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EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF THE PARENT CORPORATION - ConnectOne Bancorp, Inc.connectone3145151-ex312.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF THE PARENT CORPORATION - ConnectOne Bancorp, Inc.connectone3145151-ex322.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF THE PARENT CORPORATION - ConnectOne Bancorp, Inc.connectone3145151-ex321.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF THE PARENT CORPORATION - ConnectOne Bancorp, Inc.connectone3145151-ex311.htm

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

FORM 10-Q

(Mark One)

            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2016
 
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 No.)
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)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value:
(Title of Class)
30,265,407 shares
 (Outstanding as of November 4, 2016)



Table of Contents
            Page
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
Consolidated Statements of Condition at September 30, 2016 (unaudited) and December 31, 2015   3
Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 (unaudited) 4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 (unaudited) 5
Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2016 and for the nine months ended September 30, 2015 (unaudited) 6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited) 7
Notes to Consolidated Financial Statements
 
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
45
Item 3. Qualitative and Quantitative Disclosures about Market Risks
 
59
Item 4. Controls and Procedures
 
60
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings
 
61
Item 1a. Risk Factors
 
61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
62
Item 3. Defaults Upon Senior Securities
 
62
Item 4. Mine Safety Disclosures
 
62
Item 5. Other Information
 
62
Item 6. Exhibits
 
63
SIGNATURES
 

2 




Item 1. Financial Statements

CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

      September 30,       December 31,
(in thousands, except for share data) 2016 2015
(unaudited)
ASSETS
Cash and due from banks $ 49,028 $ 31,291
Interest-bearing deposits with banks 184,766 169,604
       Cash and cash equivalents 233,794 200,895
 
Investment securities:
       Available-for-sale 338,459 195,770
       Held-to-maturity (fair value of $ - and $230,558) - 224,056
 
Loans held-for-sale 15,112 -
 
Loans receivable        3,445,476        3,099,007
Less: Allowance for loan and lease losses 37,615 26,572
       Net loans receivable 3,407,861 3,072,435
 
Investment in restricted stock, at cost 24,535 32,612
Bank premises and equipment 22,112 22,333
Accrued interest receivable 12,497 12,545
Bank-owned life insurance 97,644 78,801
Other real estate owned 626 2,549
Goodwill 145,909 145,909
Core deposit intangibles 3,281 3,908
Other assets 25,974 24,096
       Total assets $ 4,327,804 $ 4,015,909
LIABILITIES
Deposits:
       Noninterest-bearing $ 655,683 $ 650,775
       Interest-bearing 2,613,266 2,140,191
              Total deposits 3,268,949 2,790,966
Borrowings 481,337 671,587
Subordinated debentures (net of $665 and $812 in debt issuance costs) 54,490 54,343
Other liabilities 23,440 21,669
       Total liabilities 3,828,216 3,538,565
 
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; total liquidation value of $11,250 at
       December 31, 2015 - 11,250
Common stock, no par value, authorized 50,000,000 shares; issued 32,261,240 shares at September 30,
       2016 and 32,149,585 at December 31, 2015; outstanding 30,197,318 shares at September 30, 2016 and
       30,085,663 at December 31, 2015 374,287 374,287
Additional paid-in capital 10,409 8,527
Retained earnings 130,885 104,606
Treasury stock, at cost (2,063,922 common shares at September 30, 2016 and December 31, 2015) (16,717 ) (16,717 )
Accumulated other comprehensive income/(loss) 724 (4,609 )
       Total stockholders’ equity 499,588 477,344
       Total liabilities and stockholders’ equity $ 4,327,804 $ 4,015,909

See accompanying notes to unaudited consolidated financial statements.
 
3



CONNECTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

    Three Months Ended     Nine Months Ended
September 30,   September 30,  
(in thousands, except for share and per share data) 2016     2015 2016     2015
Interest income
Interest and fees on loans $ 37,803 $ 32,276 $ 109,381 $ 91,807
Interest and dividends on investment securities:      
              Taxable 1,774 2,669 5,879 8,340
              Tax-exempt 988 901 2,867 2,666
              Dividends 352 297 1,074 797
Interest on federal funds sold and other short-term investments 261 43 541 127
       Total interest income 41,178 36,186 119,742 103,737
Interest expense
Deposits 5,159 3,655 13,532 9,980
Borrowings 2,995 2,804 9,472 7,060
       Total interest expense 8,154 6,459 23,004 17,040
Net interest income 33,024 29,727 96,738 86,697
Provision for loan and lease losses 6,750 4,175 13,500 7,550
Net interest income after provision for loan and lease losses 26,274 25,552 83,238 79,147
Noninterest income
Annuities and insurance commissions 68 77 140 210
Bank-owned life insurance 615 388 1,843 1,162
Net gains on sale of loans held-for-sale 56 63 147 276
Deposit, loan and other income 706 1,224 1,984 2,145
Insurance recovery - - - 2,224
Net gains on sales of investment securities 4,131 2,067 4,234 2,793
       Total noninterest income 5,576 3,819 8,348 8,810
Noninterest expenses
Salaries and employee benefits 7,791 6,905 23,143 20,480
Occupancy and equipment 2,049 1,916 6,450 5,785
FDIC insurance 745 535 1,955 1,535
Professional and consulting 667 836 2,078 2,045
Marketing and advertising 293 247 817 634
Data processing 1,002 957 3,036 2,686
Loss on extinguishment of debt - - - 2,397
Amortization of core deposit intangible 193 217 627 700
Other expenses 1,811 1,688 5,150 4,643
       Total noninterest expenses 14,551 13,301 43,256 40,905
Income before income tax expense 17,299 16,070 48,330 47,052
Income tax expense 5,443 5,228 15,224 15,309
Net income 11,856 10,842 33,106 31,743
Less: Preferred stock dividends - 28 22 84
Net income available to common stockholders $ 11,856 $ 10,814 $ 33,084 $ 31,659
Earnings per common share:
       Basic $ 0.39 $ 0.36 $ 1.10 $ 1.06
       Diluted 0.39 0.36 1.09 1.04
Weighted average common shares outstanding:
       Basic 30,125,287 30,045,818 30,100,057 29,786,374
       Diluted     30,401,684     30,335,571     30,376,085     30,323,376
Dividend per common share $ 0.075 $ 0.075 $ 0.225 $ 0.225

See accompanying notes to unaudited consolidated financial statements.
 
4



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

             Three Months Ended       Nine Months Ended
September 30, September 30,
(in thousands) 2016       2015 2016       2015
Net income $ 11,856 $ 10,842 $ 33,106 $ 31,743
Other comprehensive income:  
Unrealized gains and losses:      
       Unrealized holding (losses) gains on available-for-sale securities
              arising during the period (523 ) 108 1,551 (1,196 )
       Tax effect 187 (39 ) (634 ) 485
              Net of tax (336 ) 69 917 (711 )
       Unrealized gains on securities transferred from held-to-maturity
              to available-for-sale the period        10,069 -        10,069 -
       Tax effect (3,815 ) - (3,815 ) -
              Net of tax     6,254       -       6,254       -  
       Reclassification adjustment for realized gains included in net
              income (4,131 ) (2,067 ) (4,234 )        (2,793 )
       Tax effect     1,640       794       1,682       1,091  
              Net of tax (2,491 )        (1,273 ) (2,552 ) (1,702 )
       Amortization of unrealized net losses on held-to-maturity                                
              securities transferred from available-for-sale securities     1,890       37       1,986       165  
       Tax effect (774 ) (15 ) (813 ) (67 )
              Net of tax     1,116       22       1,173       98  
 
       Unrealized gains (losses) on cash flow hedges 644 (855 ) (1,081 ) (1,153 )
       Tax effect     (263 )     349       441       471  
              Net of tax 381 (506 ) (640 ) (682 )
       Unrealized pension plan gains and losses:                                
              Unrealized pension plan gains (losses) before reclassifications - 75 (1 ) 862
              Tax effect - (31 ) - (353 )
                     Net of tax - 44 (1 ) 509
              Reclassification adjustment for realized losses included in net
                     income 204 108 306 324
              Tax effect (83 ) (44 ) (124 ) (132 )
                     Net of tax 121 64 182 192
Total other comprehensive income (loss) 5,045 (1,580 ) 5,333 (2,296 )
Total comprehensive income $ 16,901 $ 9,262 $ 38,439 $ 29,447

See accompanying notes to unaudited consolidated financial statements.
 
5



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

    Accumulated
Additional Other Total
(dollars in thousands, except for Preferred     Common Paid-In Retained Treasury Comprehensive     Stockholders’
per share data) Stock Stock     Capital     Earnings     Stock     Income (Loss)     Equity
Balance as of December 31, 2014 $      11,250 $      374,287 $ 6,015 $      72,398 $      (16,717 ) $                    (1,014 ) $              446,219
Net income - - - 31,743 - - 31,743
Other comprehensive loss, net of
tax - - - - - (2,296 ) (2,296 )
Dividend on series B preferred
       stock - - - (84 ) - - (84 )
Cash dividends declared on
       common stock ($0.15 per share) - - - (6,736 ) - - (6,736 )
Exercise of stock options (339,334
       shares) - - 1,424 - - - 1,424
Restricted stock and performance
       units grants (162,491 shares) - - - - - - -
Stock-based compensation  
       expense - - 876 - - - 876
 
Balance as of September 30,
       2015 $ 11,250 $ 374,287 $ 8,315 $ 97,321 $ (16,717 ) $ (3,310 ) $ 471,146
 
Balance as of December 31, 2015 $ 11,250 $ 374,287 $ 8,527 $ 104,606 $ (16,717 ) $ (4,609 ) $ 477,344
Net income - - - 33,106 - - 33,106
Other comprehensive income, net          
       of tax - - - - - 5,333 5,333
Dividend on series B preferred
       stock - - - (22 ) - - (22 )
Cash dividends declared on
       common stock ($0.15 per share) - - - (6,805 ) - - (6,805 )
 
Redemption of preferred stock (11,250 ) - - - - - (11,250 )
Exercise of stock options (36,135
       shares) - - 232 - - - 232
Restricted stock and performance
       units grants (75,520 shares) - - - - - - -
Stock-based compensation
       expense - - 1,650 - - - 1,650
 
Balance as of September 30,
       2016 $ - $ 374,287 $ 10,409 $ 130,885 $ (16,717 ) $ 724 $ 499,588

See accompanying notes to unaudited consolidated financial statements.
 
6



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

    Nine Months Ended
September 30,
       (in thousands) 2016     2015
Cash flows from operating activities
Net income $ 33,106 $ 31,743
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment 2,084 1,720
Provision for loan and lease losses 13,500 7,550
Amortization of intangibles 627 700
Net accretion of loans (3,381 ) (3,830 )
Accretion on bank premises (94 ) (77 )
Accretion on deposits (167 ) (394 )
Accretion on borrowings (250 ) (354 )
Stock-based compensation 1,650 876
Gains on sales of investment securities, net (4,234 ) (2,793 )
Gains on sale of loans held-for-sale, net (147 ) (276 )
Loans originated for resale (6,399 ) (18,004 )
Proceeds from sale of loans held-for-sale 4,948 17,290
Net (gain) loss on sale of other real estate owned (182 ) 112
Increase in cash surrender value of bank-owned life insurance (1,843 ) (1,163 )
Amortization of premiums and accretion of discounts on investments securities, net 1,148 1,442
Decrease in accrued interest receivable 48 38
Increase in other assets (2,813 ) (3,324 )
(Decrease) increase in other liabilities (981 ) 294
       Net cash provided by operating activities 36,620 31,550
Cash flows from investing activities  
Investment securities available-for-sale:
             Purchases       (114,844 ) (34,796 )
             Sales 85,253 44,397
             Maturities, calls and principal repayments 109,452 53,542
Investment securities held-to-maturity:
             Purchases (1,000 ) (17,531 )
             Maturities and principal repayments 14,758 14,702
Net redemptions (purchases) of restricted investment in bank stocks 8,077 (6,827 )
Net increase in loans (359,945 )       (413,461 )
Purchases of premises and equipment (1,769 ) (2,513 )
Purchases of bank owned life insurance (17,000 ) -
Proceeds from sale of other real estate owned 2,992 126
       Net cash used in investing activities (274,026 ) (362,361 )
Cash flows from financing activities
Net increase in deposits 478,150 191,411
Increase in subordinated debt - 50,000
Advances of FHLB borrowings 375,000 625,000
Repayments of FHLB borrowings (565,000 ) (482,525 )
Repayment of repurchase agreement - (16,000 )
Cash dividends paid on common stock (6,805 ) (6,741 )
Cash dividends paid on preferred stock (22 ) (84 )
Redemption of preferred stock (11,250 ) -
Proceeds from exercise of stock options 232 1,424
       Net cash provided by financing activities 270,305 362,485
Net change in cash and cash equivalents 32,899 31,674
Cash and cash equivalents at beginning of period 200,895 126,847
Cash and cash equivalents at end of period $ 233,794 $ 158,521
Supplemental disclosures of cash flow information
Cash payments for:
       Interest paid on deposits and borrowings $ 22,791 $ 15,940
       Income taxes 18,195 17,045
Supplemental disclosures of noncash investing activities
       Transfer of loans to other real estate owned $ 887 $ 2,374
       Transfer of loans to loans held-for-sale 13,514 -
       Transfer of investment securities from held-to-maturity to available-for sale 209,855 -

See accompanying notes to unaudited consolidated financial statements.
 
7



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Nature of Operations and Principles of Consolidation

The consolidated financial statements of ConnectOne Bancorp, Inc. (the “Parent Corporation”) are prepared on an accrual basis and include the accounts of the Parent Corporation and its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s other direct and indirect subsidiaries, the “Company”). All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.

The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its twenty other banking offices. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate or are expected to be paid from cash flow of business operations. Commercial loans are expected to be repaid from cash flow from business operations. There are no significant concentrations of loans to any one industry or client. However, the clients’ ability to repay their loans is dependent on the cash flows, real estate and general economic conditions in the area.

The preceding unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016, or for any other interim period. The Company’s 2015 Annual Report on Form 10-K should be read in conjunction with these consolidated financial statements.

In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.

The consolidated financial statements have been prepared in conformity with GAAP. Some items in the prior year consolidated financial statements were reclassified to conform to current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Note 2. New Authoritative Accounting Guidance

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for us on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. The Company is currently evaluating the potential impact of ASU 2014-09 on its consolidated financial statements.

ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The Company adopted ASU 2014-12 effective on January 1, 2016 and its adoption did not have a significant impact on the Company’s consolidated financial statements.

ASU No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-13)" requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in the ASU No. 2015-03. The Company adopted ASU No. 2015-03 effective on January 1, 2016 and its adoption did not have a significant impact on the Company’s consolidated financial statements.

8



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. New Authoritative Accounting Guidance – (continued)

ASU No. 2015-12, "Plan Accounting: Defined Benefit Pension Plans (Topic 960): Defined Contribution Pension Plans, (Topic 962): Health and Welfare Benefit Plans, (Topic 965): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient." ASU No. 2015-12 simplifies accounting for employee benefit plans as follows: (i) fully benefit-responsive investment contracts are now to be measured, presented and disclosed at contract value, (ii) the requirement to disclose investments that represent 5 percent or more of net assets available for benefits has been eliminated, (iii) the net appreciation or depreciation in investments for the period should be presented in the aggregate, but is no longer required to be disaggregated and disclosed by general type, (iv) if an investment is measured using the net asset value per share (or its equivalent) practical expedient in Topic 820, and that investment is in a fund that files a U.S. Department of Labor Form 5500, Annual Return/Report of Employee Benefit Plan, as a direct filing entity, disclosure of that investment’s strategy is no longer required, and (v) allows employers to measure (as a practical expedient) benefit plan assets on a month-end date nearest to the employer’s fiscal year end when the fiscal period does not coincide with a month end. The Company adopted ASU No. 2015-12 effective on January 1, 2016 and its adoption did not have a significant impact on the Company’s consolidated financial statements.

ASU No. 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting." ASU 2015-15 adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The adoption of ASU 2015-15 did not have a material impact on the Company’s consolidated financial statements.

ASU No. 2015-16, “Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. The acquirer must also disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to the provision amounts had been recognized as of the acquisition date. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. The adoption of ASU 2015-16 will impact the accounting for future acquisitions.

ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things; (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for us on January 1, 2018 and we are currently evaluating the potential impact of ASU No. 2016-01 on our consolidated financial statements.

ASU No. 2016-02, “Leases (Topic 842)” requires the recognition of a right of use asset and related lease liability by lessees for leases classified as operating leases under current accounting principles GAAP. Topic 842, which replaces the current guidance under Topic 840, retains a distinction between finance leases and operating leases. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee also will not significantly change from current GAAP. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize right of use assets and lease liabilities. Topic 842 will be effective for the Company for reporting periods beginning January 1, 2019, with an early adoption permitted. The Company must apply a modified retrospective transition approach for the applicable leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

9



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. New Authoritative Accounting Guidance – (continued)

ASU 2016-09,“Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09 all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. ASU 2016-09 will be effective on January 1, 2017 and is not expected to have a significant impact on our consolidated financial statements.

ASU No. 2016-10,“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 was issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed above. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

ASU No. 2016-12,“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” ASU 2016-12 was issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” and to address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The effective date and transition of ASU 2016-12 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed above. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

10



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 2. New Authoritative Accounting Guidance – (continued)

ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” provides guidance on the following eight specific cash flow issues: (1) Debt Prepayment or Debt Extinguishment Costs: Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing: At the settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, the issuer should classify the portion of the cash payment attributable to the accreted interest related to the debt discount as cash outflows for operating activities, and the portion of the cash payment attributable to the principal as cash outflows for financing activities; (3) Contingent Consideration Payments Made after a Business Combination: Cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as cash outflows for financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date (including measurement-period adjustments) should be classified as financing activities; any excess should be classified as operating activities. Cash payments made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be classified as cash outflows for investing activities; (4) Proceeds from the Settlement of Insurance Claims: Cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage (that is, the nature of the loss). For insurance proceeds that are received in a lump-sum settlement, an entity should determine the classification on the basis of the nature of each loss included in the settlement; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies: Cash proceeds received from the settlement of corporate-owned life insurance policies should be classified as cash inflows from investing activities. The cash payments for premiums on corporate-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities; (6) Distributions Received from Equity Method Investees: When a reporting entity applies the equity method, it should make an accounting policy election to classify distributions received from equity method investees using either of the following approaches: a. Cumulative earnings approach: Distributions received are considered returns on investment and classified as cash inflows from operating activities, unless the investor’s cumulative distributions received less distributions received in prior periods that were determined to be returns of investment exceed cumulative equity in earnings recognized by the investor. When such an excess occurs, the current-period distribution up to this excess should be considered a return of investment and classified as cash inflows from investing activities. b. Nature of the distribution approach: Distributions received should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as cash inflows from operating activities) or a return of investment (classified as cash inflows from investing activities) when such information is available to the investor. If an entity elects to apply the nature of the distribution approach and the information to apply that approach to distributions received from an individual equity method investee is not available to the investor, the entity should report a change in accounting principle on a retrospective basis by applying the cumulative earnings approach in (1) for that investee. In such situations, an entity should disclose that a change in accounting principle has occurred with respect to the affected investee(s) due to the lack of available information and should provide the disclosures required in paragraphs 250-10-50-1(b) and 250-10-50-2, as applicable. This amendment does not address equity method investments measured using the fair value option; (7) Beneficial Interests in Securitization Transactions: A transferor’s beneficial interest obtained in a securitization of financial assets should be disclosed as a non cash activity, and cash receipts from payments on a transferor’s beneficial interests in securitized trade receivables should be classified as cash inflows from investing activities; (8) Separately Identifiable Cash Flows and Application of the Predominance Principle: The classification of cash receipts and payments that have aspects of more than one class of cash flows should be determined first by applying specific guidance in generally accepted accounting principles (GAAP). In the absence of specific guidance, an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. An entity should then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating this ASU to determine the impact on its consolidated financial position, results of operations and cash flows.

ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Assets Measured at Amortized Cost.” ASU 2016-13 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (PCD assets) that are measured at amortized cost basis is determined in a similar manner to other financial assets measured at amortized cost basis; however, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded as a credit loss expense for these assets. Interest income for PCD assets should be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer assessment of credit losses at acquisition. Available-for-Sale Debt Securities—Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. Available-for-sale accounting recognizes that value may be realized either through collection of contractual cash flows or through sale of the security. Therefore, the amendments limit the amount of the allowance for credit losses to the amount by which fair value is below amortized cost because the classification as available for sale is premised on an investment strategy that recognizes that the investment could be sold at fair value, if cash collection would result in the realization of an amount less than fair value. The allowance for credit losses for purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination is determined in a similar manner to other available-for-sale debt securities; however, the initial allowance for credit losses is added to the purchase price rather than reported as a credit loss expense. Only subsequent changes in the allowance for credit losses are recorded in credit loss expense. Interest income should be recognized based on the effective interest rate, excluding the discount embedded in the purchase price that is attributable to the acquirer’s assessment of credit losses at acquisition. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

11



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 3. Earnings per Common Share

Basic earnings per common share (“EPS”) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS includes any additional common shares as if all potentially dilutive common shares were issued (e.g., stock options). The Company’s weighted average common shares outstanding for diluted EPS include the effect of stock options and restricted stock awards outstanding using the Treasury Stock Method, which are not included in the calculation of basic EPS.

Earnings per common share have been computed as follows:

Three Months Ended Nine Months Ended
September 30,   September 30,
(in thousands, except per share amounts) 2016       2015       2016       2015
Net income $ 11,856 $ 10,842 $ 33,106 $ 31,743
Preferred stock dividends - (28 ) (22 ) (84 )
       Net income available to common stockholders $        11,856 $        10,814 $        33,084 $        31,659
Basic weighted average common shares outstanding   30,125 30,046   30,100 29,786
Effect of dilutive options (1) 276   290   276   537
       Diluted weighted average common shares outstanding (2) 30,401 30,336 30,376   30,323
Earnings per common share:  
       Basic $ 0.39 $ 0.36 $ 1.10 $ 1.06
       Diluted 0.39 0.36 1.09 1.04

(1) Represents incremental shares computed using the treasury stock method.
(2) Anti-dilutive shares are not included in determining diluted earnings per share. There were no anti-dilutive shares in the three and nine months ended September 30, 2016.

Note 4. Investment Securities

The Company’s investment securities are classified as available-for-sale at September 30, 2016 and as available-for-sale and held-to-maturity at December 31, 2015. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2016 and December 31, 2015. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 7 of the Notes to Consolidated Financial Statements for a further discussion.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

Transfers of debt securities from the held-to-maturity category to the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of the transfer shall be recognized in accumulated other comprehensive income, net of applicable taxes.

During the quarter ended September 30, 2016 the Company transferred all securities previously categorized as held-to-maturity to available-for-sale classification. The transfer resulted in an increase of approximately $210 million in amortized cost basis of available-for-sale securities and resulted in a net increase to accumulated other comprehensive income of $7.4 million, net of tax. This transfer will enhance liquidity and increase flexibility with regard to asset-liability management and balance sheet composition.

12




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

The following tables present information related to the Company’s investment securities at September 30, 2016 and December 31, 2015 (dollars in thousands):

Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2016 Cost Gains Losses Value
Investment securities available-for-sale                  
       Federal agency obligations $ 55,024 $ 1,084 $ (9 ) $ 56,099
       Residential mortgage pass-through securities 62,124 1,292 (12 ) 63,404
       Commercial mortgage pass-through securities 4,218 151 - 4,369
       Obligations of U.S. states and political subdivisions 135,781 5,582 (2 ) 141,361
       Trust preferred securities 5,574 310 (209 ) 5,675
       Corporate bonds and notes 37,725 916 (348 ) 38,293
       Asset-backed securities 15,797 1 (296 ) 15,502
       Certificates of deposit 973 15 - 988
       Equity securities 376 52 (3 ) 425
       Other securities 12,332 94 (83 ) 12,343
              Total securities available-for-sale $ 329,924 $ 9,497 $ (962 ) $ 338,459
 
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2015 Cost Gains Losses Value
Investment securities available-for-sale
       Federal agency obligations $ 29,062 $ 142 $ (58 ) $ 29,146
       Residential mortgage pass-through securities 44,155 803 (48 )   44,910
       Commercial mortgage pass-through securities 2,981   - (9 ) 2,972
       Obligations of U.S. states and political subdivisions 8,188 169 -   8,357
       Trust preferred securities 16,088 398 (231 ) 16,255
       Corporate bonds and notes 53,566 702   (292 ) 53,976
       Asset-backed securities   20,005 18 (298 ) 19,725
       Certificates of deposit 1,895 18   (8 ) 1,905
       Equity securities 376 21 (23 ) 374
       Other securities 18,303   - (153 ) 18,150
              Total securities available-for-sale $         194,619 $         2,271 $         (1,120 ) $         195,770
 
Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value
Investment securities held-to-maturity
       U.S. Treasury and agency securities $ 28,471 $ 755 $ - $ 29,226
       Federal agency obligations 33,616 280 (119 ) 33,777
       Residential mortgage-backed securities 3,805 11 (6 ) 3,810
       Commercial mortgage-backed securities 4,110 27 (2 ) 4,135
       Obligations of U.S. states and political divisions 118,015 5,001 (3 ) 123,013
       Corporate bonds and notes 36,039 719 (161 ) 36,597
              Total securities held-to-maturity $ 224,056 $ 6,793 $ (291 ) $ 230,558
                         
       Total investment securities $ 418,675 $ 9,064 $ (1,411 ) $ 426,328

13




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

The following table presents information for investment securities at September 30, 2016, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

September 30, 2016
Amortized       Fair
Cost Value
(in thousands)
Investment securities available-for-sale:
       Due in one year or less $ 3,886   $ 3,906
       Due after one year through five years 26,238 26,914
       Due after five years through ten years 55,486 57,204
       Due after ten years 165,264   169,894
Residential mortgage pass-through securities   62,124 63,404
Commercial mortgage pass-through securities 4,218 4,369
Equity securities 376 425
Other securities 12,332 12,343
       Total $      329,924 $      338,459

Gross gains and losses from the sales, calls and maturities of investment securities for the three-month and nine-month periods ended September 30, 2016 and 2015 were as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands)       2016       2015       2016       2015
Proceeds   $ 78,680 $ 32,125 $ 85,253 $ 44,397
Gross gains on sales of investment securities 4,131   2,067 4,234   2,793
Gross losses on sales of investment securities   -   -   -   -
       Net gains on sales of investment securities 4,131 2,067 4,234 2,793
       Less: tax provision on net gains 1,640 794 1,682 1,091
 
              Total $ 2,491 $ 1,273 $ 2,552 $ 1,702

The Company performs regular analysis on the available-for-sale securities portfolio to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record other-than-temporary impairment (“OTTI”) charges through earnings if they have the intent to sell, or more likely than not will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Company intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the Company does not intend to sell the security and it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, and as such, it determines that a decline in fair value is other-than-temporary, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

14




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

The Company reviews all securities for potential recognition of other-than-temporary impairment. The Company maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could include credit rating downgrades.

The Company’s assessment of whether an impairment in the portfolio is other-than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed deteriorating financial condition or sustained significant losses.

Temporarily Impaired Investments

The Company does not believe that any of the unrealized losses, which were comprised of 36 and 74 investment securities as of September 30, 2016 and December 31, 2015, respectively, represent an other-than-temporary impairment. The gross unrealized losses associated with U.S. Treasury and agency securities, federal agency obligations, mortgage-backed securities, corporate bonds, tax-exempt securities, asset-backed securities, trust preferred securities, mutual funds and equity securities are not considered to be other-than-temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Factors which may contribute to unrealized losses include credit risk, market risk, changes in interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Company’s investment in any one issuer or industry. The Company has established policies to reduce exposure through diversification of the investment portfolio including limits on concentrations to any one issuer. The Company believes the investment portfolio is prudently diversified.

The unrealized losses included in the tables below are primarily related to changes in interest rates and credit spreads. All of the Company’s investment securities are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. These are largely intermediate duration holdings and, in certain cases, monthly principal payments can further reduce loss exposure resulting from an increase in rates.

The Company evaluates all securities with unrealized losses quarterly to determine whether the loss is other-than-temporary. Unrealized losses in the corporate debt securities category consist primarily of senior unsecured corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. Single issuer corporate trust preferred securities are also included, and in the case of one holding the market valuation loss is largely based upon the floating rate coupon and corresponding market valuation. Neither that trust preferred issuer, nor any other corporate issuers, have defaulted on interest payments. The unrealized loss in equity securities consists of losses on other bank equities. The decline in fair value is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. Management concluded that these securities were not other-than-temporarily impaired at September 30, 2016.

In determining whether or not securities are OTTI, the Company must exercise considerable judgment. Accordingly, there can be no assurance that the actual results will not differ from the Company’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Company’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security is subject to numerous risks as cited above.

15




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015:

September 30, 2016
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair Unrealized
Value       Losses       Value       Losses       Value       Losses
(in thousands)
Investment securities
       available-for-sale:
 
Federal agency obligation $ 2,685 $ (9 ) $ 1,366 $ (3 ) $ 1,319 $ (6 )
Residential mortgage  
       pass-through securities 2,978 (12 ) 2,596 (9 ) 382 (3 )
Obligations of U.S. states        
       and political subdivisions 575 (2 ) 575   (2 )
Trust preferred securities 1,369 (209 ) - -   1,369   (209 )
Corporate bonds and notes 13,945   (348 ) 5,741   (185 ) 8,204 (163 )
Asset-backed securities 14,025 (296 ) 3,891 (72 ) 10,134   (224 )
Equity securities 134 (3 )   - -   134 (3 )
Other securities 5,417 (83 ) - -   5,417 (83 )
       Total temporarily impaired
              securities $         41,128 $         (962 ) $         14,169 $         (271 ) $         26,959 $          (691 )

16




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 4. Investment Securities – (continued)

December 31, 2015
Total Less than 12 Months 12 Months or Longer
Fair Unrealized Fair Unrealized Fair   Unrealized
Value       Losses       Value       Losses       Value       Losses
(dollars in thousands)
Investment Securities
       Available-for-Sale:
 
Federal agency obligation $ 12,260 $ (58 ) $ 12,013 $ (54 ) $ 247 $ (4 )
Residential mortgage
       pass-through securities 9,027 (48 ) 9,027 (48 ) - -
Commercial mortgage-backed
       securities 2,971 (9 ) 2,971 (9 ) - -
Trust preferred securities 1,345 (231 ) - - 1,345 (231 )
Corporate bonds and notes 16,533 (292 ) 12,702 (161 ) 3,831 (131 )
Asset-backed securities 14,745 (298 ) 11,250 (188 ) 3,495 (110 )
Certificates of deposit 215 (8 ) 215 (8 ) - -
Equity securities 123 (23 ) - - 123 (23 )
Other securities 5,347 (153 ) - - 5,347 (153 )
Total $         62,566 $         (1,120 ) $         48,178 $         (468 ) $         14,388 $         (652 )
 
Investment Securities
       Held-to-Maturity:
 
Federal agency obligation 12,554 (119 )   11,783 (109 ) 771 (10 )
Residential mortgage
       pass-through securities 2,480   (6 ) 2,480 (6 ) - -
Commercial mortgage-backed                
       securities 1,331 (2 ) 1,331   (2 ) -   -  
Obligations of U.S. states      
       and political subdivisions 981   (3 ) 981 (3 ) - -
Corporate bonds and notes 5,536 (161 ) 5,536 (161 ) - -
Total $ 22,882 $ (291 ) $ 22,111 $ (281 ) $ 771 $ (10 )
 
Total Temporarily Impaired
       Securities $ 85,448 $ (1,411 ) $ 70,289 $ (749 ) $ 15,159 $ (662 )

Investment securities having a carrying value of approximately $104.2 million and $142.5 million at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits, borrowings, Federal Reserve Discount Window and Federal Home Loan Bank advances and for other purposes required or permitted by law.

As of September 30, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Note 5 - Derivatives

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swap does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps were entered into on August 24, 2015, December 30, 2014 and October 15, 2014 each with a respective notional amount of $25 million and were designated as cash flow hedges of a Federal Home Loan Bank advance. The swaps were determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income while the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.

17




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 5 – Derivatives – (continued)

Summary information about the interest rate swaps designated as cash flow hedges as of September 30, 2016, December 31, 2015 and September 30, 2015 are presented in the following table.

September 30, December 31, September 30,
(dollars in thousands) 2016       2015       2015
Notional amount $ 75,000 $ 75,000 $ 75,000
Weighted average pay rates   1.58 % 1.56 %     1.56 %
Weighted average receive rates 0.70 %     0.44 % 0.30 %
Weighted average maturity     3.1 years         3.8 years     4.1 years
Fair value $ (1,212 ) $ (131 ) $ (1,105 )

Interest expense recorded on these swap transactions totaled approximately $167,000 and $534,000 for the three and nine months ended September 30, 2016 and approximately $165,000 and $331,000 for the three and nine months ended September 30, 2015.

Cash Flow Hedge

The following table presents the net gains (losses), recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:

Nine Months Ended September 30, 2016
Amount of loss Amount of loss Amount of loss
recognized reclassified recognized in other
in OCI (Effective from OCI to Noninterest income
(in thousands)       Portion)       interest income       (Ineffective Portion)
Interest rate contracts $ (640) $ - $ -
 
Nine Months Ended September 30, 2015
Amount of loss Amount of loss Amount of loss
recognized reclassified recognized in other
in OCI (Effective from OCI to Noninterest income
(in thousands) Portion) interest income (Ineffective Portion)
Interest rate contracts $ (1,153) $ - $ -

The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2016 and December 31, 2015:

September 30, 2016 December 31, 2015
Notional Notional
(in thousands) Amount       Fair Value       Amount       Fair Value
Interest rate swaps related to FHLB Advances included in Assets $ 75,000 $        (1,212 ) $ 75,000 $        (131 )

18




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, premiums and discounts related to purchase accounting, and an allowance for loan and lease losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Loan segments are defined as a group of loans and leases, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Company has five segments of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.

Interest income on commercial, commercial real estate, commercial construction and residential loans are discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The policy of the Company is to generally grant commercial, residential and consumer loans to residents and businesses within its market area. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

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. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. 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.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

19




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience, the primary factor, is determined by loan class and is based on the actual loss history experienced by the Bank over an actual three-year rolling calculation. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment and with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors include consideration of the following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans.

Purchased Credit-Impaired Loans

The Company purchases groups of loans in conjunction with mergers, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan and lease losses. After acquisition, losses are recognized by an increase in the allowance for loan and lease losses.

Such purchased credit-impaired loans (“PCI”) are accounted for individually. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

A PCI loan may be resolved either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. A gain or loss on resolution would be recognized based on the difference between the proceeds received and the carrying amount of the loan.

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

PCI loans that met the criteria for nonaccrual may be considered performing, regardless of whether the customer is contractually delinquent, if management can reasonably estimate the timing and amount of the expected cash flows on such loans and if management expects to fully collect the new carrying value of the loans. As such, management may no longer consider the loans to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.

20




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

Composition of Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at September 30, 2016 and December 31, 2015:

September 30, December 31,
2016       2015
  (in thousands)
Commercial $ 644,430 $ 570,116
Commercial real estate 2,100,804 1,966,696
Commercial construction 471,109     328,838
Residential real estate   229,401   233,690
Consumer 2,879 2,454
       Gross loans 3,448,623 3,101,794  
Net deferred loan fees (3,147 ) (2,787 )
       Total loans receivable $       3,445,476 $       3,099,007

As of September 30, 2016, the bank designated approximately $15.1 million as loans held-for-sale. This designation occurred during the third quarter of 2016 and consisted of approximately $1.6 million of mortgage loans and approximately $13.5 million of commercial and commercial real estate loans.

At September 30, 2016 and December 31, 2015 loan balances of approximately $1.6 billion were pledged to secure borrowings from the Federal Home Loan Bank of New York.

Purchased Credit-Impaired Loans

The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at September 30, 2016 and December 31, 2015.

September 30, December 31,
2016       2015
(in thousands)
Commercial $ 7,027 $ 7,078
Commercial real estate 1,002 1,775
Residential real estate   -   328
       Total carrying amount $ 8,029   $ 9,181

For those purchased loans disclosed above, the Company did not increase the allowance for loan and lease losses for the three and nine months ended September 30, 2016.

The accretable yield, or income expected to be collected, on the purchased loans disclosed above for the three and nine months ended September 30, 2016 is as follows (in thousands):

Three Months Three Months
Ended Ended
September       September
30, 2016 30, 2015
Beginning balance $               3,233     $               4,013  
New loans purchased   -   -  
Accretion of income   (185 )     (207 )
Reclassification from nonaccretable differences -     -
Disposals   -       -  
Ending balance $ 3,048 $ 3,806

21




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

Nine Months Nine Months
Ended Ended
      September       September
30, 2016 30, 2015
Beginning balance $             3,599 $             4,467
New loans purchased - -
Accretion of income (551 ) (661 )
Reclassification from nonaccretable differences - -
Disposals - -
Ending balance $ 3,048 $ 3,806

The following table presents information about the recorded investment in loan receivables on nonaccrual status by segment at September 30, 2016 and December 31, 2015:

Loans Receivable on Nonaccrual Status

September 30, December 31,
2016       2015
(in thousands)
Commercial $ 5,982 $ 6,586
Commercial real estate 2,489   9,112
Commercial construction -   1,479
Residential real estate 3,022 3,559
       Total loans receivable on nonaccrual status $ 11,493 $ 20,736

During the quarter ended September 30, 2016, the bank sold a lease financing receivable for approximately $2.6 million, net of closing costs. At the time of sale, the recorded investment of the lease financing receivable was $3.7 million, with a specific allowance for loan loss reserve of $1.3 million. The amount of net proceeds that exceeded the net carrying value was recorded as an increase to the allowance for loan losses.

The Company continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the Company utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention.

Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Company’s credit position at some future date.

Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements.

An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.

22




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table presents information, excluding loans held-for-sale and net deferred loan fees, about the Company’s loan credit quality at September 30, 2016 and December 31, 2015:

September 30, 2016
Special
      Pass       Mention       Substandard       Doubtful       Total
(in thousands)
Commercial $        531,599 $        2,787 $        110,044 $        - $        644,430
Commercial real estate 2,049,986 32,504 18,314 - 2,100,804
Commercial construction 469,735 1,374 - - 471,109
Residential real estate 226,012 -   3,389 - 229,401
Consumer 2,812 - 67 - 2,879
 
       Total loans $ 3,280,144 $ 36,665 $ 131,814 $ - $ 3,448,623
 
December 31, 2015
Special
Pass Mention Substandard Doubtful Total
(in thousands)
Commercial $ 462,358 $ 11,760 $ 95,998 $ - $ 570,116
Commercial real estate 1,919,041 18,990 28,426 239 1,966,696
Commercial construction 326,697 662 1,479 - 328,838
Residential real estate 229,426 - 4,264 - 233,690
Consumer 2,368 - 86 - 2,454
 
       Total loans $ 2,939,890 $ 31,412 $ 130,253 $ 239 $ 3,101,794

23




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis of the impaired loans, by loan segment, at September 30, 2016 and December 31, 2015:

September 30, 2016
Unpaid
Recorded Principal Related
      Investment       Balance       Allowance
No related allowance recorded (in thousands)
Commercial $ 6,718 $ 7,025
Commercial real estate 9,166 9,182
Commercial construction 1,374 1,374
Residential real estate 3,389 3,823
Consumer 67 67
       Total $        20,714 $        21,471
 
With an allowance recorded
Commercial $ 95,964 $ 95,964 $        12,931
Commercial real estate 153 153 105
       Total $ 96,117 $ 96,117 $ 13,036
 
Total
Commercial $ 102,682 $ 103,989 $ 12,931
Commercial real estate 9,319 9,335 105
Commercial construction 1,374 1,374 -
Residential real estate 3,389 3,823 -
Consumer 67 67 -
       Total $ 116,831 $ 117,588 $ 13,036
 
 
December 31, 2015
Unpaid
Recorded Principal Related
Investment Balance Allowance
No related allowance recorded (in thousands)
Commercial $ 610 $ 645
Commercial real estate 15,517 16,512
Commercial construction 2,149 2,141
Residential real estate 3,954 4,329
Consumer 87 86
       Total $ 22,317 $ 23,713
 
With an allowance recorded
Commercial $ 84,787 $ 84,449 $ 6,725
 
Total
Commercial $ 85,397 $ 85,094 $ 6,725
Commercial real estate 15,517 16,512 -
Commercial construction 2,149 2,141 -
Residential real estate 3,954 4,329 -
Consumer 87 86 -
       Total $ 107,104 $ 108,162 $ 6,725

24




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three and nine months ended September 30, 2016 and 2015 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015   2016 2015  
Average Interest Average Interest Average Interest Average Interest
Recorded Income Recorded Income Recorded Income Recorded Income
    Investment    Recognized    Investment    Recognized    Investment    Recognized    Investment    Recognized
Impaired loans with no
related allowance
recorded:
 
Commercial $       6,704 $       66 $       712 $       - $       4,317 $       86 $       707 $       -
Commercial real estate 9,129 65 4,869 15 8,167 118 4,905 46
Commercial
construction 1,224 21 1,479 - 979 54 1,479 -
Residential real estate 3,271 5 3,221 7 3,247 15 3,251 12
Consumer 70 1 100 1 74 3 102 4
Total $ 20,398 $ 158 $ 10,381 23 $ 16,784 $ 276 $ 10,444 $ 62
 
Impaired loans with an
allowance recorded:
 
Commercial $ 91,393 $ 925 $ 79,732 $ 722 $ 85,620 $ 2,447 $ 45,747 $ 1,206
Commercial real estate 153 - - - 153 - - -
Total $ 91,5476 $ 925 $ 79,732 $ 722 $ 102,577 $ 2,447 $ 45,747 $ 1,206
 
Total impaired loans:
 
Commercial $ 98,097 $ 991 $ 80,444 $ 722 $ 89,937 $ 2,533 $ 46,454 $ 1,206
Commercial real estate 9,282 65 4,869 15 8,320 118 4,905 46
Commercial
construction 1,224 21 1,479 - 979 54 1,479 -
Residential real estate 3,271 5 3,221 7 3,247 15 3,251 12
Consumer 70 1 100 1 74 3 102 4
 
Total $ 111,944 $ 1,083 $ 90,113 $ 745 $ 102,557 $ 2,753 $ 56,191 $ 1,268

Included in impaired loans at September 30, 2016 and December 31, 2015 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower. Cash basis interest and interest income recognized on accrual basis approximate each other.

25




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following table provides an analysis of the aging of gross loans (excluding loans held-for-sale) that are past due at September 30, 2016 and December 31, 2015 by segment:

Aging Analysis

September 30, 2016
90 Days or Greater than 90 Days
30-59 Days 60-89 Days Greater Past Total Loans Past Due and Still
Past Due Past Due Due Total Current Receivable Accruing/Accreting
   (in thousands)
Commercial $      -    $      249    $      5,363    $      5,612    $      638,818    $      644,430    $      4,543
Commercial real
estate 461 1,600 2,385 4,446 2,096,358 2,100,804 654
Commercial
construction - - - - 471,109 471,109 -
Residential real
estate 505 924 1,778 3,207 226,194 229,401 -
Consumer 9 - - 9 2,870 2,879
       Total $ 975 $ 2,773 $ 9,526 $ 13,274 $ 3,435,349 $ 3,448,623 $ 5,197
 
 
December 31, 2015
90 Days or Greater than 90 Days
30-59 Days 60-89 Days Greater Past Total Loans Past Due and Still
Past Due Past Due Due Total Current Receivable Accruing/Accreting
(in thousands)
Commercial $ 6,887 $ 3,505 $ 6,865 $ 17,257 $ 552,859 $ 570,116 $ -
Commercial real
estate 1,998 988 9,561 12,547 1,954,149 1,966,696 -
Commercial
construction - - 1,479 1,479 327,359 328,838 -
Residential real
estate - - 2,122 2,122 231,568 233,690 -
Consumer 4 9 - 13 2,441 2,454 -
       Total $ 8,889 $ 4,502 $ 20,027 $ 33,418 $ 3,068,376 $ 3,101,794 $ -

Included in the 90 days and still accruing/accreting bucket are three purchased credit-impaired loans, net of their fair value marks, which are accreting income per their valuation at date of acquisition.

26




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:

September 30, 2016
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment $       12,931 $       105 $       - $       - $       - $       - $       13,036
Collectively evaluated for impairment 7,465 11,270 4,072 1,174 4 594 24,579
Acquired portfolio - - - - - - -
Acquired with deteriorated credit quality - - - - - - -
Total $ 20,396 $ 11,375 $ 4,072 $ 1,174 $ 4 $ 594 $ 37,615
 
Gross loans
Individually evaluated for impairment $ 102,682 $ 9,319 $ 1,374 $ 3,389 $ 67 $ - $ 116,831
Collectively evaluated for impairment 487,657 1,480,859 462,687 153,488 2,178 - 2,586,869
Acquired portfolio 47,064 609,624 7,048 72,524 634 - 736,894
Acquired with deteriorated credit quality 7,027 1,002 - - - - 8,029
Total $ 644,430 $ 2,100,804 $ 471,109 $ 229,401 $ 2,879 $ - $ 3,448,623
 
 
December 31, 2015
Commercial Commercial Residential
Commercial real estate construction real estate Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment $ 6,725 $ - $ - $ - $ - $ - $ 6,725
Collectively evaluated for impairment 4,224 10,926 3,253 976 4 464 19,847
Acquired portfolio - - - - - - -
Acquired with deteriorated credit quality - - - - - - -
Total $ 10,949 $ 10,926 $ 3,253 $ 976 $ 4 $ 464 $ 26,572
 
Gross loans
Individually evaluated for impairment $ 85,397 $ 15,517 $ 2,149 $ 3,954 $ 87 $ - $ 107,104
Collectively evaluated for impairment 395,424 1,269,140 315,785 136,633 1,649 - 2,118,631
Acquired portfolio 82,217 680,264 10,904 92,775 718 866,878
Acquired with deteriorated credit quality 7,078 1,775 - 328 - - 9,181
Total $ 570,116 $ 1,966,696 $ 328,838 $ 233,690 $ 2,454 $ - $ 3,101,794

27




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The Company’s allowance for loan and lease losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan and lease losses methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

A summary of the activity in the allowance for loan and lease losses is as follows:

Three Months Ended September 30, 2016
Commercial Commercial Residential
    Commercial       real estate     construction     real estate     Consumer     Unallocated     Total
(in thousands)
Balance at June 30, 2016 $       15,548 $        11,371 $      4,040 $         1,091 $             4 $            709 $      32,763
 
Charge-offs (1,878 ) - - (27 ) (5 ) - (1,910 )
 
Recoveries 1 10 - - 1 - 12
 
Provision 6,725 (6 ) 32 110 4 (115 ) 6,750
 
Balance at September 30,
2016 $ 20,396 $ 11,375 $ 4,072 $ 1,174 $ 4 $ 594 $ 37,615
 
 
Three Months Ended September 30, 2015
Commercial Commercial Residential
Commercial real estate construction real estate Consumer Unallocated Total
(in thousands)
Balance at June 30, 2015 $ 4,633 $ 9,195 $ 1,945 $ 1,161 $ 7 $ 539 $ 17,480
 
Charge-offs - (124 ) - - - - (124 )
 
Recoveries 2 - - - - - 2
 
Provision 2,488 1,203 701 (149 ) (3 ) (65 ) 4,175
 
Balance at September 30,
2015 $ 4,633 $ 9,195 $ 2,646 $ 1,012 $ 4 $ 474 $ 21,533

28




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

Nine Months Ended September 30, 2016
Commercial Commercial Residential
    Commercial     real estate     construction     real estate     Consumer     Unallocated     Total
(in thousands)
Balance at December 31,
2015 $        10,949 $        10,926 $        3,253 $         976 $            4 $            464 $        26,572
 
Charge-offs (2,396 ) - - (94 ) (10 ) - (2,500 )
 
Recoveries 2 35 - 3 3 - 43
 
Provision 11,841 414 819 289 7 130 13,500
 
Balance at September 30,
2016 $ 20,396 $ 11,375 $ 4,072 $ 1,174 $ 4 $ 594 $ 37,615
 
Nine Months Ended September 30, 2015
Commercial Commercial Residential
Commercial real estate construction real estate Consumer Unallocated Total
(in thousands)
Balance at December 31,
2014 $ 3,083 $ 7,799 $ 1,239 $ 1,113 $ 7 $ 919 $ 14,160
 
Charge-offs (100 ) (406 ) - - (13 ) - (519 )
 
Recoveries 12 327 - 2 1 - 342
 
Provision 4,128 2,554 1,407 (103 ) 9 (445 ) 7,550
 
Balance at September 30,
2015 $ 7,123 $ 10,274 $ 2,646 $ 1,012 $ 4 $ 474 $ 21,533

Troubled Debt Restructurings

At September 30, 2016, there were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status or were contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.

The policy of the Company generally is to grant commercial, mortgage and consumer loans to residents and businesses within its market area. The ability of borrowers to repay their obligations is dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

29




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

Loans modified in troubled debt restructurings totaled $106.7 million at September 30, 2016, of which $1.4 million were on nonaccrual status and $105.3 million were performing under restructured terms. At December 31, 2015, loans modified in troubled debt restructurings totaled $86.6 million, of which $0.7 million were on nonaccrual status and $85.9 million were performing under restructured terms. The Company has allocated $12.5 and $4.5 million in specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2016 and December 31, 2015, respectively. Performing TDRs as of September 30, 2016 increased the allowance for loan and lease losses by $5.0 and $8.3 million during the three and nine months ended September 30, 2016, respectively. Performing TDRs as of December 31, 2015 did not increase the allowance for loan and lease losses during the year ended December 31, 2015.

The $12.5 million in specific allocations referenced above were associated with New York City taxi medallion lending and were calculated based on the present value of estimated cash flows, including contractual debt interest service through maturity, and principal repayments based on the estimated fair value of the collateral excluding any consideration for personal guarantees of borrowers, which provide an additional source of repayment but cannot be relied upon. The valuation per New York City corporate medallion used for the calculation at September 30, 2016 was approximately $700,000. Since December 31, 2015, an additional $8.3 million specific allocation was required at September 30, 2016 due to a decline in the Company’s estimated valuation of New York City taxi medallions since December 31, 2015, when the specific allocation was $4.5 million.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016 (dollars in thousands):

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
      Loans       Investment       Investment
Troubled debt restructurings:
       Commercial 16 $        19,311 $        19,311
       Commercial real estate 2 581 581
       Commercial construction - - -
       Residential real estate - - -
       Consumer - - -
 
              Total 18 $ 19,892 $ 19,892

Included in the above troubled debt restructurings were 14 loans secured by 25 New York City taxi medallions totaling $17.3 million. These loan modifications included interest rate reductions and maturity extensions. All 14 loans were accruing prior to modification, while 13 remained in accrual status post-modification.

The troubled debt restructurings described above increased the allowance for loan and leases losses by $8.3 million during the nine months ended September 30, 2016. There were no charge-offs in connection with a loan modification at the time of modification during the nine months ended September 30, 2016. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2016.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2015 (dollars in thousands):

Pre-Modification Post-Modification
Outstanding Outstanding
Number of Recorded Recorded
       Loans       Investment       Investment
Troubled debt restructurings:
       Commercial 47 $        75,363 $        75,363
       Commercial real estate - - -
       Commercial construction - - -
       Residential real estate - - -
       Consumer - - -
 
              Total 47 $ 75,363 $ 75,363

30




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 6. Loans and the Allowance for Loan and Lease Losses – (continued)

The troubled debt restructurings included in the table above were loans secured by New York City taxi medallions that were modified during the third 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, there was no forgiveness of principal, and the interest rates on these loans were increased from approximately 3%-3.25% to 3.75%. These loans were accruing prior to modification and remained in accrual status post-modification.

The troubled debt restructurings described above increased the allowance for loan and lease losses by $2.0 million during the nine months ended September 30, 2015. There were no charge-offs in connection with a loan modification at the time of modification during the nine months ended September 30, 2015. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2015.

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

FASB ASC 820-10-05 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurements and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

FASB ASC 820-10-65 provides additional guidance for estimating fair value in accordance with FASB ASC 820-10-05 when the volume and level of activity for the asset or liability have significantly decreased. This ASC also includes guidance on identifying circumstances that indicate a transaction is not orderly.

FASB ASC 820-10-05 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10-05 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments, which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

31




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments

Derivatives

The fair value of derivatives are based on valuation models using observable market data as of the measurement date (level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Loans Held-for-sale

Loans held-for-sale are required to be measured at the lower of cost or fair value. Under FASB ASC 820-10-05, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions.

Loans Receivable

The fair value of performing loans, except residential mortgages, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risks inherent in the loan. The estimate of maturity is based on the historical experience of the Bank with prepayments for each loan classification, modified as required by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rate and the committed rates.

The fair value of financial standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.

32




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2016 and December 31, 2015 are as follows:

September 30, 2016
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
            (Level 1)       (Level 2)       (Level 3)
(in thousands)
Recurring fair value measurements:
Assets  
Investment securities:
       available-for-sale:
              Federal agency obligations $        56,099 $        - $        56,099 $        -
              Residential mortgage pass-
                     through securities 63,404 - 63,404 -
              Commercial mortgage pass-
                     through securities 4,369 - 4,369 -
              Obligations of U.S. states and
                     political subdivision 141,361 - 123,026 18,335
              Trust preferred securities 5,675 - 5,675 -
              Corporate bonds and notes 38,293 - 38,293 -
              Asset-backed securities 15,502 - 15,502 -
              Certificates of deposit 988 - 988 -
              Equity securities 425 425 - -
              Other securities 12,343 12,343 - -
       Total available-for-sale $ 338,459 $ 12,768 $ 307,356 $ 18,335
Liabilities
Derivatives $ 1,212 $ - $ 1,212 $ -
 
Total liabilities $ 1,212 $ - $ 1,212 $ -

There were no transfers between Level 1, Level 2 and Level 3 during the three months ended September 30, 2016.

33




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

December 31, 2015
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
      (Level 1)       (Level 2)       (Level 3)
(in thousands)
Recurring fair value measurements:
Assets
Investment securities:  
       available-for-sale:
              Federal agency obligations $ 29,146   $ - $ 29,146 $ -
              Residential mortgage pass-
                     through securities 44,910 - 44,910 -
              Commercial mortgage pass-    
                     through securities 2,972 - 2,972 -
              Obligations of U.S. states and
                     political subdivision   8,357 -     8,357 -
              Trust preferred securities 16,255 - 16,255 -
              Corporate bonds and notes 53,976 - 53,976 -
              Asset-backed securities 19,725 - 19,725 -
              Certificates of deposit 1,905 - 1,905   -
              Equity securities 374 374 - -
              Other securities 18,150 18,150 - -
       Total available-for-sale $        195,770 $ 18,524 $ 177,246 $ -
       Liabilities
       Derivatives $ 131 $ - $ 131 $ -
       Total liabilities $ 131 $ - $ 131 $ -

There were no transfers between Level 1, Level 2 and Level 3 during the year ended December 31, 2015.

34



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Assets Measured at Fair Value on a Non-Recurring Basis

The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The Company primarily utilized appraisal value less cost to sell and other unobservable market inputs to determine fair value of assets, and therefore, these valuations are classified as a Level 3 measurement. For assets measured at fair value on a non-recurring basis, the fair value measurements at September 30, 2016 and December 31, 2015 are as follows:

    Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
September 30, Assets Inputs Inputs
Assets measured at fair value on a nonrecurring basis: 2016 (Level 1) (Level 2) (Level 3)
Impaired loans: (in thousands)
Commercial $ 396 $ - $ - $ 396
 
    Fair Value Measurements at Reporting Date Using
Quoted
Prices
in Active Significant
            Markets for       Other       Significant
Identical Observable Unobservable
December 31, Assets Inputs Inputs
Assets measured at fair value on a nonrecurring basis: 2015 (Level 1) (Level 2) (Level 3)
Impaired loans: (in thousands)
Commercial $ 3,751   $ -   $ -   $ 3,751

The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015.

Impaired loans. The value of the impaired loans above were measured based upon the fair value of the collateral of the loans. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio. Collateral dependent impaired loans are individually assessed to determine that each loan’s carrying value is not in excess of the fair value of the related collateral. Collateral dependent impaired loans at September 30, 2016 that required a valuation allowance were $0.9 million with a related valuation allowance of $0.5 million compared to $6.0 million with a related valuation allowance of $2.2 million at December 31, 2015.

Fair Value of Financial Instruments

FASB ASC 825-10 requires all entities to disclose the estimated fair value of their financial instrument assets and liabilities. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FASB ASC 825-10. Many of the Company’s financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company’s general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-sale and investment securities available-for-sale. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Company for the purposes of this disclosure.

Cash and cash equivalents. The carrying amounts of cash and short-term instruments approximate fair values.

FHLB stock. It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Investment Securities Held-to-Maturity. The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service. If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

35



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

Loans. The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans were segregated by types such as commercial, residential and consumer loans. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price and therefore, while permissible for presentation purposes under ASC 825-10, do not conform to ASC 820-10.

Interest-Bearing Deposits. The fair values of the Company’s interest-bearing deposits were estimated using discounted cash flow analyses. The discounted rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the Company’s interest-bearing deposits do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Term Borrowings and Subordinated Debentures. The fair value of the Company’s long-term borrowings and subordinated debentures were calculated using a discounted cash flow approach and applying discount rates currently offered based on weighted remaining maturities.

Accrued Interest Receivable/Payable. The carrying amounts of accrued interest approximate fair value resulting in a level 2 or level 3 classification based on the level of the asset or liability with which the accrual is associated.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2016 and December 31, 2015.

Fair Value Measurements
Carrying
Amount
Fair
Value
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in thousands)
September 30, 2016                        
Financial assets
       Cash and cash equivalents $ 233,794 $ 233,794 $ 233,794 $ - $ -
       Investment securities available-for-sale 338,459 338,459 12,768 307,356 18,335
       Restricted investment in bank stocks 24,535 n/a n/a n/a n/a
       Net loans 3,407,861 3,421,539 - -       3,421,539
       Loans held-for-sale 15,112 15,112 - 15,112 -
       Accrued interest receivable 12,497 12,497 - 1,895 10,602
 
Financial liabilities
       Noninterest-bearing deposits 655,683 655,683       655,683 - -
       Interest-bearing deposits       2,613,266       2,601,221 -       2,601,221 -
       Borrowings 481,337 486,503 - 486,503 -
       Subordinated debentures, net 54,490 53,784 - 53,784 -
       Derivatives 1,212 1,212 - 1,212 -
       Accrued interest payable $ 4,600 $ 4,600 $ - $ 4,600 $ -
 
December 31, 2015
Financial assets
       Cash and cash equivalents $ 200,895 $ 200,895 $ 200,895 $ - $ -
       Investment securities available-for-sale 195,770 195,770 18,524 177,246 -
       Investment securities held-to-maturity 224,056 230,558 29,226 182,774 18,558
       Restricted investment in bank stocks 32,612 n/a n/a n/a n/a
       Net loans 3,072,435 3,059,343 - - 3,059,343
       Accrued interest receivable 12,545 12,545 68 2,699 9,778
 
Financial liabilities
       Noninterest-bearing deposits 650,775 650,775   650,775 - -
       Interest-bearing deposits 2,140,191 2,137,149 - 2,137,149 -
       Borrowings 671,587   674,131 -   674,131   -
       Subordinated debentures, net   54,343 55,209 -   55,209 -
       Derivatives 131   131   - 131 -
       Accrued interest payable $ 4,387 $ 4,387 $ - $ 4,387 $ -

36



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 7 - Fair Value Measurements and Fair Value of Financial Instruments – (continued)

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825-10.

Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Note 8. Accumulated Other Comprehensive Income/(Loss)

Accumulated other comprehensive loss (net of tax) at September 30, 2016 and December 31, 2015 consisted of the following:

September 30, December 31,
      2016       2015
(in thousands)
Net unrealized gain on investment securities available-for-sale $ 5,332 $ 713
Cash flow hedge (717 ) (77 )
Unamortized component of securities transferred from available-for-sale to held-to-        
       maturity   -     (1,173 )
Defined benefit pension and post-retirement plans            (3,891 )            (4,072 )
       Total accumulated other comprehensive income (loss) $ 724 $ (4,609 )

Note 9. Stock-Based Compensation

The Company maintains two stock-based compensation plans from which new grants could be issued. The Company’s stock-based compensation plans permit Parent Corporation common stock to be issued to key employees and directors of the Company and its subsidiaries. Grants under the existing plans can be in the form of stock options (qualified or non-qualified), restricted shares, or performance units. Shares available for grant and issuance under the existing plans as of September 30, 2016 are 68,516 under the 2009 Equity Incentive Plan and 234,090 shares under the North Jersey Community Bancorp Equity Compensation Plan. The Company intends to issue all shares under these plans in the form of newly issued shares.

Restricted stock and option awards typically have a three-year vesting period starting one year after the date of grant with one-third vesting each year. The options generally expire ten years from the date of grant. Restricted stock awards granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years. All issuances are subject to forfeiture if the recipient leaves or is terminated prior to the awards vesting. Restricted shares have the same dividend and voting rights as common stock, while options and performance units do not.

All awards are issued at fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period.

No options were granted during the three and nine months ended September 30, 2016 and 2015.

37



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 9. Stock-Based Compensation – (continued)

During the three months ended September 30, 2016 and 2015 no restricted shares were awarded. The compensation expense related to restricted stock awards during the three and nine months ended September 30, 2016 was $223,000 and $572,000, respectively.

During the nine months ended September 30, 2016 and 2015, the Company granted to various key employees performance unit awards, with each unit entitling the holder to one share of the Company’s common stock contingent upon the Company meeting or exceeding certain return on asset targets over the course of a three-year period commencing on January 1 of the year of issuance. Under the grant agreement, and assuming the Company has met or exceeded the applicable targets, grants of performance unit awards will vest on the third anniversary of the grant date or on an earlier date in the event of a change in control, as defined in the agreements. At September 30, 2016, the specific number of shares related to performance unit awards that were expected to vest was 132,304, determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. The maximum amount of performance unit awards is 181,892 shares. The total amount of compensation cost related to performance unit awards included in salary expense during the quarters ended September 30, 2016 and 2015 was $238,000 and $156,000, respectively. The total amount of compensation cost related to performance unit awards included in salary expense during the nine months ended September 30, 2016 was $698,000 and $258,000, respectively.

Option activity under the Company’s option plans as of September 30, 2016 and changes during the nine months ended September 30, 2016 were as follows:

Weighted-