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EX-32.2 - EXHIBIT 32.2 - SUFFOLK BANCORPex32_2.htm
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EX-31.2 - EXHIBIT 31.2 - SUFFOLK BANCORPex31_2.htm
EX-31.1 - EXHIBIT 31.1 - SUFFOLK BANCORPex31_1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2016

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission File No. 001-37658
SUFFOLK BANCORP
(Exact Name of Registrant as Specified in Its Charter)

NEW YORK                                                                                  11-2708279
(State or Other Jurisdiction of Incorporation or Organization)                (I.R.S. Employer Identification No.)

4 WEST SECOND STREET, P.O. BOX 9000, RIVERHEAD, NY 11901
(Address of Principal Executive Offices) (Zip Code)

(631) 208-2400
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Yes ☒    No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes☐    No ☒
 
As of April 18, 2016, there were 11,861,255 shares of registrant’s Common Stock outstanding.
 


SUFFOLK BANCORP
Form 10-Q
For the Quarterly Period Ended March 31, 2016

Table of Contents

   
Page
 
PART I
 
     
Item 1.
Financial Statements
 
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
27
     
Item 3.
41
     
Item 4.
41
     
 
PART II
 
     
Item 1.
41
     
Item 1A.
41
     
Item 2.
43
     
Item 3.
43
     
Item 4.
43
     
Item 5.
43
     
Item 6.
43
     
 
44
 
PART I
ITEM 1. – FINANCIAL STATEMENTS
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
March 31, 2016 and December 31, 2015
(dollars in thousands, except per share data)

   
March 31, 2016
   
December 31, 2015
 
ASSETS
           
Cash and cash equivalents
           
Cash and non-interest-bearing deposits due from banks
 
$
86,004
   
$
75,272
 
Interest-bearing deposits due from banks
   
31,182
     
22,814
 
Total cash and cash equivalents
   
117,186
     
98,086
 
Federal Reserve and Federal Home Loan Bank stock and other investments
   
10,531
     
10,756
 
Investment securities:
               
Available for sale, at fair value
   
249,263
     
247,099
 
Held to maturity (fair value of $49,620 and $63,272, respectively)
   
47,141
     
61,309
 
Total investment securities
   
296,404
     
308,408
 
Loans
   
1,748,072
     
1,666,447
 
Allowance for loan losses
   
20,930
     
20,685
 
Net loans
   
1,727,142
     
1,645,762
 
Loans held for sale
   
573
     
1,666
 
Premises and equipment, net
   
23,395
     
23,240
 
Bank-owned life insurance
   
52,729
     
52,383
 
Deferred tax assets, net
   
14,050
     
15,845
 
Accrued interest and loan fees receivable
   
6,570
     
5,859
 
Goodwill and other intangibles
   
2,834
     
2,864
 
Other real estate owned ("OREO")
   
650
     
-
 
Other assets
   
4,322
     
3,723
 
TOTAL ASSETS
 
$
2,256,386
   
$
2,168,592
 
                 
LIABILITIES & STOCKHOLDERS' EQUITY
               
Demand deposits
 
$
790,678
   
$
787,944
 
Savings, N.O.W. and money market deposits
   
849,850
     
768,036
 
Subtotal core deposits
   
1,640,528
     
1,555,980
 
Time deposits
   
229,841
     
224,643
 
Total deposits
   
1,870,369
     
1,780,623
 
Borrowings
   
160,000
     
165,000
 
Unfunded pension liability
   
6,416
     
6,428
 
Capital leases
   
4,365
     
4,395
 
Other liabilities
   
11,519
     
14,888
 
TOTAL LIABILITIES
   
2,052,669
     
1,971,334
 
COMMITMENTS AND CONTINGENT LIABILITIES
               
STOCKHOLDERS' EQUITY                
Common stock (par value $2.50; 15,000,000 shares authorized; issued 14,019,302 and 13,966,292, respectively; outstanding 11,853,564 and 11,800,554, respectively)
   
35,048
     
34,916
 
Surplus
   
46,997
     
46,239
 
Retained earnings
   
133,749
     
130,093
 
Treasury stock at par (2,165,738 shares)
   
(5,414
)
   
(5,414
)
Accumulated other comprehensive loss, net of tax
   
(6,663
)
   
(8,576
)
TOTAL STOCKHOLDERS' EQUITY
   
203,717
     
197,258
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
2,256,386
   
$
2,168,592
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended March 31, 2016 and 2015
(dollars in thousands, except per share data)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
INTEREST INCOME
           
Loans and loan fees
 
$
17,222
   
$
14,569
 
U.S. Government agency obligations
   
418
     
541
 
Obligations of states and political subdivisions
   
994
     
1,335
 
Collateralized mortgage obligations
   
79
     
182
 
Mortgage-backed securities
   
464
     
445
 
Corporate bonds
   
146
     
38
 
Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits due from banks
   
29
     
23
 
Dividends
   
75
     
60
 
Total interest income
   
19,427
     
17,193
 
INTEREST EXPENSE
               
Savings, N.O.W. and money market deposits
   
513
     
274
 
Time deposits
   
348
     
294
 
Borrowings
   
242
     
108
 
Total interest expense
   
1,103
     
676
 
Net interest income
   
18,324
     
16,517
 
Provision for loan losses
   
250
     
250
 
Net interest income after provision for loan losses
   
18,074
     
16,267
 
NON-INTEREST INCOME
               
Service charges on deposit accounts
   
776
     
747
 
Other service charges, commissions and fees
   
611
     
593
 
Net gain on sale of securities available for sale
   
6
     
26
 
Net gain on sale of portfolio loans
   
-
     
198
 
Net gain on sale of mortgage loans originated for sale
   
74
     
144
 
Income from bank-owned life insurance
   
346
     
309
 
Other operating income
   
79
     
74
 
Total non-interest income
   
1,892
     
2,091
 
OPERATING EXPENSES
               
Employee compensation and benefits
   
8,666
     
8,606
 
Occupancy expense
   
1,442
     
1,462
 
Equipment expense
   
386
     
385
 
Consulting and professional services
   
483
     
338
 
FDIC assessment
   
293
     
290
 
Data processing
   
179
     
570
 
Other operating expenses
   
1,703
     
1,457
 
Total operating expenses
   
13,152
     
13,108
 
Income before income tax expense
   
6,814
     
5,250
 
Income tax expense
   
1,976
     
1,241
 
NET INCOME
 
$
4,838
   
$
4,009
 
EARNINGS PER COMMON SHARE - BASIC
 
$
0.41
   
$
0.34
 
EARNINGS PER COMMON SHARE - DILUTED
 
$
0.41
   
$
0.34
 
WEIGHTED AVERAGE COMMON SHARES - BASIC
   
11,829,195
     
11,694,427
 
WEIGHTED AVERAGE COMMON SHARES - DILUTED
   
11,900,808
     
11,763,099
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months Ended March 31, 2016 and 2015
(in thousands)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
             
Net income
 
$
4,838
   
$
4,009
 
Other comprehensive income, net of tax and reclassification adjustments:
               
Change in unrealized gain on securities available for sale arising during the period, net of tax of $1,128 and $703, respectively
   
1,608
     
1,075
 
Change in unrealized gain on securities transferred from available for sale to held to maturity, net of tax of $183 and $27, respectively
   
305
     
41
 
Total other comprehensive income, net of tax
   
1,913
     
1,116
 
Total comprehensive income
 
$
6,751
   
$
5,125
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
For the Three Months Ended March 31, 2016 and 2015
(dollars in thousands, except per share data)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
Common stock
           
Balance, January 1
 
$
34,916
   
$
34,591
 
Dividend reinvestment (25,337 and 7,295 shares issued, respectively)
   
63
     
18
 
Stock options exercised (1,000 shares issued in 2015)
   
-
     
3
 
Stock-based compensation
   
69
     
116
 
Ending balance
   
35,048
     
34,728
 
Surplus
               
Balance, January 1
   
46,239
     
44,230
 
Dividend reinvestment
   
603
     
143
 
Stock options exercised
   
-
     
16
 
Stock-based compensation
   
155
     
106
 
Ending balance
   
46,997
     
44,495
 
Retained earnings
               
Balance, January 1
   
130,093
     
116,169
 
Net income
   
4,838
     
4,009
 
Cash dividends on common stock ($0.10 and $0.06 per share, respectively)
   
(1,182
)
   
(700
)
Ending balance
   
133,749
     
119,478
 
Treasury stock
               
Balance, January 1
   
(5,414
)
   
(5,414
)
Ending balance
   
(5,414
)
   
(5,414
)
Accumulated other comprehensive loss, net of tax
               
Balance, January 1
   
(8,576
)
   
(6,843
)
Other comprehensive income
   
1,913
     
1,116
 
Ending balance
   
(6,663
)
   
(5,727
)
Total stockholders' equity
 
$
203,717
   
$
187,560
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended March 31, 2016 and 2015
(in thousands)

   
Three Months Ended March 31,
 
   
2016
   
2015
 
NET INCOME
 
$
4,838
   
$
4,009
 
ADJUSTMENTS TO RECONCILE NET INCOME
               
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
               
Provision for loan losses
   
250
     
250
 
Depreciation and amortization
   
554
     
565
 
Stock-based compensation - net
   
224
     
222
 
Net amortization of premiums
   
283
     
297
 
Originations of mortgage loans held for sale
   
(8,464
)
   
(9,314
)
Proceeds from sale of mortgage loans originated for sale
   
9,632
     
9,281
 
Gain on sale of mortgage loans originated for sale
   
(74
)
   
(144
)
Gain on sale of portfolio loans
   
-
     
(198
)
Decrease (increase) in other intangibles
   
30
     
(52
)
Deferred tax expense
   
483
     
99
 
Increase in accrued interest and loan fees receivable
   
(711
)
   
(806
)
(Increase) decrease in other assets
   
(598
)
   
708
 
Adjustment to unfunded pension liability
   
(12
)
   
(111
)
Decrease in other liabilities
   
(3,368
)
   
(3,626
)
Income from bank-owned life insurance
   
(346
)
   
(309
)
Net gain on sale of securities available for sale
   
(6
)
   
(26
)
Net cash provided by operating activities
   
2,715
     
845
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Principal payments on investment securities - available for sale
   
3,513
     
1,413
 
Proceeds from sale of investment securities - available for sale
   
-
     
531
 
Maturities and calls of investment securities - available for sale
   
9,200
     
6,705
 
Purchases of investment securities - available for sale
   
(12,388
)
   
-
 
Maturities and calls of investment securities - held to maturity
   
14,625
     
117
 
Decrease in Federal Reserve and Federal Home
               
Loan Bank stock and other investments
   
225
     
1,800
 
Proceeds from sale of portfolio loans
   
-
     
23,986
 
Loan originations - net
   
(82,281
)
   
(26,810
)
Purchases of premises and equipment - net
   
(709
)
   
(143
)
Net cash (used in) provided by investing activities
   
(67,815
)
   
7,599
 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposit accounts
   
89,746
     
35,612
 
Net decrease in short-term borrowings
   
(5,000
)
   
(40,000
)
Proceeds from stock options exercised
   
-
     
19
 
Cash dividends paid on common stock
   
(1,182
)
   
(700
)
Proceeds from shares issued under the dividend reinvestment plan
   
666
     
161
 
Decrease  in capital lease payable
   
(30
)
   
(28
)
Net cash provided by (used in) financing activities
   
84,200
     
(4,936
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
19,100
     
3,508
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
98,086
     
55,516
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
117,186
   
$
59,024
 
SUPPLEMENTAL DATA:
               
Interest paid
 
$
1,105
   
$
681
 
Income taxes paid
 
$
828
   
$
340
 
Loans transferred to OREO
 
$
650
   
$
-
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Suffolk Bancorp (the “Company”) was incorporated in 1985 as a bank holding company. The Company currently owns all of the outstanding capital stock of Suffolk County National Bank (the “Bank”). The Bank was organized under the national banking laws of the United States in 1890. The Bank formed Suffolk Greenway, Inc. (the “REIT”), a real estate investment trust, and owns 100% of an insurance agency and two corporations used to acquire foreclosed real estate. The insurance agency and the two corporations used to acquire foreclosed real estate are immaterial to the Company’s operations. The unaudited interim condensed consolidated financial statements include the accounts of the Company and the Bank and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Unless the context otherwise requires, references herein to the Company include the Company and the Bank and subsidiaries on a consolidated basis.

In the opinion of the Company’s management, the preceding unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of the Company’s condensed consolidated statement of condition as of March 31, 2016, its condensed consolidated statements of income for the three months ended March 31, 2016 and 2015, its condensed consolidated statements of comprehensive income for the three months ended March 31, 2016 and 2015, its condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2016 and 2015 and its condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015.

The preceding unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations to be expected for the remainder of the year. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 2015 Annual Report on Form 10-K.

Earnings Per Share - Basic earnings per share is computed based on the weighted average number of common shares and unvested restricted shares outstanding for each period. The Company’s unvested restricted shares are considered participating securities as they contain rights to non-forfeitable dividends and thus they are included in the basic earnings per share computation. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under stock options. In the event a net loss is reported, restricted shares and stock options are excluded from earnings per share computations.

The reconciliation of basic and diluted weighted average number of common shares outstanding for the three months ended March 31, 2016 and 2015 follows.

   
Three Months Ended March 31,
 
   
2016
   
2015
 
             
Weighted average common shares outstanding
   
11,714,826
     
11,602,924
 
Weighted average unvested restricted shares
   
114,369
     
91,503
 
Weighted average shares for basic earnings per share
   
11,829,195
     
11,694,427
 
Additional diluted shares:
               
Stock options
   
71,613
     
68,672
 
Weighted average shares for diluted earnings per share
   
11,900,808
     
11,763,099
 
 
Loans and Loan Interest Income Recognition – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs. Unearned discounts on installment loans are credited to income using methods that result in a level yield. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.
 
Interest income is accrued on the unpaid loan principal balance. Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. Loans of all classes will generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status. Loans may start accruing interest again when they become current as to principal and interest for at least six months, and when, after a well-documented analysis by management, it has been determined that the loans can be collected in full.  For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (“TDRs”) and are classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and recoveries, and decreased by loan charge-offs. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance for loan losses. This happens when the loan is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by a quarterly analysis of the loan portfolio. Such analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other relevant factors. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate, multifamily, mixed use commercial, real estate construction and residential mortgages loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. In assessing the adequacy of the allowance for loan losses, management reviews the loan portfolio by separate classes that have similar risk and collateral characteristics. These classes are commercial and industrial, commercial real estate, multifamily, mixed use commercial, real estate construction, residential mortgages, home equity and consumer loans.

The allowance for loan losses consists of specific and general components, as well as an unallocated component. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment or liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on the fair market value of collateral and the estimated time required to recover the Company’s investment in the loans, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every impaired loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-impaired loans and is based on historical loss experience for each loan class from a rolling twelve quarter period and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the estimated collectability of the loan class not captured by historical loss data. These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors include consideration of the following: levels and trends in various risk rating categories; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. TDRs are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Loans Held For Sale – Loans held for sale are carried at the lower of aggregate cost or fair value, based on observable inputs in the secondary market. Changes in fair value of loans held for sale are recognized in earnings.
 
Other Real Estate Owned (“OREO”) - Property acquired through foreclosure, or OREO, is initially stated at the lower of cost or fair value less estimated selling costs. Losses arising at the time of the acquisition of property are charged against the allowance for loan losses. Any additional write-downs to the carrying value of these assets that may be required, as well as the cost of maintaining and operating these foreclosed properties, are charged to expense. The Company held OREO amounting to $650 thousand at March 31, 2016 resulting from the addition of one residential property during the first quarter of 2016.

Bank-Owned Life Insurance – Bank-owned life insurance is recorded at the lower of the cash surrender value or the amount that can be realized under the insurance policy and is included as an asset in the consolidated statements of condition. Changes in the cash surrender value and insurance benefit payments are recorded in non-interest income in the consolidated statements of income.

Derivatives - Derivatives are contracts between counterparties that specify conditions under which settlements are to be made. The only derivatives held by the Company are swap contracts with the purchaser of its Visa Class B shares. The Company records its derivatives on the consolidated statements of condition at fair value. The Company’s derivatives do not qualify for hedge accounting. As a result, changes in fair value are recognized in earnings in the period in which they occur. (See also Note 3. Investment Securities contained herein.)

Recent Accounting Guidance – In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation (Topic 718), “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur. The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ASU establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), “Recognition and Measurement of Financial Assets and Financial Liabilities” which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. This ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes and also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. For public entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Generally, early adoption of the amendments in this ASU is not permitted. The Company believes that adoption in 2018 will not have a material effect on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The ASU defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The FASB subsequently issued ASU 2016-08 which updates the new standard by clarifying the principal versus agent implementation guidance and ASU 2016-10 which clarifies identifying performance obligations and the licensing implementation guidance, but neither change the core principle of the new standard. The FASB also subsequently issued ASU 2015-14 to defer the effective date of the new standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the ASU recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. The Company has not yet determined the method by which it will adopt ASU 2014-09 in 2018 and does not believe that the adoption will have a material effect on the Company’s consolidated financial statements.
 
2. ACCUMULATED OTHER COMPREHENSIVE INCOME/LOSS (“AOCI”)
The changes in the Company’s AOCI by component, net of tax, for the three months ended March 31, 2016 and 2015 follow (in thousands).

   
Three Months Ended March 31, 2016
   
Three Months Ended March 31, 2015
 
   
Unrealized
Gains and
Losses on
Available for
Sale Securities
   
Unrealized Losses
on Securities
Transferred from
Available for Sale
to Held to
Maturity
   
Pension and
Post-
Retirement
Plan Items
   
Total
   
Unrealized
Gains and
Losses on
Available for
Sale Securities
   
Unrealized Losses
on Securities
Transferred from
Available for Sale
to Held to
Maturity
   
Pension and
Post-
Retirement
Plan Items
   
Total
 
Beginning balance
 
$
1,436
   
$
(1,395
)
 
$
(8,617
)
 
$
(8,576
)
 
$
2,637
   
$
(1,805
)
 
$
(7,675
)
 
$
(6,843
)
Other comprehensive income before reclassifications
   
1,612
     
-
     
-
     
1,612
     
1,091
     
-
     
-
     
1,091
 
Amounts reclassified from AOCI
   
(4
)
   
305
     
-
     
301
     
(16
)
   
41
     
-
     
25
 
Net other comprehensive income
   
1,608
     
305
     
-
     
1,913
     
1,075
     
41
     
-
     
1,116
 
Ending balance
 
$
3,044
   
$
(1,090
)
 
$
(8,617
)
 
$
(6,663
)
 
$
3,712
   
$
(1,764
)
 
$
(7,675
)
 
$
(5,727
)

Reclassifications out of AOCI for the three months ended March 31, 2016 and 2015 follow (in thousands).

   
Amount Reclassified from AOCI
   
   
Three Months Ended March 31,
 
Affected Line Item in the Statement
Details about AOCI Components
 
2016
   
2015
 
Where Net Income is Presented
Unrealized gains and losses on available for sale securities
 
$
6
   
$
26
 
Net gain on sale of securities available for sale
Unrealized losses on securities transferred from available for sale to held to maturity
   
(488
)
   
(68
)
Interest income - U.S. Government agency obligations
Subtotal, pre-tax
   
(482
)
   
(42
)
 
Income tax effect
   
181
     
17
 
Income tax expense
Total, net of tax
 
$
(301
)
 
$
(25
)
 

3. INVESTMENT SECURITIES
At the time of purchase of a security, the Company designates the security as either available for sale, trading or held to maturity, depending upon investment objectives, liquidity needs and intent.

In 2014, investment securities with a fair value of $48 million and an unrealized loss of $3.2 million were transferred from available for sale to held to maturity. In accordance with U.S. GAAP, the securities were transferred at fair value, which became the amortized cost. The discount, equal to the unrealized holding losses at the date of transfer, is being accreted to interest income over the remaining life of the security. The unrealized holding losses at the date of transfer remained in AOCI and are being amortized simultaneously against interest income. Those amounts offset or mitigate each other.
 
The amortized cost, fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at March 31, 2016 and December 31, 2015 were as follows (in thousands):

   
March 31, 2016
   
December 31, 2015
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Available for sale:
                                               
U.S. Government agency securities
 
$
25,982
   
$
9
   
$
(19
)
 
$
25,972
   
$
28,977
   
$
2
   
$
(463
)
 
$
28,516
 
Obligations of states and political subdivisions
   
93,877
     
4,235
     
-
     
98,112
     
100,215
     
4,467
     
-
     
104,682
 
Collateralized mortgage obligations
   
19,398
     
93
     
(57
)
   
19,434
     
15,795
     
2
     
(248
)
   
15,549
 
Mortgage-backed securities
   
95,877
     
1,161
     
(83
)
   
96,955
     
93,719
     
39
     
(1,316
)
   
92,442
 
Corporate bonds
   
9,000
     
-
     
(210
)
   
8,790
     
6,000
     
-
     
(90
)
   
5,910
 
Total available for sale securities
   
244,134
     
5,498
     
(369
)
   
249,263
     
244,706
     
4,510
     
(2,117
)
   
247,099
 
Held to maturity:
                                                               
U.S. Government agency securities
   
29,513
     
1,836
     
-
     
31,349
     
43,570
     
1,450
     
-
     
45,020
 
Obligations of states and political subdivisions
   
11,628
     
563
     
-
     
12,191
     
11,739
     
536
     
-
     
12,275
 
Corporate bonds
   
6,000
     
80
     
-
     
6,080
     
6,000
     
7
     
(30
)
   
5,977
 
Total held to maturity securities
   
47,141
     
2,479
     
-
     
49,620
     
61,309
     
1,993
     
(30
)
   
63,272
 
Total investment securities
 
$
291,275
   
$
7,977
   
$
(369
)
 
$
298,883
   
$
306,015
   
$
6,503
   
$
(2,147
)
 
$
310,371
 

At March 31, 2016 and December 31, 2015, investment securities carried at $251 million and $261 million, respectively, were pledged primarily for public funds on deposit and as collateral for the Company’s derivative swap contracts.

The amortized cost, contractual maturities and fair value of the Company’s investment securities at March 31, 2016 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

   
March 31, 2016
 
   
Amortized
Cost
   
Fair
Value
 
Securities available for sale:
           
Due in one year or less
 
$
21,600
   
$
21,838
 
Due from one to five years
   
134,975
     
139,088
 
Due from five to ten years
   
87,559
     
88,337
 
Total securities available for sale
   
244,134
     
249,263
 
Securities held to maturity:
               
Due in one year or less
   
836
     
843
 
Due from one to five years
   
4,191
     
4,405
 
Due from five to ten years
   
23,667
     
24,578
 
Due after ten years
   
18,447
     
19,794
 
Total securities held to maturity
   
47,141
     
49,620
 
Total investment securities
 
$
291,275
   
$
298,883
 
 
The proceeds from sales of securities available for sale and the associated realized gains and losses are shown below (in thousands) for the periods indicated. Realized gains are also inclusive of gains on called securities.

   
Three Months Ended March 31,
 
   
2016
   
2015
 
             
Proceeds
 
$
-
   
$
531
 
                 
Gross realized gains
 
$
6
   
$
26
 
Gross realized losses
   
-
     
-
 
Net realized gains
 
$
6
   
$
26
 

Information pertaining to securities with unrealized losses at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

   
Less than 12 months
   
12 months or longer
   
Total
 
March 31, 2016
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
U.S. Government agency securities
 
$
4,965
   
$
(19
)
 
$
-
   
$
-
   
$
4,965
   
$
(19
)
Collateralized mortgage obligations
   
-
     
-
     
8,286
     
(57
)
   
8,286
     
(57
)
Mortgage-backed securities
   
9,315
     
(20
)
   
13,727
     
(63
)
   
23,042
     
(83
)
Corporate bonds
   
5,790
     
(210
)
   
-
     
-
     
5,790
     
(210
)
Total
 
$
20,070
   
$
(249
)
 
$
22,013
   
$
(120
)
 
$
42,083
   
$
(369
)

   
Less than 12 months
   
12 months or longer
   
Total
 
December 31, 2015
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
U.S. Government agency securities
 
$
16,744
   
$
(233
)
 
$
9,770
   
$
(230
)
 
$
26,514
   
$
(463
)
Collateralized mortgage obligations
   
1,831
     
(4
)
   
8,200
     
(244
)
   
10,031
     
(248
)
Mortgage-backed securities
   
66,804
     
(884
)
   
17,936
     
(432
)
   
84,740
     
(1,316
)
Corporate bonds
   
8,880
     
(120
)
   
-
     
-
     
8,880
     
(120
)
Total
 
$
94,259
   
$
(1,241
)
 
$
35,906
   
$
(906
)
 
$
130,165
   
$
(2,147
)

All securities with unrealized losses for twelve months or longer at March 31, 2016 are issued or guaranteed by U.S. Government agencies or sponsored enterprises and the related unrealized losses resulted solely from the current interest rate environment and the corresponding shape of the yield curve. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these securities prior to their recovery to a level equal to or greater than amortized cost. Management has determined that no OTTI was present at March 31, 2016.

The Bank was a member of the Visa USA payment network and was issued Class B shares upon Visa’s initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its balance sheet at zero value.

In conjunction with the sale of Visa Class B shares in 2013, the Company entered into derivative swap contracts with the purchaser of these Visa Class B shares which provide for settlements between the purchaser and the Company based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. The Company’s recorded liability representing the fair value of the derivative was $752 thousand at March 31, 2016 and December 31, 2015.

The present value of estimated future fees to be paid to the derivative counterparty, or carrying costs, calculated by reference to the market price of the Visa Class A shares at a fixed rate of interest are expensed as incurred. For the three months ended March 31, 2016 and 2015, $74 thousand and $70 thousand, respectively, in such carrying costs was expensed. The Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $3 million at March 31, 2016 and December 31, 2015, as collateral for the derivative swap contracts.
 
Subjectivity has been used in estimating the fair value of both the derivative liability and the associated fees, but management believes that these fair value estimates are adequate based on available information. However, future developments in the litigation could require potentially significant changes to these estimates.

At March 31, 2016 and December 31, 2015, the Company still owned 38,638 Visa Class B shares subsequent to the sales described here. Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

4. LOANS
At March 31, 2016 and December 31, 2015, net loans disaggregated by class consisted of the following (in thousands):

   
March 31, 2016
   
December 31, 2015
 
Commercial and industrial
 
$
195,321
   
$
189,769
 
Commercial real estate
   
718,934
     
696,787
 
Multifamily
   
480,678
     
426,549
 
Mixed use commercial
   
83,421
     
78,787
 
Real estate construction
   
37,373
     
37,233
 
Residential mortgages
   
181,649
     
186,313
 
Home equity
   
45,447
     
44,951
 
Consumer
   
5,249
     
6,058
 
Gross loans
   
1,748,072
     
1,666,447
 
Allowance for loan losses
   
(20,930
)
   
(20,685
)
Net loans at end of period
 
$
1,727,142
   
$
1,645,762
 

There were no loans in the process of foreclosure collateralized by residential real estate property at March 31, 2016.

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands).

   
Three Months Ended March 31, 2016
   
Three Months Ended March 31, 2015
 
   
Balance at
 beginning of
period
   
Charge-
offs
   
Recoveries
   
(Credit)
provision
for loan
losses
   
Balance at
 end of
period
   
Balance at
beginning of
period
   
Charge-
offs
   
Recoveries
   
Provision
(credit) for
 loan losses
   
Balance at
end of
period
 
Commercial and industrial
 
$
1,875
   
$
-
   
$
45
   
$
(16
)
 
$
1,904
   
$
1,560
   
$
(492
)
 
$
343
   
$
587
   
$
1,998
 
Commercial real estate
   
7,019
     
-
     
10
     
261
     
7,290
     
6,777
     
-
     
7
     
568
     
7,352
 
Multifamily
   
4,688
     
-
     
-
     
835
     
5,523
     
4,018
     
-
     
-
     
449
     
4,467
 
Mixed use commercial
   
766
     
-
     
-
     
86
     
852
     
261
     
-
     
-
     
12
     
273
 
Real estate construction
   
386
     
-
     
-
     
2
     
388
     
383
     
-
     
-
     
(23
)
   
360
 
Residential mortgages
   
2,476
     
-
     
2
     
(268
)
   
2,210
     
3,027
     
-
     
11
     
(420
)
   
2,618
 
Home equity
   
639
     
(7
)
   
1
     
(56
)
   
577
     
709
     
-
     
2
     
17
     
728
 
Consumer
   
106
     
(58
)
   
2
     
47
     
97
     
166
     
(1
)
   
5
     
(15
)
   
155
 
Unallocated
   
2,730
     
-
     
-
     
(641
)
   
2,089
     
2,299
     
-
     
-
     
(925
)
   
1,374
 
Total
 
$
20,685
   
$
(65
)
 
$
60
   
$
250
   
$
20,930
   
$
19,200
   
$
(493
)
 
$
368
   
$
250
   
$
19,325
 
 
At March 31, 2016 and December 31, 2015, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at March 31, 2016 and December 31, 2015 disaggregated by class and impairment methodology (in thousands).

   
Allowance for Loan Losses
   
Loan Balances
 
March 31, 2016
 
Individually
 evaluated for
impairment
   
Collectively
 evaluated for
impairment
   
Ending balance
   
Individually
 evaluated for
 impairment
   
Collectively
evaluated for
impairment
   
Ending balance
 
Commercial and industrial
 
$
84
   
$
1,820
   
$
1,904
   
$
4,957
   
$
190,364
   
$
195,321
 
Commercial real estate
   
-
     
7,290
     
7,290
     
4,511
     
714,423
     
718,934
 
Multifamily
   
-
     
5,523
     
5,523
     
-
     
480,678
     
480,678
 
Mixed use commercial
   
-
     
852
     
852
     
-
     
83,421
     
83,421
 
Real estate construction
   
-
     
388
     
388
     
-
     
37,373
     
37,373
 
Residential mortgages
   
430
     
1,780
     
2,210
     
5,152
     
176,497
     
181,649
 
Home equity
   
143
     
434
     
577
     
1,645
     
43,802
     
45,447
 
Consumer
   
43
     
54
     
97
     
297
     
4,952
     
5,249
 
Unallocated
   
-
     
2,089
     
2,089
     
-
     
-
     
-
 
Total
 
$
700
   
$
20,230
   
$
20,930
   
$
16,562
   
$
1,731,510
   
$
1,748,072
 

   
Allowance for Loan Losses
   
Loan Balances
 
December 31, 2015
 
Individually
evaluated for
impairment
   
Collectively
 evaluated for
 impairment
   
Ending balance
   
Individually
evaluated for
impairment
   
Collectively
evaluated for
 impairment
   
Ending balance
 
Commercial and industrial
 
$
-
   
$
1,875
   
$
1,875
   
$
2,872
   
$
186,897
   
$
189,769
 
Commercial real estate
   
-
     
7,019
     
7,019
     
4,334
     
692,453
     
696,787
 
Multifamily
   
-
     
4,688
     
4,688
     
-
     
426,549
     
426,549
 
Mixed use commercial
   
-
     
766
     
766
     
-
     
78,787
     
78,787
 
Real estate construction
   
-
     
386
     
386
     
-
     
37,233
     
37,233
 
Residential mortgages
   
559
     
1,917
     
2,476
     
5,817
     
180,496
     
186,313
 
Home equity
   
170
     
469
     
639
     
1,683
     
43,268
     
44,951
 
Consumer
   
48
     
58
     
106
     
379
     
5,679
     
6,058
 
Unallocated
   
-
     
2,730
     
2,730
     
-
     
-
     
-
 
Total
 
$
777
   
$
19,908
   
$
20,685
   
$
15,085
   
$
1,651,362
   
$
1,666,447
 

The following table presents the Company’s impaired loans disaggregated by class at March 31, 2016 and December 31, 2015 (in thousands).

   
March 31, 2016
   
December 31, 2015
 
   
Unpaid
 Principal
 Balance
   
Recorded
Balance
   
Allowance
Allocated
   
Unpaid
Principal
Balance
   
Recorded
Balance
   
Allowance
Allocated
 
With no allowance recorded:
                                   
Commercial and industrial
 
$
3,929
   
$
3,929
   
$
-
   
$
2,869
   
$
2,869
   
$
-
 
Commercial real estate
   
4,929
     
4,511
     
-
     
4,753
     
4,334
     
-
 
Residential mortgages
   
3,056
     
2,927
     
-
     
3,076
     
2,947
     
-
 
Home equity
   
1,300
     
1,300
     
-
     
1,233
     
1,233
     
-
 
Consumer
   
129
     
129
     
-
     
207
     
207
     
-
 
Subtotal
   
13,343
     
12,796
     
-
     
12,138
     
11,590
     
-
 
                                                 
With an allowance recorded:
                                               
Commercial and industrial
   
1,028
     
1,028
     
84
     
3
     
3
     
-
 
Residential mortgages
   
2,225
     
2,225
     
430
     
2,870
     
2,870
     
559
 
Home equity
   
361
     
345
     
143
     
586
     
450
     
170
 
Consumer
   
168
     
168
     
43
     
172
     
172
     
48
 
Subtotal
   
3,782
     
3,766
     
700
     
3,631
     
3,495
     
777
 
Total
 
$
17,125
   
$
16,562
   
$
700
   
$
15,769
   
$
15,085
   
$
777
 
 
The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the three months ended March 31, 2016 and 2015 (in thousands). No interest income was recognized on a cash basis on impaired loans for any of the periods presented. The interest income recognized on accruing impaired loans is shown in the following table.

   
Three Months Ended March 31,
 
   
2016
   
2015
 
   
Average
recorded
 investment in
 impaired
loans
   
Interest
income
recognized on
 impaired
 loans
   
Average
 recorded
 investment in
 impaired
loans
   
Interest
income
 recognized on
impaired
loans
 
Commercial and industrial
 
$
2,875
   
$
18
   
$
4,551
   
$
33
 
Commercial real estate
   
4,319
     
35
     
10,208
     
50
 
Residential mortgages
   
5,693
     
48
     
5,411
     
38
 
Home equity
   
1,671
     
15
     
1,662
     
13
 
Consumer
   
338
     
4
     
383
     
3
 
Total
 
$
14,896
   
$
120
   
$
22,215
   
$
137
 

TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $494 thousand and $534 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of March 31, 2016 and December 31, 2015, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of default by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.

At March 31, 2016 and December 31, 2015, $45 thousand was committed to be advanced in connection with TDRs, representing the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing interest. It is the Company’s policy to evaluate advances on such loans on a case-by-case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments, but may do so in certain circumstances.

Outstanding TDRs, disaggregated by class, at March 31, 2016 and December 31, 2015 are as follows (dollars in thousands):
 
   
March 31, 2016
   
December 31, 2015
 
TDRs Outstanding
 
Number of
 Loans
   
Outstanding
Recorded
 Balance
   
Number of
Loans
   
Outstanding
 Recorded
 Balance
 
Commercial and industrial
   
16
   
$
988
     
17
   
$
1,116
 
Commercial real estate
   
5
     
4,080
     
5
     
4,131
 
Residential mortgages
   
22
     
4,625
     
22
     
4,653
 
Home equity
   
5
     
1,354
     
5
     
1,362
 
Consumer
   
8
     
296
     
8
     
301
 
Total
   
56
   
$
11,343
     
57
   
$
11,563
 
 
The following presents, disaggregated by class, information regarding TDRs executed during the three months ended March 31, 2016 and 2015 (dollars in thousands):

   
Three Months Ended March 31,
 
   
2016
   
2015
 
New TDRs
 
Number
of
Loans
   
Pre-Modification
Outstanding
Recorded
Balance
   
Post-Modification
Outstanding
Recorded
Balance
   
Number
of
Loans
   
Pre-Modification
Outstanding
Recorded
Balance
   
Post-Modification
Outstanding
Recorded
Balance
 
Commercial and industrial
   
-
   
$
-
   
$
-
     
1
   
$
12
   
$
12
 
Residential mortgages
   
-
     
-
     
-
     
2
     
194
     
199
 
Total
   
-
   
$
-
   
$
-
     
3
   
$
206
   
$
211
 

There were no loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the three months ended March 31, 2016 and 2015.

Not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate.

At March 31, 2016 and December 31, 2015, non-accrual loans disaggregated by class were as follows (dollars in thousands):

   
March 31, 2016
   
December 31, 2015
 
   
Non-
accrual
 loans
   
% of
Total
   
Total Loans
   
% of Total
Loans
   
Non-
accrual
loans
   
% of
 Total
   
Total Loans
   
% of Total
 Loans
 
Commercial and industrial
 
$
4,128
     
59.0
%
 
$
195,321
     
0.2
%
 
$
1,954
     
35.3
%
 
$
189,769
     
0.1
%
Commercial real estate
   
1,959
     
28.0
     
718,934
     
0.1
     
1,733
     
31.4
     
696,787
     
0.1
 
Multifamily
   
-
     
-
     
480,678
     
-
     
-
     
-
     
426,549
     
-
 
Mixed use commercial
   
-
     
-
     
83,421
     
-
     
-
     
-
     
78,787
     
-
 
Real estate construction
   
-
     
-
     
37,373
     
-
     
-
     
-
     
37,233
     
-
 
Residential mortgages
   
724
     
10.3
     
181,649
     
0.1
     
1,358
     
24.6
     
186,313
     
0.1
 
Home equity
   
186
     
2.7
     
45,447
     
-
     
406
     
7.3
     
44,951
     
-
 
Consumer
   
1
     
-
     
5,249
     
-
     
77
     
1.4
     
6,058
     
-
 
Total
 
$
6,998
     
100.0
%
 
$
1,748,072
     
0.4
%
 
$
5,528
     
100.0
%
 
$
1,666,447
     
0.3
%

Additional interest income of approximately $98 thousand and $180 thousand would have been recorded during the three months ended March 31, 2016 and 2015, respectively, if non-accrual loans had performed in accordance with their original terms.

At March 31, 2016 and December 31, 2015, past due loans disaggregated by class were as follows (in thousands).

   
Past Due
             
March 31, 2016
 
30 - 59 days
   
60 - 89 days
   
90 days and over
   
Total
   
Current
   
Total
 
Commercial and industrial
 
$
6
   
$
40
   
$
4,128
   
$
4,174
   
$
191,147
   
$
195,321
 
Commercial real estate
   
-
     
222
     
1,959
     
2,181
     
716,753
     
718,934
 
Multifamily
   
-
     
-
     
-
     
-
     
480,678
     
480,678
 
Mixed use commercial
   
-
     
-
     
-
     
-
     
83,421
     
83,421
 
Real estate construction
   
-
     
-
     
-
     
-
     
37,373
     
37,373
 
Residential mortgages
   
588
     
174
     
724
     
1,486
     
180,163
     
181,649
 
Home equity
   
200
     
-
     
186
     
386
     
45,061
     
45,447
 
Consumer
   
3
     
-
     
1
     
4
     
5,245
     
5,249
 
Total
 
$
797
   
$
436
   
$
6,998
   
$
8,231
   
$
1,739,841
   
$
1,748,072
 
% of Total Loans
   
0.1
%
   
0.0
%
   
0.4
%
   
0.5
%
   
99.5
%
   
100.0
%
 
   
Past Due
             
December 31, 2015
 
30 - 59 days
   
60 - 89 days
   
90 days and over
   
Total
   
Current
   
Total
 
Commercial and industrial
 
$
21
   
$
-
   
$
1,954
   
$
1,975
   
$
187,794
   
$
189,769
 
Commercial real estate
   
-
     
-
     
1,733
     
1,733
     
695,054
     
696,787
 
Multifamily
   
-
     
-
     
-
     
-
     
426,549
     
426,549
 
Mixed use commercial
   
-
     
-
     
-
     
-
     
78,787
     
78,787
 
Real estate construction
   
-
     
-
     
-
     
-
     
37,233
     
37,233
 
Residential mortgages
   
512
     
175
     
1,358
     
2,045
     
184,268
     
186,313
 
Home equity
   
336
     
-
     
406
     
742
     
44,209
     
44,951
 
Consumer
   
2
     
-
     
77
     
79
     
5,979
     
6,058
 
Total
 
$
871
   
$
175
   
$
5,528
   
$
6,574
   
$
1,659,873
   
$
1,666,447
 
% of Total Loans
   
0.1
%
   
0.0
%
   
0.3
%
   
0.4
%
   
99.6
%
   
100.0
%

The Company utilizes an eight-grade risk-rating system for loans. Loans in risk grades 1- 4 are considered pass loans. The Company’s risk grades are as follows:

Risk Grade 1, Excellent - Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2, Good -  Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Company, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3, Satisfactory - Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

· At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.

· At inception, the loan was secured with collateral possessing a loan value adequate to protect the Company from loss.

· The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

· During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4, Satisfactory/Monitored - Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5, Special Mention - Loans in this category possess potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential not defined impairments to the primary source of repayment.
 
Risk Grade 6, Substandard - One or more of the following characteristics may be exhibited in loans classified Substandard:

· Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

· Loans are inadequately protected by the current net worth and paying capacity of the obligor.

· The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

· Loans have a distinct possibility that the Company will sustain some loss if deficiencies are not corrected.

· Unusual courses of action are needed to maintain a high probability of repayment.

· The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

· The lender is forced into a subordinated or unsecured position due to flaws in documentation.

· Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

· The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

· There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7, Doubtful - One or more of the following characteristics may be present in loans classified Doubtful:

· Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

· The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

· The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8, Loss - Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The Company annually reviews the ratings on all loans greater than $750 thousand. Annually, the Company engages an independent third-party to review a significant portion of loans within the commercial and industrial, commercial real estate, multifamily, mixed use commercial and real estate construction loan classes. Management uses the results of these reviews as part of its ongoing review process.
 
The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at March 31, 2016 and December 31, 2015 (in thousands).

   
March 31, 2016
   
December 31, 2015
 
   
Grade
         
Grade
       
   
Pass
   
Special mention
   
Substandard
   
Total
   
Pass
   
Special mention
   
Substandard
   
Total
 
Commercial and industrial
 
$
186,625
   
$
1,716
   
$
6,980
   
$
195,321
   
$
180,024
   
$
3,088
   
$
6,657
   
$
189,769
 
Commercial real estate
   
710,860
     
4,921
     
3,153
     
718,934
     
687,210
     
6,109
     
3,468
     
696,787
 
Multifamily
   
480,678
     
-
     
-
     
480,678
     
426,549
     
-
     
-
     
426,549
 
Mixed use commercial
   
83,421
     
-
     
-
     
83,421
     
78,779
     
-
     
8
     
78,787
 
Real estate construction
   
37,373
     
-
     
-
     
37,373
     
37,233