residential collateralized mortgage obligations   58,730    85    64,799    723 
U.S. GSE commercial mortgage-backed securities   -    -    -    - 
U.S. GSE commercial collateralized mortgage obligations   21,205    57    10,112    72 
Other asset backed securities   -    -    22,310    1,940 
Corporate bonds   17,249    751    4,875    125 
Total available for sale   169,786    1,045    117,176    2,888 
                     
Held to maturity:                    
U.S. GSE securities   -    -    -    - 
State and municipal obligations   586    -    -    - 
U.S. GSE residential mortgage-backed securities   -    -    5,251    13 
U.S. GSE residential collateralized mortgage obligations   2,472    4    4,737    62 
U.S. GSE commercial mortgage-backed securities   6,260    70    5,094    11 
U.S. GSE commercial collateralized mortgage obligations   4,846    80    3,923    67 
Corporate bonds   -    -    -    - 
Total held to maturity  $14,164   $154   $19,005   $153 

 

   Less than 12 months   Greater than 12 months 
December 31, 2015      Unrealized       Unrealized 
(In thousands)  Fair Value   losses   Fair Value   losses 
Available for sale:                    
U.S. GSE securities  $37,759   $235   $24,914   $329 
State and municipal obligations   39,621    298    5,118    24 
U.S. GSE residential mortgage-backed securities   136,025    1,224    1,510    46 
U.S. GSE residential collateralized mortgage obligations   187,543    1,781    66,830    2,107 
U.S. GSE commercial mortgage-backed securities   8,594    80    -    - 
U.S. GSE commercial collateralized mortgage obligations   51,178    503    10,034    117 
Other Asset backed securities   -    -    22,371    1,879 
Corporate bonds   27,640    360    4,825    175 
Total available for sale   488,360    4,481    135,602    4,677 
                     
Held to maturity:                    
U.S. GSE securities   -    -    -    - 
State and municipal obligations   18,375    113    -    - 
U.S. GSE residential mortgage-backed securities   7,503    106    -    - 
U.S. GSE residential collateralized mortgage obligations   15,918    149    15,679    349 
U.S. GSE commercial mortgage-backed securities   13,982    313    -    - 
U.S. GSE commercial collateralized mortgage obligations   7,912    8    3,813    177 
Corporate bonds   -    -    -    - 
Total held to maturity  $63,690   $689   $19,492   $526 

 

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

 

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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 March 31, 2016, the majority of unrealized losses on the available for sale securities are related to the Company’s U.S. GSE residential collateralized mortgage obligations, other asset backed securities, and corporate bonds. The decrease in fair value of the U.S. GSE residential collateralized mortgage obligations, other asset backed securities, and corporate bonds 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 March 31, 2016.

 

There were $28.7 million of proceeds from sales of securities with gross gains of approximately $0.3 million and gross losses of approximately $0.2 million realized for the three months ended March 31, 2016. 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 three months ended March 31, 2015. Proceeds from calls of securities were $30.6 million and $0.2 million for the three months ended March 31, 2016 and 2015, respectively.

 

Securities having a fair value of approximately $793.2 million and $611.0 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and Federal Home Loan Bank and Federal Reserve Bank overnight borrowings. The Company did not hold any trading securities during the three months ended March 31, 2016 or the year ended December 31, 2015.

 

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of New York. Members are required to own a particular amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is a member of the Atlantic Central Banker’s Bank (“ACBB”) and is required to own ACBB stock. The Bank is also a member of the 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 $24.9 million and $24.8 million in FHLB, ACBB and FRB stock at March 31, 2016 and December 31, 2015, respectively. 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.

 

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.

 

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Assets and liabilities measured on a recurring basis:

 

       Fair Value Measurements at 
       3/31/2016 
           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  $67,306       $67,306     
State and municipal obligations   103,679         103,679      
U.S. GSE residential mortgage-backed securities   216,524         216,524      
U.S. GSE residential collateralized mortgage obligations   360,863         360,863      
U.S. GSE commercial mortgage-backed securities   12,656         12,656      
U.S. GSE commercial collateralized mortgage obligations   69,061         69,061      
Other asset backed securities   22,310         22,310      
Corporate bonds   31,227         31,227      
Total available for sale  $883,626        $883,626      
Derivatives  $2,096        $2,096      
                     
Financial Liabilities:                    
Derivatives  $5,162        $5,162      

 

       Fair Value Measurements at 
       December 31, 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  $62,674       $62,674     
State and municipal obligations   87,935         87,935      
U.S. GSE residential mortgage-backed securities   200,264         200,264      
U.S. GSE residential collateralized mortgage obligations   317,878         317,878      
U.S. GSE commercial mortgage-backed securities   12,418         12,418      
U.S. GSE commercial collateralized mortgage obligations   64,198         64,198      
Other Asset backed securities   22,371         22,371      
Corporate bonds   32,465         32,465      
Total available for sale  $800,203        $800,203      
Derivatives  $779        $779      
                     
Financial Liabilities:                    
Derivatives  $2,073        $2,073      

 

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

 

       Fair Value Measurements at 
       March 31, 2016 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  $167           $167 

 

       Fair Value Measurements at 
       December 31, 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  $483           $483 
Other real estate owned   250            250 

 

Impaired loans with allocated allowance for loan losses at March 31, 2016 had a carrying amount of $0.2 million, which is made up of the outstanding balance of $0.2 million, net of a valuation allowance of $0.02 million. This resulted in an additional provision for loan losses of $0.02 million that is included in the amount reported on the income statement. Impaired loans with allocated allowance for loan losses at December 31, 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 $0.03 million. This resulted in an additional provision for loan losses of $0.03 million that is included in the amount reported on the Consolidated Statements of Income.

 

There was no other real estate owned at March 31, 2016. Other real estate owned at December 31, 2015 had a carrying amount of $250,000 and no valuation allowance recorded. Accordingly, there was no additional provision for loan losses include in the amount reported on the Consolidated Statements of Income.

 

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.

 

 15 

  

Impaired Loans and Other Real Estate Owned: For impaired loans, the Company evaluates the fair value of the loan in accordance with current accounting guidance.  For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based 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 less the estimated cost to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Adjustments may relate to location, square footage, condition, amenities, market rate of leases as well as timing of comparable sales. All appraisals undergo a second review process to insure that the methodology employed and the values derived are 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 March 31, 2016 and December 31, 2015.

 

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 Company’s financial instruments at March 31, 2016 and December 31, 2015 are as follows:

 

       Fair Value Measurements at     
       March 31, 2016 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  $44,797   $44,797   $-   $-   $44,797 
Interest bearing deposits with banks   22,411    -    22,411    -    22,411 
Securities available for sale   883,626    -    883,626    -    883,626 
Securities restricted   24,865     n/a      n/a      n/a      n/a  
Securities held to maturity   218,278    -    223,535    -    223,535 
Loans, net   2,459,448    -    -    2,468,721    2,468,721 
Derivatives   2,096         2,096         2,096 
Accrued interest receivable   9,982    -    3,810    6,172    9,982 
                          
Financial liabilities:                         
Certificates of deposit   267,578    -    268,784    -    268,784 
Demand and other deposits   2,672,834    2,672,834    -    -    2,672,834 
Federal funds purchased   135,000    135,000    -    -    135,000 
Federal Home Loan Bank term advances   299,174    199,207    102,149    -    301,356 
Repurchase agreements   50,965    -    52,029    -    52,029 
Subordinated Debentures   78,397    -    -    82,681    82,681 
Junior Subordinated Debentures   15,879    -    -    17,464    17,464 
Derivatives   5,162    -    5,162    -    5,162 
Accrued interest payable   568    74    494    -    568 

 

       Fair Value Measurements at     
       December 31, 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  $79,750   $79,750   $-   $-   $79,750 
Interest bearing deposits with banks   24,808    -    24,808    -    24,808 
Securities available for sale   800,203    -    800,203    -    800,203 
Securities restricted   24,788     n/a      n/a      n/a      n/a  
Securities held to maturity   208,351    -    210,003    -    210,003 
Loans, net   2,390,030    -    -    2,379,171    2,379,171 
Derivatives   779         779         779 
Accrued interest receivable   9,270    -    3,228    6,042    9,270 
                          
Financial liabilities:                         
Certificates of deposit   292,855    -    293,368    -    293,368 
Demand and other deposits   2,550,770    2,550,770    -    -    2,550,770 
Federal funds purchased   120,000    120,000    -    -    120,000 
Federal Home Loan Bank term advances   297,507    197,243    100,772    -    298,015 
Repurchase agreements   50,891    -    51,480    -    51,480 
Subordinated Debentures   78,363    -    -    78,830    78,830 
Junior Subordinated Debentures   15,878    -    -    16,566    16,566 
Derivatives   2,073    -    2,073    -    2,073 
Accrued interest payable   1,644    93    1,551    -    1,644 

 

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6. LOANS

 

The following table sets forth the major classifications of loans:

 

   March 31, 2016   December 31, 2015 
(In thousands)        
Commercial real estate mortgage loans  $1,011,068   $1,053,399 
Multi-family mortgage loans   380,125    350,793 
Residential real estate mortgage loans   448,164    392,815 
Commercial, financial, and agricultural loans   511,190    501,766 
Real estate-construction and land loans   111,180    91,153 
Installment/consumer loans   16,135    17,596 
Total loans   2,477,862    2,407,522 
Net deferred loan costs and fees   3,385    3,252 
    2,481,247    2,410,774 
Allowance for loan losses   (21,799)   (20,744)
Net loans  $2,459,448   $2,390,030 

 

On June 19, 2015, the Company completed the acquisition of Community National Bank (“CNB”) resulting in the addition of $734.0 million of acquired loans recorded at their fair value. There were approximately $632.0 million and $659.7 million of acquired CNB loans remaining as of March 31, 2016 and December 31, 2015, respectively.

 

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 $37.0 million and $37.7 million of acquired FNBNY loans remaining as of March 31, 2016 and December 31, 2015, respectively.

 

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

 

Real Estate Construction and Land Loans

 

Loans in this classification primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived primarily from sale of the lots/units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent this class includes commercial development projects that the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. 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.

 

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The following table represents loans by class categorized by internally assigned risk grades as of March 31, 2016 and December 31, 2015:

 

   Grades: 
March 31, 2016  Pass   Special Mention   Substandard   Doubtful   Total 
(In thousands)                    
                     
Commercial real estate:                         
Owner occupied  $467,139   $2,557   $1,861   $-   $471,557 
Non-owner occupied   532,504    525    6,482    -    539,511 
Multi-Family   379,743    -    382    -    380,125 
Residential real estate:                         
Residential mortgage   377,437    86    1,092    -    378,615 
Home equity   68,016    517    1,016    -    69,549 
Commercial:                         
Secured   113,867    284    2,025    -    116,176 
Unsecured   388,248    2,969    3,797    -    395,014 
Real estate construction and land loans   111,180    -    -    -    111,180 
Installment/consumer loans   16,035    -    100    -    16,135 
Total loans  $2,454,169   $6,938   $16,755   $-   $2,477,862 

 

At March 31, 2016 there were $0.02 million and $6.8 million, respectively, of acquired CNB loans included in the special mention and substandard grades and $0.1 million and $0.6 million, respectively, of acquired FNBNY loans included in the special mention and substandard grades.

 

   Grades: 
December 31, 2015  Pass   Special Mention   Substandard   Doubtful   Total 
(In thousands)                    
                     
Commercial real estate:                         
Owner occupied  $465,967   $3,239   $2,115   $-   $471,321 
Non-owner occupied   573,049    542    8,487    -    582,078 
Multi-Family   350,785        8    -    350,793 
Residential real estate:                         
Residential mortgage   323,557    87    845         324,489 
Home equity   66,910    523    893         68,326 
Commercial:                         
Secured   121,037    151    2,549    -    123,737 
Unsecured   370,642    3,191    4,196    -    378,029 
Real estate construction and land loans   91,153            -    91,153 
Installment/consumer loans   17,496        100    -    17,596 
Total loans  $2,380,596   $7,733   $19,193   $-   $2,407,522 

 

At December 31, 2015 there were $0.02 million and $9.6 million, respectively, of acquired CNB loans included in the special mention and substandard grades and $0.1 million and $0.2 million, respectively, of acquired FNBNY loans included in the special mention and substandard grades.

 

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Past Due and Nonaccrual Loans

 

The following table represents the aging of the recorded investment in past due loans as of March 31, 2016 and December 31, 2015 by class of loans, as defined by ASC 310-10:

 

March 31, 2016  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  $222   $-   $599   $224   $1,045   $470,512    $471,557 
Non-owner occupied   -    -    -    -    -    539,511    539,511 
Multi-Family   -    -    -    -    -    380,125    380,125 
Residential real estate:                                   
Residential mortgages   1,653    87    852    473    3,065    375,550    378,615 
Home equity   138    69    216    804    1,227    68,322    69,549 
Commercial and Industrial:                                   
Secured   20    -    258    -    278    115,898    116,176 
Unsecured   14    190    55    131    390    394,624    395,014 
Real estate construction and land loans   -    -    -    -    -    111,180    111,180 
Installment/consumer loans   -    1    -    3    4    16,131    16,135 
Total loans  $2,047   $347   $1,980   $1,635   $6,009   $2,471,853   $2,477,862 

 

December 31, 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  $-   $-   $435   $631   $1,066   $470,255    $471,321 
Non-owner occupied   -    -    -    -    -    582,078    582,078 
Multi-Family   -    -    -    -    -    350,793    350,793 
Residential real estate:                                   
Residential mortgages   939    245    -    62    1,246    323,243    324,489 
Home equity   69    100    188    610    967    67,359    68,326 
Commercial and Industrial:                                   
Secured   -    -    341    -    341    123,396    123,737 
Unsecured   128    24    -    44    196    377,833    378,029 
Real estate construction and land loans   -    -    -    -    -    91,153    91,153 
Installment/consumer loans   -    -    -    3    3    17,593    17,596 
Total loans  $1,136   $369   $964   $1,350   $3,819   $2,403,703   $2,407,522 

  

At March 31, 2016 and December 31, 2015 there were no FNBNY acquired loans 30-59 days past due. At March 31, 2016, there were $1.7 million of CNB acquired loans that were 30-89 days past due. There were $1.2 million of CNB acquired loans 30-59 days past due at December 31, 2015. All loans 90 days or more past due that are still accruing interest represent loans acquired from CNB, FNBNY and Hamptons State Bank (“HSB”) which were recorded at fair value upon acquisition. These loans are considered to be accruing as management can reasonably estimate future cash flows and 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.

 

Impaired Loans

 

As of March 31, 2016 and December 31, 2015, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $3.7 million and $2.6 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

 

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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 March 31, 2016 and December 31, 2015 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 three months ended March 31, 2016 and 2015:

 

   March 31, 2016   Three Months Ended
March 31, 2016
 
   Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
(In thousands)                    
With no related allowance recorded:                         
Commercial real estate:                         
Owner occupied  $369   $557   $-   $376   $2 
Non-owner occupied   1,237    1,237    -    1,240    19 
Residential real estate:                         
Residential mortgages   473    485    -    198    - 
Home equity   804    898    -    674    - 
Commercial:                         
Secured   198    198    -    129    3 
Unsecured   483    483    -    492    4 
Total with no related allowance recorded  $3,564   $3,858   $-   $3,109   $28 
                          
With an allowance recorded:                         
Commercial real estate - Owner occupied  $-   $-   $-   $-   $- 
Commercial real estate - Non-owner occupied   -    -    -    -    - 
Residential real estate - Residential mortgages   -    -    -    -    - 
Residential real estate - Home equity   -    -    -    -    - 
Commercial - Secured   -    -    -    -    - 
Commercial - Unsecured   185    190    18    188    2 
Total with an allowance recorded:  $185   $190   $18   $188   $2 
                          
Total:                         
Commercial real estate:                         
Owner occupied  $369   $557   $-   $376   $2 
Non-owner occupied   1,237    1,237    -    1,240    19 
Residential real estate:                         
Residential mortgages   473    485    -    198    - 
Home equity   804    898    -    674    - 
Commercial:                         
Secured   198    198    -    129    3 
Unsecured   668    673    18    680    6 
Total  $3,749   $4,048   $18   $3,297   $30 

 

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               Three Months Ended 
   December 31, 2015   March 31, 2015 
December 31, 2015  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allocated
Allowance
   Average
Recorded
Investment
   Interest Income
Recognized
 
(In thousands)                    
With no related allowance recorded:                         
Commercial real estate:                         
Owner occupied  $384   $564   $-    3,854   $28 
Non-owner occupied   927    928    -    947    15 
Residential real estate:                         
Residential mortgage   62    73    -    141    - 
Home equity   610    700    -    309    - 
Commercial:                         
Secured   96    96    -    48    1 
Unsecured   -    -    -    -    - 
Total with no related allowance recorded  $2,079   $2,361   $-   $5,299   $44 
                          
With an allowance recorded:                         
Commercial real estate- Owner occupied  $-   $-   $-   $-   $- 
Commercial real estate- Non owner occupied   318    318    20    322    4 
Residential real estate - Residential mortgage   -    -    -    -    - 
Residential real estate - Home equity   -    -    -    50    - 
Commercial -  Secured   -    -    -    330    - 
Commercial - Unsecured   194    194    9    252    3 
Total with an allowance recorded:  $512   $512   $29   $954   $7 
                          
Total:                         
Commercial real estate:                         
Owner occupied  $384   $564   $-   $3,854   $28 
Non-owner occupied   1,245    1,246    20    1,269    19 
Residential real estate:                         
Residential mortgage   62    73    -    141    - 
Home equity   610    700    -    359    - 
Commercial:                         
Secured   96    96    -    378    1 
Unsecured   194    194    9    252    3 
Total  $2,591   $2,873   $29   $6,253   $51 

 

The Bank had no other real estate owned at March 31, 2016 compared to $0.3 million at December 31, 2015.

 

Troubled Debt Restructurings

 

The terms of certain loans were modified and are considered troubled debt restructurings (“TDR”). 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 three months ended March 31, 2016, the Bank modified two loans as TDRs totaling $0.6 million compared to two loans modified as TDRs totaling $0.1 million for the three months ended March 31, 2015. During the quarters ending March 31, 2016 and

 

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2015, there were no charge offs relating to TDRs and there were no loans modified as TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

 

As of March 31, 2016 and December 31, 2015, the Company had $0.2 million and $0.1 million, respectively of nonaccrual TDR loans and $2.2 million and $1.7 million, respectively of performing TDRs. At March 31, 2016 and December 31, 2015, total nonaccrual TDR loans are secured with collateral that has an appraised value of $0.3 million and $0.3 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 ending March 31, 2016 that did not meet the definition of a TDR. These loans have a total recorded investment as of March 31, 2016 of $12.1 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.

 

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 March 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the purchased credit impaired loans was $16.9 million and $8.3 million with a remaining non-accretable difference of ($1.9 million). At December 31, 2015, the contractually required principal and interest payments receivable and carrying amount of the purchased credit impaired loans was $16.7 million and $8.3 million, respectively, with a remaining non-accretable difference of ($1.5 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 $19.8 million; expected cash flows of $8.1 million; and a fair value (initial carrying amount) of $7.5 million. The difference between the contractually required principal and interest payments receivable and the expected cash flows

 

 24 

  

($11.7 million) represented the non-accretable difference. The difference between the expected cash flows and fair value ($0.6) million represented the initial accretable yield. At March 31, 2016, the contractually required principal and interest payments receivable and carrying amount of the purchased credit impaired loans was $19.5 million and $7.2 million, respectively, with a remaining non-accretable difference of ($11.7 million). At December 31, 2015, the contractually required principal and interest payments receivable and carrying amount of the purchased credit impaired loans was $19.9 million and $7.5 million, respectively, with a remaining non-accretable difference of ($11.7 million).

 

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

 

   Three Months Ended 
   March 31, 
   2016   2015 
(In thousands)        
Balance at beginning of period  $7,113   $8,432 
Accretable discount arising from acquisition of PCI loans   -    - 
Accretion   (792)   (1,252)
Reclassification from (to) nonaccretable difference during the period   133    380 
Other   418    - 
Accretable discount at end of period  $6,872   $7,560 

 

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. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to 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 entire loan portfolio at March 31, 2016 and December 31, 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 March 31, 2016 and December 31, 2015. Additionally, the following tables represent the changes in the allowance for loan losses for the three month period ended March 31, 2016 and 2015, and the twelve month period ended December 31, 2015, 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.

 

 26 

  

   For the Three Months Ended March 31, 2016 
   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  $7,850   $4,208   $2,115   $5,405   $1,030   $136   $20,744 
Charge-offs   -    -    -    (200)   -    -    (200)
Recoveries   -    -    -    4    -    1    5 
Provision   (404)   461    583    359    247    4    1,250 
Ending Balance  $7,446   $4,669   $2,698   $5,568   $1,277   $141   $21,799 
                                    
Ending balance: individually evaluated for impairment  $-   $-   $-   $18   $-   $-   $18 
                                    
Ending balance: collectively evaluated for impairment  $7,446   $4,669   $2,698   $5,550   $1,277   $141   $21,781 
                                    
Ending balance: loan acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans  $1,011,068   $380,125   $448,164   $511,190   $111,180   $16,135   $2,477,862 
                                    
Ending balance: individually evaluated for impairment  $1,606   $-   $1,277   $866   $-   $-   $3,749 
                                    
Ending balance: collectively evaluated for impairment  $1,004,120   $376,763   $445,590   $504,290   $111,180   $16,135   $2,458,078 
                                    
Ending balance: loans acquired with deteriorated credit quality  $5,342   $3,362   $1,297   $6,034   $-   $-   $16,035 

 

The table above includes loans acquired on June 19, 2015 from CNB and February 14, 2014 from FNBNY.

 

 27 

  

   For the Twelve Months Ended December 31, 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   (50)   -    (249)   (827)   -    (2)   (1,128)
Recoveries   -    -    79    149    -    7    235 
Provision   906    1,538    77    1,557    (74)   (4)   4,000 
Ending Balance  $7,850   $4,208   $2,115   $5,405   $1,030   $136   $20,744 
                                    
Ending balance: individually evaluated for impairment  $20   $-   $-   $9   $-   $-   $29 
                                    
Ending balance: collectively evaluated for impairment  $7,830   $4,208   $2,115   $5,396   $1,030   $136   $20,715 
                                    
Ending balance: loan acquired with deteriorated credit quality  $-   $-   $-   $-   $-   $-   $- 
                                    
Loans  $1,053,399   $350,793   $392,815   $501,766   $91,153   $17,596   $2,407,522 
                                    
Ending balance: individually evaluated for impairment  $1,629   $-   $672   $290   $-   $-   $2,591 
                                    
Ending balance: collectively evaluated for impairment  $1,051,135   $347,054   $390,876   $495,045   $91,153   $17,596   $2,392,859 
                                    
Ending balance: loans acquired with deteriorated credit quality  $635   $3,739   $1,267   $6,431   $-   $-   $12,072 

 

The table above includes loans acquired on June 19, 2015 from CNB and February 14, 2014 from FNBNY.

 

   Three Months Ended March 31, 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  $6,994   $2,670   $2,208   $4,526   $1,104   $135   $17,637 
Charge-offs   -    -    -    (200)   -    (2)   (202)
Recoveries   -    -    -    20    1    4    25 
Provision   (4)   310    (71)   559    1    5    800 
Ending Balance  $6,990   $2,980   $2,137   $4,905   $1,106   $142   $18,260 

  

 28 

  

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 no contributions to the pension plan or the SERP during the three months ended March 31, 2016. In accordance with the SERP, a retired executive received a distribution from the Plan totaling $28,000 during the three months ended March 31, 2016.

 

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/(recovery):

 

   Three Months Ended March 31, 
   Pension Benefits   SERP Benefits 
(In thousands)  2016   2015   2016   2015 
Service cost  $291   $280   $44   $42 
Interest cost   196    174    26    22 
Expected return on plan assets   (455)   (453)   -    - 
Amortization of net loss   99    93    7    8 
Amortization of unrecognized prior service cost   (19)   (20)   -    - 
Amortization of unrecognized transition obligation   -    -    7    7 
Net periodic benefit cost/(recovery)  $112   $74   $84   $79 

 

9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

At March 31, 2016 and December 31, 2015, securities sold under agreements to repurchase totaled $51.0 million and $50.9 million, respectively, and were secured by U.S. GSE, residential mortgage-backed securities and residential collateralized mortgage obligations with a carrying amount of $55.9 million and $55.9 million, respectively.

 

Securities sold under agreements to repurchase are financing arrangements with $1.0 million maturing during the second quarter of 2016 and $50.0 million maturing during the fourth quarter of 2016. 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 three months ended 
(Dollars in thousands)  March 31, 2016   March 31, 2015 
Average daily balance  $50,850   $32,122 
Average interest rate   0.85%   1.01%
Maximum month-end balance  $51,025   $36,230 
Weighted average interest rate   0.84%   1.01%

 

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10. FEDERAL HOME LOAN BANK ADVANCES

 

The following table sets forth the contractual maturities and weighted average interest rates of FHLB advances over the next four years at March 31, 2016 and December 31, 2015:

 

   March 31, 2016 
Contractual Maturity  Amount   Weighted
Average Rate
 
(Dollars in thousands)        
Overnight  $    %
           
2016   251,571    0.70%
2017   19,141    0.74%
2018   25,693    1.04%
2019   2,769    1.07%
    299,174    0.73%
   $299,174    0.73%

 

   December 31, 2015 
Contractual Maturity  Amount   Weighted
Average Rate
 
(Dollars in thousands)        
Overnight  $    %
           
2016   249,599    0.75%
2017   19,149    0.74%
2018   25,781    1.04%
2019   2,978    1.08%
    297,507    0.78%
   $297,507    0.78%

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. The advances were collateralized by $763.9 million and $666.3 million of residential and commercial mortgage loans under a blanket lien arrangement at March 31, 2016 and December 31, 2015, respectively. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $1.2 billion at March 31, 2016.

 

11. BORROWED FUNDS

 

Subordinated Debentures

 

In September 2015, the Company issued $80.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”). $40.0 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 $40.0 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 subsidiary, Bridge Statutory Capital Trust II. The TPS have a liquidation

 

 30 

  

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 5 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 $125.0 million as of March 31, 2016 and December 31, 2015, were designated as cash flow hedges of certain Federal Home Loan Bank advances and repurchase agreements. 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.

 

Summary information about the interest rate swaps designated as cash flow hedges is as follows:

 

   Three Months Ended 
(Dollars in thousands)  March 31, 2016   March 31, 2015 
Notional amounts  $125,000   $75,000 
Weighted average pay rates   1.58%   1.66%
Weighted average receive rates   0.63%   0.26%
Weighted average maturity   2.97 years    3.61 years 

 

Interest expense recorded on these swap transactions totaled $250,000 and $134,000 for the three months ended March 31, 2016 and 2015, respectively, and is reported as a component of interest expense on FHLB Advances. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the three months ended March 31, 2016 the Company had $250,000 of reclassifications to interest expense. During the next twelve months, the Company estimates that $992,000 will be reclassified as an increase in interest expense.

 

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 three months ended March 31, 2016 and March 31, 2015:

 

   March 31, 2016 
           Amount of (loss) 
   Amount of (loss)   Amount of (loss)   recognized in other 
   recognized in OCI   reclassified from OCI   non-interest income 
(In thousands)  (Effective Portion)   to interest expense   (Ineffective Portion) 
Interest rate contracts  $(2,023)  $(250)  $- 

 

 31 

  

   March 31, 2015 
           Amount of (loss) 
   Amount of (loss)   Amount of (loss)   recognized in other 
   recognized in OCI   reclassified from OCI   non-interest income 
(In thousands)  (Effective Portion)   to interest expense   (Ineffective Portion) 
Interest rate contracts  $(815)  $(134)  $- 

 

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

 

   March 31, 2016   December 31, 2015 
       Fair   Fair       Fair   Fair 
   Notional   Value   Value   Notional   Value   Value 
(In thousands)  Amount   Asset   Liability   Amount   Asset   Liability 
Included in other assets/(liabilities):                              
Interest rate swaps related to FHLB Advances  $100,000   $-   $(2,044)  $100,000   $14   $(713)
Forward starting interest rate swap related to FHLB Advances  $25,000   $-   $(1,023)  $25,000   $-   $(595)

 

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:

 

   Three Months Ended 
(Dollars in thousands)  March 31, 2016   March 31, 2015 
Notional amounts  $56,014   $37,125 
Weighted average pay rates   3.47%   3.28%
Weighted average receive rates   3.47%   3.28%
Weighted average maturity   15.33 years    16.81 years 
Fair value of combined interest rate swaps  $-   $- 

 

Credit-Risk-Related Contingent Features

 

As of March 31, 2016 the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.3 million. As of March 31, 2016, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $5.0 million against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2016, it could have been required to settle its obligations under the agreements at the termination value.

 

 32 

  

13. OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

   Three Months Ended 
(In thousands)  March 31, 2016   March 31, 2015 
Unrealized holding gains on available for sale securities  $9,740   $4,915 
Reclassification adjustment for (gains) losses realized in income   (66)   10 
Income tax effect   (3,917)   (1,959)
Net change in unrealized gains on available for sale securities   5,757    2,966 
           
Reclassification adjustment for amortization realized in income   94    88 
Income tax effect   (33)   (34)
Net change in post-retirement obligation   61    54 
           
Change in fair value of derivatives used for cash flow hedges   (2,023)   (815)
Reclassification adjustment for losses realized in income   250    134 
Income tax effect   720    261 
Net change in unrealized loss on cash flow hedges   (1,053)   (420)
           
Total  $4,765   $2,600 

 

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   March 31, 
(In thousands)  2015   Change   2016 
Unrealized (losses) gains on available for sale securities  $(4,741)  $5,757   $1,016 
Unrealized (losses) gains on pension benefits   (4,111)   61    (4,050)
Unrealized losses on cash flow hedges   (770)   (1,053)   (1,823)
Total  $(9,622)  $4,765   $(4,857)

 

The following represents the reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2016 and 2015:

 

           Affected Line Item
   Three Months Ended   in the Consolidated
(In thousands)  March 31, 2016   March 31, 2015   Statements of Income
Realized gains (losses) on sale of available for sale securities  $66   $(10)  Net securities losses
Income tax (expense) benefit   (27)   4   Income tax expense
Net of income tax  $39   $(6)   
              
Amortization of defined benefit pension plan and the defined benefit plan component of the SERP:             
Prior service credit (cost)  $19   $20   Salaries and employee benefits
Transition obligation   (7)   (7)  Salaries and employee benefits
Actuarial losses   (106)   (101)  Salaries and employee benefits
   $(94)  $(88)   
Income tax benefit   38    34   Income tax expense
Net of income tax  $(56)  $(54)   
              
Realized losses on cash flow hedges  $(250)  $(134)  Interest expense
Income tax benefit   101    52   Income tax expense
Net of income tax  $(149)  $(82)   
              
Total reclassifications, net of income tax  $(166)  $(142)   

 

 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 $96.5 million, which is not deductible for tax purposes. At acquisition, CNB had total acquired assets on a fair value basis of $895.3 million, with loans of $729.4 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 three month period ended March 31, 2016 includes the operating results of CNB since the acquisition date of June 19, 2015.

 

The following summarizes the finalized 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    (6,935)   729,413 
Bank Owned Life Insurance   21,445    -    21,445 
Premises and equipment   6,398    (5,122)   1,276 
Other intangible assets   6,698    -    6,698 
Other assets   14,484    7,245    21,729 
Total Assets Acquired  $900,110   $(4,812)  $895,298 
                
Deposits  $786,853   $-   $786,853 
Federal Home Loan Bank term advances   35,581    -    35,581 
Other liabilities and accrued expenses   5,647    6,214    11,861 
Total Liabilities Assumed  $828,081   $6,214   $834,295 
                
Net Assets Acquired   72,029    (11,026)   61,003 
Consideration Paid   157,503    -    157,503 
Goodwill Recorded on Acquisition  $85,474   $11,026   $96,500 

 

15. RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share Based-Based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. The Company adopted ASU 2016-09 in the first quarter of 2016. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. ASU 2015-16 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption of ASU 2015-16 resulted in a fixed asset measurement period adjustment for $0.3 million that was recorded in 2016 related to the recovery of depreciation expense recorded in 2015.

 

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

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

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

 

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; our ability to successfully integrate acquired entities; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines, changes in real estate values; expanded regulatory requirements as a result of the Dodd-Frank Act, which could adversely affect operating results; and the “Risk Factors” discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 and elsewhere in this report. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

 

Overview

 

Who We Are and How We Generate Income

 

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

 

Principal Products and Services and Locations of Operations

 

Federally chartered in 1910, the Bank was founded by local farmers and merchants and now operates forty branches, thirty-eight in the primary market areas of Suffolk and Nassau Counties, Long Island, with one branch in Bayside, Queens and one in Manhattan. For over a century, the Bank has maintained its focus on building customer relationships in its market area. The mission of the Company is to grow through the provision of exceptional service to its customers, its employees, and the community. The Company strives to achieve excellence in financial performance and build long term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities surrounding its branch offices. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) multi-family mortgage loans; (3) home equity loans; (4) construction loans; (5) residential mortgage loans; (6) secured and unsecured commercial and consumer loans; (7) FHLB, FNMA, GNMA and FHLMC and non-agency mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8) New York State and local municipal obligations; and (9) U.S government sponsored entity (“U.S. GSE”) securities. The Bank also offers the CDARS program, providing multi-millions of FDIC insurance on CD deposits to its customers. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture,

 

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safe deposit boxes, individual retirement accounts as well as investment services through Bridge Financial Services, which offers a full range of investment products and services through a third party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. The Bank’s customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

 

Significant Events

 

Issuance of Subordinted Debentures

In September 2015, the Company issued $80.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”). $40.0 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 $40.0 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.

 

Acquisition of Community National Bank

On June 19, 2015, the Company acquired 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 $96.5 million, which is not deductible for tax purposes. At acquisition, CNB had total acquired assets on a fair value basis of $899.3 million, with loans of $729.4 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.

 

Acquisition of FNBNY

On February 14, 2014, the Company acquired FNBNY Bancorp and its wholly owned subsidiary, the First National Bank of New York (collectively “FNBNY”) at a purchase price of $6.1 million and issued an aggregate of 240,598 Company shares in exchange for all the issued and outstanding stock of FNBNY. The purchase price was subject to certain post-closing adjustments equal to 60 percent of the net recoveries on $6.3 million of certain identified problem loans over a two-year period after the acquisition. As of February 14, 2016, a net recovery was realized and $0.3 million has been distributed to the former FNBNY shareholders. No further distributions are required. At acquisition, FNBNY had total acquired assets on a fair value basis of $211.9 million, with loans of $89.7 million, investment securities of $103.2 million and deposits of $169.9 million. With three full-service branches, including the Company’s first two branches in Nassau County located in Merrick and Massapequa, and one in western Suffolk County located in Melville, the transaction expanded our geographic footprint into Nassau County, complemented our existing branch network and enhanced our asset generation capabilities. The expanded branch network allowed the Company to serve a greater portion of the Long Island and metropolitan marketplace.

 

Quarterly Highlights

 

·Net income for the first quarter of 2016 was $8.6 million and $0.49 per diluted share, compared to $4.8 million and $0.41 per diluted share for the first quarter of 2015.

 

·Net interest income increased to $29.4 million for the first quarter of 2016 compared to $18.7 million in 2015.

 

·Net interest margin was 3.43% for the first quarter of 2016 compared to 3.63% for the 2015 period.

 

·Loans held for investment at March 31, 2016 of $2.48 billion increased $70.5 million or 2.9% over December 31, 2015 and increased $1.078 billion or 76.8% over March 31, 2015.

 

·Total assets of $3.91 billion at March 31, 2016, increased $131.6 million compared to December 31, 2015 and increased $1.626 billion or 71.1% compared to March 31, 2015.

 

·Deposits of $2.94 billion at March 31, 2016, increased $96.8 million over December 31, 2015 and increased $1.101 billion or 59.9% compared to March 31, 2015 levels.

 

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·Allowance for loan losses to total loans ratio, which was calculated inclusive of $632 million and $660 million, respectively, of CNB acquired loans, was 0.88% as of March 31, 2016 compared to 0.86% at December 31, 2015. The allowance for loan losses to total loans ratio at March 31, 2016, was 1.30% excluding CNB acquired loans.

 

·All capital ratios exceed the fully phased in requirements of Basel III as of March 31, 2016.

 

·A cash dividend of $0.23 per share was declared in April 2016 for the first quarter.

 

Current Environment

 

The Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule in July 2013 that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.  Among other things, the rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised.  Additional constraints were also imposed on the inclusion in regulatory capital of mortgage-servicing assets, defined tax assets and minority interests.  The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.  The final rule became effective for the Bank on January 1, 2015.  The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rules, while more favorable to community banks, require that all banks maintain higher levels of capital. The Bank’s current capital levels meet these new requirements.

 

In December 2015, the Federal Reserve increased the federal funds target rate 25 basis points. The Federal Open Market Committee (“FOMC”) anticipates maintaining the federal funds target rate at 25 to 50 basis points due to uncertain global economic conditions. In determining the timing and amount of future adjustments to the target rate, the Committee will assess labor market conditions, inflation and economic activity, as well as global market developments. The Committee continues its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling over maturing Treasury securities at auction and anticipates doing so until normalization of the level of the federal funds rate is well under way.

 

Growth and service strategies have the potential to offset the compression on net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2010, the Bank has opened ten new branches, including the most recent branch openings in September 2014 in Bay Shore, New York, November 2014 in Port Jefferson, New York and December 2014 in Smithtown, New York. Most of the recent branch openings move the Bank geographically westward and demonstrate its commitment to traditional growth through branch expansion. The Bank has also grown through acquisitions including the June 2015 acquisition of CNB, the February 2014 acquisition of FNBNY, and the May 2011 acquisition of Hampton State Bank. Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships.

 

Challenges and Opportunities

 

As noted earlier, on June 19, 2015, the Company acquired CNB. This acquisition increases the Company’s scale and continues the westward expansion into new markets in Nassau County, Queens and Manhattan. Management recognizes the challenges associated acquisitions and leveraged the experience gained in the acquisitions of FNBNY in 2014 and Hamptons State Bank in 2011, to successfully integrate the operations of CNB.

 

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

 

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

 

Corporate objectives for 2016 include: leveraging our expanding branch network to build customer relationships and grow loans and deposits; focusing on opportunities and processes that continue to enhance the customer experience at the Bank; improving operational efficiencies and prudent management of non-interest expense; and maximizing non-interest income through Bridge Abstract as well as other lines of business. Management believes there remain opportunities to grow its franchise and that continued investments to generate core funding, quality loans and new sources of revenue remain keys to continue creating long term shareholder value. The ability to attract, retain, train and cultivate employees at all levels of the Company remains significant to meeting corporate objectives. The Company has made great progress toward the achievement of these objectives, and avoided many of the problems facing other financial institutions as a result of maintaining discipline in its underwriting, expansion strategies, investing and general business practices. The Company has capitalized on opportunities presented by the market and diligently seeks opportunities for growth and to strengthen the franchise. The Company recognizes the potential risks of the current economic environment and will monitor the impact of market events as we consider growth initiatives and evaluate loans and investments. Management and the Board have built a solid foundation for growth and the Company is positioned to adapt to anticipated changes in the industry resulting from new regulations and legislative initiatives.

 

Critical Accounting Policies

 

Allowance for Loan Losses

 

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

 

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses 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

 

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evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

 

For 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 Bank uses assumptions and methodologies that are relevant to estimating the level of impairment and probable losses in the loan portfolio. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to 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 entire loan portfolio at March 31, 2016 and December 31, 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.

 

Net Income

 

Net income for the three months ended March 31, 2016 was $8.6 million and $0.49 per diluted share as compared to $4.8 million and $0.41 per diluted share for the same period in 2015.   Changes in net income for the three months ended March 31, 2016 compared to March 31, 2015 include: (i) a $10.7 million or 57.4% increase in net interest income as a result of growth in interest earning assets primarily related to loans and investments; (ii) a $0.5 million or 56.3% increase in the provision for loan losses; (iii) a $1.2 million or 42.5% increase in non-interest income related to $0.6 million in service charges and customer fees, title fee income, net securities gains, and $0.6 million in other non-interest income; (iv) an increase in non-interest expenses of $5.6 million related to higher operating costs associated with the acquired CNB operations and facilities, investments in technology, additional marketing costs, and amortization of CNB related intangible assets partially offset by a net recovery of $0.3 million of accrued costs associated with the CNB acquisition; and (v) a $2.0 million increase in income taxes associated with higher pre-tax income. The effective income tax rate was 35.0% for the quarter ended March 31, 2016 compared to 35.5% for the same period last year.

 

Analysis of Net Interest Income

 

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

 

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the years indicated and reflect the average yield on assets and average cost of liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the years shown. Average balances are derived from daily average balances and include nonaccrual loans. The yields and costs include fees, which are considered adjustments to yields. Interest on nonaccrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

 

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   Three Months Ended March 31, 
   2016   2015 
           Average           Average 
   Average       Yield/   Average       Yield/ 
(Dollars in thousands)  Balance   Interest   Cost   Balance   Interest   Cost 
Interest earning assets:                              
Loans, net (1)(2)  $2,423,498   $28,047    4.65%  $1,349,992   $16,493    4.95%
Mortgage-backed securities, CMOs and other asset-backed securities   737,161    3,849    2.10    493,502    2,567    2.11 
Taxable securities   217,806    1,361    2.51    189,295    1,017    2.18 
Tax exempt securities (2)   73,507    631    3.45    71,672    654    3.70 
Deposits with banks   31,911    37    0.47    12,699    7    0.22 
Total interest earning assets   3,483,883    33,925    3.92    2,117,160    20,738    3.97 
Non interest earning assets:                              
Cash and due from banks   59,913              45,694           
Other assets   250,657