Attached files

file filename
EX-31.2 - PERSONAL CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - ConnectOne Bancorp, Inc.exhibit31-2.htm
EX-32 - PERSONAL CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - ConnectOne Bancorp, Inc.exhibit32.htm
EX-23.1 - CONSENT OF CROWE HORWATH LLP - ConnectOne Bancorp, Inc.exhibit23-1.htm
EX-12.1 - STATEMENT OF RATIOS OF EARNINGS TO FIXED CHARGES - ConnectOne Bancorp, Inc.exhibit12-1.htm
EX-21.1 - SUBSIDIARIES OF THE REGISTRANT - ConnectOne Bancorp, Inc.exhibit21-1.htm
EX-23.2 - CONSENT OF BDO, USA LLP - ConnectOne Bancorp, Inc.exhibit23-2.htm
EX-31.1 - PERSONAL CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - ConnectOne Bancorp, Inc.exhibit31-1.htm

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

For the Fiscal Year Ended December 31, 2015

OR

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

For the Transition Period from           to          

Commission File Number: 000-11486

ConnectOne Bancorp, Inc.
(Exact name of registrant as specified in its charter)

New Jersey        52-1273725
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization) Identification Number)

301 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of Principal Executive Offices) (Zip Code)

201-816-8900
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class        Name of each exchange on which registered
Common Stock, no par value   NASDAQ

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐  No 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  ☐  No 

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  ☒  No 



Table of Contents

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 Regulation S-T (232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has required to submit and post such files.)  Yes  ☒  No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer        Accelerated Filer        Non-Accelerated        Small Reporting Company 

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

The aggregate market value of the voting and nonvoting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter - $607.1 million.

Shares Outstanding on March 4, 2016
Common Stock, no par value: 30,091,367 shares

DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement in connection with the 2016 Annual Stockholders Meeting to be filed with the Commission pursuant to Regulation 14A will be incorporated by reference in Part III



Table of Contents

CONNECTONE BANCORP, INC.

TABLE OF CONTENTS

Page
      PART I      
Item 1. Business 4
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 21
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Mine Safety Disclosures 22
PART II
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 23
Item 6. Selected Financial Data 25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Financial Statements and Supplementary Data:   48
       Report of Independent Registered Public Accounting Firms 49
       Consolidated Statements of Condition 51
       Consolidated Statements of Income 52
       Consolidated Statements of Comprehensive Income 53
       Consolidated Statements of Changes in Stockholders’ Equity 54
       Consolidated Statements of Cash Flows 55
       Notes to Consolidated Financial Statements 57
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 111
Item 9A. Controls and Procedures 111
       Report of Independent Registered Public Accounting Firms 113
Item 9B. Other Information 114
PART III
Item 10. Directors, Executive Officers and Corporate Governance 115
Item 11. Executive Compensation 115
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 115
Item 13. Certain Relationships and Related Transactions, and Director Independence 115
Item 14. Principal Accounting Fees and Services 115
PART IV
Item 15. Exhibits, Financial Statements Schedules 116
Signatures 119

Information included in or incorporated by reference in this Annual Report on Form 10-K, other filings with the Securities and Exchange Commission, the Company’s press releases or other public statements, contain or may contain forward looking statements. Please refer to a discussion of the Company’s forward looking statements and associated risks in “Item 1 - Business - Historical Development of Business” and “Item 1A - Risk Factors” in this Annual Report on Form 10-K.



Table of Contents

CONNECTONE BANCORP, INC.
FORM 10-K

PART I

Item 1. Business

Historical Development of Business

This report, in Item 1, Item 7 and elsewhere, includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. These forward-looking statements concern the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp, Inc. and its subsidiaries, including statements preceded by, followed by or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp, Inc. is engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp, Inc.; (8) a delayed or incomplete resolution of regulatory issues could adversely impact our planning; (9) difficulties in integrating any businesses that we may acquire, which may increase our expenses and delay the achievement of any benefits that we may expect from such acquisitions; (10) the impact of reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; and (11) the outcome of any future regulatory and legal investigations and proceedings may not be anticipated. Further information on other factors that could affect the financial results of ConnectOne Bancorp, Inc. are included in Item 1A of this Annual Report on Form 10-K and in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc. ConnectOne Bancorp, Inc. assumes no obligation to update forward-looking statements at any time.

ConnectOne Bancorp, Inc., (the “Company” and with ConnectOne Bank, “we” or “us”) a one-bank holding company, was incorporated in the state of New Jersey on November 12, 1982 as Center Bancorp, Inc. and commenced operations on May 1, 1983 upon the acquisition of all outstanding shares of capital stock of Union Center National Bank, its then principal subsidiary.

On January 20, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ConnectOne Bancorp, Inc., a New Jersey corporation (“Legacy ConnectOne”). Effective July 1, 2014, the Company completed the merger contemplated by the Merger Agreement (the “Merger”) with Legacy ConnectOne merging with and into the Company, with the Company as the surviving corporation. Also at closing, the Company changed its name to “ConnectOne Bancorp, Inc.” and changed its NASDAQ trading symbol to “CNOB”. Immediately following the consummation of the Merger, Union Center Bank merged with and into ConnectOne Bank, a New Jersey-chartered commercial bank (“ConnectOne Bank” or the “Bank”) and a wholly-owned subsidiary of Legacy ConnectOne, with ConnectOne Bank continuing as the surviving bank. Subject to the terms and conditions of the Merger Agreement, each share of common stock, no par value per share, of Legacy ConnectOne was converted into 2.6 shares of the Company’s common stock.

The Company’s primary activity, at this time, is to act as a holding company for the Bank and its other subsidiaries. As used herein, the term “Parent Corporation” shall refer to the Company on an unconsolidated basis.

The Company owns 100% of the voting shares of Center Bancorp, Inc. Statutory Trust II, through which it issued trust preferred securities. The trust exists for the exclusive purpose of (i) issuing trust securities representing undivided beneficial interests in the assets of the trust; (ii) investing the gross proceeds of the trust securities in $5.2 million of junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements as the statutory business trust is not consolidated in accordance with Financial Accounting Standards Board (“FASB”) FASB ASC 810-10 “Consolidation of Variable Interest Entities.” Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income. See Note 11 of the Consolidated Financial Statements.

Except as described above, the Company’s wholly-owned subsidiaries are all included in the Company’s consolidated financial statements. These subsidiaries include an advertising subsidiary; an insurance subsidiary offering annuity products, property and casualty, life and health insurance, and various investment subsidiaries which hold, maintain and manage investment assets for the Company. The Company’s subsidiaries also include a real estate investment trust (the “REIT”) which holds a portion of the Company’s real estate loan portfolio. All subsidiaries mentioned above are directly or indirectly wholly owned by the Company, except that the Company owns less than 100% of the preferred stock of the REIT. A real estate investment trust must have 100 or more shareholders. The REIT has issued less than 20% of its outstanding non-voting preferred stock to individuals, primarily Bank personnel and directors.

- 4 -



Table of Contents

SEC Reports and Corporate Governance

The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.ConnectOneBank.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Also available on the website are the Company’s corporate code of conduct that applies to all of the Company’s employees, including principal officers and directors, and charters for the Audit Committee and Compensation Committee.

Additionally, the Company will provide without charge, a copy of its Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to ConnectOne Bancorp, Inc., Attention: Shareholder Relations, 301 Sylvan Avenue, Englewood Cliffs, New Jersey 07632.

Narrative Description of the Business

We offer a broad range of deposit and loan products and services to the general public and, in particular, to small and mid-sized businesses, local professionals and individuals residing, working and conducting business in our trade area.

While we expect to take an opportunistic approach to acquisitions, considering opportunities to purchase whole institutions, branches or lines of business that complement our existing strategy in the future, we expect the bulk of our future growth to be organic. Our goal is to open new offices in the counties contained in our broader trade area discussed below. However, we do not believe that we need to establish a physical location in each market that we serve. We believe that advances in technology have created new delivery channels which allow us to service customers and maintain business relationships without a physical presence, and that these customers can also be serviced through a regional office. We believe the key to customer acquisition and retention is establishing quality teams of lenders and business relationship officers who will frequently go to the customer, rather than having the customer come into the branch.

We emphasize superior customer service and relationship banking. The Bank offers high-quality service by minimizing personnel turnover and by providing more direct, personal attention than we believe is offered by competing financial institutions, the majority of which are branch offices of banks headquartered outside our primary trade area. By emphasizing the need for a professional, responsive and knowledgeable staff, we offer a superior level of service to our customers. As a result of senior management’s availability for consultation on a daily basis, we believe we offer customers a quicker response on loan applications and other banking transactions than competitors, whose decisions may be made in distant headquarters. We believe that this response time results in a pricing advantage to us, in that we frequently may exceed competitors’ loan pricing and still win customers. We also provide state-of-the-art banking technology, including remote deposit capture, internet banking and mobile banking, to provide our customers with the most choices and maximum flexibility. We believe that this combination of quick, responsive and personal service and advanced technology provides the Bank’s customers with a superior banking experience.

The Bank, through its subsidiary, Center Financial Group LLC, provides financial services, including brokerage services, insurance and annuities, mutual funds and financial planning.

Our Market Area

Our banking offices are located in Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth Counties in New Jersey and in the borough of Manhattan, in New York City, which include some of the most affluent markets in the United States. We also attract business and customers from broader regions, including northern New Jersey, the five boroughs of New York City, and Westchester and Nassau counties in New York State.

Products and Services

We derive a majority of our revenue from net interest income (i.e., the difference between the interest we receive on our loans and securities and the interest we pay on deposits and other borrowings). We offer a broad range of deposit and loan products. In addition, to attract the business of consumer and business customers, we also provide a broad array of other banking services. Products and services provided include personal and business checking accounts, retirement accounts, money market accounts, time and savings accounts, credit cards, wire transfers, access to automated teller services, internet banking, Treasury Direct, ACH origination, lockbox services and mobile banking by phone. In addition, we offer safe deposit boxes. The Bank also offers remote deposit capture banking for both retail and business customers, providing the ability to electronically scan and transmit checks for deposit, reducing time and cost.

Checking account products consist of both retail and business demand deposit products. Retail products include Totally Free checking and, for businesses, both interest-bearing accounts, which require a minimum balance, and non-interest bearing accounts. NOW accounts consist of both retail and business interest-bearing transaction accounts that have minimum balance requirements. Money market accounts consist of products that provide a market rate of interest to depositors but offers a limited number of preauthorized withdrawals. Our savings accounts consist statement type accounts. Time deposits consist of certificates of deposit, including those held in IRA accounts, generally with initial maturities ranging from 7 days to 60 months and brokered certificates of deposit, which we use for asset liability management purposes and to supplement other sources of funding. CDARS/ICS Reciprocal deposits are offered based the Bank’s participation in Promontory Interfinancial Network, LLC. Customers who are FDIC insurance sensitive are able to place large dollar deposits with the Company and the Company uses CDARS to place those funds into certificates of deposit issued by other banks in the Network. This occurs in increments of less than the FDIC insurance limits so that both the principal and interest are eligible for FDIC insurance coverage in amounts larger than the standard dollar amount. The FDIC currently considers these funds as brokered deposits.

- 5 -



Table of Contents

Deposits serve as the primary source of funding for our interest-earning assets, but also generate non-interest revenue through insufficient funds fees, stop payment fees, wire transfer fees, safe deposit rental fees, debit card income, including foreign ATM fees and credit and debit card interchange, gift card fees, and other miscellaneous fees. In addition, the Bank generates additional non-interest revenue associated with residential loan origination and sale, loan servicing, late fees and merchant services.

We offer personal and commercial business loans on a secured and unsecured basis, revolving lines of credit, commercial mortgage loans, and residential mortgages on both primary and secondary residences, home equity loans, bridge loans and other personal purpose loans. However, we are not and have not historically been a participant in the sub-prime lending market.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, taxi medallions, inventory and equipment, and liens on commercial and residential real estate. As of December 31, 2015, our taxi medallion portfolio totaled $103.2 million, of which $99.9 million was current and $3.3 million was past due 30-60 days. All of our taxi medallion loans are secured by New York City taxi medallions. Troubled debt restructurings associated with this portfolio totaled $78.5 million. The average loan-to-value ratio of the medallion portfolio was approximately 90% assuming valuations of $800 thousand for corporate and $700 thousand for individual.

Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

The Board of Directors has approved a loan policy granting designated lending authorities to specific officers of the Bank. Those officers are comprised of the Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Team Leader and the Consumer Loan Officer. All loan approvals require the signatures of a minimum of two officers. The Senior Lending Group (Chief Executive Officer, Chief Lending Officer and Chief Credit Officer) can approve loans up to $25 million in aggregate loan exposure and not exceed 65% of the Legal Lending Limit of the Bank (currently $60.5 million as of December 31, 2015 for most loans), provided that (i) the credit does not involve an exception to policy greater than $7.5 million or $20 million in all credit outstanding to the borrower in the aggregate, (ii) the credit does not exceed certain dollar amount thresholds set forth in our policy, which varies by loan type, and (iii) the credit is not extended to an insider of the Bank. The Board Loan Committee (which includes the Chief Executive Officer and four other Board members) approves credits that are both exceptions to policy and are above prescribed amounts related to loan type and collateral. Loans to insiders must be approved by the entire Board.

The Bank’s lending policies generally provide for lending inside of our primary trade area. However, the Bank will make loans to persons outside of our primary trade area when we deem it prudent to do so. In an effort to promote a high degree of asset quality, the Bank focuses primarily upon offering secured loans. However, the Bank does make short-term unsecured loans to borrowers with high net worth and income profiles. The Bank generally requires loan customers to maintain deposit accounts with the Bank. In addition, the Bank generally provides for a minimum required rate of interest in its variable rate loans. We believe that having senior management on-site allows for an enhanced local presence and rapid decision-making that attracts borrowers. The Bank’s legal lending limit to any one borrower is 15% of the Bank’s capital base (defined as tangible equity plus the allowance for loan and lease losses) for most loans ($60.5 million) and 25% of the capital base for loans secured by readily marketable collateral ($100.8 million). At December 31, 2015, the Bank’s largest committed relationship (to several affiliated borrowers) totaled $57.9 million. The Bank’s largest single loan outstanding at December 31, 2015 was $27.7 million.

Our business model includes using industry best practices for community banks, including personalized service, state-of-the-art technology and extended hours. We believe that this will generate deposit accounts with somewhat larger average balances than are found at many other financial institutions. We also use pricing techniques in our efforts to attract banking relationships having larger than average balances.

Competition

The banking business is highly competitive. We face substantial immediate competition and potential future competition both in attracting deposits and in originating loans. We compete with numerous commercial banks, savings banks and savings and loan associations, many of which have assets, capital and lending limits larger than those that we have. Other competitors include money market mutual funds, mortgage bankers, insurance companies, stock brokerage firms, regulated small loan companies, credit unions and issuers of commercial paper and other securities.

- 6 -



Table of Contents

Our larger competitors have greater financial resources to finance wide-ranging advertising campaigns. Additionally, we endeavor to compete for business by providing high quality, personal service to customers, customer access to our decision-makers and competitive interest rates and fees. We seek to hire and retain quality employees who desire greater responsibility than may be available working for a larger employer.

SUPERVISION AND REGULATION

The banking industry is highly regulated. Statutory and regulatory controls increase a bank holding company’s cost of doing business and limit the options of its management to deploy assets and maximize income. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on the Company or the Bank. It is intended only to briefly summarize some material provisions.

Bank Holding Company Regulation

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “Holding Company Act”). As a bank holding company, the Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file reports with the FRB and provide such additional information as the FRB may require. The Company and its subsidiaries are subject to examination by the FRB.

The Holding Company Act prohibits the Company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks, except that it may, upon application, engage in, and may own shares of companies engaged in, certain businesses found by the FRB to be so closely related to banking “as to be a proper incident thereto.” The Holding Company Act requires prior approval by the FRB of the acquisition by the Company of more than 5% of the voting stock of any other bank. Satisfactory capital ratios and Community Reinvestment Act ratings and anti-money laundering policies are generally prerequisites to obtaining federal regulatory approval to make acquisitions. The policy of the FRB provides that a bank holding company is expected to act as a source of financial strength to its subsidiary bank and to commit resources to support the subsidiary bank in circumstances in which it might not do so absent that policy.

As a New Jersey-charted commercial bank and an FDIC-insured institution, acquisitions by the Bank require approval of the New Jersey Department of Banking and Insurance (the “Banking Department”) and the FDIC, an agency of the federal government. The Holding Company Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The Gramm-Leach-Bliley Act, discussed below, allows the Company to expand into insurance, securities, merchant banking activities, and other activities that are financial in nature, in certain circumstances.

Regulation of Bank Subsidiary

The operations of the Bank are subject to requirements and restrictions under federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted, and limitations on the types of investments that may be made and the types of services which may be offered. Various consumer laws and regulations also affect the operations of the Bank. There are various legal limitations, including Sections 23A and 23B of the Federal Reserve Act, which govern the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its holding company’s non-bank subsidiaries and affiliates. Under federal law, a bank subsidiary may only make loans or extensions of credit to, or investment in the securities of, its parent or the non-bank subsidiaries of its parent (other than direct subsidiaries of such bank which are not financial subsidiaries) or to any affiliate, or take their securities as collateral for loans to any borrower, upon satisfaction of various regulatory criteria, including specific collateral loan to value requirements.

The Dodd-Frank Act

The Dodd-Frank Act, adopted in 2010, will continue to have a broad impact on the financial services industry, as a result of the significant regulatory and compliance changes made by the Dodd-Frank Act, including, among other things, (i) enhanced resolution authority over troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the FRB, the Office of the Comptroller of the Currency and the FDIC. A summary of certain provisions of the Dodd-Frank Act is set forth below:

Minimum Capital Requirements. The Dodd-Frank Act requires new capital rules and the application of the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. In addition to making bank holding companies subject to the same capital requirements as their bank subsidiaries, these provisions (often referred to as the Collins Amendment to the Dodd-Frank Act) were also intended to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. The Dodd-Frank Act also requires banking regulators to seek to make capital standards countercyclical, so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction. See “Capital Adequacy Guidelines” for a description of capital requirements adopted by U.S. federal banking regulators in 2013 and the treatment of trust preferred securities under such rules.

- 7 -



Table of Contents

The Consumer Financial Protection Bureau (“Bureau”). The Dodd-Frank Act created the Bureau within the FRB. The Bureau is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The Bureau has rulemaking authority over many of the statutes governing products and services offered to bank consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the Bureau and state attorneys general are permitted to enforce consumer protection rules adopted by the Bureau against state-chartered institutions. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Institutions with $10 billion or less in assets, such as the Bank, will continue to be examined for compliance with the consumer laws by their primary bank regulators.
  
Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. In December 2010, the FDIC increased the designated reserve ratio to 2.0 percent.
   
Shareholder Votes. The Dodd-Frank Act requires publicly traded companies like the Company to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments in certain circumstances. The Dodd-Frank Act also authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The SEC has not yet adopted such rules.

Although a significant number of the rules and regulations mandated by the Dodd-Frank Act have been finalized, many of the new requirements called for have yet to be implemented and will likely be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact such requirements will have on financial institutions’ operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements (which, in turn, could require the Company and the Bank to seek additional capital) or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

Regulation W

Regulation W codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank. The Company is considered to be an affiliate of the Bank. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and
  
to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates

In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

a loan or extension of credit to an affiliate;
   
a purchase of, or an investment in, securities issued by an affiliate;

- 8 -



Table of Contents

a purchase of assets from an affiliate, with some exceptions;
 
the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and
 
the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

Further, under Regulation W:

a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
   
covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and
  
with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by certain types of collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit   

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the FRB decides to treat these subsidiaries as affiliates.

FDICIA

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), each federal banking agency has promulgated regulations, specifying the levels at which an insured depository institution such as the Bank would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution. To qualify to engage in financial activities under the Gramm-Leach-Bliley Act, all depository institutions must be “well capitalized.”

The FDIC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it (i) has a total risk-based capital ratio of at least 10.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 8.0 percent, (iii) has a Tier 1 leverage ratio of at least 5.0 percent, (iv) has a common equity Tier 1 capital ratio of at least 6.5%, and (v) meets certain other requirements. An institution will be classified as “adequately capitalized” if it (i) has a total risk-based capital ratio of at least 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of at least 6.0 percent, (iii) has a Tier 1 leverage ratio of at least 4.0 percent, has a common equity Tier 1 capital ratio of at least 4.5%, and (v) does not meet the definition of “well capitalized.” An institution will be classified as “undercapitalized” if it (i) has a total risk-based capital ratio of less than 8.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 6.0 percent, (iii) has a Tier 1 leverage ratio of less than 4.0 percent, or (iv) has a common equity Tier 1 capital ratio of less than 4.5%. An institution will be classified as “significantly undercapitalized” if it (i) has a total risk-based capital ratio of less than 6.0 percent, (ii) has a Tier 1 risk-based capital ratio of less than 4.0 percent, (iii) has a Tier 1 leverage ratio of less than 3.0 percent, or (iv) has a common equity Tier 1 capital ratio of less 3.0%. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2.0 percent. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination rating.

In addition, significant provisions of FDICIA required federal banking regulators to impose standards in a number of other important areas to assure bank safety and soundness, including internal controls, information systems and internal audit systems, credit underwriting, asset growth, compensation, loan documentation and interest rate exposure.

Capital Adequacy Guidelines

In December 2010 and January 2011, the Basel Committee on Banking Supervision (the “Basel Committee”) published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” In July 2013, the FRB, the FDIC and the Comptroller of the Currency adopted final rules (the “New Rules”), which implement certain provisions of Basel III and the Dodd-Frank Act. The New Rules replaced the existing general risk-based capital rules of the various banking agencies with a single, integrated regulatory capital framework. The New Rules require higher capital cushions and more stringent criteria for what qualifies as regulatory capital. The New Rules were effective for the Bank and the Company on January 1, 2015.

Under the New Rules, the Company and the Bank are required to maintain the following minimum capital ratios, expressed as a percentage of risk-weighted assets:

Common Equity Tier 1 Capital Ratio of 4.5% ( the “CET1”);
  
Tier 1 Capital Ratio (CET1 capital plus “Additional Tier 1 capital”) of 6.0%; and
 
Total Capital Ratio (Tier 1 capital plus Tier 2 capital) of 8.0%.

- 9 -



Table of Contents

In addition, the Company and the Bank will be subject to a leverage ratio of 4% (calculated as Tier 1 capital to average consolidated assets as reported on the consolidated financial statements).

The New Rules also require a “capital conservation buffer.” When fully phased in on January 1 2019, the Company and the Bank will be required to maintain a 2.5% capital conservation buffer, which is composed entirely of CET1, on top of the minimum risk-weighted asset ratios described above, resulting in the following minimum capital ratios:

CET1 of 7%;
 

Tier 1 Capital Ratio of 8.5%; and
 

Total Capital Ratio of 10.5%.

The purpose of the capital conservation buffer is to absorb losses during periods of economic stress. Banking institutions with a CET1, Tier 1 Capital Ratio and Total Capital Ratio above the minimum set forth above but below the capital conservation buffer will face constraints on their ability to pay dividends, repurchase equity and pay discretionary bonuses to executive officers, based on the amount of the shortfall.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level, and it increases by 0.625% on each subsequent January 1 until it reaches 2.5% on January 1, 2019.

The New Rules provide for several deductions from and adjustments to CET1, which are being phased in between January 1, 2015 and January 1, 2018. For example, mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in common equity issued by nonconsolidated financial entities must be deducted from CET1 to the extent that any one of those categories exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Under the New Rules, banking organizations such as the Company and the Bank may make a one-time permanent election regarding the treatment of accumulated other comprehensive income items in determining regulatory capital ratios. Effective as of January 1, 2015, the Company and the Bank elected to exclude accumulated other comprehensive income items for purposes of determining regulatory capital.

While the New Rules generally require the phase-out of non-qualifying capital instruments such as trust preferred securities and cumulative perpetual preferred stock, holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, may permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

The New Rules prescribe a standardized approach for calculating risk-weighted assets. Depending on the nature of the assets, the risk categories generally range from 0% for U.S. Government and agency securities, to 600% for certain equity exposures, and result in higher risk weights for a variety of asset categories. In addition, the New Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

Consistent with the Dodd-Frank Act, the New Rules adopt alternatives to credit ratings for calculating the risk-weighting for certain assets.

Federal Deposit Insurance and Premiums

Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF.

The assessment base for deposit insurance premiums is an institution’s average consolidated total assets minus average tangible equity. In connection with adopting this assessment base calculation, the FDIC lowered total base assessment rates to between 2.5 and 9 basis points for banks in the lowest risk category, and 30 to 45 basis points for banks in the highest risk category. The Company paid $2.1 million in total FDIC assessments in 2015, as compared to $1.6 million in 2014.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (DRR), that is, the ratio of the DIF to insured deposits. The FDIC has adopted a plan under which it will meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on institutions with assets less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. The FDIC has not yet announced how it will implement this offset.

In addition to deposit insurance assessments, the FDIC is required to continue to collect from institutions payments for the servicing of obligations of the Financing Corporation (“FICO”) that were issued in connection with the resolution of savings and loan associations, so long as such obligations remain outstanding. The Bank paid a FICO premium of $189,100 in 2015.

- 10 -



Table of Contents

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “Modernization Act”):

allows bank holding companies meeting management, capital, and Community Reinvestment Act standards to engage in a substantially broader range of non-banking activities than previously was permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies, if the bank holding company elects to become a financial holding company, it files a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals;
 

allows insurers and other financial services companies to acquire banks;
 

removes various restrictions that previously applied to bank holding company ownership of securities firms and mutual fund advisory companies; and
 

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

The Modernization Act also modified other financial laws, including laws related to financial privacy and community reinvestment. The Company has elected not to become a financial holding company.

Community Reinvestment Act

Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, an insured depository institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of every bank, to assess the bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such bank.

USA PATRIOT Act

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) gives the federal government powers to address terrorist threats through domestic security measures, surveillance powers, information sharing, and anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, the USA PATRIOT Act encourages information-sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions, including banks, thrift institutions, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

All financial institutions must establish anti-money laundering programs that include, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.
 

The Secretary of the Department of Treasury, in conjunction with other bank regulators, is authorized to issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened.
 

Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) are required to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.
 

Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks.
 

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

- 11 -



Table of Contents

The United States Treasury Department has issued a number of implementing regulations which address various requirements of the USA PATRIOT Act and are applicable to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers.

SBLF

On September 15, 2011, the Company issued to the Treasury a total of 11,250 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “SBLF Preferred Stock”), having a liquidation value of $1,000 per share, for a total purchase price of $11,250,000 as part of the Treasury’s Small Business Lending Fund program (“SBLF”).

The SBLF Preferred Stock qualifies as Tier 1 capital. Non-cumulative dividends are payable quarterly on January 1, April 1, July 1 and October 1 for the SBLF Preferred Stock, commencing on January 1, 2012. The dividend rate is calculated as a percentage of the aggregate liquidation value of the outstanding SBLF Preferred Stock and is based on changes in the level of “Qualified Small Business Lending” or “QSBL” by the Bank The dividend rate on the SBLF Preferred Stock was set at five percent for the initial dividend period.

For the second through tenth calendar quarters after the closing of the SBLF Program transaction, the dividend rate will fluctuate between one percent and five percent to reflect the amount of change in the Bank’s level of QSBL. More specifically, if the Bank’s QSBL at the end of a quarter has increased as compared to the baseline, then the dividend rate payable on the SBLF Preferred Stock would change as follows:

Dividend Rate
Relative Increase in QSBL to Baseline         (for each of the 2nd – 10th Dividend Periods)
0% or less 5 %
More than 0%, but less than 2.5%   5 %
2.5% or more, but less than 5% 4 %
5% or more, but less than 7.5% 3 %
7.5% or more, but less than 10% 2 %
10% or more 1 %

From the eleventh through the eighteenth calendar quarters and that portion of the nineteenth calendar quarter which ends immediately prior to the date that is the four and one half years anniversary of the closing of the SBLF Program transaction, the dividend rate on the SBLF Preferred Stock will be fixed at between one percent and seven percent based on the level of QSBL at that time, as compared to the baseline in accordance with the chart below. If any SBLF Preferred Stock remains outstanding after four and one half years following the closing of the SBLF Program transaction, the dividend rate will increase to nine percent. In our case, the dividend rate on the SBLF Preferred Stock will increase to 9.0% on March 15, 2016.

0% or less

7 %
More than 0%, but less than 2.5% 5 %
2.5% or more, but less than 5% 4 %
5% or more, but less than 7.5% 3 %
7.5% or more, but less than 10% 2 %
10% or more 1 %

The SBLF Preferred Stock is non-voting, except in limited circumstances that could impact the SBLF investment, such as (i) authorization of senior stock, (ii) charter amendments adversely affecting the SBLF Preferred Stock and (iii) extraordinary transactions such as mergers, asset sales, share exchanges and the like (unless the SBLF Preferred Stock remains outstanding and the rights and preferences thereof are not impaired by such transaction).

In the event the Company misses five dividend payments, whether or not consecutive, the holder of the SBLF Preferred Stock will have the right, but not the obligation, to appoint a representative as an “observer” on the Company’s Board of Directors.

Further, the SBLF Preferred Stock may be redeemed by the Company at any time, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends for the then current Dividend Period, subject to the approval of the Company’s federal banking regulator.

The SBLF Preferred Stock is not subject to any contractual restrictions on transfer and thus the Secretary may sell, transfer, exchange or enter into other transactions with respect to the SBLF Preferred Stock without the Company’s consent.

The Company expects to repurchase all outstanding $11.25 million SBLF preferred stock by March 31, 2016.

- 12 -



Table of Contents

Loans to Related Parties

The Company’s authority to extend credit to its directors and executive officers, as well as to entities controlled by such persons, is currently governed by the requirements of the Sarbanes-Oxley Act of 2002 and Regulation O promulgated by the FRB. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the Bank’s Board of Directors must approve extensions of credit in excess of certain limits.

Dividend Restrictions

The Parent Corporation is a legal entity separate and distinct from the Bank. Virtually all of the revenue of the Parent Corporation available for payment of dividends on its capital stock will result from amounts paid to the Parent Corporation by the Bank. All such dividends are subject to the laws of the state of New Jersey, the Banking Act, the Federal Deposit Insurance Act (“FDIA”) and the regulation of the New Jersey Department of Banking and Insurance and of the FDIC.

Under the New Jersey Corporation Act, the Parent Corporation is permitted to pay cash dividends provided that the payment does not leave us insolvent. As a bank holding company under the BHCA, we would be prohibited from paying cash dividends if we are not in compliance with any capital requirements applicable to us. However, as a practical matter, for so long as our major operations consist of ownership of the Bank, the Bank will remain our source of dividend payments, and our ability to pay dividends will be subject to any restrictions applicable to the Bank.

Under the New Jersey Banking Act of 1948, as amended, dividends may be paid by the Bank only if, after the payment of the dividend, the capital stock of the Bank will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of the dividend will not reduce the Bank’s surplus. The payment of dividends is also dependent upon the Bank’s ability to maintain adequate capital ratios pursuant to applicable regulatory requirements.

The terms of the SBLF Preferred Stock discussed above impose limits on the Company’s ability to pay dividends on and repurchase shares of its common stock and other securities. More specifically, if the Company fails to declare and pay dividends on the SBLF Preferred Stock in a given quarter, then during such quarter and for the next three quarters following such missed dividend payment, the Company may not pay dividends on, or repurchase, any common stock or any other securities that are junior to (or in parity with) the SBLF Preferred Stock, except in very limited circumstances.

Also under the terms of the SBLF Preferred Stock, the Company may declare and pay dividends on its common stock or any other stock junior to the SBLF Preferred Stock, or repurchase shares of any such stock, only if after payment of such dividends or repurchase of such shares, the Company’s Tier 1 Capital would be at least equal to the so-called Tier 1 Dividend Threshold, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Stock.

The FRB has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs asset quality and overall financial condition. FRB regulations also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized, and under regulations implementing the Basel III accord, a bank holding company’s ability to pay cash dividends may be impaired if it fails to satisfy certain capital buffer requirements. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

- 13 -



Table of Contents

Item 1A. Risk Factors

An investment in our common stock involves risks. Stockholders should carefully consider the risks described below, together with all other information contained in this Annual Report on Form 10-K, before making any purchase or sale decisions regarding our common stock. If any of the following risks actually occur, our business, financial condition or operating results may be harmed. In that case, the trading price of our common stock may decline, and stockholders may lose part or all of their investment in our common stock.

Risks Applicable to Our Business:

Our growth-oriented business strategy could be adversely affected if we are not able to attract and retain skilled employees or if we lose the services of our senior management team.

We may not be able to successfully manage our business as a result of the strain on our management and operations that may result from growth. Our ability to manage growth will depend upon our ability to continue to attract, hire and retain skilled employees. The loss of members of our senior management team, including those officers named in the summary compensation table of our proxy statement, could have a material adverse effect on our results or operations and ability to execute our strategic goals. Our success will also depend on the ability of our officers and key employees to continue to implement and improve our operational and other systems, to manage multiple, concurrent customer relationships and to hire, train and manage our employees.

We may need to raise additional capital to execute our growth oriented business strategy.

In order to continue our growth, we will be required to maintain our regulatory capital ratios at levels higher than the minimum ratios set by our regulators. In light of current economic conditions, our regulators have been seeking higher capital bases for insured depository institutions experiencing strong growth. In addition, the implementation of the Basel III regulatory capital requirements may require us to increase our regulatory capital ratios and raise additional capital. We can offer you no assurances that we will be able to raise capital in the future, or that the terms of any such capital will be beneficial to our existing security holders. In the event we are unable to raise capital in the future, we may not be able to continue our growth strategy

We have a significant concentration in commercial real estate loans.

Our loan portfolio is made up largely of commercial real estate loans. These types of loans generally expose a lender to a higher degree of credit risk of non-payment and loss than do residential mortgage loans because of several factors, including dependence on the successful operation of a business or a project for repayment, and loan terms with a balloon payment rather than full amortization over the loan term. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans. Underwriting and portfolio management activities cannot completely eliminate all risks related to these loans. Any significant failure to pay on time by our customers or a significant default by our customers would materially and adversely affect us.

At December 31, 2015, we had $2.0 billion of commercial real estate loans, which represented 63.4% of our total loan portfolio and 492.3% of risk-based capital. Our commercial real estate loans include loans secured by multifamily, owner occupied and nonowner occupied properties for commercial uses.

Loans secured by owner-occupied real estate are reliant on the operating businesses to provide cash flow to meet debt service obligations, and as a result they are more susceptible to the general impact on the economic environment affecting those operating companies as well as the real estate.

Although the economy in our market area generally, and the real estate market in particular, is improving, we can give you no assurance that it will continue to grow or that the rate of growth will accelerate. We can give you no assurance that it will continue to grow or that the rate of growth will accelerate to historical levels. Many factors, including continuing European economic difficulties could reduce or halt growth in our local economy and real estate market. Accordingly, it may be more difficult for commercial real estate borrowers to repay their loans in a timely manner in the current economic climate, as commercial real estate borrowers’ ability to repay their loans frequently depends on the successful development of their properties. The deterioration of one or a few of our commercial real estate loans could cause a material increase in our level of nonperforming loans, which would result in a loss of revenue from these loans and could result in an increase in the provision for loan and lease losses and/or an increase in charge-offs, all of which could have a material adverse impact on our net income. We also may incur losses on commercial real estate loans due to declines in occupancy rates and rental rates, which may decrease property values and may decrease the likelihood that a borrower may find permanent financing alternatives. Given the continued weaknesses in the commercial real estate market in general, there may be loans where the value of our collateral has been negatively impacted. Any weakening of the commercial real estate market may increase the likelihood of default of these loans, which could negatively impact our loan portfolio’s performance and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, we could incur material losses. Any of these events could increase our costs, require management time and attention, and materially and adversely affect us.

- 14 -



Table of Contents

Federal banking agencies have issued guidance regarding high concentrations of commercial real estate loans within bank loan portfolios. The guidance requires financial institutions that exceed certain levels of commercial real estate lending compared with their total capital to maintain heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If there is any deterioration in our commercial real estate portfolio or if our regulators conclude that we have not implemented appropriate risk management practices, it could adversely affect our business, and could result in the requirement to maintain increased capital levels. Such capital may not be available at that time, and may result in our regulators requiring us to reduce our concentration in commercial real estate loans.

If we are limited in our ability to originate loans secured by commercial real estate we may face greater risk in our loan portfolio

If, because of our concentration of commercial real estate loans, or for any other reasons, we are limited in our ability to originate loans secured by commercial real estate, we may incur greater risk in our loan portfolio. For example, we may seek to originate commercial and industrial loans, including both secured and unsecured commercial and industrial loans. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses and personal guarantees. Secured commercial and industrial loans are generally collateralized by accounts receivable, inventory, equipment or other assets owned by the borrower and typically include a personal guaranty of the business owner. Compared to real estate, that type of collateral is more difficult to monitor, its value is harder to ascertain, it may depreciate more rapidly and it may not be as readily saleable if repossessed. Therefore, we may be exposed to greater risk of loss on these credits.

The nature and growth rate of our commercial loan portfolio may expose us to increased lending risks.

Given the significant growth in our loan portfolio, many of our commercial real estate loans are unseasoned, meaning that they were originated relatively recently. As of December 31, 2015, we had $2.0 billion in commercial real estate loans outstanding. Approximately 63.9% of the loans, or $1.3 billion, had been originated in the past three years. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could negatively affect our performance.

Our portfolio of loans secured by New York City taxi medallions could expose us to both credit risk and significant volatility in our reported results of operations in future periods due to changes in the value of these medallions.

We maintain a significant ($103.2 million at December 31, 2015) portfolio of loans secured by New York City taxi medallions. The taxi industry in New York City is facing significant competition and pressure from technology based ride share companies such as Uber and Lyft. This has resulted in volatility in the pricing of medallions, and has impacted the earnings of many medallion holders, including our borrowers. These trends in the New York City taxi industry could expose us to greater credit risk and the risk of loss if our borrowers are unable to comply with the terms of their loans.

In addition, a significant portion ($78.5 million) of our portfolio of loans secured by New York City taxi medallions has been deemed impaired, and classified as troubled debt restructurings (“TDRs”) and the level of specific allocations we may need to recognize with regard to these loans and any additional take medallion loans that may become impaired in future periods will be largely dependent upon the valuation we assign to these medallions. Because reported sales prices of these medallions recently have been very volatile, as the industry is under competitive stress, and do not necessarily represent orderly sales, we may also need to take into consideration factors beyond the market price of the medallions in determining our valuation, such as cash flow and industry prospects. In any case, our valuation may be volatile from period to period, and could result in our recognizing significant additional provisions if our valuation declines, while an increase in our valuation could result in a recapture, or reversal, of any such additional provisions. As a result, our results of operations could be materially adversely affected by declines in our valuation of New York City taxi medallions, even if our loans continue to perform as agreed, and we could experience significant volatility in our reported earnings if the reported prices for these medallions continue to be unsettled.

We have concluded that we have material weaknesses in our internal control over financial reporting.

As disclosed elsewhere in this Annual Report, we identified material weaknesses in our internal control over financial reporting related to controls over the identification and measurement of troubled debt restructurings in our taxi medallion portfolio, which, due to loan size and structure, is underwritten using market and industry data, and did not contain individual loan information required to accurately assess whether or not a modification should be deemed a troubled debt restructuring (“TDR”) and the measurement of impairment for such TDRs. Upon completion of the review, it was determined that $75.4 million in carrying value of taxi medallion loans, which were originally deemed to not be TDRs, should have been deemed TDRs when they were modified in April 2015. All of the modified loans are fully performing in accordance with their modified terms, and there have been no missed payments regarding any of the modified loans.

- 15 -



Table of Contents

When such oversights occur, we evaluate the impact on our disclosure controls and procedures, including our internal controls over financial reporting. Because our controls did not timely identify the modified loans as TDRs, we have concluded that we have a material weakness in our internal control over financial reporting with regard to the identification of TDRs in our taxi medallion portfolio. Management has taken steps to improve its controls with respect to identifying and measuring impairment of TDRs when loans are modified by reviewing and enhancing the financial documentation on an individual loan basis, calculating impairment based on objectively verifiable evidence and by strengthening management oversight. However, we can give you no assurances that we may not discover additional issues which make us conclude that we have other material weaknesses in our internal control over financial reporting or that our disclosure controls and procedures are not effective in the future, or that future material weaknesses in our internal controls over financial reporting or failures in our disclosure controls and procedures may not have a material adverse effect on our results of operations or financial condition.

The small to medium-sized businesses that the Bank lends to may have fewer resources to weather a downturn in the economy, which may impair a borrower’s ability to repay a loan to the Bank that could materially harm our operating results.

The Bank targets its business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience significant volatility in operating results. Any one or more of these factors may impair the borrower’s ability to repay a loan. In addition, the success of a small to medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay a loan. Economic downturns and other events that negatively impact our market areas could cause the Bank to incur substantial credit losses that could negatively affect our results of operations and financial condition.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Historically low interest rates may adversely affect our net interest income and profitability.

During the last seven years it has been the policy of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, yields on securities we have purchased, and to a lesser extent, market rates on the loans we have originated, have been at levels lower than were available prior to 2008. Consequently, the average yield on our interest-earning assets has decreased during the recent low interest rate environment. As a general matter, our interest-bearing liabilities re-price or mature more quickly than our interest-earning assets, which have contributed to increases in net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) in the short term. However, our ability to lower our interest expense is limited at these interest rate levels, while the average yield on our interest-earning assets may continue to decrease. Accordingly, our net interest income may decrease, which may have an adverse effect on our profitability. For information with respect to changes in interest rates, see “Risk Factors-Changes in interest rates may adversely affect or our earnings and financial condition.”

Anti-takeover provisions in our corporate documents and in New Jersey corporate law may make it difficult and expensive to remove current management.

Anti-takeover provisions in our corporate documents and in New Jersey law may render the removal of our existing board of directors and management more difficult. Consequently, it may be difficult and expensive for our stockholders to remove current management, even if current management is not performing adequately.

Competition from other financial institutions in originating loans and attracting deposits may adversely affect our profitability.

We face substantial competition in originating loans. This competition comes principally from other banks, savings institutions, mortgage banking companies, credit unions and other lenders. Many of our competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income by decreasing the number and size of loans that we originate and the interest rates we may charge on these loans.

- 16 -



Table of Contents

In attracting deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of our competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition and more branch locations.

These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect our ability to generate the funds necessary for lending operations, which may increase our cost of funds.

We also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, insurance companies and governmental organizations, which may offer more favorable terms. Some of our non-bank competitors are not subject to the same extensive regulations that govern our operations. As a result, such non-bank competitors may have advantages over us in providing certain products and services. This competition may reduce or limit our margins on banking services, reduce our market share and adversely affect our earnings and financial condition.

External factors, many of which we cannot control, may result in liquidity concerns for us.

Liquidity risk is the potential that the Bank may be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, operating expenses, capital expenditures and dividend payments to shareholders.

Liquidity is derived primarily from deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations, and access to other funding sources. In addition, in recent periods we have substantially increased our use of alternate deposit origination channels, such as brokered deposits, including reciprocal deposit services, and internet listing services.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to market factors or an adverse regulatory action against us. In addition, our ability to use alternate deposit originations channels could be substantially impaired if we fail to remain “well capitalized”. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. The liquidity issues have been particularly acute for regional and community banks, as many of the larger financial institutions have significantly curtailed their lending to regional and community banks to reduce their exposure to the risks of other banks. In addition, many of the larger correspondent lenders have reduced or even eliminated federal funds lines for their correspondent customers. Furthermore, regional and community banks generally have less access to the capital markets than do the national and super-regional banks because of their smaller size and limited analyst coverage. Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.

Declines in the value of our investment securities portfolio may adversely impact our results.

As of December 31, 2015, we had approximately $419.8 million in investment securities, consisting of available-for-sale and held-to-maturity. We may be required to record impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information on investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the ability of the Bank to upstream dividends to the Company, which could have a material adverse effect on our liquidity and our ability to pay dividends to shareholders and could also negatively impact our regulatory capital ratios.

The Bank’s ability to pay dividends is subject to regulatory limitations, which, to the extent that the Company requires such dividends in the future, may affect the Company’s ability to honor its obligations and pay dividends.

As a bank holding company, the Company is a separate legal entity from the Bank and its subsidiaries and does not have significant operations. We currently depend on the Bank’s cash and liquidity to pay our operating expenses and to fund dividends to shareholders. We cannot assure you that in the future the Bank will have the capacity to pay the necessary dividends and that we will not require dividends from the Bank to satisfy our obligations. Various statutes and regulations limit the availability of dividends from the Bank. It is possible, depending upon our and the Bank’s financial condition and other factors, that bank regulators could assert that payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event that the Bank is unable to pay dividends, we may not be able to service our obligations, as they become due, or pay dividends on our capital stock. Consequently, the inability to receive dividends from the Bank could adversely affect our financial condition, results of operations, cash flows and prospects.

- 17 -



Table of Contents

In addition, as described under “Capital Adequacy Guidelines,” beginning in 2016, banks and bank holding companies will be required to maintain a capital conservation buffer on top of minimum risk-weighted asset ratios. When fully phased in on January 1, 2019, the capital conservation buffer will be 2.5%. Banking institutions which do not maintain capital in excess of the capital conservation buffer will face constraints on the payment of dividends, equity repurchases and compensation based on the amount of the shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions to the Company may be prohibited or limited.

We may incur impairment to goodwill.

We review our goodwill at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. We operate in a competitive environment and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in an impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations.

If we pursue acquisitions, we may heighten the risks to our operations and financial condition.

To the extent that we undertake acquisitions, we may experience the effects of higher operating expenses relative to operating income from the new operations, which may have a material adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses involve similar risks to those commonly associated with branching, but may also involve additional risks, including:

potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
 

exposure to potential asset quality issues of the acquired bank or related business;
 

difficulty and expense of integrating the operations and personnel of banks and businesses we acquire; and
 

the possible loss of key employees and customers of the banks and businesses we acquire.

Attractive acquisition opportunities may not be available to us in the future.

We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things, our regulators will consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill when considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and shareholders’ equity per share of our common stock.

Hurricanes or other adverse weather events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Hurricanes and other weather events can disrupt our operations, result in damage to our properties and negatively affect the local economies in which we operate. In addition, these weather events may result in a decline in value or destruction of properties securing our loans and an increase in delinquencies, foreclosures and loan losses.

- 18 -



Table of Contents

Risks Applicable to the Banking Industry Generally:

The financial services industry is undergoing a period of great volatility and disruption.

Beginning in mid-2007, there has been significant turmoil and volatility in global financial markets. Recent market uncertainty regarding the financial sector has increased. In addition to the impact on the economy generally, changes in interest rates, in the shape of the yield curve, or in valuations in the debt or equity markets or disruptions in the liquidity or other functioning of financial markets, all of which have been seen recently, could directly impact us in one or more of the following ways:

Net interest income, the difference between interest earned on our interest earning assets and interest paid on interest bearing liabilities, represents a significant portion of our earnings. Both increases and decreases in the interest rate environment may reduce our profits. We expect that we will continue to realize income from the spread between the interest we earn on loans, securities and other interest-earning assets, and the interest we pay on deposits, borrowings and other interest-bearing liabilities. The net interest spread is affected by the differences between the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Our interest-earning assets may not reprice as slowly or rapidly as our interest-bearing liabilities.
 

The market value of our securities portfolio may decline and result in other than temporary impairment charges. The value of securities in our portfolio is affected by factors that impact the U.S. securities market in general as well as specific financial sector factors and entities. Recent uncertainty in the market regarding the financial sector has negatively impacted the value of securities within our portfolio. Further declines in these sectors may result in future other than temporary impairment charges.
 

Asset quality may deteriorate as borrowers become unable to repay their loans.

Our allowance for loan and lease losses may not be adequate to cover actual losses.

Like all financial institutions, we maintain an allowance for loan and lease losses to provide for loan defaults and nonperformance. The process for determining the amount of the allowance is critical to our financial results and condition. It requires difficult, subjective and complex judgments about the future, including the impact of national and regional economic conditions on the ability of our borrowers to repay their loans. If our judgment proves to be incorrect, our allowance for loan and lease losses may not be sufficient to cover losses inherent in our loan portfolio. Further, state and federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan and lease losses and may require an increase in our allowance for loan and lease losses.

Although we believe that our allowance for loan and lease losses is adequate to cover known and probable incurred losses included in the portfolio, we cannot assure you that we will not further increase the allowance for loan and lease losses or that our regulators will not require us to increase this allowance. Either of these occurrences could adversely affect our earnings.

Changes in interest rates may adversely affect our earnings and financial condition.

Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds. The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”), and market interest rates.

A sustained increase in market interest rates could adversely affect our earnings if our cost of funds increases more rapidly than our yield on our earning assets, and compresses our net interest margin. In addition, the economic value of portfolio equity would decline if interest rates increase. For example, we estimate that as of December 31, 2015, a 200 basis point increase in interest rates would have resulted in our economic value of portfolio equity declining by approximately $45.1 million or 9.6%. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Sensitivity Analysis.”

Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities. That means either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets, an increase in market rates of interest could reduce our net interest income. Likewise, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could reduce our net interest income. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, deflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.

We also attempt to manage risk from changes in market interest rates, in part, by controlling the mix of interest rate sensitive assets and interest rate sensitive liabilities. However, interest rate risk management techniques are not exact. A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance.

The banking business is subject to significant government regulations.

We are subject to extensive governmental supervision, regulation and control. These laws and regulations are subject to change, and may require substantial modifications to our operations or may cause us to incur substantial additional compliance costs. In addition, future legislation and government policy could adversely affect the commercial banking industry and our operations. Such governing laws can be anticipated to continue to be the subject of future modification. Our management cannot predict what effect any such future modifications will have on our operations. In addition, the primary focus of Federal and state banking regulation is the protection of depositors and not the shareholders of the regulated institutions.

- 19 -



Table of Contents

For example, the Dodd-Frank Act may result in substantial new compliance costs. The Dodd-Frank Act was signed into law on July 21, 2010. Generally, the Dodd-Frank Act is effective the day after it was signed into law, but different effective dates apply to specific sections of the law, many of which will not become effective until various Federal regulatory agencies have promulgated rules implementing the statutory provisions. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole, or on our business, results of operations and financial condition.

The following aspects of the financial reform and consumer protection act are related to the operations of the Bank:

A new independent consumer financial protection bureau was established within the Federal Reserve, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. However, smaller financial institutions, like the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.
 

The act also imposes new obligations on originators of residential mortgage loans, such as the Bank. Among other things, originators must make a reasonable and good faith determination based on documented information that a borrower has a reasonable ability to repay a particular mortgage loan over the long term. If the originator cannot meet this standard, the loan may be unenforceable in foreclosure proceedings. The act contains an exception from this ability to repay rule for “qualified mortgages”, which are deemed to satisfy the rule, but does not define the term, and left authority to the Consumer Financial Protection Bureau (“CFPB”) to adopt a definition. A rule issued by the CFPB in January 2013, and effective January 10, 2014, sets forth specific underwriting criteria for a loan to qualify as a Qualified Mortgage Loan. The criteria generally exclude loans that are interest-only, have excessive upfront points or fees, have negative amortization features or balloon payments, or have terms in excess of 30 years. The underwriting criteria also impose a maximum debt to income ratio of 43%. If a loan meets these criteria and is not a “higher priced loan” as defined in FRB regulations, the CFPB rule establishes a safe harbor preventing a consumer from asserting as a defense to foreclosure the failure of the originator to establish the consumer’s ability to repay. However, this defense will be available to a consumer for all other residential mortgage loans. Although the majority of residential mortgages historically originated by the Bank would qualify as Qualified Mortgage Loans, the Bank has also made, and may continue to make in the future, residential mortgage loans that will not qualify as Qualified Mortgage Loans. These loans may expose the Bank to greater losses, loan repurchase obligations, or litigation related expenses and delays in taking title to collateral real estate, if these loans do not perform and borrowers challenge whether the Bank satisfied the ability to repay rule on originating the loan.
 

Tier 1 capital treatment for “hybrid” capital items like trust preferred securities is eliminated subject to various grandfathering and transition rules.
 

The prohibition on payment of interest on demand deposits was repealed, effective July 21, 2011.
 

Deposit insurance is permanently increased to $250,000.
 

The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.
 

The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

In addition, in order to implement Basel III and certain additional capital changes required by the Dodd-Frank Act, on July 9, 2013, the Federal banking agencies, including the FDIC, the Federal Reserve and the Office of the Comptroller of the Currency, approved, as an interim final rule, the regulatory capital requirements for U.S. insured depository institutions and their holding companies. This regulation requires financial institutions to maintain higher capital levels and more equity capital.

These provisions, as well as any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, may impact the profitability of our business activities and may change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.

Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years, and assessing the probable impact on our operations. However, the ultimate effect of these changes on the financial services industry in general, and us in particular, is uncertain at this time.

- 20 -



Table of Contents

The laws that regulate our operations are designed for the protection of depositors and the public, not our shareholders.

The federal and state laws and regulations applicable to our operations give regulatory authorities extensive discretion in connection with their supervisory and enforcement responsibilities, and generally have been promulgated to protect depositors and the Deposit Insurance Fund and not for the purpose of protecting shareholders. These laws and regulations can materially affect our future business. Laws and regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by bank regulatory authorities is also subject to change.

We can give no assurance that future changes in laws and regulations or changes in their interpretation will not adversely affect our business. Legislative and regulatory changes may increase our cost of doing business or otherwise adversely affect us and create competitive advantages for non-bank competitors.

The potential impact of changes in monetary policy and interest rates may negatively affect our operations.

Our operating results may be significantly affected (favorably or unfavorably) by market rates of interest that, in turn, are affected by prevailing economic conditions, by the fiscal and monetary policies of the United States government and by the policies of various regulatory agencies. Our earnings will depend significantly upon our interest rate spread (i.e., the difference between the interest rate earned on our loans and investments and the interest raid paid on our deposits and borrowings). Like many financial institutions, we may be subject to the risk of fluctuations in interest rates, which, if significant, may have a material adverse effect on our operations.

We cannot predict how changes in technology will impact our business; increased use of technology may expose us to service interruptions or breaches in security.

The financial services market, including banking services, is increasingly affected by advances in technology, including developments in:

Telecommunications;
 

Data processing;
 

Automation;
 

Internet-based banking, including personal computers, mobile phones and tablets;
 

Debit cards and so-called “smart cards”; and
 

Remote deposit capture.

Our ability to compete successfully in the future will depend, to a certain extent, on whether we can anticipate and respond to technological changes. We offer electronic banking services for our consumer and business customers via our website, www.cnob.com, including Internet banking and electronic bill payment, as well as mobile banking by phone. We also offer check cards, ATM cards, credit cards, and automatic and ACH transfers. The successful operation and further development of these and other new technologies will likely require additional capital investments in the future. In addition, increased use of electronic banking creates opportunities for interruptions in service or security breaches, which could expose us to claims by customers or other third parties. We cannot assure you that we will have sufficient resources or access to the necessary proprietary technology to remain competitive in the future, or that we will be able to maintain a secure electronic environment.

Item 1B. Unresolved Staff Comments

None.

- 21 -



Table of Contents

Item 2. Properties

The Bank operates seven banking offices in Bergen County, NJ, consisting of one office each in Englewood Cliffs, Englewood, Cresskill, Fort Lee, Hackensack, Ridgewood and Saddle River; nine banking offices in Union County, NJ, consisting of five offices in Union Township, and one office each in Springfield Township, Berkeley Heights, Vauxhall and Summit; three banking offices in Morris County, NJ, consisting of one office each in Boonton, Madison and Morristown; one office in Newark in Essex County, NJ; one office in West New York in Hudson County, NJ; one office in Princeton in Mercer County, NJ, and one office in Holmdel in Monmouth County, NJ. The Bank is also opened a branch office in the borough of Manhattan in New York City. The Bank’s principal office is located at 301 Sylvan Avenue, Englewood Cliffs, NJ. The principal office is a three-story leased building constructed in 2008.

The following table sets forth certain information regarding the Bank’s leased locations.

Branch Location       Term
301 Sylvan Avenue, Englewood Cliffs, NJ Term expires November 30, 2028; renewable at the Bank’s option
12 East Palisade Avenue, Englewood, NJ Term expires July 31, 2022; renewable at the Bank’s option
1 Union Avenue, Cresskill, NJ Term expires June 30, 2026; renewable at the Bank’s option
899 Palisade Avenue, Fort Lee, NJ Term expires April 30, 2017; renewable at the Bank’s option
142 John Street, Hackensack, NJ Term expires December 31, 2016; renewable at the Bank’s option
171 East Ridgewood Avenue, Ridgewood, NJ Term expires April 30, 2019 renewable at the Bank’s option
71 East Allendale Road, Saddle River, NJ Term expires May 31, 2032, unless terminated or extended by the Bank
356 Chestnut Street, Union, NJ   Term expires in 2028; renewable at the Bank’s option
2933 Vauxhall Road, Vauxhall, NJ Term expires January 31, 2020; renewable at the Bank’s option
104 Ely Place, Boonton, NJ Term expires August 29, 2021; renewable at the Bank’s option
300 Main Street, Madison, NJ Term expires May 31, 2016; renewable at the Bank’s option
545 Morris Avenue, Summit, NJ Term expires January 31, 2024; renewable at the Bank’s option
217 Chestnut Street, Newark, NJ Term expires February 28, 2019
5914 Park Avenue, West New York, NJ Term expires September 30, 2018; renewable at the Bank’s option
344 Nassau Street, Princeton, NJ Term expires May 31, 2016; renewable at the Bank’s option
963 Holmdel Road, Holmdel, NJ Term expires July 31, 2021; renewable at the Bank’s option
551 Madison Ave, Suite 202, New York, NY Term expires March, 2023

The Bank operates a Drive In/Walk Up located at 2022 Stowe Street, Union, NJ.

Item 3. Legal Proceedings

There are no significant pending legal proceedings involving the Company other than those arising out of routine operations. None of these matters would have a material adverse effect on the Company or its results of operations if decided adversely to the Company.

Item 4. Mine Safety Disclosures

Not applicable.

- 22 -



Table of Contents

PART II

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

Security Market Information

The common stock of the Company is traded on the NASDAQ Global Select Market under the symbol “CNOB”. As of December 31, 2015, the Company had 514 stockholders of record, excluding beneficial owners for whom CEDE & Company or others act as nominees. On December 31, 2015, the closing sale price was $18.69.

The following table sets forth the high and low closing sales price, and the dividends declared, on a share of the Company’s common stock for the years ended December 31, 2015 and 2014.

Common Stock Price
2015 2014 Common Dividends Declared
High       Low       High       Low       2015       2014
Fourth Quarter $      19.51 $      17.50 $      19.15 $      18.86 $ 0.075 $ 0.075
Third Quarter 22.27 18.50   19.09 18.93   0.075 0.075
Second Quarter 21.88   19.00 19.38 18.93   0.075   0.075
First Quarter 19.50   17.85 19.11   18.73 0.075 0.075
Total   $ 0.300 $ 0.300

Share Repurchase Program

Historically, repurchases have been made from time to time as, in the opinion of management, market conditions warranted, in the open market or in privately negotiated transactions. Shares repurchased were used for stock dividends and other issuances. No repurchases were made of the Company’s common stock during 2015 or 2014.

Dividends

Federal laws and regulations contain restrictions on the ability of the Parent Corporation and the Bank to pay dividends. For information regarding restrictions on dividends, see Part I, Item 1, “Business” and Part II, Item 8, “Financial Statements and Supplementary Data”, Note 20 of the Notes to Consolidated Financial Statements.”

Stockholders Return Comparison

Set forth on the following page is a line graph presentation comparing the cumulative stockholder return on the Parent Corporation’s common stock, on a dividend reinvested basis, against the cumulative total returns of the NASDAQ and the KBW Bank Index for the period from December 31, 2010 through December 31, 2015.

- 23 -



Table of Contents

COMPARABLE FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG CONNECTONE BANCORP, INC,
S&P COMPOSITE AND SNL MID-ATLANTIC BANK INDEX


Assumes $100 invested on January 1, 2011
Assumes dividends reinvested
Year ended December 31, 2015

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS

Fiscal Year Ending
Company/Index/Market       12/31/10       12/31/11       12/31/12       12/31/13       12/31/14       12/31/15
ConnectOne Bancorp, Inc. 100.00 121.35 145.94 239.71 246.61 246.48
Nasdaq Composite 100.00   99.23 116.80 163.38 187.42   200.69
KBW Bank Index 100.00 86.98 102.21 140.44   153.41 154.16

- 24 -



Table of Contents

Item 6. Selected Financial Data

The following tables set forth selected consolidated financial data as of the dates and for the periods presented. The selected consolidated statement of financial condition data as of December 31, 2015 and 2014 and the selected consolidated summary of income data for the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The selected consolidated statement of financial condition data as of December 31, 2013, 2012 and 2011 and the selected consolidated summary of income data for the years ended December 31, 2012 and 2011 have been derived from audited consolidated financial statements that are not presented in this Annual Report.

The selected historical consolidated financial data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that we have presented elsewhere in this Annual Report.

On July 1, 2014, the Merger was completed. See Note 3 – Business Combinations of the Notes to the Consolidated Financial Statements.

- 25 -



Table of Contents

SUMMARY OF SELECTED STATISTICAL INFORMATION AND FINANCIAL DATA

For the Years Ended December 31,
2015      2014      2013      2012      2011
(dollars in thousands, except share data)
Selected Statement of Financial Condition
Data
     Total assets $     4,016,721 $     3,448,572 $     1,673,082 $     1,629,082 $     1,432,738
     Loans receivable 3,009,007 2,538,641 960,943 889,672 754,992
     Allowance for loan and lease losses 26,572 14,160 10,333 10,237 9,602
     Securities - available for sale 195,770 289,532 323,070 496,815 414,507
     Goodwill and other intangible
          assets 149,817 150,734 16,828 16,858 16,902
     Borrowings 671,587 495,553 146,000 146,000 161,000
     Subordinated debt 55,155 5,155 5,155 5,155 5,155
     Deposits 2,790,966 2,475,607 1,342,005 1,306,922 1,121,415
     Tangible common stockholders’ equity(1) 316,277 284,235 168,584 160,691 135,916
     Total stockholders’ equity 477,344 446,219 168,584 160,691 135,916
     Average total assets 3,661,306 2,520,524 1,633,270 1,538,473 1,321,262
     Average common stockholders’ equity 456,036 301,004 153,775 138,464 119,363
Dividends
     Cash dividends paid on common stock $ 8,996 $ 6,940 $ 4,254 $ 2,778 $ 1,955
     Dividend payout ratio 21.84% 37.60% 21.50% 16.13% 14.92%
Cash dividends per share
     Cash dividends $ 0.300 $ 0.300 $ 0.280 $ 0.195 $ 0.120
 
Selected Statement of Income Data
     Interest income $ 140,967 $ 94,207 $ 57,268 $ 55,272 $ 51,927
     Interest expense 23,814 14,808 11,082 11,776 12,177
     Net interest income 117,153 79,399 46,186 43,496 39,750
     Provision for loan and lease losses 12,605 4,683 350 325 2,448
     Net interest income after provision for  
          loan losses 104,548 74,716 45,836 43,171 37,302
     Noninterest income   11,173 7,498 6,851   7,210   7,478
     Noninterest expense 54,484 54,804 25,278 25,197   23,443
     Income before income            
          tax expense 61,237 27,410 27,409 25,184 21,337
     Income tax expense 19,926 8,845 7,484 7,677 7,411
     Net income $ 41,311 $ 18,565 $ 19,925 $ 17,507 $ 13,926
     Net income available to common
          stockholders $ 41,199 $ 18,453 $ 19,784 $ 17,226 $ 13,106
____________________

(1)        These measures are not measures recognized under generally accepted accounting principles in the United States (“GAAP”), and are therefore considered to be non-GAAP financial measures. See –“Non-GAAP Financial Measures” for a reconciliation of these measurers to their most comparable GAAP measures.

- 26 -



Table of Contents

At or for the Years Ended December 31,
(dollars in thousands, except share data) 2015 2014 2013 2012 2011
Per Common Share Data                        
       Basic $ 1.38 $ 0.80 $ 1.21 $ 1.05 $ 0.80
       Diluted 1.36 0.79 1.21 1.05 0.80
       Book value per common share 15.49 14.65 9.61 9.14 7.63
       Tangible book value per common
              share (1) 10.51 9.57 8.58 8.11 6.60
 
Weighted Average Common Shares
Outstanding
       Basic 29,938,458 23,029,813 16,349,204 16,340,197 16,295,761
       Diluted 30,283,966 23,479,074 16,385,692 16,351,046 16,314,899
 
Selected Performance Ratios
       Return on average assets 1.13% 0.74% 1.22% 1.14% 1.05%
       Return on average common
              stockholders’ equity 9.03% 6.13% 12.87% 12.44% 10.98%
       Net interest margin 3.55% 3.57% 3.30% 3.32% 3.53%
 
Selected Asset Quality Ratios
       as a % of loans receivable:
              Nonaccrual loans 0.67% 0.46% 0.33% 0.41% 0.91%
              Loans past due 90 days and still
                     accruing -% 0.05% -% 0.01% 0.14%
              Performing TDRs 2.77% 0.07% 0.60% 0.77% 0.99%
              Allowance for loan and lease losses 0.86% 0.56% 1.08% 1.15% 1.27%
 
       Nonperforming assets (2) to total assets 0.58% 0.37% 0.20% 0.30% 0.52%
       Allowance for loan and lease losses to
              nonaccrual loans 128.1% 122.0% 329.4% 283.1% 139.7%
       Net loan charge-offs (recoveries) to
              average loans 0.01% 0.05% 0.03% (0.04)% 0.24%
 
Capital Ratios
       Leverage ratio 9.07%   9.37% 9.69% 9.02%   9.29%
       Common equity Tier 1 risk-based ratio 9.14% n/a n/a n/a n/a
       Risk-based Tier 1 capital ratio   9.61%   10.44%     12.10%     11.39%   12.00%
       Risk-based total capital ratio 11.77% 10.94% 12.90% 12.22% 12.89%
       Tangible common equity to tangible  
              assets (1) 8.18% 8.62% 8.48% 8.22% 7.61%
____________________

(1)        These measures are not measures recognized under generally accepted accounting principles in the United States (“GAAP”), and are therefore considered to be non-GAAP financial measures. See –“Non-GAAP Financial Measures” for a reconciliation of these measurers to their most comparable GAAP measures.
(2) Nonperforming assets are defined as nonaccrual loans plus other real estate owned.

- 27 -



Table of Contents

Notes to Selected Financial Data

   As of the year ended December 31,
2015    2014    2013    2012    2011
(dollars in thousands, except per share data)
Tangible common equity and tangible common
equity/tangible assets
Common stockholders’ equity $ 466,094 $ 434,969 $ 157,334 $ 149,441 $ 124,666
Less: goodwill and other intangible assets 149,817 150,734 16,828 16,858 16,902
Tangible common stockholders’ equity $ 316,277 $ 284,235 $ 140,506 $ 132,583 $ 107,764
 
Total assets $ 4,016,721 $ 3,448,572 $ 1,673,082 $ 1,629,765 $ 1,432,738
Less: goodwill and other intangible assets 149,817 150,734 16,828 16,858 16,902
Tangible assets $ 3,866,904 $ 3,297,838 $ 1,656,254 $ 1,612,907 $ 1,415,836
 
Tangible common equity ratio 8.18% 8.62% 8.48% 8.22% 7.61%
 
Tangible book value per common share
Book value per common share $ 15.49 $ 14.65 $ 9.61 $ 9.14 $ 7.63
Less: goodwill and other intangible assets 4.98 5.08 1.03 1.03 1.03
Tangible book value per common share $      10.51 $      9.57 $      8.58 $      8.11 $      6.60

- 28 -



Table of Contents

Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations

The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for each of the past three years and financial condition for each of the past two years. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing under Item 8 of this report, and statistical data presented in this document.

Cautionary Statement Concerning Forward-Looking Statements

See Item 1 of this Annual Report on Form 10-K for information regarding forward-looking statements.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to our audited consolidated financial statements contains a summary of our significant accounting policies. Management believes our policy with respect to the methodology for the determination of the allowance for loan and lease losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application are periodically reviewed with the Audit Committee and our Board of Directors.

Business Combinations

The Company accounts for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms.

Allowance for Loan and Lease Losses and Related Provision

The allowance for loan and lease losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the Company’s Consolidated Statements of Condition.

The evaluation of the adequacy of the allowance for loan and lease losses includes, among other factors, an analysis of historical loss rates by loan category applied to current loan totals. However, actual loan losses may be higher or lower than historical trends, which vary. Actual losses on specified problem loans, which also are provided for in the evaluation, may vary from estimated loss percentages, which are established based upon a limited number of potential loss classifications.

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Management believes that the current allowance for loan and lease losses will be adequate to absorb loan and lease losses on existing loans and leases that may become uncollectible based on the evaluation of known and inherent risks in the originated loan portfolio. The evaluation takes into consideration such factors as changes in the nature and size of the portfolio, overall portfolio quality, and specific problem loans and current economic conditions which may affect our borrowers’ ability to pay. The evaluation also details historical losses by loan category and the resulting loan loss rates which are projected for current loan total amounts. Loss estimates for specified problem loans are also detailed. Various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to make additional provisions for loan losses based upon information available to them at the time of their examination. All of the factors considered in the analysis of the adequacy of the allowance for loan and lease losses may be subject to change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that could materially adversely impact earnings in future periods. Additional information can be found in Note 1 of the Notes to Consolidated Financial Statements.

- 29 -



Table of Contents

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns.

Fluctuations in the actual outcome of these future tax consequences could impact the Company’s consolidated financial condition or results of operations. Notes 1 (under the caption “Use of Estimates”) and 12 of the Notes to Consolidated Financial Statements include additional discussion on the accounting for income taxes.

Goodwill

The Company has adopted the provisions of FASB ASC 350-10-05, which requires that goodwill be reported separate from other intangible assets in the Consolidated Statements of Condition and not be amortized but tested for impairment annually or more frequently if indicators arise for impairment. No impairment charge was deemed necessary for the years ended December 31, 2015, 2014 and 2013.

Fair Value of Investment Securities

The Company relies upon the guidance in FASB ASC 820-10-65 when determining fair value for the Company’s pooled trust preferred securities and private issue corporate bond. See Note 22 of the Notes to Consolidated Financial Statements, Fair Value Measurements and Fair Value of Financial Instruments, for further discussion.

Overview and Strategy

We serve as a holding company for the Bank, which is our primary asset and only operating subsidiary. We follow a business plan that emphasizes the delivery of customized banking services in our market area to customers who desire a high level of personalized service and responsiveness. The Bank conducts a traditional banking business, making commercial loans, consumer loans and residential and commercial real estate loans. In addition, the Bank offers various non-deposit products through non-proprietary relationships with third party vendors. The Bank relies upon deposits as the primary funding source for its assets. The Bank offers traditional deposit products.

Many of our customer relationships start with referrals from existing customers. We then seek to cross sell our products to customers to grow the customer relationship. For example, we will frequently offer an interest rate concession on credit products for customers that maintain a non-interest bearing deposit account at the Bank. This strategy has lowered our funding costs and helped slow the growth of our interest expense even as we have substantially increased our total deposits. It has also helped fuel our significant loan growth. We believe that the Bank’s significant growth and increasing profitability demonstrate the need for and success of our brand of banking.

Our results of operations depend primarily on our net interest income, which is the difference between the interest earned on our interest-earning assets and the interest paid on funds borrowed to support those assets, primarily deposits. Net interest margin is the difference between the weighted average rate received on interest-earning assets and the weighted average rate paid to fund those interest-earning assets, which is also affected by the average level of interest-earning assets as compared with that of interest-bearing liabilities. Net income is also affected by the amount of non-interest income and non-interest expenses.

- 30 -



Table of Contents

General

The following discussion and analysis presents the more significant factors affecting the Company’s financial condition as of December 31, 2015 and 2014 and results of operations for each of the years in the three-year period ended December 31, 2015. The Merger was effective July 1, 2014, which significantly impacts comparisons to earlier periods. The MD&A should be read in conjunction with the consolidated financial statements, notes to consolidated financial statements and other information contained in this report. On July 1, 2014, the combined company changed its name to ConnectOne.

Operating Results Overview

Net income for the year ended December 31, 2015 was $41.3 million, an increase of $22.7 million, or 123.4%, compared to net income of $18.6 million for 2014. Net income available to common shareholders for the year ended December 31, 2015 was $41.2 million, an increase of $22.7 million, or 123.3%, compared to net income available to common shareholders of $18.5 million for 2014. Diluted earnings per share were $1.36 for 2015, a 73.1% increase from $0.79 for 2014.

The increase in net income from 2014 to 2015 was attributable to the following:

Increased net interest income of $37.8 million primarily due to the impact of the Merger and organic growth,
 

Increased provision for loan and lease losses of $7.9 million primarily due to an increase in organic loan growth during 2015, higher levels of specific reserves including $4.5 million related to the taxi medallion portfolio and $1.3 million related to the Union Center’s former operations center that was repositioned as a lease financing receivable and the maturity and extension of acquired portfolio loans,
 

Increased noninterest income of $3.7 million primarily resulting from an insurance recovery ($2.2 million) and an increase in net gains on sale of investment securities ($1.1 million),


Noninterest expense remained relatively flat due to an increase in salaries and employee benefits ($8.9 million), occupancy and equipment ($2.3 million), and professional and consulting ($1.3 million), offset by impact of the Merger (including direct merger charges of $12.4 million in 2014), and
 

Increased income tax expense of $11.1 million resulting from higher pretax income in 2015 offset by nondeductible merger-related expenses incurred in 2014.

Net income for the year ended December 31, 2014 was $18.6 million, a decrease of $1.4 million, or 6.8%, compared to net income of $19.9 million for 2013. Net income available to common shareholders for the year ended December 31, 2014 was $18.5 million, a decrease of $1.3 million, or 6.7%, compared to net income available to common shareholders of $19.8 million for 2013. Diluted earnings per share were $0.79 for 2014, a 34.7% decrease from $1.21 for 2013.

The decrease in net income from 2013 to 2014 was attributable to the following:

Increased net interest income of $33.2 million primarily due to the impact of the Merger and including net favorable purchase accounting adjustments of $5.3 million,
 

A higher loan loss provision of $4.3 million largely due to an increase in organic loan growth during 2014, the maturity and extension of acquired portfolio loans during the second half of 2014 and an increase in net loan charge-offs,
 

A $29.5 million increase in non-interest expense principally due to the impact of the Merger (including direct merger charges of $12.4 million), a $4.6 million loss on the extinguishment of debt and a $2.4 million charge on a fraudulent wire transfer, and
 

Increased income tax expense of $1.4 million resulting from nondeductible merger-related expenses incurred in 2014.

Net Interest Income

Fully taxable equivalent net interest income for 2015 totaled $119.7 million, an increase of $37.9 million, or 46.4%, from 2014. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 47.3% to $3.4 billion principally as a result of the Merger, which was effective on July 1, 2014. Partially offsetting the increase in interest earning assets was a 2 basis-point contraction in the net interest margin. During 2015, the Bank’s funding costs were higher due to an increase in longer-term funding, including time deposits and subordinated debt. Average total loans increased by 64.6% to $2.8 billion in 2015 from $1.7 billion in 2014.

Fully taxable equivalent net interest income for 2014 totaled $81.8 million, an increase of $33.1 million, or 67.9%, from 2013. The increase in net interest income was due to an increase in average interest-earning assets, which grew by 54.9% to $2.3 billion principally as a result of the Merger, as well as a 27 basis-point widening of the net interest margin to 3.57% due to net accretion of purchase accounting fair value adjustments recognized on acquired loans, securities, time deposits and borrowings and a reduction in the average rate paid on borrowings resulting from a $70 million debt extinguishment and subsequent refinancing accomplished at the end of the third quarter of 2014. Average total loans increased by 86.7% to $1.7 billion in 2014 from $908.8 million in 2013.

- 31 -



Table of Contents

Average Balance Sheets

The following table sets forth certain information relating to our average assets and liabilities for the years ended December 31, 2015, 2014 and 2013 and reflect the average yield on assets and average cost of liabilities for the periods indicated. Such yields are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.

   Years Ended December 31,
2015 2014 2013
Average    Income/    Yield/    Average    Income/    Yield/    Average    Income/    Yield/
(Tax-Equivalent Basis) Balance Expense Rate Balance Expense Rate Balance Expense Rate
(dollars in thousands)
ASSETS
Interest-earning assets:
       Investment securities (1) (2) $ 482.703 $ 16,128 3.34% $ 508,024 $ 18,148 3.57% $ 559,454 $ 19,108 3.42%
       Loans receivable (2) (3) (4) 2,793,952 126,133 4.51% 1,696,977 77,669 4.58% 908,784 40,281 4.43%
       Restricted investment in bank stocks 27,335 1,081 3.95% 14,946 636 4.26% 8,983 407 4.53%
       Federal funds sold and interest-earnings deposits
       with banks 65,513 178 0.27% 68,152 138 0.20% 351 2 0.57%
       Total interest-earning assets 3,369,503 143,520 4.26% 2,288,099 96,591 4.22% 1,477,572 59,798 4.05%
Noninterest-earning assets:
       Allowance for loan and lease losses (17,905) (14,267) (10,235)
       Non-interest earning assets 309,708 246,692 165,933
              Total assets $ 3,661,306 $ 2,520,524 $ 1,633,270
 
LIABILITIES & STOCKHOLDERS’ EQUITY
       Savings, NOW, money market, interest checking: $ 1,279,663 4,972 0.39% $ 1,121,148 4,152 0.37% $ 895,532 3,637 0.41%
       Time deposits 752,380 8,784 1.17% 424,603 4,108 0.97% 172,444 1,582 0.92%
       Total interest-bearing deposits 2,032,043 13,756 0.68% 1,545,751 8,260 0.53% 1,067,976 5,219 0.49%
 
       Borrowings 565,408 8,181 1.45% 288,798 6,301 2.18% 146,425 5,705 3.90%
       Subordinated debentures 30,497 1,700 5.57% 5,155 156 3.03% 5,155 158 3.06%
       Capital lease obligation 2,946 177 6.01% 1,528 91 5.96% - - -
       Total interest-bearing liabilities 2,630,894 23,814 0.91% 1,841,232 14,808 0.80% 1,219,556 11,082 0.91%
       Noninterest bearing deposits 537,287 350,310 233,835
       Other liabilities 25,839 16,728 14,854
       Stockholders’ equity 467,286 312,254 165,025
              Total liabilities and stockholders’ equity $      3,661,306 $      2,520,524 $      1,633,270
 
Net interest income/interest rate spread (5) $ 119,706 3.35% $ 81,783 3.42% $ 48,716 3.14%
Tax-equivalent adjustment (2,553) (2,384) (2,530)
Net interest income as reported $      117,153 $      79,399 $      46,186
Net interest margin (6)      3.55%      3.57%      3.30%
___________________

(1) Average balances for available-for-sale securities are based on amortized cost.
(2) Interest income is presented on a tax equivalent basis using 35% Federal tax rate.
(3) Includes loan fee income.
(4) Loans receivable include nonaccrual loans.
(5) Represents difference between the average yield on interest earnings assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(6)      Represents net interest income on a fully taxable equivalent basis divided by average total interest-earning assets.

- 32 -



Table of Contents

Rate/Volume Analysis

The following table presents, by category, the major factors that contributed to the changes in net interest income. Changes due to both volume and rate have been allocated in proportion to the relationship of the dollar amount change in each.

    2015/2014 2014/2013
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Average     Average     Net     Average     Average     Net
Volume Rate Change Volume Rate Change
(dollars in thousands)
Interest income:
              Investment securities: $ (879) $ (1,141) $ (2,020) $ (1,918) $ 958 $ (960)
              Loans receivable 49,508 (1,044) 48,464 36,034 1,354 37,388
              Restricted investment in bank
                     stocks 486 (41) 445 252 (23) 229
              Federal funds sold and interest-
                     earnings deposits with banks (5) 45 40 136 - 136
 
Total interest income $ 49,110 $ (2,181) $ 46,929 $ 34,504 $ 2,289 $ 36,793
 
Interest expense:
       Savings, NOW, money market,
              interest checking $ 608 $ 212 $ 820 $ 792 $ (277) $ 515
Time deposits 3,688 988 4,676 2,435 91 2,526
Borrowings and subordinated
       debentures 4,218 (794) 3,424 1,089 (495) 594
Capital lease obligation 85 1 86 91 - 91
 
Total interest expense $ 8,599 $ 407 $      9,006 $ 4,407 $ (681) $      3,726
Change in net interest income $      40,511 $      (2,588) 37,923 $      30,097 $      2,970 33,067

Provision for Loan and Lease Losses

In determining the provision for loan and lease losses, management considers national and local economic trends and conditions; trends in the portfolio including orientation to specific loan types or industries; experience, ability and depth of lending management in relation to the complexity of the portfolio; effects of changes in lending policies, trends in volume and terms of loans; levels and trends in delinquencies, impaired loans and net charge-offs and the results of independent third party loan and lease review.

For the year ended December 31, 2015, the provision for loan and lease losses was $12.6 million, an increase of $7.9 million, compared to the provision for loan and lease losses of $4.7 million for the same period in 2014. The increase resulted from an increase in organic loan growth during 2015, higher levels of specific reserves including $4.5 million related to the taxi medallion portfolio and $1.3 million related to the Union Center’s former operations center that was repositioned as a lease financing receivable and the maturity and extension of acquired portfolio loans.

For the year ended December 31, 2014, the provision for loan and lease losses was $4.7 million, an increase of $4.3 million, compared to the provision for loan and lease losses of $0.4 million for the same period in 2013. This increase resulted from organic loan growth during 2014, the maturity and extension of acquired portfolio loans during the second half of 2014 and an increase in net loan charge-offs.

Noninterest Income

Noninterest income for the full-year 2015 increased by $3.7 million, or 49.0% to $11.2 million from $7.5 million in 2014. The increase was primarily the result of a 2015 insurance recovery of $2.2 million and higher net investment securities gains, increasing by $1.1 million to $3.9 million for the year ended December 31, 2015 from $2.8 million for the year ended December 31, 2014, partially offset by a slight decline in deposit, loan and other income of $0.1 million to $2.7 million and a decline in annuities and insurance commissions of $0.2 million to $0.2 million for the year ended December 31, 2015.

Noninterest income for the full-year 2014 increased by $0.6 million, or 9.4% to $7.5 million from $6.9 million in 2013. The increase was primarily the result of higher net investment securities gains, increasing by $1.1 million to $2.8 million for the year ended December 31, 2014 from $1.7 million for the year ended December 31, 2013, partially offset by a slight decline in deposit, loan and other income of $0.2 million to $2.8 million and a decline in annuities and insurance commissions of $0.1 million to $0.4 million for the year ended December 31, 2014.

- 33 -



Table of Contents

The decline in fee income was the result of the Company de-emphasizing service charges, focusing instead on customer growth and retention. This strategy was particularly important during the Merger conversion process as the implementation of certain fees and other charges were intentionally delayed or waived.

Noninterest Expense

Noninterest expenses for the full-year 2015 decreased by $0.3 million, or 0.6% to $54.5 million from $54.8 million in 2014. The decrease was a result of merger-related charges of $12.4 million in 2014, offset by increases attributable to the Merger (2015 reflected a full-year of combined company expenses whereas 2014 reflected only the second half) as well as an increased level of business and staff resulting from organic growth. Salary and employee benefits increased by $8.9 million, occupancy and equipment expenses increased by $2.3 million and professional and consulting fees increased by $1.3 million.

Noninterest expenses for the full-year 2014 increased by $29.5 million, or 116.8% to $54.8 million from $25.3 million in 2013. The increase was primarily due to the impact of the Merger, including merger-related charges of $12.4 million. In addition, at the end of the third quarter of 2014, the Company repurchased $70.0 million of putable Federal Home Loan Bank advances which resulted in a loss on debt extinguishment of $4.6 million.

Income Taxes

Income tax expense was $19.9 million for the full-year 2015 compared to $8.8 million for the full-year 2014 and $7.5 million for the full-year 2013. The effective tax rates were 32.5% for 2015 and 32.3% for 2014 and 27.3% for 2013. The effective tax rate in 2015 from 2014 remained relatively flat, while the effective tax rate increased in 2014 from 2013 due to nondeductible merger-related expenses incurred in 2014 as well as an increase in income subject to state taxes.

For a more detailed description of income taxes see Note 12 of the Notes to Consolidated Financial Statements.

Financial Condition Overview

At December 31, 2015, the Company’s total assets were $4.0 billion, an increase of $568 million from December 31, 2014. Loans receivable were $3.1 billion, an increase of $560 million from December 31, 2014. Deposits were $2.5 billion, an increase of $315 million from December 31, 2014.

At December 31, 2014, the statement of financial condition reflected the Merger. The Company’s total assets were $3.4 billion, an increase of $1.8 billion from December 31, 2013. Loans receivable were $2.5 billion, an increase of $1.6 billion from December 31, 2013. Deposits were $2.5 billion, an increase of $1.1 billion from December 31, 2013.

Loan Portfolio

The Bank’s lending activities are generally oriented to small-to-medium sized businesses, high net worth individuals, professional practices and consumer and retail customers living and working in the Bank’s market area of Bergen, Union, Morris, Essex, Hudson, Mercer and Monmouth counties, New Jersey. The Bank has not made loans to borrowers outside of the United States. The Bank believes that its strategy of high-quality customer service, competitive rate structures and selective marketing have enabled it to gain market share.

Commercial loans are loans made for business purposes and are primarily secured by collateral such as cash balances with the Bank, marketable securities held by or under the control of the Bank, business assets including accounts receivable, taxi medallions, inventory and equipment and liens on commercial and residential real estate. Commercial construction loans are loans to finance the construction of commercial or residential properties secured by first liens on such properties. Commercial real estate loans include loans secured by first liens on completed commercial properties, including multi-family properties, to purchase or refinance such properties. Residential mortgages include loans secured by first liens on residential real estate, and are generally made to existing customers of the Bank to purchase or refinance primary and secondary residences. Home equity loans and lines of credit include loans secured by first or second liens on residential real estate for primary or secondary residences. Consumer loans are made to individuals who qualify for auto loans, cash reserve, credit cards and installment loans.

During 2015 and 2014, loan portfolio growth was positively impacted in several ways including (i) an increase in demand for small business lines of credit, and business term loans as economic conditions have stabilized and begun to improve, (ii) industry consolidation and lending restrictions involving larger competitors allowing the Bank to gain market share, (iii) an increase in refinancing strategies employed by borrowers during the current low rate environment, and (iv) the Bank’s success in attracting highly experienced commercial loan officers with substantial local market knowledge.

- 34 -



Table of Contents

Gross loans at December 31, 2015 totaled $3.1 billion, an increase of $562 million, or 22.1%, over gross loans at December 31, 2014 of $2.5 billion. The increase in gross loans was attributed to organic loan growth. The largest component of our loan portfolio at December 31, 2015 and December 31, 2014 was commercial real estate loans. Our commercial real estate loans at December 31, 2015 totaled $2.0 billion, an increase of $332 million, or 20.3%, over commercial real estate loans at December 31, 2014 of $1.6 billion. Our commercial loans totaled $570.1 million at December 31, 2015, an increase of $70.3 million, or 14.1%, over commercial loans at December 31, 2014 of $499.8 million. Our commercial construction loans at December 31, 2015 totaled $328.8 million, an increase of $161.5 million, or 96.5%, over commercial construction loans at December 31, 2014 of $167.4 million. Our residential real estate loans totaled $233.7 million at December 31, 2015, a decrease of $1.3 million, or 0.5%, over residential real estate loans at December 31, 2014 of $235.0 million. Our consumer loans at December 31, 2015 totaled $2.5 million, a decrease of $0.4 million, 14.8%, over consumer loans of $2.9 million at December 31, 2014. The growth in our loan portfolio reflects the success of our business strategy, in particular emphasizing high-quality customer service strategy, which has led to continued customer referrals.

The following table sets forth the classification of our loans by loan portfolio class as of December 31, 2015, 2014, 2013, 2012 and 2011.

    December 31,
2015     2014     2013     2012     2011
(dollars in thousands)
Commercial $ 570,116 $ 499,816 $ 229,688 $ 181,682 $ 146,711
Commercial real estate 1,966,696 1,634,510 536,539 497,392 408,164
Commercial construction 328,838 167,359 42,722 40,277 39,388
Residential real estate 233,690 234,967 150,571 169,094 159,753
Consumer 2,454 2,879 1,084 1,104 959
       Gross loans 3,101,794 2,539,531 960,604 889,549 754,975
Net deferred loan (income) costs (2,787) (890) 339 123 17
       Loans receivable 3,099,007 2,538,641 960,943 889,672 754,992
Allowance for loan and lease losses (26,572) (14,160) (10,333) (10,237) (9,602)
       Net loans receivable $      3,072,435 $      2,524,481 $      950,610 $      879,435 $      745,390

The following table sets forth the classification of our gross loans by loan portfolio class and by fixed and adjustable rate loans as of December 31, 2015 and 2014 in term of contractual maturity.

At December 31, 2015, Maturing
      After            
In One Year
One Year through After
or Less Five Years Five Years Total
(dollars in thousands)
Commercial $ 297,149 $ 177,529 $ 95,438 $ 570,116
Commercial real estate 131,756 393,588 1,441,352 1,966,696
Commercial construction 208,862 112,750 7.226 328,838
Residential real estate 4,973 41,987 186,730 233,690
Consumer 1,526 881 47 2,454
              Total $ 644,266 $ 726,735 $ 1,730,793 $ 3,101,794
 
Loans with:
       Fixed rates $ 174,934 $ 449,640 $ 486,508 $ 1,111,082
       Variable rates 470,956 275,471 1,244,285 1,990,712
              Total $      645,890 $      725,111 $      1,730,793 $      3,101,794

- 35 -



Table of Contents

Asset Quality

General. One of our key objectives is to maintain a high level of asset quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts typically are made 15 days after the date the payment is due, and late notices are sent approximately 15 days after the date the payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are delinquent 30 days or more are reported to the board of directors of the Bank on a monthly basis.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“nonaccrual” loans). Except for loans that are well secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan that is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

Real estate acquired as a result of foreclosure is classified as OREO until sold. OREO is recorded at the lower of cost or fair value less estimated selling costs. Costs associated with acquiring and improving a foreclosed property are usually capitalized to the extent that the carrying value does not exceed fair value less estimated selling costs. Holding costs are charged to expense. Gains and losses on the sale of OREO are charged to operations, as incurred.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. As part of the evaluation of impaired loans, the Company individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.

In limited situations we will modify or restructure a borrower’s existing loan terms and conditions. A restructured loan is considered a troubled debt restructuring (“TDR”) when, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower in modifying or renewing a loan that the institution would not otherwise consider.

Asset Classification. Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “special mention.”

- 36 -



Table of Contents

When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for loan and lease losses must be established for loan losses in an amount deemed prudent by management. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount.

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Our management believes that, based on information currently available, our allowance for loan and lease losses is maintained at a level which covers all known and probable incurred losses in the portfolio at each reporting date. However, actual losses are dependent upon future events and, as such; further additions to the level of allowances for loan losses may become necessary.

The table below sets forth information on our classified assets designated special mention at the dates indicated.

December 31
2015 2014
(dollars in thousands)
Classified Assets:
       Substandard $      130,253       $      42,262
       Doubtful 239 289
       Loss - -
              Total classified assets 130,492 42,551
Special Mention Assets 31,412 19,305
       Total classified and special mention assets $ 161,904 $ 61,856

During the year ended December 31, 2015, “substandard” loans, which include lower credit quality loans which possess higher risk characteristics than special mention assets, increased from $42.3 million, or 1.7% of total loans, at December 31, 2014 to $130.5 million, or 4.2% of total loans, at December 31, 2015. The increase in “substandard” loans was due to downgrades of specific credits in both the commercial and commercial real estate segments of the loan portfolio, including $80.3 million of taxi medallion loans.

Nonperforming Loans, Troubled Debt Restructurings, Past Due Loans and OREO

Nonperforming loans include nonaccrual loans and accruing loans which are contractually past due 90 days or more. Nonaccrual loans represent loans on which interest accruals have been suspended. It is the Company’s general policy to consider the charge-off of loans, or a portion thereof, when they become contractually past due ninety days or more as to interest or principal payments or when other internal or external factors indicate that collection of principal or interest is doubtful. Troubled debt restructurings represent loans on which a concession was granted to a borrower, such as a reduction in interest rate to a rate lower than the current market rate for new debt with similar risks, and which are currently performing in accordance with the modified terms. The Company previously reported performing troubled debt restructured loans as a component of nonperforming assets. For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements.

- 37 -



Table of Contents

The following table sets forth, as of the dates indicated, the amount of the Company’s nonaccrual loans, other real estate owned (“OREO”), performing troubled debt restructurings (“TDRs”) and loan past due 90 days and still accruing:

At December 31,
2015 2014 2013 2012 2011
  (dollars in thousands)
Nonaccrual loans       $      20,737       $      11,609       $      3,137       $      3,616       $      6,871
OREO 2,549 1,108 220 1,300 591
Total nonperforming assets $ 23,286 $ 12,717 $ 3,357 $ 4,916 $ 7,462
Performing TDRs $ 85,925 $ 1,763 $ 5,746 $ 6,813 $ 7,459
Loans past due 90 days and still  
accruing $ - $ 1,211 $ - $ 55 $ 1,029
 
Nonaccrual loans to total loans
       receivable 0.67% 0.46% 0.33% 0.41% 0.91%
Nonperforming assets to total assets 0.58% 0.37% 0.20% 0.30% 0.52%
Nonperforming assets, performing
       TDRs, and loans past due 90 days
       and still accruing to total loans
       receivable 3.52% 0.62% 0.95% 1.32% 2.11%

The increase in performing TDRs was mainly attributable to 48 loans secured by NYC taxi medallions totaling $78.5 million as of December 31, 2015 that were modified in troubled debt restructurings during the second and fourth quarter of 2015. The modifications consisted of a deferral of principal amortization from approximately 25-30 year amortization to interest-only. There was no extension of the loans’ contractual maturity dates and the loans’ interest rates were increased from approximately 3%-3.25% to 3.75%. There was no forgiveness of principal and the average remaining maturity of the loans was approximately 23 months at the time of modification. These loans were accruing prior to modification and remained in accrual status post-modification.

A specific reserve of $4.5 million in specific allocations associated with taxi medallion lending was recorded during the year ended December 31, 2015. The reserve was based on the fair value of the collateral, and excludes any consideration for the personal guarantees of borrowers, which provides an additional source of repayment but cannot be relied upon. The valuation per corporate medallion used for the calculation at December 31, 2015 was $800,000. A specific allocation was required at December 31, 2015 primarily due to a decline in the value of taxi medallions.

As of December 31, 2015, taxi medallion loans totaled $103.2 million, of which $99.9 million was current and $3.3 million was past due 30-60 days. The average loan-to-value ratio, assuming current estimated values, was approximately 90%.

Allowance for Loan and Lease Losses and Related Provision

The allowance for loan and lease losses is a reserve established through charges to earnings in the form of a provision for loan and lease losses. We maintain an allowance for loan and lease losses at a level considered adequate to provide for all known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. Our officers analyze risks within the loan portfolio on a continuous basis and through an external independent loan review function, and the results of the loan review function are also reviewed by our Audit Committee. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to our allowance for loan and lease losses.

At December 31, 2015, the allowance for loan and lease losses was $26.6 million, an increase of $12.4 million or 87.7%, from $14.2 million for the year ended December 31, 2014. Net charge-offs totaled $0.2 million during 2015 and $0.9 million for 2014. The allowance for loan and lease losses as a percentage of loans receivable was 0.86% at December 31, 2015 and 0.56% at December 31, 2014. The increase in this percentage was attributable to organic loan growth and the maturity and extension of acquired portfolio loans. In purchase accounting, any allowance for loan and lease losses on an acquired loan portfolio is reversed and a credit risk discount is applied directly to the acquired loan balances.

- 38 -



Table of Contents

Five-Year Statistical Allowance for Loan and Lease Losses

The following table reflects the relationship of loan volume, the provision and allowance for loan and lease losses and net charge-offs for the past five years.

Years Ended December 31,
2015       2014       2013       2012       2011
(dollars in thousands)
Balance at the beginning of year $      14,160 $      10,333 $      10,237 $      9,602 $      8,867
       Charge-offs:
       Commercial 507 777 132 57 1,985
       Residential real estate - 159 175 454 23
       Consumer 31 - 22 16 20
Total charge-offs 538 936 329 527 2,028
Recoveries:
       Commercial 340 50 69 620 255
       Residential real estate 2 19 - 210 53
       Consumer 3 11 6 7 7
Total recoveries 345 80 75 837 315
Net charge-offs (recoveries) 193 856 254 (310) 1,713
Provision for loan and lease losses 12,605 4,683 350 325 2,448
Balance at end of year $ 26,572 $ 14,160 $ 10,333 $ 10,237 $ 9,602
Ratio of net charge-offs (recoveries) during  
       the year to average loans outstanding  
       during the year 0.01% 0.05% 0.03% (0.04)% 0.24%
Allowance for loan and lease losses as a
percentage of total loans at end of year 0.86% 0.56% 1.08% 1.15% 1.27%

For additional information regarding loans, see Note 5 of the Notes to the Consolidated Financial Statements.

Implicit in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made, the creditworthiness of the borrower and prevailing economic conditions. The allowance for loan and lease losses has been allocated in the table below according to the estimated amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans at December 31, for each of the past five years.

The table below shows, for three types of loans, the amounts of the allowance allocable to such loans and the percentage of such loans to total loans, along with the amount of the unallocated allowance.

Commercial Residential real estate Consumer Unallocated
Loans to Loans to Loans to
Total Total Total
Amount of Loans Amount of Loans Amount of Loans Amount of
    Allowance     %     Allowance     %     Allowance     %     Allowance     Total
(dollars in thousands)
2015 $      25,127 92.4 $          977 7.5 $          4 0.1 $          464 $     26,572
2014 12,121 90.6 1,113 9.3 7 0.1 919 14,160
2013 7,806 84.2 990 15.7 146 0.1 1,391 10,333
2012 7,944 80.9 1,528 19.0 114 0.1 651 10,237
2011 8,206 78.7 1,263 21.2 51 0.1 82 9,602

Investments

For the year ended December 31, 2015, the average volume of investment securities decreased by $25.3 million to approximately $482.7 million or 14.3% of average earning assets, from $508.0 million on average, or 22.2% of average earning assets, in 2014. The decrease in investment securities resulted from a focus on funding new loan originations. At December 31, 2015, the total investment portfolio amounted to $419.8 million, a decrease of $94.4 million from December 31, 2014. At December 31, 2015, the principal components of the investment portfolio are U.S. Treasury and Government Agency Obligations, Federal Agency Obligations including mortgage-backed securities, Obligations of U.S. states and political subdivision, corporate bonds and notes, and other debt and equity securities.

- 39 -



Table of Contents

During the year ended December 31, 2015, volume related factors decreased investment revenue by $1.1 million. The tax-equivalent yield on investments increased by 23 basis points to 3.57% from a yield of 3.34% during the year ended December 31, 2014. This caused the Company to prudently decrease the size of its investment portfolio in an effort to deploy excess cash into loans.

There were no holdings of any pooled trust preferred securities at December 31, 2015 and 2014. The Company owned one pooled trust preferred security in 2013, which consisted of securities issued by financial institutions and insurance companies. The Company held the mezzanine tranche of these securities. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. During 2013, a Pooled TRUP, ALESCO VII, incurred its eighteenth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable to that all principal and interest would be repaid, and recorded an other-than-temporary impairment charge of $628,000 for the twelve months ended December 31, 2013. The new cost basis for this security had been written down to $260,000. This security was sold effective December 31, 2013 at the new cost basis.

At December 31, 2015 and 2014 the Company did not own any private label mortgage backed securities which required evaluation for impairment. The Company owned one variable rate private label collateralized mortgage obligation (CMO) in 2013, which was evaluated for impairment, which was subsequently sold. The Company recorded $24,000 in principal losses in 2013.

Securities available-for-sale are a part of the Company’s interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk, liquidity management and other factors. The Company continues to reposition the investment portfolio as part of an overall corporate-wide strategy to produce reasonable and consistent margins where feasible, while attempting to limit risks inherent in the Company’s balance sheet.

At December 31, 2015, the net unrealized gain carried as a component of accumulated other comprehensive income and included in stockholders’ equity, net of tax, amounted to $0.6 million as compared with a net unrealized gain of $4.9 million at December 31, 2014, resulting from changes in market conditions and interest rates at December 31, 2015. No alternative valuation approaches were used for any holdings at December 31, 2015 or December 31, 2014. For additional information regarding the Company’s investment portfolio, see Note 4, Note 17 and Note 22 of the Notes to the Consolidated Financial Statements.

During 2015, securities sold from the Company’s available-for-sale portfolio amounted to $65.3 million, as compared with $81.8 million in 2014 and $122.2 million in 2013. The gross realized gains on securities sold, called or matured amounted to approximately $3.9 million in 2015, as compared to $2.8 million in 2014 and $2.5 million in 2013, while there were no gross realized losses in 2015, and there were losses of $19 thousand in 2014 and $88 thousand in 2013. There were no impairment charges in 2015 and in 2014 as compared to $740 thousand in 2013, which included impairment charges of $652 thousand. During 2013, the Company recorded an other-than-temporary charge of $628,000 on the Pooled TRUP, ALESCO VII, and $24,000 in principal losses on the same variable rate private label CMO.

The table below illustrates the maturity distribution and weighted average yield on a tax-equivalent basis for investment securities at December 31, 2015, on a contractual maturity basis.

Due after 1 year Due after 5 years
Due in 1 year or less through 5 years through 10 years Due after 10 years Total
Weighted Weighted         Weighted         Weighted Weighted
    Amortized     Average     Amortized     Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield     Cost     Yield     Value
(dollars in thousands)
Investment Securities Available-for-Sale
Federal Agency Obligations $   - -% $   3,069 1.75% $   1,518 2.85% $   24,475 2.25% $   29,062 2.23% $   29,146
Residential Mortgage Pass-through Securities - - 608 2.00 3,737 2.26 39,810 2.62 44,155 2.58 44,910
Commercial Mortgage Pass-through
       Securities - - - - 2,981 2.43 - - 2,981 2.43 2,972
Obligations of U.S. States and Political
       Subdivisions - - 1,385 2.69 5,757 5.28 1,046 6.15 8,188 4.95 8,357
Trust Preferred - - - - 4,500 5.37 11,588 5.82 16,088 5.69 16,255
Corporate Bonds and Notes 12,993 3.40 15,014 3.14 25,559 4.14 - - 53,566 3.67 53,976
Asset-backed Securities - - 1,434 1.02 6,742 1.45 11,829 1.10 20,005 1.21 19,725
Certificates of Deposit 550 1.56 828 2.18 295 2.00 222 2.70 1,895 2.03 1,905
Equity Securities - - - - - - 376 0.48 376 0.48 374
Other Securities - - - - - - 18,303 1.85 18,303 1.85 18,150
Total $ 13,543 3.33% $ 22,338 2.65% $ 51,089 3.53% $ 107,649 2.59% $ 194,619 2.89% $ 195,770
       Investment Securities Held-to-Maturity
U.S. Treasury and Agency Securities $ - - % $ - - % $ 28,471 2.50% $ - - % $ 28,471 2.50% $ 29,226
Federal Agency Obligations - - 27 4.62 1,136 2.44 32,453 2.49 33,616 2.49 33,777
Residential Mortgage Pass-through Securities 2 2.49 118 0.64 247 1.72 3,438 1.88 3,805 1.83 3,810
Commercial Mortgage Pass-through
       Securities - - 2,777 2.27 1,333 2.30 - - 4,110 2.28 4,135
Obligations of U.S. States and Political
       Subdivisions - - 3,752 4.19 24,972 4.13 89,291 4.72 118,015 4.58 123,013
Corporate Bonds and Notes 1,000 0.93 9,343 2.24 25,695 3.76 - - 36,038 3.29 36,597
Total $ 1,002 0.93% $ 16,017 2.69% $ 81,854 3.39% $ 125,182 4.06% $ 224,055 3.70% $ 230,558
       Total Investment Securities $ 14,545 3.16% $ 38,355 2.70% $ 132,943 3.52% $ 232,831 3.39% $ 418,674 3.33% $ 426,328

For information regarding the carrying value of the investment portfolio, see Note 4, Note 17 and Note 22 of the Notes to the Consolidated Financial Statements.

- 40 -



Table of Contents

The securities listed in the table above are either rated investment grade by Moody’s and/or Standard and Poor’s or have shadow credit ratings from a credit agency supporting an investment grade and conform to the Company’s investment policy guidelines. There were no municipal securities, or corporate securities, of any single issuer exceeding 10 percent of stockholders’ equity at December 31, 2015.

Equity securities and other securities do not have a contractual maturity and are included in the “Due after ten years” maturity in the table above.

The following table sets forth the carrying value of the Company’s investment securities, as of December 31 for each of the last three years.

      2015       2014       2013
(dollars in thousands)
Investment Securities Available-for-Sale:
U.S. treasury & agency securities $      - $      - $      13,519
Federal agency obligations 29,146 32,817 19,941
Residential mortgage pass-through securities 44,910 60,356 48,874
Commercial mortgage pass-through securities 2,972 3,046 6,991
Obligations of U.S. States and political subdivisions 8,357 8,406 31,460
Trust preferred securities 16,255 16,306 19,403
Corporate bonds and notes 53,976 125,777 158,630
Asset-backed securities 19,725 27,502 15,979
Certificates of deposit 1,905 2,123 2,262
Equity securities 374 307 287
Other securities 18,150 12,892 5,724
       Total $ 195,770 $ 289,532 $ 323,070
 
Investment Securities Held-to-Maturity:
U.S. treasury & agency securities $ 28,471 $ 28,264 $ 28,056
Federal agency obligations 33,616 27,103 15,249
Residential mortgage pass-through securities 3,805 5,955 2,246
Commercial mortgage-backed securities 4,110 4,266 4,417
Obligations of U.S. States and political subdivisions 118,015 120,144 127,418
Corporate bonds and notes 36,039 38,950 37,900
       Total $ 224,056 $ 224,682 $ 215,286
Total investment securities $ 418,676 $ 514,214 $ 538,356

For other information regarding the Company’s investment securities portfolio, see Note 4 and Note 22 of the Notes to the Consolidated Financial Statements.

- 41 -



Table of Contents

Interest Rate Sensitivity Analysis

The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.

We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of December 31, 2015 and December 31, 2014 the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and Bank’s management.

The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.

Based on our model, which was run as of December 31, 2015, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 5.65%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.62%. As of December 31, 2014, we estimated that over the next one-year period, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 0.29%, while a 100 basis-point instantaneous decrease in the general level of interest rates would decrease our net interest income by 3.41%.

Based on our model, which was run as of December 31, 2015, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 6.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 5.59%. As of December 31, 2014, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would increase our net interest income by 2.76%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 6.54%.

An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of December 31, 2015, would decline by 9.65% with an instantaneous rate shock of up 200 basis points, and increase by 8.20% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2014, would decline by 15.02% with an instantaneous rate shock of up 200 basis points, and increase by 13.65% with an instantaneous rate shock of down 100 basis points.

Estimated Change in
Interest Rates Estimated EVE        Interest Rates Estimated Estimated Change in NII
(basis points) EVE Amount % (basis points) NII Amount %
  +300         $ 394,436              $ (72,817)           (15.6)           +300             $ 130,479     $ 10,212     8.5  
  +200       422,177       (45,076)   (9.6)   +200     127,064   6,797     5.7  
  +100       448,088     (19,165)   (4.1)     +100     123,394     3,127     2.6  
0       467,253   -     0.0   0     120,267   -   0.0  
-100 505,586 38,333 8.2 -100   115,918 (4,349) (3.6)

Estimates of Fair Value

The estimation of fair value is significant to certain assets of the Company, including available-for-sale investment securities. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, expected cash flows, credit quality, discount rates, or market interest rates. Fair values for most available for sale investment securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. See Note 22 of the Notes to Consolidated Financial Statements for additional discussion.

These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

- 42 -



Table of Contents

Impact of Inflation and Changing Prices

The financial statements and notes thereto presented elsewhere herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Liquidity

Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

At December 31, 2015, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of December 31, 2015, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $466.5 million, which represented 12.2% of total assets and 17.5% of total deposits and borrowings, compared to $416.4 million at December 31, 2014, which represented 12.1% of total assets and 14.0% of total deposits and borrowings on such date.

The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of December 31, 2015, had the ability to borrow $1.2 billion. In addition, at December 31, 2015, the Bank had in place borrowing capacity of $25 million through correspondent banks. The Bank also has a credit facility established with the Federal Reserve Bank of New York for direct discount window borrowings with capacity based on pledged collateral of $78 million. At December 31, 2015, the Bank had aggregate available and unused credit of $635 million, which represents the aforementioned facilities totaling $1.3 billion net of $656 million in outstanding borrowings. At December 31, 2015, outstanding commitments for the Bank to extend credit were $626 million.

Cash and cash equivalents totaled $200.9 million on December 31, 2015, increasing by $74.0 million from $126.8 million at December 31, 2014. Operating activities provided $52.3 million in net cash. Investing activities used $509.9 million in net cash, primarily reflecting an increase in loans, which was offset in part by cash flow from the securities portfolio. Financing activities provided $531.7 million in net cash, primarily reflecting a net increase of $233.1 million in deposits, $50.0 million of new subordinated debt, and a net increase of $176.0 in borrowings (consisting of $848.9 million in new borrowings offset by notional repayments of $672.9 million). Borrowing activity was significantly higher during the year ended December 31, 2015 when compared to the same period of 2014 due to the Merger and continued growth in our lending operations.

- 43 -



Table of Contents

Deposits

Deposits are our primary source of funds. Average total deposits increased $673.3 million, or 35.5% to $2.6 billion in 2015 from 2014, $594.3 million, or 45.6%, to $1.9 billion in 2014 from $1.3 billion in 2013. Growth in both periods was, due to the impact of the Merger and a growth in core deposits, primarily in money market accounts deposits. Transaction and nontransaction (time) deposits have grown as the customer’s base has expanded.

The following table sets forth the average amount of various types of deposits for each of the periods indicated.

December 31,
2015 Average 2014 Average       2013 Average
      Balance       Rate       Balance       Rate       Rate
(dollars in                              
thousands)                              
Demand, noninterest bearing $      537,287 -- $      350,310 -- $      233,835 --
Demand, interest bearing &                              
NOW     450,359   0.36%     339,707   0.43%     298,530   0.40%
Money market accounts 609,797 0.45% 584,586 0.41% 411,209 0.44%
Savings     219,507   0.28%     196,855   0.16%     185,793   0.33%
Time 752,380 1.17% 424,604 1.13% 172,444 0.92%
 
Total Deposits   $ 2,569,330   0.54%   $ 1,896,062   0.47%   $ 1,301,811   0.40%

The following table sets forth the distribution of total deposit accounts, by account types for each of the periods indicated.

As of
December 31, 2015 December 31, 2014
% of % of
Amount total Amount       total
(dollars in                  
thousands)  
Demand, non-interest bearing   $      650,775   23.32%   $      492,515   19.89%
Demand, interest bearing &
NOW 490,380 17.57% 444,387 17.95%
Money market accounts 658,695 23.60% 644,669 26.04%
Savings 216,399 7.75% 224,638 9.07%
Time 774,717 27.76% 669,398 27.04%
 
Total Deposits $ 2,790,966 100.00% $ 2,475,607 100.00%

The following table summarizes the maturity distribution of time deposits in denomination of $250,000 or more:

  December 31, December 31,
(dollars in thousands)         2015 2014
3 months or less $ 16,798       $ 12,089
Over 3 to 6 months 38,553 14,804
Over 6 to 12 months 49,853 50,885
Over 12 months 37,617 30,203
 
Total $ 142,821 $ 107,981

- 44 -



Table of Contents

Borrowings

Borrowings consist of long and short term advances from the Federal Home Loan Bank and securities sold under agreements to repurchase. Federal Home Loan Bank advances are secured, under the terms of a blanket collateral agreement, by commercial mortgage loans. As of December 31, 2015, the Company had $671.6 million in notes outstanding at a weighted average interest rate of 1.37%. As of December 31, 2014, the Company had $495.6 million in notes outstanding at a weighted average interest rate of 1.48%.

Contractual Obligations and Other Commitments

The following table summarizes contractual obligations at December 31, 2015 and the effect such obligations are expected to have on liquidity and cash flows in future periods.

5 years or
Total 1 year or less 1 – 3 years 3 – 5 years more
December 31, 2015 (dollars in thousands)
Contractual Obligations:
Operating lease obligations       $      13,370       $      1,887       $      3,088       $      2,757       $      5,638
Total contracted cost obligations 13,370 1,887 3,088 2,757 5,638
Other Long-term Liabilities/Long-term
       Debt
Time Deposits 774,717 344,224 336,675 93,818 -
Federal Home Loan Bank advances and
       repurchase agreements 671,587 270,587 301,000 100,000 -
Capital lease 4,217 292 584 642 2,699
Subordinated debentures 55,155 - - - 55,155
Total Other Long-term
       Liabilities/Long-term Debt 1,505,676 615,103 638,259 194,460 57.854
Other Commercial Commitments –
       Off Balance Sheet:
Commitments under commercial loans
       and lines of credit 278,201 216,725 38,487 6,432 16,557
Home equity and other revolving lines
       of credit 52,191 23,437 8,792 5,505 14,457
Outstanding commercial mortgage loan
       commitments 273,552 199,991 70,554 3,007 -
Standby letters of credit 20,895 20,615 280 - -
Overdraft protection lines 770 361 23 - 386
Total off balance sheet arrangements
       and contractual obligations 625,609 461,129 118,136 14,944 31,400
Total contractual obligations and other
       commitments $ 2,144,655 $ 1,078,119 $ 759,483 $ 212,161 $ 94,892

- 45 -



Table of Contents

Capital

The maintenance of a solid capital foundation continues to be a primary goal for the Company. Accordingly, capital plans and dividend policies are monitored on an ongoing basis. The most important objective of the capital planning process is to balance effectively the retention of capital to support future growth and the goal of providing stockholders with an attractive long-term return on their investment.

The Company’s Tier 1 leverage capital (defined as tangible stockholders’ equity for common stock and Trust Preferred Capital Securities) at December 31, 2015 amounted to $339.5 million or 9.1% of average total assets. At December 31, 2014, the Company’s Tier 1 leverage capital amounted to $301.6 million or 9.4% of average total assets. Tier 1 capital excludes the effect of FASB ASC 320-10-05, which amounted to $0.7 million of net unrealized losses, after tax, on securities available-for-sale at December 31, 2015 (and would be reported as a component of accumulated other comprehensive income which is included in stockholders’ equity), and is reduced by goodwill and intangible assets, which amounted to $147.5 million as of December 31, 2015. For information on goodwill and intangible assets, see Note 1 to the Consolidated Financial Statements.

United States bank regulators have issued guidelines establishing minimum capital standards related to the level of assets and off balance-sheet exposures adjusted for credit risk. Specifically, these guidelines categorize assets and off balance-sheet items into four risk-weightings and require banking institutions to maintain a minimum ratio of capital to risk-weighted assets. At December 31, 2015, the Company’s CET 1, Tier 1 and total risk-based capital ratios were 9.1%, 9.6% and 11.8%, respectively. For information on risk-based capital and regulatory guidelines for the Parent Corporation and its bank subsidiary, see Note 16 to the Consolidated Financial Statements.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the bank regulators regarding capital components, risk weightings, and other factors.

- 46 -



Table of Contents

Subordinated Debentures

During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures is three-month LIBOR plus 2.85% and reprices quarterly. The rate at December 31, 2015 was 3.17%.

During June 2015, the Parent Corporation issued $50 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain institutional accredited investors. The net proceeds from the sale of the Notes are expected to be used to redeem, by March 31, 2016, $11.3 million outstanding of its Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program, and for general corporate purposes, which included the Parent Corporation contributing $35 million of the net proceeds to the Bank in the form of common equity. The Notes are non-callable for five years, have a stated maturity of July 1, 2025, and bear interest at a fixed rate of 5.75% per year, from and including June 30, 2015 to, but excluding July 1, 2020. From and including July 1, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to a level equal to the then current three-month LIBOR rate plus 393 basis points.

- 47 -



Table of Contents

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Sensitivity

Market Risk

Interest rate risk management is our primary market risk. See "Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operation- Interest Rate Sensitivity Analysis" herein for a discussion of our management of our interest rate risk.

8. Financial Statements and Supplementary Data

All Financial Statements:

The following financial statements are filed as part of this report under Item 8 - “Financial Statements and Supplementary Data.”


- 48 -



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
ConnectOne Bancorp, Inc.
Englewood Cliffs, New Jersey

We have audited the accompanying consolidated statements of financial condition of ConnectOne Bancorp, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ConnectOne Bancorp, Inc. as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ConnectOne Bancorp, Inc.'s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2016 expressed an adverse opinion thereon.

/s/Crowe Horwath LLP
Crowe Horwath LLP
Livingston, New Jersey
March 4, 2016

- 49 -



Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
ConnectOne Bancorp, Inc.
Englewood Cliffs, New Jersey

We have audited the accompanying consolidated statement of condition (not included herein) of ConnectOne Bancorp, Inc. (formerly known as Center Bancorp, Inc.) and its subsidiaries ( the “Corporation”) as of December 31, 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2013. ConnectOne Bancorp, Inc.’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position (not included herein) of the Corporation as of December 31, 2013, and the consolidated results of its operations and its cash flows for the year ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP
BDO USA, LLP
Philadelphia, Pennsylvania
March 5, 2014

- 50 -



Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,
      2015       2014
(in thousands, except for share data)
ASSETS
Cash and due from banks $       31,291 $       31,813
Interest-bearing deposits with banks 169,604 95,034
       Cash and due from banks 200,895 126,847
 
Investment securities:
       Securities available-for-sale 195,770 289,532
       Securities held-to-maturity (fair value of $230,558 and $231,445) 224,056 224,682
 
Loans receivable 3,099,007 2,538,641
Less: Allowance for loan and lease losses 26,572 14,160
       Net loans receivable 3,072,435 2,524,481
 
Investment in restricted stock, at cost 32,612 23,535
Bank premises and equipment, net 22,333 20,653
Accrued interest receivable 12,545 11,700
Bank-owned life insurance 78,801 52,518
Other real estate owned 2,549 1,108
Goodwill 145,909 145,909
Core deposit intangibles 3,908 4,825
Other assets 24,908 22,782
       Total assets $ 4,016,721 $ 3,448,572
 
LIABILITIES
Deposits:
       Noninterest-bearing $ 650,775 $ 492,516
       Interest-bearing 2,140,191 1,983,091
              Total deposits 2,790,966 2,475,607
Borrowings 671,587 495,553
Subordinated debentures 55,155 5,155
Accounts payable and accrued liabilities 21,669 26,038
       Total liabilities 3,539,377 3,002,353
 
COMMITMENTS AND CONTINGENCIES
 
STOCKHOLDERS’ EQUITY
Preferred Stock, $1,000 liquidation value per share:
       Authorized 5,000,000 shares; issued and outstanding 11,250 shares
              of Series B preferred stock at December 31, 2015 and 2014; total
              liquidation value of $11,250 at December 31, 2015 and 2014 11,250 11,250
Common stock, no par value:
       Authorized 50,000,000 shares; issued 32,149,585 shares at
              December 31, 2015 and 31,758,828 shares at December 31, 2014;
              outstanding 30,085,663 shares at December 31, 2015 and 29,694,906 at
              December 31, 2014 374,287 374,287
Additional paid-in capital 8,527 6,015
Retained earnings 104,606 72,398
Treasury stock, at cost (2,063,922 shares at December 31, 2015 and
       December 31, 2014) (16,717) (16,717)
Accumulated other comprehensive loss (4,609) (1,014)
       Total stockholders’ equity 477,344 446,219
       Total liabilities and stockholders’ equity $ 4,016,721 $ 3,448,572

See the accompanying notes to the consolidated financial statements.

- 51 -



Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,
      2015       2014       2013
(in thousands, except for share and per share data)
Interest income:
        Interest and fees on loans $       125,493  $       77,669 $       40,132
        Interest and dividends on investment securities:
                Taxable 10,665 12,024 12,189
                Nontaxable 3,550 3,740 4,422
                Dividends 1,081 636 523
        Interest on federal funds sold and other short-term investment 178 138 2
Total interest income 140,967 94,207 57,268
Interest expense:
        Deposits 13,756 8,260 5,219
        Borrowings 10,058 6,548 5,863
Total interest expense 23,814 14,808 11,082
Net interest income 117,153 79,399 46,186
Provision for loan and lease losses 12,605 4,683 350
Net interest income after provision for loan and lease losses 104,548 74,716 45,836
Noninterest income:
        Annuity and insurance 242 382 489
        Bank-owned life insurance commissions 1,782 1,303 1,364
        Net gains on sale of loans held for sale 327 182 294
        Deposit, loan and other income 2,667 2,813 2,993
        Insurance recovery 2,224 - -
        Total other-than-temporary impairment losses - - (652)
        Net gains on sale of investment securities 3,931 2,818 2,363
                Net investment securities gains 3,931 2,818 1,711
Total noninterest income 11,173 7,498 6,851
Noninterest expense:
        Salaries and employee benefits 27,685 18,829 13,465
        Occupancy and equipment 7,587 5,312 3,518
        FDIC Insurance 2,110 1,618 1,098
        Professional and consulting 2,951 1,661 1,111
        Marketing and advertising 847 498 304
        Data processing 3,703 2,575 1,422
        Merger-related expenses - 12,388 -
        Loss on extinguishment of debt 2,397 4,550 -
        Amortization of core deposit intangible 917 506 30
        Charge due to wire fraud   - 2,374 -
        Other expenses 6,287 4,493 4,330
Total noninterest expenses 54,484 54,804 25,278
Income before income tax expense 61,237 27,410 27,409
Income tax expense 19,926 8,845 7,484
Net income 41,311 18,565 19,925
Less: Preferred stock dividends 112 112 141
Net income available to common stockholders $ 41,199 $ 18,453 $ 19,784
 
Earnings per common share:
        Basic $ 1.38 $ 0.80 $ 1.21
        Diluted $ 1.36 $ 0.79 $ 1.21
Weighted average common shares outstanding:
        Basic         29,938,458 23,029,813 16,349,204
        Diluted 30,283,966 23,479,074 16,385,692
Dividends per common share $ 0.300 $ 0.300 $ 0.280

See the accompanying notes to the consolidated financial statements.

- 52 -



Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,
    2015     2014     2013
(in thousands)
Net income $      41,311 $      18,565 $      19,925
Other comprehensive income (loss), net of tax:
Unrealized gains and losses on securities available-for-sale:
       Unrealized holding (losses) gains on available for sale securities (2,991) 6,966 (8,741)
       Tax effect 1,196 (2,635) 3,578
              Net of tax amount (1,795) 4,331 (5,163)
       Reclassification adjustments for OTTI losses included in income - - 652
       Tax effect - - (178)
              Net of tax amount - - 474
       Reclassification adjustment for realized gains arising during this period (3,931) (2,818) (2,363)
       Tax effect 1,564 986 645
              Net of tax amount (2,367) (1,832) (1,718)
Unrealized holding losses on securities transferred from available-for-sale to held-to-
       maturity securities - - (2,612)
       Tax effect - - 1,064
              Net of tax amount - - (1,548)
       Amortization of net unrealized holding losses (gains) on securities transferred from
       available-for-sale to held-to-maturity securities 220 215 (58)
       Tax effect (90) (91) 19
              Net of tax amount 130 124 (39)
Unrealized holding (loss) gain on cash flow hedge (179) 48 -
       Tax effect 73 (20) -
              Net of tax amount (106) 28 -
Pension plan:
       Actuarial gains (losses) 918 (1,896) 654
       Tax effect (375) 775 (267)
              Net of tax amount 543 (1,121) 387
Total other comprehensive (loss) income (3,595) 1,530 (7,607)
Total comprehensive income $ 37,716 $ 20,095 $ 12,318

See the accompanying notes to the consolidated financial statements.

- 53 -



Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Accumulated
Additional Other Total
Preferred Common Paid In Retained Treasury Comprehensive Stockholders’
      Stock       Stock       Capital       Earnings       Stock       Income (Loss)       Equity
(in thousands, except for share data)
Balance as of January 1, 2013 11,250 110,056 4,801 46,753 (17,232) 5,063 160,691
Net income - - - 19,925 - - 19,925
Other comprehensive loss, net of taxes - - - - - (7,607) (7,607)
Dividends on series B preferred stock - - - (169) - - (169)
Cash dividends declared on common
       stock ($0.280 per share) - - - (4,581) - - (4,581)
Dividend on restricted stock declared - - - (1) - - (1)
Issuance cost of common stock - - - (13) - - (13)
Issuance of restricted stock award
       (18,829 shares) - - 91 - 152 - 243
Exercise of stock options (2,268
       shares) - - 19 - 2 - 21
Stock-based compensation expense - - 75 - - - 75
Balance as of December 31, 2013 11,250 110,056 4,986 61,914 (17,078) (2,544) 168,584
Net income - - - 18,565 - - 18,565
Other comprehensive income, net of taxes - - - - - 1,530 1,530
Dividends on series B preferred stock - - - (112) - - (112)
Cash dividends declared on common
       stock ($0.300 per share) - - - (7,962) - - (7,962)
Issuance cost of common stock - - - (7) - - (7)
Exercise of 100,911 stock options
       (including tax benefits of $282) - - 806 - 361 - 1,167
Stock-based compensation expense - - 223 - - - 223
Stock issued in acquisition of legacy
       ConnectOne Bancorp, Inc.
       (13,221,152 shares) - 264,231 - - - - 264,231
Balance as of December 31, 2014 $ 11,250 $ 374,287 $ 6,015 $ 72,398 $ (16,717) $ (1,014) $ 446,219
Net income - - - 41,311 - - 41,311
Other comprehensive loss, net of taxes - - - - (3,595) (3,595)
Dividends on series B preferred stock - - - (112) - - (112)
Cash dividends declared on common  
       stock ($0.300 per share) - - - (8,991) - - (8,991)
Exercise of 340,492 stock options - - 1,765 - - - 1,765
Stock-based compensation expense - - 747 - - - 747
Balance as of December 31, 2015 $      11,250 $      374,287 $      8,527 $      104,606 $      (16,717) $      (4,609) $      477,344

See the accompanying notes to the consolidated financial statements.

- 54 -



Table of Contents

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
(dollars in thousands)       2015       2014       2013
Cash flows from operating activities:
Net income   $       41,311 $       18,565 $       19,925
Adjustments to Reconcile Net Income to Net
        Cash Provided by Operating Activities:
Depreciation and amortization 3,226 2,045 886
Provision for loan and lease losses 12,605 4,683 350
Net deferred income tax (benefit) expense (3,493) 184 1,739
Stock-based compensation expense 747 223 59
Net other-than-temporary impairment losses   - - 652
Net gains on sales of available-for-sale securities (3,931) (2,818) (2,363)
Net gains on sales of loans held for sale (327) (261) (294)
Net loans originated for sale (20,834) (10,994) (14,816)
Proceeds from sales of loans held for sale 21,161 11,445 16,601
Net gains on disposition of premises and equipment - - (2)
Net loss on sales of other real estate owned 164 23 75
Life insurance death benefit - - (291)
Increase in cash surrender value of bank owned life insurance (1,782) (1,303) (1,073)
Loss on extinguishment of debt 2,397 4,550 -
Net amortization of securities 1,793 2,074 3,316
Increase in accrued interest receivable (845) (428) (233)
Decrease in other assets 1,190 2,200 414
(Decrease) increase in other liabilities (1,080) 377 (1,792)
Net cash provided by operating activities 52,302 30,565 23,153
 
Cash flows from investing activities:
Investment securities available-for-sale:
        Purchases (37,403) (37,886) (155,464)
        Sales 65,231 80,449 122,165
        Maturities, calls and principal repayment 62,007 33,496 46,378
Investment securities held-to-maturity:
        Purchases (17,531) (20,860) (23,531)
        Maturities and principal repayment 17,520 10,766 3,830
Net purchase of restricted investment in bank stock (9,077) (903) (22)
Net increase in loans (562,933) (279,270) (71,761)
Purchases of premises and equipment (3,989) (2,037) (973)
Purchase of bank-owned life insurance (24,501) - -
Proceeds from life insurance death benefits - - 592
Proceeds from sale of premises and equipment - - 2
Proceeds from sale of other real estate owned 769 1,544 1,230
Cash and cash equivalent acquired in acquisition - 70,318 -
Net cash used in investing activities (509,907) (144,383) (77,554)
 
Cash flows from financing activities:
Net increase in deposits 315,359 82,260 35,083
Increase in subordinated debentures 50,000 - -
Advances of FHLB borrowings 848,875 161,183 -
Repayments of FHLB borrowings (656,841) (79,550) -
Repayment of purchase agreement (18,397) - -
Cash dividends on common stock (8,996) (6,940) (4,254)
Cash dividends on preferred stock (112) (140) (141)
Issuance cost of common stock - (7) (13)
Tax benefit from exercise of stock options 341 282 16
Issuance of restricted stock award - - 243
Proceeds from exercise of stock options 1,424 885 21
Net cash provided by financing activities 531,653 157,973 30,955
Net (decrease) increase in cash and cash equivalents 74,048 44,155 (23,446)
Cash and cash equivalents at beginning of year 126,847 82,692 106,138
Cash and cash equivalents at end of year $ 200,895 $ 126,847 $ 82,692

(continued)

- 55 -



Table of Contents

Cash paid during year for:                        
       Interest paid on deposits and borrowings $      23,357 14,785 10,993
       Income taxes 17,880 4,993 4,727
       
Supplemental noncash disclosures:
Investing:
       Trade date accounting settlement for investments $ - $ - $ 8,759
       Transfer of loans to other real estate owned 2,374 352 236
       Transfer from investment securities available-for-sale
              to investment securities held-to-maturity $ - $ - $      138,800
       
Financing:
       Dividends declared, not paid 2,258 $ 2,250 $ 1,256
       
Business combinations:
       Noncash assets acquired:  
              Investment securities $ - $ 28,452 $