# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2018

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2018-08-08
- Accepted by EDGAR: Aug 8, 2018, 16:26 ET
- Period: 2018-06-30
- Accession: 0001144204-18-042835
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000114420418042835/tv499707_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000114420418042835/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $2.6m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $4.7m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $7.6m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $14.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $4.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $6.7m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $18.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.95 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.95 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 19,468 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 19,453 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $28.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $4.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2018-01-01 to 2018-06-30 | $9.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2018-06-30 | $105.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-06-30 | $4.41bn | us-gaap:Assets |
| Total liabilities | at 2018-06-30 | $3.98bn | us-gaap:Liabilities |
| Shareholders' equity | at 2018-06-30 | $439.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 77,785 characters.

### Private Securities Litigation Reform Act Safe Harbor Statement

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

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demand for loan products; demand for financial services; competition; the Company’s ability to successfully integrate acquired entities; changes in the quality and composition of the Bank’s loan and investment portfolios; changes in management’s business strategies; changes in accounting principles, policies or guidelines; changes in real estate values; expanded regulatory requirements as a result of the Dodd-Frank Act, which could adversely affect operating results; and the “Risk Factors” discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

### Overview

#### Who The Company Is and How It Generates Income

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

#### Principal Products and Services and Locations of Operations

The Bank was established in 1910 and is headquartered in Bridgehampton, New York. During 2017, the Bank conducted a branch rationalization study analyzing branch performance and market opportunities. As a result of the study, and in an effort to increase efficiency and remove branch redundancy, the Bank closed six locations in the first quarter of 2018. The branches closed in Suffolk County, New York are located in Cutchogue, Center Moriches, and Melville, and the branches closed in Nassau County, New York are located in Massapequa, New Hyde Park and Hewlett. The Bank now operates thirty-eight branches in its primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including thirty-five in Suffolk and Nassau Counties, two in Queens and one in Manhattan. For over a century, the Bank has maintained its focus on building customer relationships in its market area. The mission of the Bank is to grow through the provision of exceptional service to its customers, its employees, and the community. The Bank strives to achieve excellence in financial performance and build long-term shareholder value. The Bank engages in full service commercial and consumer banking business, including accepting time, savings and demand deposits from the consumers, businesses and local municipalities in its market area. These deposits, together with funds generated from operations and borrowings, are invested primarily in: (1) commercial real estate loans; (2) multi-family mortgage loans; (3) residential mortgage loans; (4) secured and unsecured commercial and consumer loans; (5) home equity loans; (6) construction loans; (7) FHLB, FNMA, GNMA and FHLMC mortgage-backed securities, collateralized mortgage obligations and other asset backed securities; (8) New York State and local municipal obligations; and (9) U.S. government sponsored entity (“U.S. GSE”) securities. The Bank also offers the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) programs, providing multi-millions of dollars of Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits to its customers. In addition, the Bank offers merchant credit and debit card processing, automated teller machines, cash management services, lockbox processing, online banking services, remote deposit capture, safe deposit boxes, and individual retirement accounts as well as investment services through Bridge Financial Services, which offers a full range of investment products and services through a third party broker dealer. Through its title insurance abstract subsidiary, the Bank acts as a broker for title insurance services. The Bank’s customer base is comprised principally of small businesses, municipal relationships and consumer relationships.

### Significant Recent Events

#### Balance Sheet Restructure

In the second quarter 2018, the Company undertook an initiative to improve corporate performance along many metrics including yield, liquidity, and capital. The Company evaluated the structure and composition of its assets and liabilities and decided it was prudent to execute a restructuring strategy. The Company restructured $190 million of its investment portfolio, selling lower yielding bonds and recognizing losses already reflected in capital through other comprehensive income, and reinvested the proceeds in bonds with yields 150 basis points higher, but with the same duration. The Company expects this will have a positive impact on its net interest margin and earnings per share going forward. The Company estimates that the time to recover the loss to be just over three years. In connection with the balance sheet restructuring, the Company reduced the investment portfolio by $40 million and paid down its higher cost borrowings. Additionally, the Company continued to actively manage its loan portfolio and commercial real estate concentrations by selling $39.8 million of commercial real estate and multi-family loans at a gain of $0.3 million in the second quarter 2018.

### Quarterly Highlights

- Net income for the second quarter of 2018 was $6.7 million, or $0.34 per diluted share, inclusive of pre-tax net securities losses of $7.9 million, or $0.31 per diluted share after tax, related to the Company’s balance sheet restructure.
- Net interest income increased to $33.9 million for the second quarter of 2018 compared to $30.8 million in 2017.
- Net interest margin was 3.30% the second quarter of 2018 compared to 3.25% for the 2017 period.
- Loans held for investment at June 30, 2018 totaled $3.2 billion, an increase of $77.9 million, or 2.5%, from December 31, 2017 and an increase of $384.4 million, or 13.7%, over June 30, 2017.
- Total assets of $4.4 billion at June 30, 2018, decreased $15.2 million compared to December 31, 2017 and increased $193.3 million compared to June 30, 2017.
- Deposits of $3.6 billion at June 30, 2018, increased $218.7 million over December 31, 2017 and increased $493.6 million compared to June 30, 2017.
- Allowance for loan losses was 1.00% of loans at June 30, 2018 compared to 1.02% at December 31, 2017.
- A cash dividend of $0.23 per share was declared in July 2018 for the second quarter.

#### Challenges and Opportunities

In June 2018, in view of realized and expected labor market conditions and inflation, the Federal Open Market Committee (“FOMC”) decided to raise the target range for the federal funds rate to 1.75 to 2.00 percent. The FOMC’s stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to two percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the FOMC will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric two percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Interest rates have been at or near historic lows for an extended period of time. Growth and service strategies have the potential to offset the compression on the net interest margin with volume as the customer base grows through expanding the Bank’s footprint, while maintaining and developing existing relationships. Since 2010, the Bank has opened fourteen branches, including one in September 2017 in Astoria, New York, two in April 2017 in Riverhead and East Moriches, New York, and one in March 2017 in Sag Harbor, New York. The Bank has also grown through acquisitions including the June 2015 acquisition of Community National Bank (“CNB”), the February 2014 acquisition of First National Bank of New York (“FNBNY”), and the May 2011 acquisition of Hamptons State Bank (“HSB”). Management will continue to seek opportunities to expand its reach into other contiguous markets by network expansion, or through the addition of professionals with established customer relationships. Recent and pending acquisitions of local competitors may also provide additional growth opportunities.

The Bank continues to face challenges associated with ever-increasing regulations and the current low interest rate environment. Over time, additional rate increases should provide some relief to net interest margin compression as new loans are funded and securities are reinvested at higher rates. However, in the short term, the fair value of available for sale securities declines when rates increase, resulting in net unrealized losses and a reduction in stockholders’ equity. Strategies for managing higher rates have a cost. Extending liability maturities or shortening the term of assets increases interest expense and reduces interest income. An additional method for managing in a higher rate environment is to grow stable core deposits, requiring continued investment in people, technology and branches. Over time, the costs of these strategies should provide long-term benefits.

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

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

#### Critical Accounting Policies

#### Allowance for Loan Losses

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

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance.

Individual valuation allowances are established in connection with specific loan reviews and the asset classification process including the procedures for impairment testing under FASB ASC No. 310, “Receivables”. Such valuation, which includes a review of loans for which full collectability in accordance with contractual terms is not reasonably assured, considers the estimated fair value of the underlying collateral less the costs to sell, if any, or the present value of expected future cash flows, or the loan’s observable market value. Any shortfall that exists from this analysis results in a specific allowance for the loan. Pursuant to the Company’s policy, loan losses must be charged-off in the period the loans, or portions thereof, are deemed uncollectible. Assumptions and judgments by management, in conjunction with outside sources, are used to determine whether full collectability of a loan is not reasonably assured. These assumptions and judgments are also used to determine the estimates of the fair value of the underlying collateral or the present value of expected future cash flows or the loan’s observable market value. Individual valuation allowances could differ materially as a result of changes in these assumptions and judgments. Individual loan analyses are periodically performed on specific loans considered impaired. The results of the individual valuation allowances are aggregated and included in the overall allowance for loan losses.

Loan pool valuation allowances represent loss allowances that have been established to recognize the inherent risks associated with the Bank’s lending activities, but which, unlike individual allowances, have not been allocated to particular problem assets. Pool evaluations are broken down into loans with homogenous characteristics by loan type and include commercial real estate mortgages, owner and non-owner occupied; multi-family mortgage loans; residential real estate mortgages; home equity loans; commercial, industrial and agricultural loans, secured and unsecured; real estate construction and land loans; and consumer loans. Management considers a variety of factors in determining the adequacy of the valuation allowance and has developed a range of valuation allowances necessary to adequately provide for probable incurred losses in each pool of loans. Management considers the Bank’s charge-off history along with the growth in the portfolio as well as the Bank’s credit administration and asset management philosophies and procedures when determining the allowances for each pool. In addition, management evaluates and considers the credit’s risk rating, which includes management’s evaluation of: cash flow, collateral, guarantor support, financial disclosures, industry trends and strength of borrowers’ management, the impact that economic and market conditions may have on the portfolio as well as known and inherent risks in the portfolio. Finally, management evaluates and considers the allowance ratios and coverage percentages of both peer group and regulatory agency data. These evaluations are inherently subjective because, even though they are based on objective data, it is management’s interpretation of that data that determines the amount of the appropriate allowance. If the evaluations prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio, resulting in additions to the allowance for loan losses.

For PCI loans, a valuation allowance is established when it is probable that the Bank will be unable to collect all the cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimate after acquisition. A specific allowance is established when subsequent evaluations of expected cash flows from PCI loans reflect a decrease in those estimates. The allowance established represents the excess of the recorded investment in those loans over the present value of the currently estimated future cash flow, discounted at the last effective accounting yield.

The Bank uses assumptions and methodologies that are relevant to estimating the level of impairment and probable losses in the loan portfolio. To the extent that the data supporting such assumptions has limitations, management's judgment and experience play a key role in recording the allowance estimates. Additions to the allowance for loan losses are made by provisions charged to earnings. Furthermore, an improvement in the expected cash flows related to PCI loans would result in a reduction of the required specific allowance with a corresponding credit to the provision.

The Credit Risk Management Committee (“CRMC”) is comprised of Bank management. The adequacy of the allowance is analyzed quarterly, with any adjustment to a level deemed appropriate by the CRMC, based on its risk assessment of the entire portfolio. Each quarter, members of the CRMC meet with the Credit Risk Committee of the Board to review credit risk trends and the adequacy of the allowance for loan losses. Based on the CRMC’s review of the classified loans, delinquency charge-off trends, and the overall allowance levels as they relate to the entire loan portfolio at June 30, 2018 and December 31, 2017, management believes the allowance for loan losses has been established at levels sufficient to cover the probable incurred losses in the Bank’s loan portfolio. Future additions or reductions to the allowance may be necessary based on changes in economic, market or other conditions. Changes in estimates could result in a material change in the allowance. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require the Bank to recognize adjustments to the allowance based on their judgments of the information available to them at the time of their examination.

#### Net Income

Net income for the three months ended June 30, 2018 was $6.7 million and $0.34 per diluted share as compared to $8.8 million and $0.45 per diluted share for the same period in 2017. Changes in net income for the three months ended June 30, 2018 compared to June 30, 2017 include: (i) a $3.1 million, or 10.2%, increase in net interest income; (ii) a $7.1 million decrease in non-interest income (loss); (iii) a $1.5 million, or 7.1%, increase in non-interest expense; and (iv) a $2.8 million, or 62.2%, decrease in income tax expense.

Net income for the six months ended June 30, 2018 was $18.8 million and $0.95 per diluted share as compared to $18.0 million and $0.91 per diluted share for the same period in 2017. Changes in net income for the six months ended June 30, 2018 compared to June 30, 2017 include: (i) a $7.2 million, or 11.8%, increase in net interest income; (ii) a $7.1 million decrease in non-interest income (loss); (iii) a $3.8 million, or 9.2%, increase in non-interest expense; and (iv) a $3.9 million, or 44.7%, decrease in income tax expense.

#### Analysis of Net Interest Income

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

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the periods indicated and reflects the average yield on assets and average cost of liabilities for those periods on a tax equivalent basis based on the U.S. federal statutory tax rate. The Tax Act lowered the U.S. federal statutory tax rate from 35% to 21% effective as of January 1, 2018. The Company’s tax equivalent adjustment to interest income decreased for the six months ended June 30, 2018 as a result of the lower federal statutory tax rate in 2018. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from daily average balances and include nonaccrual loans. The yields and costs include fees and costs, which are considered adjustments to yields. Interest on nonaccrual loans has been included only to the extent reflected in the consolidated statements of income. For purposes of this table, the average balances for investments in debt and equity securities exclude unrealized appreciation/depreciation due to the application of FASB ASC 320, “Investments - Debt and Equity Securities.”

*(Dollars in thousands)*

| Interest earning assets: | Three Months Ended June 30, 2018 Average Balance | Interest | Average Yield/ Cost | 2017 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$3,179,632** | **$35,817** | **4.52%** | $2,702,605 | $30,348 | 4.50% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **672,108** | **3,825** | **2.28** | 750,593 | 3,899 | 2.08 |
| Taxable securities | **182,375** | **1,445** | **3.18** | 228,454 | 1,544 | 2.71 |
| Tax exempt securities (2) | **70,496** | **514** | **2.92** | 93,760 | 720 | 3.08 |
| Deposits with banks | **25,206** | **106** | **1.69** | 28,904 | 71 | 0.99 |
| Total interest earning assets (2) | **4,129,817** | **41,707** | **4.05** | 3,804,316 | 36,582 | 3.86 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **80,637** |  |  | 70,409 |  |  |
| Other assets | **284,401** |  |  | 285,025 |  |  |
| Total assets | **$4,494,855** |  |  | $4,159,750 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$1,910,249** | **$3,438** | **0.72%** | $1,714,594 | $1,812 | 0.42% |
| Certificates of deposit of $100,000 or more | **167,782** | **582** | **1.39** | 143,124 | 431 | 1.21 |
| Other time deposits | **118,587** | **493** | **1.67** | 74,224 | 179 | 0.97 |
| Federal funds purchased and repurchase agreements | **122,463** | **567** | **1.86** | 125,231 | 355 | 1.14 |
| Federal Home Loan Bank advances | **337,615** | **1,407** | **1.67** | 401,458 | 1,529 | 1.53 |
| Subordinated debentures | **78,688** | **1,135** | **5.79** | 78,549 | 1,135 | 5.80 |
| Total interest bearing liabilities | **2,735,384** | **7,622** | **1.12** | 2,537,180 | 5,441 | 0.86 |
| Non-interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,265,370** |  |  | 1,151,288 |  |  |
| Other liabilities | **40,633** |  |  | 31,745 |  |  |
| Total liabilities | **4,041,387** |  |  | 3,720,213 |  |  |
| Stockholders' equity | **453,468** |  |  | 439,537 |  |  |
| Total liabilities and stockholders' equity | **$4,494,855** |  |  | $4,159,750 |  |  |
| Net interest income/interest rate spread (2)(3) |  | **34,085** | **2.93%** |  | 31,141 | 3.00% |
| Net interest earning assets/net interest margin (2)(4) | **$1,394,433** |  | **3.31%** | $1,267,136 |  | 3.28% |
| Tax equivalent adjustment |  | **(156)** | **(0.01)** |  | (348) | (0.03) |
| Net interest income/net interest margin (4) |  | **$33,929** | **3.30%** |  | $30,793 | 3.25% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **150.98%** |  |  | 149.94% |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses.

(2) Presented on a tax equivalent basis based on the U.S. statutory rate of 21% and 35% for the three months ended June 30, 2018 and 2017, respectively.

(3) Net interest rate spread represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest earning assets.

*(Dollars in thousands)*

| Interest earning assets: | Six Months Ended June 30, 2018 Average Balance | Interest | Average Yield/ Cost | 2017 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$3,153,909** | **$71,477** | **4.57%** | $2,645,618 | $59,826 | 4.56% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **679,283** | **7,549** | **2.24** | 750,060 | 7,716 | 2.07 |
| Taxable securities | **190,984** | **2,937** | **3.10** | 227,998 | 3,043 | 2.69 |
| Tax exempt securities (2) | **76,746** | **1,078** | **2.83** | 94,114 | 1,444 | 3.09 |
| Deposits with banks | **24,163** | **196** | **1.64** | 25,178 | 117 | 0.94 |
| Total interest earning assets (2) | **4,125,085** | **83,237** | **4.07** | 3,742,968 | 72,146 | 3.89 |
| Non-interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **73,966** |  |  | 68,374 |  |  |
| Other assets | **286,027** |  |  | 282,781 |  |  |
| Total assets | **$4,485,078** |  |  | $4,094,123 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$1,876,823** | **$5,952** | **0.64%** | $1,674,831 | $3,363 | 0.40% |
| Certificates of deposit of $100,000 or more | **161,749** | **1,099** | **1.37** | 135,625 | 810 | 1.20 |
| Other time deposits | **92,623** | **688** | **1.50** | 76,765 | 357 | 0.94 |
| Federal funds purchased and repurchase agreements | **136,974** | **1,173** | **1.73** | 134,347 | 671 | 1.01 |
| Federal Home Loan Bank advances | **382,681** | **3,265** | **1.72** | 402,847 | 2,678 | 1.34 |
| Subordinated debentures | **78,671** | **2,270** | **5.82** | 78,531 | 2,270 | 5.83 |
| Junior subordinated debentures | **-** | **-** | **-** | 1,348 | 48 | 7.18 |
| Total interest bearing liabilities | **2,729,521** | **14,447** | **1.07** | 2,504,294 | 10,197 | 0.82 |
| Non-interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,264,186** |  |  | 1,123,193 |  |  |
| Other liabilities | **39,242** |  |  | 31,109 |  |  |
| Total liabilities | **4,032,949** |  |  | 3,658,596 |  |  |
| Stockholders' equity | **452,129** |  |  | 435,527 |  |  |
| Total liabilities and stockholders' equity | **$4,485,078** |  |  | $4,094,123 |  |  |
| Net interest income/interest rate spread (2)(3) |  | **68,790** | **3.00%** |  | 61,949 | 3.07% |
| Net interest earning assets/net interest margin (2)(4) | **$1,395,564** |  | **3.36%** | $1,238,674 |  | 3.34% |
| Tax equivalent adjustment |  | **(322)** | **(0.01)** |  | (695) | (0.04) |
| Net interest income/net interest margin (4) |  | **$68,468** | **3.35%** |  | $61,254 | 3.30% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **151.13%** |  |  | 149.46% |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses.

(2) Presented on a tax equivalent basis based on the U.S. statutory rate of 21% and 35% for the six months ended June 30, 2018 and 2017, respectively.

(3) Net interest rate spread represents the difference between the yield on average interest earning assets and the cost of average interest bearing liabilities.

(4) Net interest margin represents net interest income divided by average interest earning assets.

#### Rate/Volume Analysis

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The following table illustrates the extent to which changes in interest rates and in the volume of average interest earning assets and interest bearing liabilities have affected the Bank’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rate. In addition, average earning assets include nonaccrual loans.

*(In thousands)*

| Interest income on interest earning assets: | Three Months Ended June 30, 2018 Over 2017 Changes Due To Volume | Rate | Net Change | Six Months Ended June 30, 2018 Over 2017 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | $5,335 | $134 | $5,469 | $11,519 | $132 | $11,651 |
| Mortgage-backed securities, CMOs and other asset-backed securities | (1,603) | 1,529 | (74) | (1,440) | 1,273 | (167) |
| Taxable securities | (1,208) | 1,109 | (99) | (1,019) | 913 | (106) |
| Tax exempt securities (2) | (170) | (36) | (206) | (251) | (115) | (366) |
| Deposits with banks | (57) | 92 | 35 | (14) | 93 | 79 |
| Total interest income on interest earning assets (2) | 2,297 | 2,828 | 5,125 | 8,795 | 2,296 | 11,091 |
| Interest expense on interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | 224 | 1,402 | 1,626 | 446 | 2,143 | 2,589 |
| Certificates of deposit of $100,000 or more | 81 | 70 | 151 | 169 | 120 | 289 |
| Other time deposits | 142 | 172 | 314 | 85 | 246 | 331 |
| Federal funds purchased and repurchase agreements | (54) | 266 | 212 | 13 | 489 | 502 |
| Federal Home Loan Bank advances | (791) | 669 | (122) | (371) | 958 | 587 |
| Subordinated debentures | 8 | (8) | - | 8 | (8) | - |
| Junior subordinated debentures | - | - | - | (48) | - | (48) |
| Total interest expense on interest bearing liabilities | (390) | 2,571 | 2,181 | 302 | 3,948 | 4,250 |
| Net interest income (2) | $2,687 | $257 | $2,944 | $8,493 | $(1,652) | $6,841 |

(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan losses.

(2) Presented on a tax equivalent basis based on the U.S. statutory rate of 21% for the three and six months ended June 30, 2018, and 35% for the three and six months ended June 30, 2017.

#### Analysis of Net Interest Income for the Three Months Ended June 30, 2018 and 2017

Net interest income was $33.9 million for the three months ended June 30, 2018 compared to $30.8 million for the three months ended June 30, 2017. Average net interest earning assets increased $127.3 million to $1.4 billion for the three months ended June 30, 2018 compared to $1.3 billion for the three months ended June 30, 2017. The increase in average net interest earning assets reflects organic growth in loans, partially offset by an increase in average deposits and a decrease in average investment securities. The net interest margin increased to 3.30% for the three months ended June 30, 2018 compared to 3.25% for the three months ended June 30, 2017. The increase in the net interest margin for 2018 compared to 2017 reflects the higher average yield on interest earning assets primarily due to loan portfolio growth, partially offset by higher overall funding costs due in part to the Fed Funds rate increases in the six months ended June 30, 2018 and year ended December 31, 2017.

Interest income increased $5.3 million, or 14.7%, to $41.5 million for the three months ended June 30, 2018 from $36.2 million for the same period in 2017, as average interest earning assets increased $325.5 million, or 8.6%, to $4.1 billion for the three months ended June 30, 2018 compared to $3.8 billion for the same period in 2017. The increase in average interest earning assets for the three months ended June 30, 2018 compared to 2017 reflects organic growth in loans, partially offset by a decrease in average investment securities. The tax adjusted average yield on interest earning assets was 4.05% for the quarter ended June 30, 2018 compared to 3.86% for the quarter ended June 30, 2017.

Interest income on loans increased $5.5 million to $35.8 million for the three months ended June 30, 2018 over 2017, primarily due to growth in the loan portfolio. For the three months ended June 30, 2018, average loans grew by $477.0 million, or 17.7%, to $3.2 billion as compared to $2.7 billion for the same period in 2017. The increase in average loans was the result of organic growth in commercial real estate mortgage loans, residential mortgage loans, commercial and industrial loans, multi-family mortgage loans, and real estate construction and land loans. The tax adjusted yield on average loans was 4.52% for the second quarter of 2018 and 4.50% for the same period in 2017. The Bank remains committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities was $5.7 million for the three months ended June 30, 2018 compared to $5.9 million for the same period in 2017. Interest income on securities included net amortization of premiums on securities of $1.2 million for the three months ended June 30, 2018 compared to $1.6 million for the same period in 2017. For the three months ended June 30, 2018, average total investments decreased by $147.8 million, or 13.8%, to $925.0 million as compared to $1.1 billion for the same period in 2017. The tax adjusted average yield on total securities was 2.51% for the three months ended June 30, 2018 and 2.30% for the three months ended June 30, 2017.

Total interest expense increased to $7.6 million for the three months ended June 30, 2018 as compared to $5.4 million for the same period in 2017. The increase in interest expense for the three months ended June 30, 2018 is a result of the increase in the cost of average interest bearing liabilities coupled with an increase in average interest bearing liabilities. The cost of average interest bearing liabilities was 1.12% for the three months ended June 30, 2018 and 0.86% for the three months ended June 30, 2017. The increase in the cost of average interest bearing liabilities is primarily due to higher overall funding costs due in part to the Fed Funds rate increases in the six months ended June 30, 2018 and the year ended December 31, 2017. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, in a rising rate environment the cost of funds increases faster than the yields on assets. The Company began extending the terms of certain matured borrowings at the end of the 2017 first quarter in anticipation of further Fed Funds rate increases. Additionally, the large percentages of deposits in money market accounts reprice at short-term market rates, making the balance sheet more liability sensitive. The Bank continues its prudent management of deposit pricing. Average total interest bearing liabilities increased $198.2 million, or 7.8%, to $2.7 billion for the three months ended June 30, 2018 compared to $2.5 billion for the same period in 2017 due to an increase in average deposits, partially offset by a decrease in average borrowings.

For the three months ended June 30, 2018, average total deposits increased by $378.8 million to $3.5 billion as compared to average total deposits of $3.1 billion for the three months ended June 30, 2017 due to increases in average savings, NOW and money market accounts, average demand deposits, and average certificates of deposit. The average balance of savings, NOW and money market accounts increased $195.7 million, or 11.4%, to $1.9 billion for the three months ended June 30, 2018 compared to $1.7 billion for the three months ended June 30, 2017. The cost of average savings, NOW and money market deposits was 0.72% for the 2018 second quarter compared to 0.42% for the 2017 second quarter. Average demand deposits increased $114.1 million, or 9.9%, to $1.3 billion for the three months ended June 30, 2018 as compared to $1.2 billion for the same period in 2017. Average balances in certificates of deposit increased $69.1 million, or 31.8%, to $286.4 million for the three months ended June 30, 2018 compared to $217.3 million for the three months ended June 30, 2017. The cost of average certificates of deposit increased to 1.51% for the three months ended June 30, 2018 compared to 1.13% for the same period in 2017. Average public fund deposits comprised 16.7% of total average deposits during the 2018 second quarter and 18.0% for the 2017 second quarter.

Average federal funds purchased and repurchase agreements decreased $2.8 million, or 2.2%, to $122.5 million for the three months ended June 30, 2018 compared to $125.2 million for the same period in 2017. The cost of average federal funds purchased and repurchase agreements was 1.86% for the 2018 second quarter compared to 1.14% for the 2017 second quarter. Average FHLB advances decreased $63.9 million, or 15.9%, to $337.6 million for the three months ended June 30, 2018 compared to $401.5 million for the three months ended June 30, 2017.

#### Analysis of Net Interest Income for the Six Months Ended June 30, 2018 and 2017

Net interest income was $68.5 million for the six months ended June 30, 2018 compared to $61.3 million for the six months ended June 30, 2017. Average net interest earning assets increased $156.9 million to $1.4 billion for the six months ended June 30, 2018 compared to $1.2 billion for the six months ended June 30, 2017. The increase in average net interest earning assets reflects organic growth in loans, partially offset by an increase in average deposits and a decrease in average investment securities. The net interest margin increased to 3.35% for the six months ended June 30, 2018 compared to 3.30% for the six months ended June 30, 2017. The increase in the net interest margin for 2018 compared to 2017 reflects the higher average yield on interest earning assets primarily due to loan portfolio growth, partially offset by higher overall funding costs due in part to the Fed Funds rate increases in the six months ended June 30, 2018 and year ended December 31, 2017.

Interest income increased $11.5 million, or 16.0%, to $82.9 million for the six months ended June 30, 2018 from $71.4 million for the same period in 2017, as average interest earning assets increased $382.1 million, or 10.2%, to $4.1 billion for the six months ended June 30, 2018 compared to $3.7 billion for the same period in 2017. The increase in average interest earning assets for the six months ended June 30, 2018 compared to 2017 reflects organic growth in loans, partially offset by a decrease in average investment securities. The tax adjusted average yield on interest earning assets was 4.07% for the six months ended June 30, 2018 compared to 3.89% for the six months ended June 30, 2017.

Interest income on loans increased $11.8 million to $71.4 million for the six months ended June 30, 2018 over 2017, primarily due to growth in the loan portfolio. For the six months ended June 30, 2018, average loans grew by $508.3 million, or 19.2%, to $3.2 billion as compared to $2.6 billion for the same period in 2017. The increase in average loans was the result of organic growth in commercial real estate mortgage loans, residential mortgage loans, commercial and industrial loans, multi-family mortgage loans, and real estate construction and land loans. The tax adjusted yield on average loans was 4.57% for the six months ended June 30, 2018 and 4.56% for the same period in 2017. The Bank remains committed to growing loans with prudent underwriting, sensible pricing, and limited credit and extension risk.

Interest income on investment securities was $11.3 million for the six months ended June 30, 2018 and $11.7 million for the same period in 2017. Interest income on securities included net amortization of premiums on securities of $2.5 million for the six months ended June 30, 2018 compared to $3.3 million for the same period in 2017. For the six months ended June 30, 2018, average total investments decreased by $125.2 million, or 11.7%, to $947.0 million as compared to $1.1 billion for the same period in 2017. The tax adjusted average yield on total securities was 2.46% for the six months ended June 30, 2018 and 2.30% for the six months ended June 30, 2017.

Total interest expense increased to $14.4 million for the six months ended June 30, 2018 as compared to $10.2 million for the same period in 2017. The increase in interest expense for the six months ended June 30, 2018 is a result of the increase in the cost of average interest bearing liabilities coupled with an increase in average interest bearing liabilities. The cost of average interest bearing liabilities was 1.07% for the six months ended June 30, 2018 and 0.82% for the six months ended June 30, 2017. The increase in the cost of average interest bearing liabilities is primarily due to higher overall funding costs, due in part to the Fed Funds rate increases in the six months ended June 30, 2018 and the year ended December 31, 2017. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, in a rising rate environment the cost of funds increases faster than the yields on assets. The Company began extending the terms of certain matured borrowings at the end of the 2017 first quarter in anticipation of further Fed Funds rate increases. Additionally, the large percentages of deposits in money market accounts reprice at short-term market rates, making the balance sheet more liability sensitive. The Bank continues its prudent management of deposit pricing. Average total interest bearing liabilities increased $225.2 million, or 9.0%, to $2.7 billion for the six months ended June 30, 2018 compared to $2.5 billion for the same period in 2017 due to an increase in average deposits, partially offset by a decrease in average borrowings.

For the six months ended June 30, 2018, average total deposits increased by $385.0 million to $3.4 billion as compared to average total deposits of $3.0 billion for the six months ended June 30, 2017 due to increases in average savings, NOW and money market accounts, average demand deposits, and average certificates of deposit. The average balance of savings, NOW and money market accounts increased $202.0 million, or 12.1%, to $1.9 billion for the six months ended June 30, 2018 compared to $1.7 billion for the six months ended June 30, 2017. The cost of average savings, NOW and money market deposits was 0.64% for the six months ended June 30, 2018 compared to 0.40% for the six months ended June 30, 2017. Average demand deposits increased $141.0 million, or 12.6%, to $1.3 billion for the six months ended June 30, 2018 as compared to $1.1 billion for the same period in 2017. Average balances in certificates of deposit increased $42.0 million, or 19.8%, to $254.4 million for the six months ended June 30, 2018 compared to $212.4 million for the six months ended June 30, 2017. The cost of average certificates of deposit increased to 1.42% for the six months ended June 30, 2018 compared to 1.11% for the same period in 2017. Average public fund deposits comprised 17.3% of total average deposits during the six months ended June 30, 2018 and 18.2% for the six months ended June 30, 2017.

Average federal funds purchased and repurchase agreements increased $2.6 million, or 2.0%, to $137.0 million for the six months ended June 30, 2018 compared to $134.3 million for the same period in 2017. The cost of average federal funds purchased and repurchase agreements was 1.73% for the six months ended June 30, 2018 compared to 1.01% for the six months ended June 30, 2017. Average FHLB advances decreased $20.2 million, or 5.0%, to $382.7 million for the six months ended June 30, 2018 compared to $402.8 million for the six months ended June 30, 2017. Average junior subordinated debentures for the six months ended June 30, 2018 was zero compared to $1.3 million for the same period in 2017. The junior subordinated debentures were redeemed in January 2017.

#### Provision and Allowance for Loan Losses

The Bank’s loan portfolio consists primarily of real estate loans secured by commercial, multi-family and residential real estate properties located in the Bank’s principal lending areas of Nassau and Suffolk Counties on Long Island and the New York City boroughs. The interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rates offered by its competitors, the Bank’s relationship with the customer, and the related credit risks of the transaction. These factors are affected by general and economic conditions including, but not limited to, monetary policies of the federal government, including the Federal Reserve Board, legislative policies and governmental budgetary matters.

Based on the Company’s continuing review of the overall loan portfolio, the current asset quality of the portfolio, the growth in the loan portfolio and the net charge-offs, a provision for loan losses of $0.4 million and $1.2 million was recorded during the three and six months ended June 30, 2018, respectively, compared to a provision for loan losses of $1.0 million and $1.8 million, respectively, during the same periods in 2017. Net charge-offs were $1.6 million for the quarter ended June 30, 2018 compared to net charge-offs of $24 thousand for the quarter ended June 30, 2017. Net charge-offs were $1.3 million for the six months ended June 30, 2018 compared to $0.1 million for the six months ended June 30, 2017. The increase in net charge-offs during the 2018 second quarter relates to the charge-off of one loan that was fully reserved. The ratio of the allowance for loan losses to nonaccrual loans was 1,979%, 456% and 1,030%, at June 30, 2018, December 31, 2017, and June 30, 2017, respectively. The allowance for loan losses totaled $31.7 million at June 30, 2018 as compared to $31.7 million at December 31, 2017 and $27.5 million at June 30, 2017. The allowance as a percentage of total loans was 1.00% at June 30, 2018, compared to 1.02% at December 31, 2017 and 0.99% at June 30, 2017. The increase in the allowance for loan losses from June 30, 2017 reflects portfolio growth, coupled with the impact of the significant increase in charge-offs experienced during the 2017 fourth quarter. Management continues to carefully monitor the loan portfolio as well as real estate trends in Nassau and Suffolk Counties and the New York City boroughs.

Loans totaling $75.9 million, or 2.4%, of total loans at June 30, 2018 were categorized as classified loans compared to $85.3 million, or 2.8%, at December 31, 2017 and $103.9 million, or 3.7%, at June 30, 2017. Classified loans include loans with credit quality indicators with the internally assigned grades of special mention, substandard and doubtful. These loans are categorized as classified loans because management has information that indicates the borrower may not be able to comply with the present repayment terms. These loans are subject to increased management attention and their classification is reviewed at least quarterly.

At June 30, 2018, $21.9 million of classified loans were commercial real estate (“CRE”) loans. Of the $21.9 million of CRE loans, $21.2 million were current and $0.7 million were past due. At June 30, 2018, $11.4 million of classified loans were residential real estate loans, with $9.8 million current and $1.6 million past due. Commercial, industrial, and agricultural loans represented $42.3 million of classified loans, with $41.2 million current and $1.1 million past due. Taxi medallion loans represented $21.9 million of the classified commercial, industrial and agricultural loans at June 30, 2018. All of the Bank’s taxi medallion loans are collateralized by New York City – Manhattan medallions and have personal guarantees. All taxi medallion loans were current as of June 30, 2018 except one which was nonaccrual. No new originations of taxi medallion loans are currently planned and management expects these balances to decline through amortization and pay-offs. During the 2018 second quarter, four taxi loans totaling $2.4 million were paid off in full. There was $0.3 million of classified real estate construction and land loans, all of which are current.

CRE loans, including multi-family loans, represented $1.9 billion, or 59.8%, of the total loan portfolio at June 30, 2018 compared to $1.9 billion, or 61.0%, at December 31, 2017 and $1.7 billion, or 62.3%, at June 30, 2017. The Bank’s underwriting standards for CRE loans require an evaluation of the cash flow of the property, the overall cash flow of the borrower and related guarantors as well as the value of the real estate securing the loan. In addition, the Bank’s underwriting standards for CRE loans are consistent with regulatory requirements with original loan to value ratios generally less than or equal to 75%. The Bank considers charge-off history, delinquency trends, cash flow analysis, and the impact of the local economy on commercial real estate values when evaluating the appropriate level of the allowance for loan losses.

As of June 30, 2018 and December 31, 2017, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $15.3 million and $22.5 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and TDRs. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22. Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral less costs to sell is used to determine the fair value of the loan. The fair value of the collateral is determined based on recent appraised values. The fair value of the collateral less costs to sell or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required. The decrease in impaired loans from December 31, 2017 was attributable to the payoff of certain TDRs, partially offset by new TDRs during the six months ended June 30, 2018, coupled with a decrease in nonaccrual loans due to the charge-off of one loan and sales and payoffs. During the six months ended June 30, 2018, the Bank modified certain commercial and industrial loans as TDRs totaling $6.8 million. These TDR loans are current at June 30, 2018.

Nonaccrual loans were $1.6 million, or 0.05%, of total loans at June 30, 2018, and $7.0 million, or 0.22%, of total loans at December 31, 2017. TDRs represent $70 thousand of the nonaccrual loans at June 30, 2018 compared to $5 thousand at December 31, 2017.

The Bank’s other real estate owned at June 30, 2018 was $0.2 million, consisting of one property, compared to none at December 31, 2017.

The following table sets forth changes in the allowance for loan losses for the periods indicated:

*(In thousands)*

|  | Six Months Ended June 30, 2018 | June 30, 2017 |
| --- | ---: | ---: |
| Beginning balance | **$31,707** | $25,904 |
| Charge-offs: |  |  |
| Residential real estate mortgage loans | **(24)** | **-** |
| Commercial, industrial and agricultural loans | **(1,708)** | (128) |
| Total | **(1,732)** | (128) |
| Recoveries: |  |  |
| Residential real estate mortgage loans | **1** | 2 |
| Commercial, industrial and agricultural loans | **475** | 15 |
| Installment/consumer loans | **1** | 1 |
| Total | **477** | 18 |
| Net charge-offs | **(1,255)** | (110) |
| Provision for loan losses charged to operations | **1,200** | 1,750 |
| Ending balance | **$31,652** | $27,544 |

#### Allocation of Allowance for Loan Losses

The following table sets forth the allocation of the total allowance for loan losses by loan classification at the dates indicated:

*(Dollars in thousands)*

|  | June 30, 2018 Amount | Percentage of Loans to Total Loans | December 31, 2017 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$11,206** | **41.8%** | $11,048 | 41.7% |
| Multi-family mortgage loans | **2,466** | **18.0** | 4,521 | 19.2 |
| Residential real estate mortgage loans | **4,237** | **16.1** | 2,438 | 15.0 |
| Commercial, industrial & agricultural loans | **12,358** | **19.8** | 12,838 | 19.9 |
| Real estate construction and land loans | **1,263** | **3.7** | 740 | 3.5 |
| Installment/consumer loans | **122** | **0.6** | 122 | 0.7 |
| Total | **$31,652** | **100.0%** | $31,707 | 100.0% |

#### Non-Interest Income (Loss)

Total non-interest income (loss) decreased $7.1 million to $(2.6) million during the three months ended June 30, 2018 compared to $4.5 million for the three months ended June 30, 2017, driven primarily by a $7.9 million net securities loss related to the balance sheet restructure, partially offset by a $0.4 million increase in other operating income, a $0.3 million increase in service charges and other fees, and a $0.3 million gain on sale of loans.

Total non-interest income decreased $7.1 million to $1.5 million during the six months ended June 30, 2018 compared to $8.6 million for the six months ended June 30, 2017, driven primarily by a $7.9 million net securities loss related to the balance sheet restructure, partially offset by a $0.5 million increase in other operating income, a $0.5 million increase in service charges and other fees, and a $0.3 million gain on sale of loans.

#### Non-Interest Expense

Total non-interest expense increased $1.5 million to $22.5 million during the three months ended June 30, 2018 compared to $21.0 million over the same period in 2017. The increase was primarily due to higher salaries and benefits, professional services, technology and communications, other operating expenses, and FDIC assessments, partially offset by lower marketing and advertising, occupancy and equipment, and amortization of other intangible assets.

Total non-interest expense increased $3.8 million to $45.1 million during the six months ended June 30, 2018 compared to $41.3 million over the same period in 2017. The increase was primarily due to higher salaries and benefits, professional services, technology and communications, other operating expenses, and FDIC assessments, partially offset by lower occupancy and equipment, marketing and advertising, and amortization of other intangible assets.

Salaries and benefits increased $1.5 million to $13.1 million for the three months ended June 30, 2018 compared to $11.6 million for the same period in 2017. The increase in salaries and benefits in the second quarter of 2018 versus the second quarter of 2017 is primarily due to additional staff related to business development and risk management. Professional services increased $0.2 million to $0.9 million for the three months ended June 30, 2018, compared to the same period in 2017. Technology and communications increased $0.2 million to $1.6 million for the three months ended June 30, 2018 compared to $1.4 million for the same period in the prior year. Other operating expenses increased $0.1 million to $1.9 million for the three months ended June 30, 2018 compared to $1.8 million for the same period in 2017. FDIC assessments increased to $0.4 million for the three months ended June 30, 2018 from $0.3 million for the same period in 2017. Occupancy and equipment decreased $0.2 million to $3.2 million for the three months ended June 30, 2018 compared to $3.4 million for the same period in 2017. The decrease in occupancy and equipment expense in the second quarter of 2018 versus the second quarter of 2017 reflects the cost savings related to the execution of the Company’s branch rationalization strategy. Marketing and advertising were $1.2 million for the three months ended June 30, 2018 compared to $1.6 million for the same period in 2017. Amortization of other intangible assets was $0.2 million compared to $0.3 million for the same period in 2017.

Salaries and benefits increased $2.8 million to $25.9 million for the six months ended June 30, 2018 compared to $23.1 million for the same period in 2017. The increase in salaries and benefits for the six months ended June 30, 2018 versus the same period in 2017 is primarily due to additional staff related to business development and risk management. FDIC assessments increased to $0.9 million for the six months ended June 30, 2018 from $0.6 million for the same period in 2017. Professional services increased $0.7 million to $2.1 million for the six months ended June 30, 2018, compared to $1.4 million for the same period in 2017. Technology and communications increased $0.5 million to $3.2 million for the six months ended June 30, 2018 compared to $2.7 million for the same period in the prior year. Other operating expenses increased $0.4 million to $3.9 million for the six months ended June 30, 2018 compared to $3.5 million for the same period in 2017. Occupancy and equipment decreased $0.4 million to $6.4 million for the six months ended June 30, 2018 compared to $6.8 million for the same period in 2017. The decrease in occupancy and equipment expense for the six months ended June 30, 2018 compared to the same period in 2017 reflects the cost savings related to the execution of the Company’s branch rationalization strategy. Marketing and advertising were $2.2 million for the six months ended June 30, 2018 compared to $2.5 million for the same period in 2017. Amortization of other intangible assets was $0.5 million compared to $0.6 million for the same period in 2017.

#### Income Taxes

Income tax expense was $1.7 million for the three months ended June 30, 2018 compared to $4.5 million for the three months ended June 30, 2017. The decrease reflects lower income before income taxes and a lower effective tax rate in 2018 due to the enactment of the Tax Act in the fourth quarter of 2017. The effective tax rate for the three months ended June 30, 2018 was 20.1% compared to 33.8% for the same period last year.

Income tax expense was $4.9 million for the six months ended June 30, 2018 compared to $8.8 million for the six months ended June 30, 2017. The decrease reflects lower income before income taxes and a lower effective tax rate in 2018 due to the enactment of the Tax Act in the fourth quarter of 2017. The effective tax rate for the six months ended June 30, 2018 was 20.6% compared to 32.9% for the same period last year.

#### Financial Condition

Total assets decreased $15.2 million, or 0.3%, to $4.4 billion at June 30, 2018 compared to December 31, 2017. Cash and cash equivalents increased $11.1 million, or 11.8%, to $105.9 million at June 30, 2018 compared to December 31, 2017. Total securities decreased $120.6 million, or 12.4%, to $855.5 million at June 30, 2018 compared to December 31, 2017, which includes the Company’s sale of $238.3 million of securities in the three months ended June 30, 2018. Total loans held for investment, net, increased $78.0 million, or 2.5%, to $3.1 billion at June 30, 2018 compared to December 31, 2017, which includes the Company’s sale of $39.8 million of commercial real estate and multi-family loans in the three months ended June 30, 2018. The ability to grow the loan portfolio, while minimizing interest rate risk sensitivity and maintaining credit quality, remains a strong focus of management.

Total liabilities decreased $25.8 million, or 0.6%, to $4.0 billion at June 30, 2018 compared to December 31, 2017. Total deposits increased $218.7 million, or 6.6%, to $3.6 billion at June 30, 2018, compared to December 31, 2017. Savings, NOW and money market deposits increased $146.2 million, or 8.2%, to $1.9 billion at June 30, 2018 compared to December 31, 2017. Certificates of deposit increased $103.8 million, or 46.7%, to $326.2 million at June 30, 2018 compared to December 31, 2017. Demand deposits decreased $31.4 million, or 2.3%, to $1.3 billion at June 30, 2018 compared to December 31, 2017. Federal funds purchased were zero at June 30, 2018 compared to $50.0 million at December 31, 2017. Federal Home Loan Bank advances decreased $200.5 million to $300.9 million at June 30, 2018 compared to December 31, 2017. The decrease in wholesale borrowings in 2018 reflects the Company’s strategy to pay down its higher cost borrowings.

Stockholders’ equity was $439.8 million at June 30, 2018, an increase of $10.6 million, or 2.5%, from December 31, 2017, primarily due to net income of $18.8 million, share based compensation of $1.8 million, and proceeds from the issuance of shares of common stock under the dividend reinvestment plan of $0.5 million, partially offset by $9.2 million in dividends and an increase in accumulated other comprehensive loss, net of deferred income taxes, of $0.8 million. In July 2018, the Company declared a quarterly dividend of $0.23 per share and continues its long-term trend of uninterrupted dividends.

### Liquidity

The objective of liquidity management is to ensure the sufficiency of funds available to respond to the needs of depositors and borrowers, and to take advantage of unanticipated opportunities for Company growth or earnings enhancement. Liquidity management addresses the ability of the Company to meet financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet customer borrowing commitments and deposit withdrawals, either on demand or on contractual maturity, to repay borrowings as they mature, to fund current and planned expenditures and to make new loans and investments as opportunities arise.

The Company’s principal sources of liquidity included cash and cash equivalents of $6.9 million as of June 30, 2018, and dividend capabilities from the Bank. Cash available for distribution of dividends to shareholders of the Company is primarily derived from dividends paid by the Bank to the Company. For the six months ended June 30, 2018, the Bank paid $10.0 million in cash dividends to the Company. Prior regulatory approval is required if the total of all dividends declared by the Bank in any calendar year exceeds the total of the Bank’s net income of that year combined with its retained net income of the preceding two years. As of June 30, 2018, the Bank has $46.0 million of retained net income available for dividends to the Company. In the event that the Company subsequently expands its current operations, in addition to dividends from the Bank, it will need to rely on its own earnings, additional capital raised and other borrowings to meet liquidity needs. The Company did not make any capital contributions to the Bank during the six months ended June 30, 2018.

The Bank’s most liquid assets are cash and cash equivalents, securities available for sale and securities held to maturity due within one year. The levels of these assets are dependent on the Bank’s operating, financing, lending and investing activities during any given period. Other sources of liquidity include loan and investment securities principal repayments and maturities, lines of credit with other financial institutions including the FHLB and FRB, growth in core deposits and sources of wholesale funding such as brokered deposits. While scheduled loan amortization, maturing securities and short-term investments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank adjusts its liquidity levels as appropriate to meet funding needs such as seasonal deposit outflows, loans, and asset and liability management objectives. Historically, the Bank has relied on its deposit base, drawn through its full-service branches that serve its market area and local municipal deposits, as its principal source of funding. The Bank seeks to retain existing deposits and loans and maintain customer relationships by offering quality service and competitive interest rates to its customers, while managing the overall cost of funds needed to finance its strategies.

The Bank’s Asset/Liability and Funds Management Policy allows for wholesale borrowings of up to 25% of total assets. At June 30, 2018, the Bank had aggregate lines of credit of $380.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $360.0 million is available on an unsecured basis. As of June 30, 2018, the Bank had no overnight borrowings outstanding under these lines. The Bank also has the ability, as a member of the FHLB system, to borrow against unencumbered residential and commercial mortgages owned by the Bank. The Bank also has a master repurchase agreement with the FHLB, which increases its borrowing capacity. As of June 30, 2018, the Bank had $10.0 million outstanding in FHLB overnight borrowings and $290.9 million outstanding in FHLB term borrowings. As of December 31, 2017, the Bank had $185.0 million outstanding in FHLB overnight borrowings and $316.4 million outstanding in FHLB term borrowings. The Bank had $1.4 million and $0.9 million at June 30, 2018 and December 31, 2017, respectively, of securities sold under agreements to repurchase outstanding with customers and nothing outstanding with brokers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As of June 30, 2018, the Bank had $116.4 million outstanding in brokered certificates of deposit and $197.8 million outstanding in brokered money market accounts. As of December 31, 2017, the Bank had $44.9 million outstanding in brokered certificates of deposit and $163.2 million outstanding in brokered money market accounts.

Liquidity policies are established by senior management and reviewed and approved by the full Board of Directors at least annually. Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of the Company’s operating requirements. The Bank’s liquidity levels are affected by the use of short term and wholesale borrowings and the amount of public funds in the deposit mix. Excess short-term liquidity is invested in overnight federal funds sold or in an interest earning account at the FRB.

### Capital Resources

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classifications also are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, tier 1 and common equity tier 1 capital to risk weighted assets and of tier 1 capital to average assets. Tier 1 capital, risk weighted assets and average assets are as defined by regulation. The required minimums for the Company and Bank are set forth in the tables that follow. The Company and the Bank met all capital adequacy requirements at June 30, 2018 and December 31, 2017.

On January 1, 2015, the Basel III Capital Rules became effective and include transition provisions through January 1, 2019. These rules provide for the following minimum capital to risk-weighted assets ratios as of January 1, 2015: a) 4.5% based on common equity tier 1 capital ("CET1"); b) 6.0% based on tier 1 capital; and c) 8.0% based on total regulatory capital. A minimum leverage ratio (tier 1 capital as a percentage of total average assets) of 4.0% is also required under the Basel III Capital Rules. When fully phased in, the Basel III Capital Rules will additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing by 0.625% each subsequent January 1, until it reaches 2.5% on January 1, 2019. When the capital conservation buffer is fully phased in on January 1, 2019, the Company and the Bank will effectively have the following minimum capital to risk-weighted assets ratios: a) 7.0% based on CET1; b) 8.5% based on tier 1 capital; and c) 10.5% based on total regulatory capital.

The Company and the Bank made the one-time, permanent election to continue to exclude the effects of accumulated other comprehensive income or loss items included in stockholders' equity for the purposes of determining the regulatory capital ratios.

As of June 30, 2018, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based and tier 1 leverage ratios as set forth in the tables below. Since that notification, there are no conditions or events that management believes have changed the institution’s category.

In accordance with the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%, and a financial institution will be able to elect to be subject to this new definition.

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at June 30, 2018 and December 31, 2017:

*(Dollars in thousands)*

| Common equity tier 1 capital to risk weighted assets: | June 30, 2018 Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum Capital Adequacy Requirement with Capital Conservation Buffer Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | **$346,944** | **10.2%** | **$152,437** | **4.5%** | **$215,953** | **6.375%** | **n/a** | **n/a** |
| Bank | **419,695** | **12.4** | **152,430** | **4.5** | **215,943** | **6.375** | **$220,177** | **6.5%** |
| Total capital to risk weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | **458,872** | **13.5** | **271,000** | **8.0** | **334,515** | **9.875** | **n/a** | **n/a** |
| Bank | **451,623** | **13.3** | **270,987** | **8.0** | **334,500** | **9.875** | **338,734** | **10.0** |
| Tier 1 capital to risk weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | **346,944** | **10.2** | **203,250** | **6.0** | **266,765** | **7.875** | **n/a** | **n/a** |
| Bank | **419,695** | **12.4** | **203,240** | **6.0** | **266,753** | **7.875** | **270,987** | **8.0** |
| Tier 1 capital to average assets: |  |  |  |  |  |  |  |  |
| Consolidated | **346,944** | **7.9** | **175,641** | **4.0** | **n/a** | **n/a** | **n/a** | **n/a** |
| Bank | **419,695** | **9.6** | **175,647** | **4.0** | **n/a** | **n/a** | **219,559** | **5.0** |

*(Dollars in thousands)*

| Common equity tier 1 capital to risk weighted assets: | December 31, 2017 Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum Capital Adequacy Requirement with Capital Conservation Buffer Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $336,393 | 10.0% | $152,011 | 4.5% | $194,237 | 5.75% | n/a | n/a |
| Bank | 408,089 | 12.1 | 152,002 | 4.5 | 194,224 | 5.75 | $219,558 | 6.5% |
| Total capital to risk weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | 448,376 | 13.3 | 270,242 | 8.0 | 312,468 | 9.25 | n/a | n/a |
| Bank | 440,072 | 13.0 | 270,225 | 8.0 | 312,448 | 9.25 | 337,781 | 10.0 |
| Tier 1 capital to risk weighted assets: |  |  |  |  |  |  |  |  |
| Consolidated | 336,393 | 10.0 | 202,682 | 6.0 | 244,907 | 7.25 | n/a | n/a |
| Bank | 408,089 | 12.1 | 202,669 | 6.0 | 244,892 | 7.25 | 270,225 | 8.0 |
| Tier 1 capital to average assets: |  |  |  |  |  |  |  |  |
| Consolidated | 336,393 | 7.9 | 170,440 | 4.0 | n/a | n/a | n/a | n/a |
| Bank | 408,089 | 9.6 | 170,441 | 4.0 | n/a | n/a | 213,051 | 5.0 |

### Recent Regulatory and Accounting Developments

Refer to Note 14. “Recent Accounting Pronouncements” in the Condensed Notes to the Consolidated Financial Statements in Part I, Item 1 “Financial Statements” for details related to recent regulatory and accounting developments.

## Market risk

As filed, 8,751 characters.

#### Asset/Liability Management

Management considers interest rate risk to be the most significant market risk for the Company. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the Company as a result of changes in interest rates.

The Company’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and the credit quality of earning assets. The Company’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates.

The Company’s Asset and Liability Committee evaluates periodically, but at least four times a year, the impact of changes in market interest rates on assets and liabilities, net interest margin, capital and liquidity. Risk assessments are governed by policies and limits established by senior management, which are reviewed and approved by the full Board of Directors at least annually. The economic environment continually presents uncertainties as to future interest rate trends. The Asset and Liability Committee regularly utilizes a model that projects net interest income based on increasing or decreasing interest rates, in order to be better able to respond to changes in interest rates.

At June 30, 2018, $725.9 million, or 87.6%, of the Company’s available for sale and held to maturity securities had fixed interest rates. At June 30, 2018, $2.4 billion, or 75.7%, of the Company’s loan portfolio had adjustable or floating interest rates. Changes in interest rates affect the value of the Company’s interest earning assets and in particular its securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. Increases in interest rates could result in decreases in the market value of interest earning assets, which could adversely affect the Company’s stockholders’ equity and its results of operations if sold. The Company is also subject to reinvestment risk associated with changes in interest rates. Changes in market interest rates also could affect the type (fixed-rate or adjustable-rate) and amount of loans originated by the Company and the average life of loans and securities, which can impact the yields earned on the Company’s loans and securities. In periods of decreasing interest rates, the average life of loans and securities held by the Company may be shortened to the extent increased prepayment activity occurs during such periods which, in turn, may result in the investment of funds from such prepayments in lower yielding assets. Under these circumstances, the Company is subject to reinvestment risk to the extent that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may result in decreasing loan prepayments with respect to fixed rate loans (and therefore an increase in the average life of such loans), may result in a decrease in loan demand, and may make it more difficult for borrowers to repay adjustable rate loans.

The Company utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. The simulation model captures the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on the Company’s consolidated balance sheet. This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon given 100 and 200 basis point upward shifts in interest rates and a 100 basis point downward shift in interest rates. A parallel and pro-rata shift in rates over a twelve-month period is assumed.

In addition to the above scenarios, the Company considers other, non-parallel rate shifts that would also exert pressure on earnings. The current low interest rate environment presents the possibility for a flattening of the yield curve. This could happen if the FOMC began to raise short-term interest rates without there being a corresponding rise in long-term rates. This would have the effect of raising short-term borrowing costs without allowing longer-term assets to reprice higher.

The following reflects the Company’s net interest income sensitivity analysis at June 30, 2018 and December 31, 2017:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | June 30, 2018 Potential Change in Future Net Interest Income Year 1 $ Change | % Change | Year 2 $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | **$(3,220)** | **(2.42)%** | **$6,751** | **5.07%** |
| 100 | **$(1,527)** | **(1.15)%** | **$6,019** | **4.52%** |
| Static | **-** | **-** | **-** | **-** |
| -100 | **$297** | **0.22%** | **$2,652** | **1.99%** |

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | December 31, 2017 Potential Change in Future Net Interest Income Year 1 $ Change | % Change | Year 2 $ Change | % Change |
| ---: | ---: | ---: | ---: | ---: |
| 200 | **$(4,548)** | **(3.45)%** | **$3,217** | **2.44%** |
| 100 | **$(2,262)** | **(1.71)%** | **$2,937** | **2.23%** |
| Static | - | - | **-** | **-** |
| -100 | **$918** | **0.70%** | **$1,090** | **0.83%** |

As noted in the table above, a 200 basis point increase in interest rates is projected to decrease net interest income by 2.42 percent in year 1 and increase net interest income by 5.07 percent in year 2. The Company’s balance sheet sensitivity to such a move in interest rates at June 30, 2018 decreased as compared to December 31, 2017 (which was a decrease of 3.45 percent in net interest income over a twelve-month period). This decrease is the result of a higher proportion of the Company’s assets repricing to market rates, coupled with a large increase in demand deposits and the Company’s ability to hold the costs of interest bearing deposits to below market rates. The lower projected interest rate sensitivity trend can be attributed to the strategic balance sheet restructuring of the Company’s investment portfolio, as well as the increase in non-public, non-brokered deposits in the second quarter of 2018. Overall, the strategy for the Bank remains focused on reducing its exposure to rising rates. Over the intervening year, the effective duration (a measure of price sensitivity to interest rates) of the bond portfolio increased from 3.23 at December 31, 2017 to 3.55 at June 30, 2018. Additionally, the Bank has increased its use of swaps to extend liabilities. The Company believes that its strong core funding profile also provides protection from rising rates due to the ability of the Bank to lag increases in the rates paid to on these accounts to market rates.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied on as being indicative of expected operating results. These hypothetical estimates are based on numerous assumptions including, but not limited to, the nature and timing of interest rate levels and yield curve shapes, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment and replacement of asset and liability cash flows. While assumptions are developed based on perceived current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences may change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to prepayment and refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, prepayment penalties and product preference changes and other internal and external variables. Furthermore, the sensitivity analysis does not reflect actions that management might take in responding to, or anticipating, changes in interest rates and market conditions.

## Controls and procedures

As filed, 880 characters.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2018. Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company’s internal control over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 174 characters.

There have been no material changes to the risk factors disclosed in Item 1A., Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Filed Aug 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-042835. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.