# Dime Commercial Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [Dime Commercial Bancshares, Inc.](/companies/dcom.md) (CIK 846617)
- Form: 10-Q
- Filed: 2017-05-09
- Accepted by EDGAR: May 9, 2017, 08:58 ET
- Period: 2017-03-31
- Accession: 0001571049-17-004694
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/846617/000157104917004694/t1701364_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/846617/000157104917004694/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $4.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $9.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.47 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.47 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 19,296,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | $9.5m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $809.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2017-01-01 to 2017-03-31 | $4.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2017-03-31 | $71.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2017-03-31 | $4.06bn | us-gaap:Assets |
| Total liabilities | at 2017-03-31 | $3.64bn | us-gaap:Liabilities |
| Shareholders' equity | at 2017-03-31 | $429.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,585 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 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 Federal Deposit Insurance Corporation (“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, 2016. 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, 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 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

Federally chartered in 1910, the Bank was founded by local farmers and merchants and now operates forty-three branches in its primary market areas of Suffolk and Nassau Counties on Long Island and the New York City boroughs, including forty-one in Suffolk and Nassau Counties, one 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 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 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 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

#### Redemption of Junior Subordinated Debentures

On December 15, 2016, the Company notified holders of the TPS of the full redemption of the TPS on January 18, 2017. The redemption price equaled the liquidation amount, plus accrued but unpaid interest until but not including the redemption date. TPS not converted into shares of the Company’s common stock on or prior to January 17, 2017 were redeemed as of January 18, 2017. 15,450 shares of TPS with a liquidation amount of $15.5 million were converted into 532,740 shares of the Company’s common stock. The remaining 350 shares of TPS with a liquidation amount of $350,000 were redeemed on January 18, 2017.

#### Public Offering of Common Stock

On November 28, 2016, the Company completed a public offering of common stock wherein the Company sold 1,613,000 shares of common stock at a price of $31.00 per share, for gross proceeds of approximately $50.0 million. No shares were sold pursuant to the option granted to the underwriters. The net proceeds of the offering, after deducting underwriting discounts and commissions and offering expenses, were approximately $47.5 million. The purpose of the offering was in part to provide additional capital to Bridge Bancorp to support organic growth, the pursuit of strategic acquisition opportunities and other general corporate purposes, including contributing capital to the Bank.

#### Quarterly Highlights

- Net income for the first quarter of 2017 was $9.2 million and $0.47 per diluted share, compared to $8.6 million and $0.49 per diluted share for the first quarter of 2016.
- Net interest income increased to $30.5 million for the first quarter of 2017 compared to $29.4 million in 2016.
- Net interest margin was 3.39% the first quarter of 2017 compared to 3.43% for the 2016 period.
- Loans held for investment at March 31, 2017 totaled $2.66 billion, an increase of $57.1 million or 2.2% over December 31, 2016 and $176.3 million or 7.1% over March 31, 2016.
- Total assets of $4.06 billion at March 31, 2017, increased $10.4 million compared to December 31, 2016 and $151.4 million compared to March 31, 2016.
- Deposits of $2.98 billion at March 31, 2017, increased $56.9 million over December 31, 2016 and $42.5 million compared to March 31, 2016.
- Allowance for loan losses was 1.00% of loans at March 31, 2017 and December 31, 2016.
- A cash dividend of $0.23 per share was declared in April 2017 for the first quarter.

#### Challenges and Opportunities

In March 2017, the Federal Reserve increased the federal funds target rate 25 basis points to a target range of 75 to 100 basis points. The Federal Open Market Committee’s (“FOMC”) stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a 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 objectives of maximum employment and two percent inflation. The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the FOMC’s holdings of longer-term securities at sizeable levels, should help maintain accommodative financial conditions.

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 thirteen new branches, including 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 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. Pending acquisitions of local competitors may also provide additional growth opportunities.

Although the turmoil in the financial markets has subsided somewhat since the Presidential election in the middle of the fourth quarter, market uncertainty still exists. 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 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 deposits and loans, and generating higher levels of revenue and income.

Corporate objectives for 2017 include: expanding the branch network through de novo branch openings; leveraging the Bank’s 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. 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. 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 March 31, 2017 was $9.2 million and $0.47 per diluted share as compared to $8.6 million and $0.49 per diluted share for the same period in 2016. Changes in net income for the three months ended March 31, 2017 compared to March 31, 2016 include: (i) a $1.0 million or 3.5% increase in net interest income; (ii) a $0.5 million or 36.0% decrease in the provision for loan losses; (iii) a $0.1 million or 3.2% increase in non-interest income; (iv) a $1.4 million or 7.3% increase in non-interest expense; and (v) a $0.3 million or 7.1% decrease in income taxes.

#### 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. 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 March 31, 2017 Average Balance | Interest | Average Yield/ Cost | 2016 Average Balance | Interest | Average Yield/ Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2) | **$2,587,999** | **$29,478** | **4.62%** | $2,423,498 | $28,047 | 4.65% |
| Mortgage-backed securities, CMOs and other asset-backed securities | **749,521** | **3,817** | **2.07** | 737,161 | 3,849 | 2.10 |
| Taxable securities | **227,537** | **1,499** | **2.67** | 217,806 | 1,361 | 2.51 |
| Tax exempt securities (2) | **94,472** | **724** | **3.11** | 73,507 | 631 | 3.45 |
| Deposits with banks | **21,411** | **46** | **0.87** | 31,911 | 37 | 0.47 |
| Total interest earning assets (2) | **3,680,940** | **35,564** | **3.92** | 3,483,883 | 33,925 | 3.92 |
| Non-interest earning assets: |  |  |  |  |  |  |
| Cash and due from banks | **66,316** |  |  | 59,913 |  |  |
| Other assets | **280,511** |  |  | 250,657 |  |  |
| Total assets | **$4,027,767** |  |  | $3,794,453 |  |  |
| Interest bearing liabilities: |  |  |  |  |  |  |
| Savings, NOW and money market deposits | **$1,634,627** | **$1,551** | **0.38%** | $1,574,728 | $1,278 | 0.33% |
| Certificates of deposit of $100,000 or more | **128,042** | **379** | **1.20** | 156,876 | 215 | 0.55 |
| Other time deposits | **79,334** | **178** | **0.91** | 120,760 | 194 | 0.65 |
| Federal funds purchased and repurchase agreements | **143,565** | **316** | **0.89** | 106,757 | 185 | 0.70 |
| Federal Home Loan Bank advances | **404,252** | **1,149** | **1.15** | 287,646 | 827 | 1.16 |
| Subordinated debentures | **78,514** | **1,135** | **5.86** | 78,374 | 1,135 | 5.82 |
| Junior subordinated debentures | **2,710** | **48** | **7.18** | 15,878 | 341 | 8.64 |
| Total interest bearing liabilities | **2,471,044** | **4,756** | **0.78** | 2,341,019 | 4,175 | 0.72 |
| Non-interest bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | **1,094,786** |  |  | 1,068,944 |  |  |
| Other liabilities | **30,464** |  |  | 37,191 |  |  |
| Total liabilities | **3,596,294** |  |  | 3,447,154 |  |  |
| Stockholders' equity | **431,473** |  |  | 347,299 |  |  |
| Total liabilities and stockholders' equity | **$4,027,767** |  |  | $3,794,453 |  |  |
| Net interest income/interest rate spread (2)(3) |  | **30,808** | **3.14%** |  | 29,750 | 3.20% |
| Net interest earning assets/net interest margin (2)(4) | **$1,209,896** |  | **3.39%** | $1,142,864 |  | 3.43% |
| Ratio of interest earning assets to interest bearing liabilities |  |  | **148.96%** |  |  | 148.82% |
| Tax equivalent adjustment |  | **(347)** |  |  | (318) |  |
| Net interest income |  | **$30,461** |  |  | $29,432 |  |

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

(2) 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 March 31, 2017 Over 2016 Changes Due To Volume | Rate | Net Change |
| --- | ---: | ---: | ---: |
| Loans, net (1)(2) | $2,635 | $(1,204) | $1,431 |
| Mortgage-backed securities, CMOs and other asset-backed securities | 222 | (254) | (32) |
| Taxable securities | 57 | 81 | 138 |
| Tax exempt securities (2) | 441 | (348) | 93 |
| Deposits with banks | (69) | 78 | 9 |
| Total interest income on interest earning assets | 3,286 | (1,647) | 1,639 |
| Interest expense on interest bearing liabilities: |  |  |  |
| Savings, NOW and money market deposits | 55 | 218 | 273 |
| Certificates of deposit of $100,000 or more | (252) | 416 | 164 |
| Other time deposits | (297) | 281 | (16) |
| Federal funds purchased and repurchase agreements | 73 | 58 | 131 |
| Federal Home Loan Bank advances | 372 | (50) | 322 |
| Subordinated debentures | - | - | - |
| Junior subordinated debentures | (243) | (50) | (293) |
| Total interest expense on interest bearing liabilities | (292) | 873 | 581 |
| Net interest income | $3,578 | $(2,520) | $1,058 |

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

(2) Presented on a tax equivalent basis.

#### Analysis of Net Interest Income for the Three Months Ended March 31, 2017 and 2016

Net interest income was $30.5 million for the three months ended March 31, 2017 compared to $29.4 million for the three months ended March 31, 2016. Average net interest earning assets increased $67.0 million to $1.21 billion for the three months ended March 31, 2017 compared to $1.14 billion for the three months ended March 31, 2016. The increase in average net interest earning assets reflects organic growth in loans and securities partially offset by an increase in average deposits and borrowings. The net interest margin decreased to 3.39% for the three months ended March 31, 2017 compared to 3.43% for the three months ended March 31, 2016. The decrease in the net interest margin for 2017 compared to 2016 reflects the higher overall funding costs due in part to the Fed Funds rate increases in December 2016 and March 2017 partially offset by the decrease in costs associated with the junior subordinated debentures which were redeemed in January 2017.

Interest income increased $1.6 million or 4.8% to $35.2 million for the three months ended March 31, 2017 from $33.6 million for the same period in 2016 as average interest earning assets increased $197.1 million or 5.7% to $3.68 billion for the three months ended March 31, 2017 compared to $3.48 billion for the same period in 2016. The increase in average interest earning assets for the three months ended March 31, 2017 compared to 2016 reflects organic growth in loans and securities. The tax adjusted average yield on interest earning assets was 3.92% for the quarter ended March 31, 2017 and March 31, 2016.

Interest income on loans increased $1.4 million to $29.4 million for the three months ended March 31, 2017 over 2016, primarily due to growth in the loan portfolio. For the three months ended March 31, 2017, average loans grew by $164.5 million or 6.8% to $2.59 billion as compared to $2.42 billion for the same period in 2016. The increase in average loans was the result of organic growth in multi-family mortgage loans, commercial real estate mortgage loans, and commercial and industrial loans partially offset by a decrease in residential mortgage loans. The tax adjusted yield on average loans was 4.62% for the first quarter of 2017 and 4.65% for the same period in 2016. The Bank remains committed to growing loans with prudent underwriting, sensible pricing and limited credit and extension risk.

Interest income on investment securities was $5.8 million for the three months ended March 31, 2017 and $5.6 million for the three months ended March 31, 2016. Interest income on securities included net amortization of premiums on securities of $1.7 million for the three months ended March 31, 2017 compared to $1.5 million for the same period in 2016. For the three months ended March 31, 2017, average total investments increased by $43.1 million or 4.2% to $1.07 billion as compared to $1.03 billion for the same period in 2016. The tax adjusted average yield on total securities was 2.29% for the three months ended March 31, 2017 and 2.28% for the three months ended March 31, 2016.

Total interest expense increased to $4.8 million for the three months ended March 31, 2017 as compared to $4.2 million for the same period in 2016. The increase in interest expense for the three months ended March 31, 2017 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 0.78% for the three months ended March 31, 2017 and 0.72% for the three months ended March 31, 2016. 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 December 2016 and March 2017 partially offset by the decrease in costs associated with the junior subordinated debentures which were redeemed in January 2017. 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. 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 $130.0 million or 5.6% to $2.47 billion for the three months ended March 31, 2017 compared to $2.34 billion for the same period in 2016 due to increases in both average borrowings and average deposits.

For the three months ended March 31, 2017, average total deposits increased by $15.5 million to $2.94 billion as compared to average total deposits of $2.92 billion for the three months ended March 31, 2016 due to increases in average savings, NOW and money market accounts and demand deposits offset by decreases in certificates of deposit. The average balance of savings, NOW and money market accounts increased $59.9 million or 3.8% to $1.63 billion for the three months ended March 31, 2017 compared to $1.57 billion for the three months ended March 31, 2016. The cost of average savings, NOW and money market deposits was 0.38% for the 2017 first quarter compared to 0.33% for the 2016 first quarter. Average demand deposits increased $25.8 million or 2.4% to $1.09 billion for the three months ended March 31, 2017 as compared to $1.07 billion for the same period in 2016. Average balances in certificates of deposit decreased $70.2 million or 25.3% to $207.4 million for the three months ended March 31, 2017 compared to $277.6 million for the three months ended March 31, 2016. The cost of average certificates of deposit increased to 1.09% for the three months ended March 31, 2017 compared to 0.59% for the same period in 2016. Average public fund deposits comprised 18.5% of total average deposits during the 2017 first quarter and 17.9% for the 2016 first quarter.

Average federal funds purchased and repurchase agreements increased $36.8 million or 34.5% to $143.6 million for the three months ended March 31, 2017 compared to $106.8 million for the same period in 2016. The cost of average federal funds purchased and repurchase agreements was 0.89% for the 2017 first quarter compared to 0.70% for the 2016 first quarter. Average FHLB advances increased $116.7 million or 40.5% to $404.3 million for the three months ended March 31, 2017 compared to $287.6 million for the three months ended March 31, 2016. Average junior subordinated debentures decreased $13.2 million or 82.9% to $2.7 million for the three months ended March 31, 2017 compared to $15.9 million for the same period in 2016. 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 $0.8 million was recorded during the three months ended March 31, 2017 compared to a provision for loan losses of $1.3 million during the same period in 2016. Contributing to the lower provision was lower loan growth and net charge-offs in the 2017 first quarter compared to the 2016 first quarter. Net charge-offs were $0.1 million for the quarter ended March 31, 2017 compared to $0.2 million for the quarter ended March 31, 2016. The ratio of the allowance for loan losses to nonaccrual loans was 2,118%, 2,087% and 1,333%, at March 31, 2017, December 31, 2016, and March 31, 2016, respectively. The allowance for loan losses increased to $26.6 million at March 31, 2017 as compared to $25.9 million at December 31, 2016 and $21.8 million at March 31, 2016. The allowance as a percentage of total loans was 1.00% at March 31, 2017 and December 31, 2016 and 0.88% at March 31, 2016. The increase in the allowance for loan losses from March 31, 2016 reflects loan portfolio growth, primarily multi-family mortgage loans, coupled with an increase in classified loans as of December 31, 2016, as well as certain acquired loans being refinanced by the Bank over the past year. In accordance with current accounting guidance, acquired loans are recorded at fair value as of acquisition, effectively netting estimated future losses against the loan balances whereas loans originated and refinanced by the Bank have recorded allowances for loan losses. 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 $95.7 million or 3.6% of total loans at March 31, 2017 were categorized as classified loans compared to $84.3 million or 3.2% at December 31, 2016 and $23.7 million or 1.0% at March 31, 2016. 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 March 31, 2017, $43.9 million of classified loans were commercial real estate (“CRE”) loans, which were well secured with real estate as collateral. Of the $43.9 million of CRE loans, $41.3 million were current and $2.6 million were past due. In addition, all the CRE loans have personal guarantees. At March 31, 2017, $10.8 million of classified loans were residential real estate loans with $10.2 million current and $0.6 million past due. The increase in classified residential real estate loans from December 31, 2016 is the result of the modification of two loans to one borrower which were classified as special mention at March 31, 2017. Commercial, industrial, and agricultural loans represented $40.6 million of classified loans, with $40.0 million current and $0.6 million past due. Taxi medallion loans represented $26.2 million of the classified commercial, industrial and agricultural loans at March 31, 2017. The Bank’s taxi medallion loan portfolio was downgraded to special mention at December 31, 2016 due to weakening cash flows and declining collateral values. All of the Bank’s taxi medallion loans are collateralized by New York City – Manhattan medallions, have personal guarantees and were current as of March 31, 2017. The Bank has not experienced any delinquencies in this portfolio. No new originations of taxi medallion loans are currently planned and management expects these balances to decline through amortization and pay offs. There was $0.3 million of classified real estate construction and land loans, all of which are current. The remaining $0.1 million in classified loans are consumer loans that are unsecured and current, have personal guarantees and demonstrate sufficient cash flow to pay the loans. Due to the structure and nature of the credits, the Company does not expect to sustain a material loss on these relationships.

CRE loans, including multi-family loans, represented $1.57 billion or 59.1% of the total loan portfolio at March 31, 2017 compared to $1.54 billion or 59.2% at December 31, 2016 and $1.39 billion or 56.1% at March 31, 2016. 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 March 31, 2017 and December 31, 2016, the Company had individually impaired loans as defined by FASB ASC No. 310, “Receivables” of $11.0 million and $3.4 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 restructurings (“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 increase in impaired loans is the result of the modification of two loans to one borrower. The loans are both current and are classified as performing TDRs at March 31, 2017.

Nonaccrual loans were $1.3 million or 0.05% of total loans at March 31, 2017 and $1.2 million or 0.05% of total loans at December 31, 2016. TDRs represent $0.3 million of the nonaccrual loans at March 31, 2017 and December 31, 2016.

The Bank had no other real estate owned at March 31, 2017 and December 31, 2016.

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

*(In thousands)*

|  | Three Months Ended March 31, 2017 | March 31, 2016 |
| --- | ---: | ---: |
| Beginning balance | **$25,904** | $20,744 |
| Charge-offs: |  |  |
| Commercial real estate mortgage loans | **-** | - |
| Multi-family mortgage loans | **-** | - |
| Residential real estate mortgage loans | **-** | - |
| Commercial, industrial and agricultural loans | **(95)** | (200) |
| Real estate construction and land loans | **-** | - |
| Installment/consumer loans | **-** | - |
| Total | **(95)** | (200) |
| Recoveries: |  |  |
| Commercial real estate mortgage loans | **-** | - |
| Multi-family mortgage loans | **-** | - |
| Residential real estate mortgage loans | **1** | - |
| Commercial, industrial and agricultural loans | **7** | 4 |
| Real estate construction and land loans | **-** | - |
| Installment/consumer loans | **1** | 1 |
| Total | **9** | 5 |
| Net charge-offs | **(86)** | (195) |
| Provision for loan losses charged to operations | **800** | 1,250 |
| Ending balance | **$26,618** | $21,799 |

### 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)*

|  | March 31, 2017 Amount | Percentage of Loans to Total Loans | December 31, 2016 Amount | Percentage of Loans to Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate mortgage loans | **$7,745** | **38.9%** | $8,759 | 39.2% |
| Multi-family mortgage loans | **6,480** | **20.2** | 6,264 | 20.0 |
| Residential real estate mortgage loans | **2,027** | **16.7** | 1,961 | 16.9 |
| Commercial, industrial & agricultural loans | **9,198** | **20.4** | 7,837 | 20.2 |
| Real estate construction and land loans | **1,058** | **3.2** | 955 | 3.1 |
| Installment/consumer loans | **110** | **0.6** | 128 | 0.6 |
| Total | **$26,618** | **100.0%** | $25,904 | 100.0% |

### Non-Interest Income

Total non-interest income increased $0.1 million to $4.1 million for the three months ended March 31, 2017 compared to $4.0 million for the same period in 2016. The increase primarily reflects a $0.2 million increase in BOLI income, attributable to the additional $30.0 million BOLI purchase in the 2016 second quarter, and a $0.1 million increase in service charges on deposit accounts, partially offset by lower other operating income of $0.1 million. The decrease in other operating income for the three months ended 2017 was primarily due to a net recovery associated with certain identified FNBNY acquired problem loans recorded in 2016 partially offset by an increase in gain on sale of SBA loans.

### Non-Interest Expense

Total non-interest expense increased $1.4 million to $20.3 million during the three months ended March 31, 2017 compared to $18.9 million over the same period in 2016. The increase was primarily due to increases in salaries and benefits, occupancy and equipment, other operating expenses, technology and communications and the reversal of acquisition costs recorded in 2016, partially offset by lower amortization of intangibles and professional services. Salaries and benefits increased $0.8 million to $11.3 million for the three months ended March 31, 2017 compared to $10.5 million for the same period in 2016. Occupancy and equipment increased $0.5 million to $3.4 million for the three months ended March 31, 2017 compared to $2.9 million for the same period in 2016. Other operating expenses increased $0.3 million to $2.0 million for the three months ended March 31, 2017 compared to $1.7 million for the same period in 2016. Technology and communications increased to $1.3 million for the 2017 first quarter from $1.1 million for the same period in the prior year. Amortization of other intangible assets decreased $0.4 million to $0.3 million compared to $0.7 million for the same period in 2016 resulting from the CNB non-compete agreement being fully amortized as of December 31, 2016. Professional services decreased to $0.8 million for the three months ended March 31, 2017 from $1.0 million for the same period in 2016. The reversal of accrued acquisition costs in 2016 was due to the reversal of pending merger related liabilities recorded at the acquisition date which were subsequently settled.

### Income Taxes

Income tax expense was $4.3 million for the three months ended March 31, 2017 compared to $4.6 million for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 was 32.0% compared to 35.0% for the same period last year. The decrease in the effective tax rate was a result of the tax benefits recognized on stock grants which vested during the 2017 first quarter. The Company expects the tax rate to return to a more normalized rate of approximately 34.5% for the remainder of the year.

#### Financial Condition

Total assets of the Company at March 31, 2017 increased $10.4 million to $4.06 billion at March 31, 2017 compared to December 31, 2016. Cash and cash equivalents decreased $42.8 million or 37.7% to $71.0 million at March 31, 2017 compared to $113.8 million at December 31, 2016. Total securities decreased $4.0 million to $1.07 billion and net loans increased $56.4 million or 2.2% to $2.63 billion compared to December 31, 2016. The ability to grow the investment and loan portfolios, while minimizing interest rate risk sensitivity and maintaining credit quality, remains a strong focus of management. Total deposits increased $56.9 million to $2.98 billion at March 31, 2017 compared to $2.93 billion at December 31, 2016. Savings, NOW and money market deposits increased $117.5 million to $1.69 billion at March 31, 2017 from $1.57 billion at December 31, 2016. Certificates of deposit increased $3.2 million to $209.9 million at March 31, 2017 from $206.7 million at December 31, 2016. Demand deposits decreased $63.8 million to $1.09 billion as of March 31, 2017 compared to $1.15 billion at December 31, 2016. Federal funds purchased were $50.0 million at March 31, 2017 compared to $100.0 million at December 31, 2016. Junior subordinated debentures decreased $15.2 million in the 2017 first quarter due to the redemption in January 2017.

Stockholders’ equity was $429.5 million at March 31, 2017, an increase of $21.5 million or 5.3% from December 31, 2016, primarily due to the issuance of shares of common stock related to the trust preferred securities conversions of $14.9 million, net income of $9.2 million, a decrease in accumulated other comprehensive loss, net of deferred income taxes of $1.3 million, share based compensation of $0.6 million, and proceeds from the issuance of shares of common stock under the dividend reinvestment plan of $0.2 million, partially offset by $4.5 million in dividends. In April 2017, 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, 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 Company’s principal sources of liquidity included cash and cash equivalents of $21.8 million as of March 31, 2017, 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 three months ended March 31, 2017, 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 March 31, 2017, the Bank has $37.6 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 three months ended March 31, 2017.

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 March 31, 2017, the Bank had aggregate lines of credit of $349.5 million with unaffiliated correspondent banks to provide short term credit for liquidity requirements. Of these aggregate lines of credit, $329.5 million is available on an unsecured basis. As of March 31, 2017, the Bank had $50.0 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 March 31, 2017, the Bank had $43.0 million outstanding in FHLB overnight borrowings and $448.2 million outstanding in FHLB term borrowings. As of December 31, 2016, the Bank had $175.0 million outstanding in FHLB overnight borrowings and $321.7 million outstanding in FHLB term borrowings. As of March 31, 2017 and December 31, 2016, the Bank had $0.7 million 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 March 31, 2017, the Bank had $18.4 million outstanding in brokered certificates of deposit and $143.0 million outstanding in brokered money market accounts. As of December 31, 2016, the Bank had $18.4 million outstanding in brokered certificates of deposit and $161.8 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 March 31, 2017 and December 31, 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 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 March 31, 2017 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.

The following tables present actual capital levels and minimum required levels for the Company and the Bank under Basel III rules at March 31, 2017 and December 31, 2016.

*(Dollars in thousands)*

| Common equity tier 1 capital to risk weighted assets: | March 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 | **$332,067** **11.2%** | **$133,262** **4.5%** | **$170,280** **5.75%** | **n/a** **n/a** |
| Bank | **388,450** **13.1** | **133,246** **4.5** | **170,258** **5.75** | **$192,466** **6.5%** |
| Total capital to risk weighted assets: |  |  |  |  |
| Consolidated | **438,961** **14.8** | **236,911** **8.0** | **273,928** **9.25** | **n/a** **n/a** |
| Bank | **415,344** **14.0** | **236,881** **8.0** | **273,894** **9.25** | **296,102** **10.0** |
| Tier 1 capital to risk weighted assets: |  |  |  |  |
| Consolidated | **332,067** **11.2** | **177,683** **6.0** | **214,700** **7.25** | **n/a** **n/a** |
| Bank | **388,450** **13.1** | **177,661** **6.0** | **214,674** **7.25** | **236,881** **8.0** |
| Tier 1 capital to average assets: |  |  |  |  |
| Consolidated | **332,067** **8.5** | **156,931** **4.0** | **n/a** **n/a** | **n/a** **n/a** |
| Bank | **388,450** **9.9** | **156,978** **4.0** | **n/a** **n/a** | **196,223** **5.0** |
|  | December 31, 2016 |  |  |  |
|  |  |  | Minimum Capital | Minimum To Be Well |
|  |  | Minimum Capital | Adequacy Requirement with | Capitalized Under Prompt |
|  | Actual Capital | Adequacy Requirement | Capital Conservation Buffer | Corrective Action Provisions |
| (Dollars in thousands) | Amount Ratio | Amount Ratio | Amount Ratio | Amount Ratio |
| Common equity tier 1 capital to risk weighted assets: |  |  |  |  |
| Consolidated | $312,731 10.8% | $130,065 4.5% | $148,129 5.125% | n/a n/a |
| Bank | 378,352 13.1 | 130,054 4.5 | 148,117 5.125 | $187,856 6.5% |
| Total capital to risk weighted assets: |  |  |  |  |
| Consolidated | 434,184 15.0 | 231,226 8.0 | 249,290 8.625 | n/a n/a |
| Bank | 404,532 14.0 | 231,208 8.0 | 249,271 8.625 | 289,010 10.0 |
| Tier 1 capital to risk weighted assets: |  |  |  |  |
| Consolidated | 328,004 11.3 | 173,419 6.0 | 191,484 6.625 | n/a n/a |
| Bank | 378,352 13.1 | 173,406 6.0 | 191,469 6.625 | 231,208 8.0 |
| Tier 1 capital to average assets: |  |  |  |  |
| Consolidated | 328,004 8.6 | 152,391 4.0 | n/a n/a | n/a n/a |
| Bank | 378,352 9.9 | 152,382 4.0 | n/a n/a | 190,478 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, 7,424 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 March 31, 2017, $949.2 million or 91.4% of the Company’s available for sale and held to maturity 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 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 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 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 March 31, 2017:

*(Dollars in thousands)*

| Change in Interest Rates in Basis Points | Potential Change in Future Net Interest Income $ Change | % Change |
| ---: | ---: | ---: |
| 200 | **$(5,783)** | **(4.91)%** |
| 100 | **$(3,042)** | **(2.58)%** |
| Static | **-** | **-** |
| (100) | **$972** | **0.83%** |

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 4.91 percent. The Company’s balance sheet sensitivity to such a move in interest rates at March 31, 2017 increased as compared to March 31, 2016 (which was a decrease of 4.80 percent in net interest income over a twelve month period). This increase is the result of larger short term funding balances coupled with a short term rate increase in comparison to the prior year. 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 slightly from 3.30 to 3.59, but decreased from 3.73 at December 31, 2016. 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 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, 881 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 March 31, 2017. 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, 2016.

Filed May 9, 2017.
Source: SEC EDGAR, the filing index for accession 0001571049-17-004694. Last ingested by Listed: Nov 7, 2026, 12:41 ET. No prices; not investment advice.