# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2016-08-08
- Accepted by EDGAR: Aug 8, 2016, 16:32 ET
- Period: 2016-06-30
- Accession: 0001571049-16-017227
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000157104916017227/t1601876_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000157104916017227/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $4.1m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $8.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $4.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $9.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $8.9m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $17.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.50 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.51 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | $1.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 17,693,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 17,669,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $16.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $1.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2016-01-01 to 2016-06-30 | $8.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2016-06-30 | $79.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2016-06-30 | $3.74bn | us-gaap:Assets |
| Total liabilities | at 2016-06-30 | $3.39bn | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | $358.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 74,622 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 variation of such similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include, but are not limited to, possible or assumed estimates with respect to the financial condition, expected or anticipated revenue, and results of operations and business of the Company, including earnings growth; revenue growth in retail banking, lending and other areas; origination volume in the consumer, commercial and other lending businesses; current and future capital management programs; non-interest income levels, including fees from the title abstract subsidiary and banking services as well as product sales; tangible capital generation; market share; expense levels; and other business operations and strategies. The Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA.

Factors that could cause future results to vary from current management expectations include, but are not limited to, changing economic conditions; legislative and regulatory changes, including increases in FDIC insurance rates; monetary and fiscal policies of the federal government; changes in tax policies; rates and regulations of federal, state and local tax authorities; changes in interest rates; deposit flows; the cost of funds; demands for loan products; demand for financial services; competition; 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, 2015 and 2016 Quarterly Reports on Form 10-Q. The forward-looking statements are made as of the date of this report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.

### Overview

#### Who We Are and How We Generate Income

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

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

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

### Issuance of Subordinated Debentures

In September 2015, the Company issued $80.0 million in aggregate principal amount of fixed-to-floating rate subordinated debentures (the “Notes”). $40.0 million of the Notes are callable at par after five years, have a stated maturity of September 30, 2025 and bear interest at a fixed annual rate of 5.25% per year, from and including September 21, 2015 until but excluding September 30, 2020. From and including September 30, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 360 basis points. The remaining $40.0 million of the Notes are callable at par after ten years, have a stated maturity of September 30, 2030 and bear interest at a fixed annual rate of 5.75% per year, from and including September 21, 2015 until but excluding September 30, 2025. From and including September 30, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 345 basis points.

The Notes are included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.

### Acquisition of Community National Bank

On June 19, 2015, the Company acquired CNB at a purchase price of $157.5 million, issued an aggregate of 5.647 million Bridge Bancorp common shares in exchange for all the issued and outstanding common stock of CNB and recorded goodwill of $96.5 million, which is not deductible for tax purposes. At acquisition, CNB had total acquired assets on a fair value basis of $895.3 million, with loans of $729.4 million, investment securities of $90.1 million and deposits of $786.9 million. The transaction expanded the Company’s geographic footprint across Long Island including Nassau County, Queens and into New York City. It complements the Bank’s existing branch network and enhances asset generation capabilities. The expanded branch network allows the Bank to serve a greater portion of the Long Island and metropolitan marketplace through a network of 40 branches.

### Acquisition of FNBNY

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

#### Quarterly Highlights

- Net income for the second quarter of 2016 was $8.9 million and $0.50 per diluted share, compared to $0.5 million and $0.04 per diluted share for the quarter ended June 30, 2015 which included $5.3 million in costs, net of income taxes, associated with the CNB acquisition and a reduction in income tax expense of $0.4 million associated with changes in the New York City tax law enacted in the second quarter of 2015.
- Net interest income increased to $30.6 million for the second quarter of 2016 compared to $20.4 million in 2015 primarily due to the increase in average interest earning assets reflecting the assets acquired from CNB as well as organic growth in loans and securities.
- Net interest margin was 3.48% for the second quarter of 2016 compared to 3.57% for the 2015 period. The decrease in the net interest margin reflects the higher cost of borrowings associated with the $80 million in subordinated debentures issued in September 2015 and federal funds purchased and repurchase agreements.
- Loans held for investment at June 30, 2016 totaled $2.52 billion, an increase of $114.2 million or 4.7% over December 31, 2015 and $259.7 million or 11.5% over June 30, 2015.
- Total assets of $3.74 billion at June 30, 2016, decreased $38.7 million compared to December 31, 2015 and increased $315.3 million compared to June 30, 2015. The decrease in total assets from December 31, 2015 reflects the Company’s execution of a strategy to deleverage the balance sheet. During the second quarter the Company sold $235.7 million of lower yielding securities and paid down $85.3 million of borrowings and funded the run off of $67.4 million in acquired high rate certificates of deposit, $43.7 million in loan growth and $30.0 million in additional bank owned life insurance (“BOLI”).
- Deposits of $2.85 billion at June 30, 2016, increased $10.0 million over December 31, 2015 and $70.1 million compared to June 30, 2015.
- Allowance for loan losses to total loans ratio, which was calculated inclusive of $635.8 million of CNB and FNBNY acquired loans at June 30, 2016 and $697.4 million at December 31, 2015, was 0.90% as of June 30, 2016 compared to 0.86% at December 31, 2015. The allowance for loan losses to total loans ratio at June 30, 2016, was 1.20% excluding these acquired loans.
- All capital ratios exceed the fully phased in requirements of Basel III as of June 30, 2016.
- A cash dividend of $0.23 per share was declared in July 2016 for the second quarter.

#### Current Environment

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

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

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

#### Challenges and Opportunities

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

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

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

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

### Critical Accounting Policies

#### Allowance for Loan Losses

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

The allowance for loan losses is established and maintained through a provision for loan losses based on probable incurred losses inherent in the Bank’s loan portfolio. Management evaluates the adequacy of the allowance on a quarterly basis. The allowance is comprised of both individual valuation allowances and loan pool valuation allowances. The Bank monitors its entire loan portfolio on a regular basis, with consideration given to detailed analysis of classified loans, repayment patterns, probable incurred losses, past loss experience, current economic conditions, and various types of concentrations of credit. Additions to the allowance are charged to expense and realized losses, net of recoveries, are charged to the allowance. Refer to Note 7. “Allowance for Loan Losses” in the Condensed Notes to the Consolidated Financial Statements in Part I, Item 1 “Financial Statements” for further discussion of the allowance for loan losses.

### Net Income

Net income for the three months ended June 30, 2016 was $8.9 million and $0.50 per diluted share as compared to $0.5 million and $0.04 per diluted share for the same period in 2015. Changes in net income for the three months ended June 30, 2016 compared to June 30, 2015 include: (i) a $10.2 million or 49.8% increase in net interest income as a result of the increase in average interest earning assets reflecting assets acquired from CNB as well as organic growth in loans and securities; (ii) a $0.2 million or 28.6% increase in the provision for loan losses; (iii) a $1.8 million or 68.9% increase in non-interest income related to increases in customer fee income, net securities gains, BOLI income, and gains on sales of the guaranteed portion of Small Business Administration (“SBA”) loans; (iv) a decrease in non-interest expense of $1.6 million related to lower acquisition costs offset by higher operating costs associated with the acquired CNB operations and facilities, investments in technology, additional marketing costs, FDIC assessment, and amortization of CNB related intangible assets; and (v) a $4.9 million increase in income taxes associated with higher pre-tax income. The effective income tax rate was 34.5% for the quarter ended June 30, 2016 compared to a tax benefit for the same period last year.

Net income for the six months ended June 30, 2016 was $17.5 million and $0.99 per diluted share as compared to $5.2 million and $0.43 per diluted share for the same period in 2015. Changes in net income for the six months ended June 30, 2016 compared to June 30, 2015 include: (i) a $20.9 million or 53.4% increase in net interest income as a result of the increase in average interest earning assets reflecting assets acquired from CNB as well as organic growth in loans and securities; (ii) a $0.7 million or 43.3% increase in the provision for loan losses reflecting loan portfolio growth; (iii) a $3.0 million or 55.0% increase in non-interest income related to increases in customer fee income, net securities gains, BOLI income, and gains on sales of the guaranteed portion of SBA loans; (iv) an increase in non-interest expense of $4.0 million related to higher operating costs associated with the acquired CNB operations and facilities, investments in technology, additional marketing costs, FDIC assessment, and amortization of CNB related intangible assets partially offset by lower acquisition costs; and (v) a $6.9 million increase in income taxes associated with higher pre-tax income. The effective income tax rate was 34.7% for the six months ended June 30, 2016 compared to 31.3% for the same period last year.

### Analysis of Net Interest Income

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

The following table sets forth certain information relating to the Company’s average consolidated balance sheets and its consolidated statements of income for the periods indicated and reflect the average yield on assets and average cost of liabilities for those periods. 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, 2016 Average Balance | Interest | Average Yield/ Cost | 2015 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$2,497,858** | **$29,327** | **4.72%** | $1,543,555 | $18,605 | 4.83% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **741,752** | **3,648** | **1.98** | 510,941 | 2,468 | 1.94 |
| Taxable securities | **220,300** | **1,388** | **2.53** | 188,426 | 995 | 2.12 |
| Tax exempt securities (2) | **81,061** | **667** | **3.31** | 76,330 | 669 | 3.52 |
| Federal funds sold | **-** | **-** | **-** | 32 | - | - |
| Deposits with banks | **28,916** | **35** | **0.49** | 13,885 | 11 | 0.32 |
| Total interest earning assets | **3,569,887** | **35,065** | **3.95** | 2,333,169 | 22,748 | 3.91 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **66,512** |  |  | 56,001 |  |  |
| Other assets | **286,824** |  |  | 123,658 |  |  |
| Total assets | **$3,923,223** |  |  | $2,512,828 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$1,593,438** | **$1,289** | **0.33%** | $1,129,103 | $832 | 0.30% |
| Certificates of deposit of $100,000 or more | **125,993** | **116** | **0.37** | 95,120 | 217 | 0.92 |
| Other time deposits | **99,652** | **123** | **0.50** | 64,140 | 131 | 0.82 |
| Federal funds purchased and repurchase agreements | **182,240** | **293** | **0.65** | 108,764 | 92 | 0.34 |
| Federal Home Loan Bank advances | **335,696** | **844** | **1.01** | 134,459 | 339 | 1.01 |
| Subordinated Debentures | **78,409** | **1,135** | **5.82** | - | - | - |
| Junior Subordinated Debentures | **15,876** | **343** | **8.69** | 15,875 | 342 | 8.64 |
| Total interest bearing liabilities | **2,431,304** | **4,143** | **0.69** | 1,547,461 | 1,953 | 0.51 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,101,229** |  |  | 744,319 |  |  |
| Other liabilities | **37,066** |  |  | 15,933 |  |  |
| Total liabilities | **3,569,599** |  |  | 2,307,713 |  |  |
| Stockholders' equity | **353,624** |  |  | 205,115 |  |  |
| Total liabilities and stockholders' equity | **$3,923,223** |  |  | $2,512,828 |  |  |
| Net interest income (2) /interest rate spread (3) |  | **30,922** | **3.26%** |  | 20,795 | 3.40% |
| Net interest earning assets/net interest margin (4) | **$1,138,583** |  | **3.48%** | $785,708 |  | 3.57% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **146.83%** |  |  | 150.77% |
| Tax equivalent adjustment |  | **(332)** |  |  | (368) |  |
| Net interest income |  | **$30,590** |  |  | $20,427 |  |

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

(2) The above table is presented on a tax equivalent basis.

(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, 2016 Average Balance | Interest | Average Yield/ Cost | 2015 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1) (2) | **$2,460,678** | **$57,374** | **4.69%** | $1,447,309 | $35,207 | 4.91% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **739,457** | **7,497** | **2.04** | 502,270 | 5,035 | 2.02 |
| Taxable securities | **219,053** | **2,749** | **2.52** | 188,858 | 2,012 | 2.15 |
| Tax exempt securities (2) | **77,284** | **1,298** | **3.38** | 74,014 | 1,323 | 3.60 |
| Federal funds sold | **-** | **-** | **-** | 16 | - | - |
| Deposits with banks | **30,413** | **72** | **0.48** | 13,295 | 18 | 0.27 |
| Total interest earning assets | **3,526,885** | **68,990** | **3.93** | 2,225,762 | 43,595 | 3.95 |
| Non interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **63,212** |  |  | 50,876 |  |  |
| Other assets | **268,741** |  |  | 112,712 |  |  |
| Total assets | **$3,858,838** |  |  | $2,389,350 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$1,584,083** | **$2,567** | **0.33%** | $1,093,008 | $1,605 | 0.30% |
| Certificates of deposit of $100,000 or more | **141,435** | **331** | **0.47** | 89,381 | 407 | 0.92 |
| Other time deposits | **110,206** | **317** | **0.58** | 60,521 | 243 | 0.81 |
| Federal funds purchased and repurchase agreements | **144,498** | **478** | **0.67** | 114,942 | 238 | 0.42 |
| Federal Home Loan Bank advances | **311,671** | **1,671** | **1.08** | 110,207 | 589 | 1.08 |
| Subordinated Debentures | **78,392** | **2,270** | **5.82** | - | - | - |
| Junior Subordinated Debentures | **15,877** | **684** | **8.66** | 15,874 | 683 | 8.68 |
| Total interest bearing liabilities | **2,386,162** | **8,318** | **0.70** | 1,483,933 | 3,765 | 0.51 |
| Non interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,085,086** |  |  | 697,736 |  |  |
| Other liabilities | **37,128** |  |  | 15,161 |  |  |
| Total liabilities | **3,508,376** |  |  | 2,196,830 |  |  |
| Stockholders' equity | **350,462** |  |  | 192,520 |  |  |
| Total liabilities and stockholders' equity | **$3,858,838** |  |  | $2,389,350 |  |  |
| Net interest income (2) /interest rate spread (3) |  | **60,672** | **3.23%** |  | 39,830 | 3.44% |
| Net interest earning assets/net interest margin (4) | **$1,140,723** |  | **3.46%** | $741,829 |  | 3.61% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **147.81%** |  |  | 149.99% |
| Tax equivalent adjustment |  | **(650)** |  |  | (708) |  |
| Net interest income |  | **$60,022** |  |  | $39,122 |  |

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

(2) The above table is presented on a tax equivalent basis.

(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, 2016 Over 2015 Changes Due To Volume | Rate | Net Change | Six Months Ended June 30, 2016 Over 2015 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | $13,616 | $(2,894) | $10,722 | $26,819 | $(4,652) | $22,167 |
| Mortgage-backed securities, CMOs and other asset-backed securities | 1,128 | 52 | 1,180 | 2,412 | 50 | 2,462 |
| Taxable securities | 183 | 210 | 393 | 355 | 382 | 737 |
| Tax exempt securities (2) | 162 | (164) | (2) | 126 | (151) | (25) |
| Federal funds sold | - | - | - | - | - | - |
| Deposits with banks | 16 | 8 | 24 | 34 | 20 | 54 |
| Total interest earning assets | 15,105 | (2,788) | 12,317 | 29,746 | (4,351) | 25,395 |
| Interest expense on interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | 368 | 89 | 457 | 787 | 175 | 962 |
| Certificates of deposit of $100,000 or more | 333 | (434) | (101) | 396 | (472) | (76) |
| Other time deposits | 236 | (244) | (8) | 262 | (188) | 74 |
| Federal funds purchased and repurchase agreements | 86 | 115 | 201 | 72 | 168 | 240 |
| Federal Home Loan Bank Advances | 505 | - | 505 | 1,082 | - | 1,082 |
| Subordinated Debentures | 1,135 | - | 1,135 | 2,270 | - | 2,270 |
| Junior Subordinated Debentures | - | 1 | 1 | 1 | - | 1 |
| Total interest bearing liabilities | 2,663 | (473) | 2,190 | 4,870 | (317) | 4,553 |
| Net interest income (2) | $12,442 | $(2,315) | $10,127 | $24,876 | $(4,034) | $20,842 |

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

(2) The above table is presented on a tax equivalent basis.

### Analysis of Net Interest Income for the Three Months Ended June 30, 2016 and 2015

Net interest income was $30.6 million for the three months ended June 30, 2016 compared to $20.4 million for the three months ended June 30, 2015, an increase of $10.2 million or 49.8%. Total average interest earning assets increased $1.24 billion or 53.0%, for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 reflecting the acquired assets from CNB as well as organic growth in loans and securities. The yield on interest earning assets increased approximately 4 basis points to 3.95% for the 2016 second quarter from 3.91% for the 2015 second quarter. The cost of interest bearing liabilities increased approximately 18 basis points during the second quarter of 2016 to 0.69% compared to 0.51% for the second quarter of 2015. The overall funding cost for the 2016 second quarter was 0.47%, including demand deposits. Net interest margin decreased to 3.48% for the three months ended June 30, 2016, compared to 3.57% for the three months ended June 30, 2015 as a result of higher costs of borrowings associated with the $80 million in subordinated debentures issued in September 2015 and federal funds purchased and repurchase agreements.

Total interest income increased $12.3 million or 55.2% to $34.7 million for the three months ended June 30, 2016 from $22.4 million for the same period in 2015. Interest income on loans increased $10.7 million or 58.2% to $29.2 million for the three months ended June 30, 2016 from $18.5 million for the same period in 2015. The tax adjusted average yield on total loans was 4.72% for 2016 as compared to 4.83% in 2015. For the three months ended June 30, 2016, average net loans grew by $954.3 million or 61.8% to $2.50 billion as compared to $1.54 billion for the same period in 2015, driven by growth in commercial real estate mortgage loans, commercial, industrial and agricultural loans, and multi-family mortgage loans as a result of the CNB acquisition coupled with organic growth. The Bank remains committed to growing loans with prudent underwriting, sensible pricing and limited credit and extension risk.

Interest income on investments in asset-backed, taxable and tax exempt securities increased $1.4 million to $5.2 million for the three months ended June 30, 2016 compared to $3.8 million for the same period in 2015. Interest income on securities included net amortization of premiums of $1.7 million in the second quarter of 2016 compared to net amortization of premiums of $1.3 million for the same period in 2015. The tax adjusted average yield on total securities was 2.20% for the three months ended June 30, 2016, compared to 2.14% in 2015. For the three months ended June 30, 2016, average total investments in securities increased by $267.4 million or 34.5% to $1.04 billion as compared to $775.7 million for the three months ended June 30, 2015. Average interest earning cash increased by $15.0 million to $28.9 million for the three months ended June 30, 2016 as compared to $13.9 million for the same period in 2015.

Total interest expense increased to $4.1 million for the three months ended June 30, 2016 compared to $2.0 million for the same period in 2015. The increase for the three months ended June 30, 2016 is primarily a result of the increase in average interest bearing liabilities. Average total interest bearing liabilities were $2.43 billion for the three months ended June 30, 2016 compared to $1.55 billion for the same period in 2015 resulting from an increase of $530.7 million in interest bearing deposits, a $201.2 million increase in average FHLB advances and the issuance of $80.0 million of subordinated debentures in September 2015. The cost of total interest bearing liabilities increased to 0.69% for the 2016 second quarter compared to 0.51% for the prior year primarily due to the issuance of the subordinated debentures. Since the Company’s interest bearing liabilities generally reprice or mature more quickly than its interest earning assets, an increase in short term interest rates would initially result in a decrease in net interest income. Additionally, the large percentages of deposits in money market accounts reprice at short term market rates making the balance sheet more liability sensitive. The average cost of certificates of deposit has decreased from 2015 as a result of the runoff of higher cost acquired certificates of deposit. The Bank continues its prudent management of deposit pricing.

For the three months ended June 30, 2016, average total deposits increased by $887.6 million or 43.7% to $2.92 billion from $2.03 billion from the same period in 2015. Components of this increase include an increase in the average balances of savings, NOW and money market accounts of $464.3 million or 41.1% to $1.59 billion for the three months ended June 30, 2016 compared to $1.13 billion for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits increased $66.3 million to $225.6 million for 2016 as compared to $159.3 million for the same period last year. Average balances in demand deposits increased $356.9 million or 48.0% to $1.10 billion for 2016 as compared to $744.3 million for the same period last year. The Bank grew deposits as a result of the acquisition of CNB as well as building new relationships in existing and new markets. Average public fund deposits comprised 19.1% of total average deposits during the three months ended June 30, 2016 and 17.0% of total average deposits for the same period in 2015. Average federal funds purchased and repurchase agreements increased $73.4 million or 67.6% to $182.2 million for the three months ended June 30, 2016 compared to $108.8 million for the same period in the prior year. Average FHLB advances increased $201.2 million or 149.7% to $335.7 million for the three months ended June 30, 2016 compared to $134.5 million for the same period in 2015.

### Analysis of Net Interest Income for the Six Months ended June 30, 2016 and 2015

Net interest income was $60.0 million for the six months ended June 30, 2016 compared to $39.1 million for the six months ended June 30, 2015, an increase of $20.9 million or 53.4%. Total average interest earning assets increased $1.30 billion or 58.5%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 reflecting the acquired assets from CNB as well as organic growth in loans and securities. The yield on interest earning assets decreased approximately 2 basis points to 3.93% for 2016 from 3.95% for 2015. The cost of interest bearing liabilities increased approximately 19 basis points during 2016 to 0.70% compared to 0.51% for 2015. The overall funding cost for the six months ended June 30, 2016 was 0.48%, including demand deposits. Net interest margin decreased to 3.46% for 2016, compared to 3.61% for 2015 as a result of higher costs of borrowings associated with the $80 million in subordinated debentures issued in September 2015 and federal funds purchased and repurchase agreements.

Total interest income increased $25.4 million or 59.3% to $68.3 million for the six months ended June 30, 2016 from $42.9 million for the same period in 2015. Interest income on loans increased $22.2 million or 63.5% to $57.2 million for 2016 from $35.0 million for 2015. The tax adjusted average yield on total loans was 4.69% for 2016 as compared to 4.91% in 2015. For the six months ended June 30, 2016, average net loans grew by $1.01 billion or 70.0% to $2.46 billion as compared to $1.45 billion for the same period in 2015, driven by growth in commercial real estate mortgage loans, commercial, industrial and agricultural loans, and multi-family mortgage loans as a result of the CNB acquisition coupled with organic growth.

Interest income on investments in asset-backed, taxable and tax exempt securities increased $2.8 million to $10.5 million for the six months ended June 30, 2016 compared to $7.7 million for the same period in 2015. Interest income on securities included net amortization of premiums of $3.2 million for 2016 compared to net amortization of premiums of $2.3 million for 2015. The tax adjusted average yield on total securities was 2.24% for 2016, compared to 2.21% in 2015. For the six months ended June 30, 2016, average total investments in securities increased by $270.7 million or 35.4% to $1.04 billion as compared to $765.1 million for the six months ended June 30, 2015. Average interest earning cash increased by $17.1 million to $30.4 million for the six months ended June 30, 2016 as compared to $13.3 million for the same period in 2015.

Total interest expense increased to $8.3 million for the six months ended June 30, 2016 compared to $3.8 million for the same period in 2015. The increase for the six months ended June 30, 2016 is primarily a result of the increase in average interest bearing liabilities. Average total interest bearing liabilities were $2.39 billion for the six months ended June 30, 2016 compared to $1.48 billion for the same period in 2015 resulting from an increase of $592.8 million in interest bearing deposits, a $201.5 million increase in average FHLB advances and the issuance of $80.0 million of subordinated debentures in September 2015. The cost of total interest bearing liabilities increased to 0.70% for 2016 compared to 0.51% for the prior year primarily due to the issuance of the subordinated debentures.

For the six months ended June 30, 2016, average total deposits increased by $980.2 million or 50.5% to $2.92 billion from $1.94 billion for the same period in 2015. Components of this increase include an increase in the average balances of savings, NOW and money market accounts of $491.1 million or 44.9% to $1.58 billion for the six months ended June 30, 2016 compared to $1.09 billion for the same period last year. Average balances in certificates of deposit of $100,000 or more and other time deposits increased $101.7 million or 67.9% to $251.6 million for 2016 as compared to $149.9 million for the same period last year. Average balances in demand deposits increased $387.4 million or 55.5% to $1.09 billion for 2016 as compared to $697.7 million for the same period last year. The Bank grew deposits as a result of the acquisition of CNB as well as building new relationships in existing and new markets. Average public fund deposits comprised 18.5% of total average deposits during 2016 and 18.2% of total average deposits in 2015. Average federal funds purchased and repurchase agreements increased $29.6 million or 25.7% to $144.5 million for the six months ended June 30, 2016 compared to $114.9 million for the same period in the prior year. Average FHLB advances increased $201.5 million to $311.7 million for the six months ended June 30, 2016 compared to $110.2 million for the same period in 2015.

### Provision and Allowance for Loan Losses

The Bank’s loan portfolio consists primarily of real estate loans secured by commercial and residential real estate properties located in the Bank’s principal lending areas of Nassau and Suffolk Counties, Long Island. 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 our 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 $0.9 million and $2.2 million was recorded during the three and six months ended June 30, 2016, respectively, compared to a provision for loan losses of $0.7 million and $1.5 million, respectively, during the same periods in 2015. There was a net recovery of $9,000 for the quarter ended June 30, 2016 compared to net charge-offs of $0.1 million for the quarter ended June 30, 2015. Net charge-offs were $0.2 million for the six months ended June 30, 2016 compared to $0.3 million for the six months ended June 30, 2015. The ratio of allowance for loan losses to nonaccrual loans was 1,108%, 1,537% and 954%, at June 30, 2016, December 31, 2015, and June 30, 2015, respectively. The allowance for loan losses increased to $22.7 million at June 30, 2016 as compared to $20.7 million at December 31, 2015 and $18.8 million at June 30, 2015. As a percentage of total loans the allowance was 0.90% at June 30, 2016 compared to 0.86% at December 31, 2015 and 0.83% at June 30, 2015. In accordance with current accounting guidance, the acquired CNB loans were recorded at fair value as of acquisition, effectively netting estimated future losses against the loan balances. Management continues to carefully monitor the loan portfolio as well as real estate trends in Nassau and Suffolk Counties.

Loans of approximately $19.9 million or 0.8% of total loans at June 30, 2016 were categorized as classified loans compared to $26.9 million or 1.1% at December 31, 2015 and $25.1 million or 1.1% at June 30, 2015. 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 as 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 on at least a quarterly basis. At June 30, 2016, classified loans included $0.3 million of acquired FNBNY loans and $4.3 million of acquired CNB loans. At December 31, 2015, classified loans included $0.3 million of acquired FNBNY loans and $9.6 million of acquired CNB loans.

At June 30, 2016, approximately $8.7 million of classified loans were commercial real estate (“CRE”) loans, including multi-family loans, and were well secured with real estate as collateral. Of the $8.7 million of CRE loans, $6.0 million were current and $2.7 million were past due. In addition, all the CRE loans have personal guarantees. At June 30, 2016, approximately $3.6 million of classified loans were residential real estate loans with $2.2 million current and $1.4 million past due. Commercial, industrial, and agricultural loans represented $7.1 million of classified loans, with $0.3 million past due and $6.8 million current. There was $0.3 million of real estate construction and land loans considered classified, all of which was current. All real estate construction and land loans are well secured with collateral. The remaining $0.1 million in classified loans are consumer loans that are unsecured and demonstrate sufficient cash flow to pay the loans.

CRE loans, including multi-family loans, represented $1.44 billion or 57.3% of the total loan portfolio at June 30, 2016 compared to $1.35 billion or 56.1% at December 31, 2015 and $1.25 billion or 55.3% at June 30, 2015. The Bank’s underwriting standards for CRE loans requires 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, 2016 and December 31, 2015, the Company had impaired loans as defined by FASB ASC No. 310, “Receivables” of $4.1 million and $2.6 million, respectively. For a loan to be considered impaired, management determines after review whether it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management applies its normal loan review procedures in making these judgments. Impaired loans include individually classified nonaccrual loans and troubled debt restructured loans. For impaired loans, the Bank evaluates the impairment of the loan in accordance with FASB ASC 310-10-35-22. Impairment is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate. For loans that are collateral dependent, the fair value of the collateral is used to determine the fair value of the loan. The fair value of the collateral is determined based upon recent appraised values. The fair value of the collateral or present value of expected cash flows is compared to the carrying value to determine if any write-down or specific loan loss allowance allocation is required. These methods of fair value measurement for impaired loans are considered Level 3 within the fair value hierarchy described in FASB ASC 820-10-50-5.

Nonaccrual loans were $2.1 million or 0.08% of total loans at June 30, 2016 and $1.4 million or 0.06% of total loans at December 31, 2015. Approximately $0.1 million of the nonaccrual loans at June 30, 2016 and December 31, 2015, represent troubled debt restructured loans.

The Bank had no other real estate owned at June 30, 2016 and $0.3 million at December 31, 2015.

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

*(In thousands)*

|  | Six Months Ended June 30, 2016 | June 30, 2015 |
| --- | ---: | ---: |
| Allowance for loan losses balance at beginning of period | **$20,744** | $17,637 |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **-** | - |
| Multi-family mortgage loans | **-** | - |
| Residential real estate mortgage loans | **-** | - |
| Commercial, industrial and agricultural loans | **(297)** | (530) |
| Real estate construction and land loans | **-** | - |
| Installment/consumer loans | **(2)** | (2) |
| Total | **(299)** | (532) |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **100** | - |
| Multi-family mortgage loans | **-** | - |
| Residential real estate mortgage loans | **2** | 78 |
| Commercial, industrial and agricultural loans | **7** | 130 |
| Real estate construction and land loans | **-** | - |
| Installment/consumer loans | **4** | 5 |
| Total | **113** | 213 |
| Net charge-offs | **(186)** | (319) |
| Provision for loan losses charged to operations | **2,150** | 1,500 |
| Allowance for loan losses balance at end of period | **$22,708** | $18,818 |

#### Allocation of Allowance for Loan Losses

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

*(Dollars in thousands)*

|  | June 30, 2016 Amount | Percentage of Loans to Total Loans | December 31, 2015 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$7,632** | **40.4%** | $7,850 | 43.8% |
| Multi-family loans | **5,287** | **16.9** | 4,208 | 14.6 |
| Residential real estate mortgage loans | **2,753** | **17.9** | 2,115 | 16.3 |
| Commercial, industrial & agricultural loans | **5,771** | **20.3** | 5,405 | 20.8 |
| Real estate construction and land loans | **1,131** | **3.8** | 1,030 | 3.8 |
| Installment/consumer loans | **134** | **0.7** | 136 | 0.7 |
| Total | **$22,708** | **100.0%** | $20,744 | 100.0% |

### Non-Interest Income

Total non-interest income increased $1.8 million to $4.3 million for the three months ended June 30, 2016 compared to $2.5 million for the same period in 2015. The increase primarily reflects an increase in customer fee income of $0.4 million, net securities gains of $0.4 million, an increase in BOLI income of $0.2 million and gains on sales of the guaranteed portion of SBA loans of $0.3 million.

Total non-interest income increased $3.0 million or 55.0% to $8.3 million for the six months ended June 30, 2016 compared to $5.3 million for the same period in 2015. The increase primarily reflects an increase in customer fee income of $1.0 million, net securities gains of $0.5 million, an increase in BOLI income of $0.3 million, gains on sales of the guaranteed portion of SBA loans of $0.5 million and a net recovery associated with certain identified FNBNY acquired problem loans.

### Non-Interest Expense

Total non-interest expense decreased $1.6 million or 7.2% to $20.4 million during the three months ended June 30, 2016 compared to $22.0 million over the same period in 2015. The decrease was primarily related to acquisition costs of $8.2 million in 2015, offset by increases in all other expense categories. Salaries and benefits increased $3.0 million to $10.6 million for the three months ended June 30, 2016 compared to $7.6 million for the same period in 2015. Occupancy and equipment increased $1.0 million to $3.3 million for the 2016 second quarter compared to $2.3 million for the same period in 2015. Technology and communications increased to $1.3 million for the 2016 second quarter from $0.8 million for the same period in the prior year. Marketing and advertising increased to $1.2 million compared to $0.9 million for the same period in 2015. Professional services increased $0.4 million to $1.0 million for the three months ended June 30, 2016 compared to $0.6 million for the same period in 2015. FDIC assessments increased $0.2 million to $0.5 million for the three months ended June 30, 2016. Additionally, amortization of other intangible assets and other operating expenses increased $0.6 million and $0.4 million, respectively, to $0.7 million and $1.8 million, respectively, for the three months ended June 30, 2016.

Total non-interest expense increased $4.0 million or 11.3% to $39.3 million during the six months ended June 30, 2016 compared to $35.3 million over the same period in 2015. Salaries and employee benefits increased $6.1 million or 40.3% to $21.2 million for the six months ended June 30, 2016 from $15.1 million for the same period in 2015. Occupancy and equipment expense increased $1.7 million to $6.2 million for the six months ended June 30, 2016 as compared to $4.5 million for the same period last year. Amortization of other intangible assets and professional services increased $1.2 million and $0.9 million, respectively, for the six months ended June 30, 2016 to $1.3 million and $2.0 million, respectively, as compared to $0.1 million and $1.1 million, respectively, for the same period last year. Technology and communications increased to $2.4 million for the six months ended June 30, 2016 from $1.6 million for the same period the prior year. Marketing and advertising increased to $2.0 million for the six months ended June 30, 2016 from $1.4 million for the same period in 2015. FDIC assessments increased $0.4 million to $1.0 million for the six months ended June 30, 2016 compared to the same period last year. Other operating expenses increased $0.9 million for the six months ended June 30, 2016 to $3.5 million as compared to $2.6 million for the six months ended June 30, 2015. These increases were offset by a decrease in acquisition costs of $8.6 million for the six months ended June 30, 2016 compared to the same period in 2015.

The above mentioned increases in non-interest expense for the three and six months ended June 30, 2016 compared to the same periods in 2015 are primarily related to higher operating costs associated with the acquired CNB operations and facilities, investments in technology, additional marketing costs, higher FDIC assessment resulting from the larger deposit base, and amortization of CNB related intangible assets.

### Income Taxes

The provision for income taxes increased $4.9 million to $4.7 million for the three months ended June 30, 2016 compared to a net income tax benefit of $0.2 million for the three months ended June 30, 2015. The tax benefit was the result of changes in New York City income tax law associated with New York City tax legislation signed into law on April 13, 2015, and effective January 1, 2015, which largely conformed New York City banking income tax laws with the New York State legislation enacted in 2014. The impact of this change in tax law was to establish and recognize additional deferred tax assets of $0.4 million. The effective tax rate for the three months ended June 30, 2016 was 34.5% compared to a tax benefit for the same period last year.

The provision for income taxes was $9.3 million for the six months ended June 30, 2016 compared to $2.4 million for the same period last year. The effective tax rate for the six months ended June 30, 2016 increased to 34.7% from 31.3% for the same period last year. The increase in the effective rate for 2016 was a result of lower pre-tax income and the tax benefit associated with the change in New York City tax law recognized in 2015.

### Financial Condition

Total assets of the Company at June 30, 2016 decreased $38.7 million to $3.74 billion at June 30, 2016 compared to December 31, 2015. Cash and due from banks decreased $29.2 million. Total securities decreased $159.4 million or 15.8% to $849.1 million and net loans increased $112.2 million or 4.7% to $2.50 billion compared to December 31, 2015. BOLI increased $30.8 million to $84.1 million at June 30, 2016. Total deposits increased $10.0 million to $2.85 billion at June 30, 2016 compared to $2.84 billion at December 31, 2015. Demand deposits decreased $44.9 million to $1.11 billion as of June 30, 2016 compared to $1.16 billion at December 31, 2015. Savings, NOW and money market deposits increased $157.3 million to $1.55 billion at June 30, 2016 from $1.39 billion at December 31, 2015. Certificates of deposit of $100,000 or more decreased $66.3 million to $101.5 million at June 30, 2016, from $167.8 million at December 31, 2015. Other time deposits decreased $36.2 million to $88.9 million at June 30, 2016, from $125.1 million at December 31, 2015. Federal funds purchased were $150.0 million at June 30, 2016 compared to $120.0 million at December 31, 2015. Federal Home Loan Bank advances were $198.8 million at June 30, 2016 compared to $297.5 million at December 31, 2015. The decrease in total assets from December 31, 2015 reflects the Company’s execution of a strategy to deleverage the balance sheet. During the second quarter the Company sold $235.7 million of lower yielding securities and paid down $85.3 million of borrowings and funded the run off of $67.4 million in acquired high rate certificates of deposit, $43.7 million in loan growth and $30.0 million in additional BOLI.

Stockholders’ equity was $358.1 million at June 30, 2016, an increase of $17.0 million or 5.0% from December 31, 2015, reflecting net income of $17.5 million, a $6.0 million increase in other comprehensive income primarily related to the decrease in the unrealized loss on available for sale securities and $1.1 million related to stock based compensation plans, partially offset by $8.1 million in dividends. In July 2016, 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 earnings enhancement opportunities for Company growth. 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, deposit withdrawals either on demand or 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 Holding Company’s principal sources of liquidity included cash and cash equivalents of $0.7 million as of June 30, 2016, and dividends 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, 2016, the Bank did not pay a cash dividend 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, 2016, the Bank has $47.2 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 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 upon 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 Federal Home Loan Bank and Federal Reserve Bank, growth in core deposits and sources of wholesale funding such as brokered certificates of deposit. 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, 2016, the Bank had aggregate lines of credit of $295.0 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $275.0 million is available on an unsecured basis. As of June 30, 2016, the Bank had $150.0 million in 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, 2016, the Bank had $40.0 million outstanding in FHLB overnight borrowings and $158.8 million outstanding in FHLB term borrowings. As of December 31, 2015, the Bank had $120.0 million in overnight borrowings outstanding, nothing outstanding in FHLB overnight borrowings and $297.5 million outstanding in FHLB term borrowings. As of June 30, 2016 and December 31, 2015, the Bank had $50.0 million of securities sold under agreements to repurchase outstanding with brokers and $0.9 million outstanding with customers. In addition, the Bank has approved broker relationships for the purpose of issuing brokered deposits. As of June 30, 2016, the Bank had $18.4 million outstanding in brokered certificates of deposit and $98.6 million outstanding in brokered money market accounts. As of December 31, 2015, the Bank had $22.4 million outstanding in brokered certificates of deposit and $148.0 million outstanding in brokered money market accounts.

Management continually monitors the liquidity position and believes that sufficient liquidity exists to meet all of our operating requirements. Based on the objectives determined by the Asset and Liability Committee, the Bank’s liquidity levels may be affected by the use of short term and wholesale borrowings, and the amount of public funds in the deposit mix. The Asset and Liability Committee is comprised of members of senior management and the Board. Excess short-term liquidity is invested in overnight federal funds sold or in an interest earning account at the Federal Reserve.

### 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 and 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 follows. The Company and the Bank met all capital adequacy requirements at June 30, 2016.

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 upon common equity tier 1 capital ("CET1"); b) 6.0% based upon tier 1 capital; and c) 8.0% based upon 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 upon CET1; b) 8.5% based upon tier 1 capital; and c) 10.5% based upon 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, 2016 the most recent notification from the Federal Deposit Insurance Corporation 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 and Tier 1 leverage ratios as set forth in the table below. Since that notification, there are no conditions or events that management believes have changed the institution’s category.

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at June 30, 2016 and December 31, 2015.

*(Dollars in thousands)*

| As of June 30, 2016 Common Equity Tier 1 Capital to Risk Weighted Assets: | Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Consolidated** | **$252,814** | **9.1%** | **$125,440** | **4.5%** | **n/a** | **n/a** |
| **Bank** | **346,488** | **12.4** | **125,428** | **4.5** | **$181,173** | **6.5%** |
| **Total Capital to Risk Weighted Assets:** |  |  |  |  |  |  |
| **Consolidated** | **371,392** | **13.3** | **223,004** | **8.0** | **n/a** | **n/a** |
| **Bank** | **369,472** | **13.3** | **222,983** | **8.0** | **278,728** | **10.0** |
| **Tier 1 Capital to Risk Weighted Assets:** |  |  |  |  |  |  |
| **Consolidated** | **268,408** | **9.6** | **167,253** | **6.0** | **n/a** | **n/a** |
| **Bank** | **346,488** | **12.4** | **167,237** | **6.0** | **222,983** | **8.0** |
| **Tier 1 Capital to Average Assets:** |  |  |  |  |  |  |
| **Consolidated** | **268,408** | **7.0** | **152,725** | **4.0** | **n/a** | **n/a** |
| **Bank** | **346,488** | **9.1** | **152,722** | **4.0** | **190,902** | **5.0** |

50

*(Dollars in thousands)*

| As of December 31, 2015 Common Equity Tier 1 Capital to Risk Weighted Assets: | Actual Capital Amount | Ratio | Minimum Capital Adequacy Requirement Amount | Ratio | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $249,921 | 9.3% | $121,074 | 4.5% | n/a | n/a |
| Bank | 319,351 | 11.9 | 121,074 | 4.5 | $174,884 | 6.5% |
| Total Capital to Risk Weighted Assets: |  |  |  |  |  |  |
| Consolidated | 366,393 | 13.6 | 215,243 | 8.0 | n/a | n/a |
| Bank | 340,371 | 12.7 | 215,242 | 8.0 | 269,053 | 10.0 |
| Tier 1 Capital to Risk Weighted Assets: |  |  |  |  |  |  |
| Consolidated | 265,373 | 9.9 | 161,432 | 6.0 | n/a | n/a |
| Bank | 319,351 | 11.9 | 161,432 | 6.0 | 215,242 | 8.0 |
| Tier 1 Capital to Average Assets: |  |  |  |  |  |  |
| Consolidated | 265,373 | 7.6 | 140,490 | 4.0 | n/a | n/a |
| Bank | 319,351 | 9.1 | 140,492 | 4.0 | 175,615 | 5.0 |

### Impact of Inflation and Changing Prices

The Unaudited Consolidated Financial Statements and notes thereto have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Changes in interest rates could adversely affect our results of operations and financial condition. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of goods and services. Interest rates are highly sensitive to many factors, which are beyond the control of the Company, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Bank.

### Recent Regulatory and Accounting Developments

Refer to Note 15. “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, 7,238 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, 2016, $784.0 million or 92.3% of the Company’s securities had fixed 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 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 to 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 seasonality of the Company’s deposit flows and 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 a 100 and 200 basis point upward shift 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, 2016:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | Potential Change in Future Net Interest Income $ Change | % Change |
| ---: | ---: | ---: |
| 200 | **$(4,516)** | **(4.11)%** |
| 100 | **$(2,048)** | **(1.87)%** |
| Static | **-** | **-** |
| (100) | **$567** | **0.52%** |

As noted in the table above, a 200 basis point increase in interest rates is projected to decrease net interest income over the next twelve months by 4.11 percent. Our balance sheet sensitivity to such a move in interest rates at June 30, 2016 decreased as compared to June 30, 2015 (which was a decrease of 5.12 percent in net interest income over a 12 month period). This decrease is due to several factors which reflect our strategy to lessen our exposure to rising rates. Over the intervening year, the effective duration (a measure of price sensitivity to interest rates) of the bond portfolio decreased from 3.73 to 2.90. Additionally, the bank has increased its use of swaps to extend liabilities.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon 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 upon 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, 2016. 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, 250 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, 2015 and Quarterly Report on Form 10-Q for the three months ended March 31, 2016.

Filed Aug 8, 2016.
Source: SEC EDGAR, the filing index for accession 0001571049-16-017227. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.