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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: SEPTEMBER 30, 2016

OR

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

Commission File 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 October 21, 2016, there were 11,911,620 shares of registrant’s Common Stock outstanding.
 


SUFFOLK BANCORP
Form 10-Q
For the Quarterly Period Ended September 30, 2016

Table of Contents
 
   
Page
 
PART I
 
     
Item 1.
Financial Statements
 
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
Item 2.
29
     
Item 3.
45
     
Item 4.
46
     
 
PART II
 
     
Item 1.
46
     
Item 1A.
46
     
Item 2.
50
     
Item 3.
50
     
Item 4.
50
     
Item 5.
50
     
Item 6.
50
     
 
51
 
PART I
ITEM 1. – FINANCIAL STATEMENTS

SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
September 30, 2016 and December 31, 2015
(dollars in thousands, except per share data)

   
September 30, 2016
   
December 31, 2015
 
ASSETS
           
Cash and cash equivalents
           
Cash and non-interest-bearing deposits due from banks
 
$
40,086
   
$
75,272
 
Interest-bearing deposits due from banks
   
141,843
     
22,814
 
Total cash and cash equivalents
   
181,929
     
98,086
 
Federal Reserve and Federal Home Loan Bank stock and other investments
   
4,528
     
10,756
 
Investment securities:
               
Available for sale, at fair value
   
194,273
     
247,099
 
Held to maturity (fair value of $19,633 and $63,272, respectively)
   
18,896
     
61,309
 
Total investment securities
   
213,169
     
308,408
 
Loans
   
1,710,786
     
1,666,447
 
Allowance for loan losses
   
20,465
     
20,685
 
Net loans
   
1,690,321
     
1,645,762
 
Loans held for sale
   
1,504
     
1,666
 
Premises and equipment, net
   
25,289
     
23,240
 
Bank-owned life insurance
   
53,418
     
52,383
 
Deferred tax assets, net
   
12,445
     
15,845
 
Accrued interest and loan fees receivable
   
5,840
     
5,859
 
Goodwill and other intangibles
   
2,761
     
2,864
 
Other real estate owned ("OREO")
   
650
     
-
 
Other assets
   
4,621
     
3,723
 
TOTAL ASSETS
 
$
2,196,475
   
$
2,168,592
 
                 
LIABILITIES & STOCKHOLDERS' EQUITY
               
Demand deposits
 
$
867,178
   
$
787,944
 
Savings, N.O.W. and money market deposits
   
857,790
     
768,036
 
Subtotal core deposits
   
1,724,968
     
1,555,980
 
Time deposits
   
219,232
     
224,643
 
Total deposits
   
1,944,200
     
1,780,623
 
Borrowings
   
15,000
     
165,000
 
Unfunded pension liability
   
6,416
     
6,428
 
Capital leases
   
4,298
     
4,395
 
Other liabilities
   
11,863
     
14,888
 
TOTAL LIABILITIES
   
1,981,777
     
1,971,334
 
COMMITMENTS AND CONTINGENT LIABILITIES
               
STOCKHOLDERS' EQUITY
               
Common stock (par value $2.50; 15,000,000 shares authorized; issued 14,073,159 and 13,966,292, respectively; outstanding 11,907,421 and 11,800,554, respectively)
   
35,183
     
34,916
 
Surplus
   
48,520
     
46,239
 
Retained earnings
   
142,632
     
130,093
 
Treasury stock at par (2,165,738 shares)
   
(5,414
)
   
(5,414
)
Accumulated other comprehensive loss, net of tax
   
(6,223
)
   
(8,576
)
TOTAL STOCKHOLDERS' EQUITY
   
214,698
     
197,258
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
2,196,475
   
$
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 and Nine Months Ended September 30, 2016 and 2015
(dollars in thousands, except per share data)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
INTEREST INCOME
                       
Loans and loan fees
 
$
17,545
   
$
15,798
   
$
52,808
   
$
46,362
 
U.S. Government agency obligations
   
47
     
530
     
662
     
1,602
 
Obligations of states and political subdivisions
   
791
     
1,114
     
2,709
     
3,725
 
Collateralized mortgage obligations
   
91
     
149
     
270
     
507
 
Mortgage-backed securities
   
464
     
441
     
1,401
     
1,329
 
Corporate bonds
   
161
     
96
     
469
     
179
 
Federal funds sold, securities purchased under agreements to resell and interest-bearing deposits due from banks
   
133
     
7
     
191
     
50
 
Dividends
   
92
     
71
     
275
     
221
 
Total interest income
   
19,324
     
18,206
     
58,785
     
53,975
 
INTEREST EXPENSE
                               
Savings, N.O.W. and money market deposits
   
539
     
338
     
1,562
     
906
 
Time deposits
   
331
     
396
     
1,015
     
1,043
 
Borrowings
   
66
     
94
     
474
     
310
 
Total interest expense
   
936
     
828
     
3,051
     
2,259
 
Net interest income
   
18,388
     
17,378
     
55,734
     
51,716
 
(Credit) provision for loan losses
   
(350
)
   
350
     
(100
)
   
600
 
Net interest income after (credit) provision for loan losses
   
18,738
     
17,028
     
55,834
     
51,116
 
NON-INTEREST INCOME
                               
Service charges on deposit accounts
   
523
     
749
     
1,913
     
2,319
 
Other service charges, commissions and fees
   
793
     
759
     
2,088
     
2,032
 
Net gain on sale of securities available for sale
   
523
     
133
     
547
     
319
 
Net gain on sale of portfolio loans
   
-
     
370
     
457
     
568
 
Net gain on sale of mortgage loans originated for sale
   
100
     
85
     
247
     
290
 
Income from bank-owned life insurance
   
344
     
306
     
1,035
     
918
 
Other operating income
   
39
     
25
     
168
     
122
 
Total non-interest income
   
2,322
     
2,427
     
6,455
     
6,568
 
OPERATING EXPENSES
                               
Employee compensation and benefits
   
8,518
     
7,980
     
25,666
     
25,102
 
Occupancy expense
   
1,337
     
1,401
     
4,125
     
4,236
 
Equipment expense
   
494
     
410
     
1,341
     
1,199
 
Consulting and professional services
   
476
     
609
     
1,578
     
1,491
 
FDIC assessment
   
303
     
226
     
887
     
802
 
Data processing
   
156
     
506
     
569
     
1,590
 
Merger costs
   
644
     
-
     
644
     
-
 
Other operating expenses
   
1,539
     
1,536
     
5,128
     
4,530
 
Total operating expenses
   
13,467
     
12,668
     
39,938
     
38,950
 
Income before income tax expense
   
7,593
     
6,787
     
22,351
     
18,734
 
Income tax expense
   
2,118
     
1,864
     
6,253
     
4,684
 
NET INCOME
 
$
5,475
   
$
4,923
   
$
16,098
   
$
14,050
 
EARNINGS PER COMMON SHARE - BASIC
 
$
0.46
   
$
0.42
   
$
1.36
   
$
1.20
 
EARNINGS PER COMMON SHARE - DILUTED
 
$
0.46
   
$
0.42
   
$
1.35
   
$
1.19
 
WEIGHTED AVERAGE COMMON SHARES - BASIC
   
11,901,866
     
11,785,731
     
11,868,990
     
11,743,076
 
WEIGHTED AVERAGE COMMON SHARES - DILUTED
   
12,000,351
     
11,863,299
     
11,950,595
     
11,817,899
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three and Nine Months Ended September 30, 2016 and 2015
(in thousands)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Net income
 
$
5,475
   
$
4,923
   
$
16,098
   
$
14,050
 
Other comprehensive (loss) income, net of tax and reclassification adjustments:
                               
Change in unrealized (loss) gain on securities available for sale arising during the period, net of tax of ($755), $700, $756 and $354, respectively
   
(1,135
)
   
1,008
     
1,031
     
479
 
Change in unrealized gain on securities transferred from available for sale to held to maturity, net of tax of $280, $14, $879 and $67, respectively
   
411
     
55
     
1,322
     
136
 
Total other comprehensive (loss) income, net of tax
   
(724
)
   
1,063
     
2,353
     
615
 
Total comprehensive income
 
$
4,751
   
$
5,986
   
$
18,451
   
$
14,665
 

See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
For the Nine Months Ended September 30, 2016 and 2015
(dollars in thousands, except per share data)

   
Nine Months Ended September 30,
 
   
2016
   
2015
 
Common stock
           
Balance, January 1
 
$
34,916
   
$
34,591
 
Dividend reinvestment (66,365 and 23,524 shares issued, respectively)
   
166
     
59
 
Stock options exercised (39,334 shares issued in 2015)
   
-
     
98
 
Stock-based compensation
   
101
     
142
 
Ending balance
   
35,183
     
34,890
 
Surplus
               
Balance, January 1
   
46,239
     
44,230
 
Dividend reinvestment
   
1,619
     
501
 
Stock options exercised
   
-
     
441
 
Stock-based compensation
   
662
     
484
 
Ending balance
   
48,520
     
45,656
 
Retained earnings
               
Balance, January 1
   
130,093
     
116,169
 
Net income
   
16,098
     
14,050
 
Cash dividends on common stock ($0.30 and $0.22 per share, respectively)
   
(3,559
)
   
(2,583
)
Ending balance
   
142,632
     
127,636
 
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
   
2,353
     
615
 
Ending balance
   
(6,223
)
   
(6,228
)
Total stockholders' equity
 
$
214,698
   
$
196,540
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2016 and 2015
(in thousands)

   
Nine Months Ended September 30,
 
   
2016
   
2015
 
NET INCOME
 
$
16,098
   
$
14,050
 
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
               
(Credit) provision for loan losses
   
(100
)
   
600
 
Depreciation and amortization
   
1,788
     
1,740
 
Stock-based compensation - net
   
763
     
626
 
Net amortization of premiums
   
874
     
863
 
Originations of mortgage loans held for sale
   
(34,482
)
   
(31,613
)
Proceeds from sale of mortgage loans originated for sale
   
34,892
     
32,517
 
Gain on sale of mortgage loans originated for sale
   
(247
)
   
(290
)
Gain on sale of portfolio loans
   
(457
)
   
(568
)
Decrease in other intangibles
   
103
     
76
 
Deferred tax expense
   
1,768
     
872
 
Decrease (increase) in accrued interest and loan fees receivable
   
19
     
(673
)
(Increase) decrease in other assets
   
(899
)
   
1,377
 
Adjustment to unfunded pension liability
   
(12
)
   
(334
)
Decrease in other liabilities
   
(3,026
)
   
(1,598
)
Income from bank-owned life insurance
   
(1,035
)
   
(918
)
Net gain on sale and calls of securities available for sale
   
(547
)
   
(319
)
Net cash provided by operating activities
   
15,500
     
16,408
 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Principal payments on investment securities - available for sale
   
6,661
     
8,030
 
Proceeds from sale of investment securities - available for sale
   
6,615
     
10,080
 
Maturities and calls of investment securities - available for sale
   
54,290
     
26,505
 
Purchases of investment securities - available for sale
   
(13,188
)
   
(6,800
)
Maturities and calls of investment securities - held to maturity
   
44,521
     
1,957
 
Purchases of investment securities - held to maturity
   
-
     
(6,000
)
Decrease in interest-bearing time deposits in other banks
   
-
     
10,000
 
Decrease in Federal Reserve and Federal Home Loan Bank stock and other investments
   
6,228
     
3,019
 
Proceeds from sale of portfolio loans
   
49,184
     
49,871
 
Loan originations - net
   
(93,837
)
   
(227,745
)
Purchases of premises and equipment - net
   
(3,837
)
   
(1,243
)
Net cash provided by (used in) investing activities
   
56,637
     
(132,326
)
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase in deposit accounts
   
163,577
     
239,771
 
Net decrease in short-term borrowings
   
(150,000
)
   
(95,000
)
Net increase in long-term borrowings
   
-
     
15,000
 
Proceeds from stock options exercised
   
-
     
539
 
Cash dividends paid on common stock
   
(3,559
)
   
(2,583
)
Proceeds from shares issued under the dividend reinvestment plan
   
1,785
     
560
 
Decrease  in capital lease payable
   
(97
)
   
(85
)
Net cash provided by financing activities
   
11,706
     
158,202
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
   
83,843
     
42,284
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
   
98,086
     
55,516
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
181,929
   
$
97,800
 
SUPPLEMENTAL DATA:
               
Interest paid
 
$
3,093
   
$
2,208
 
Income taxes paid
 
$
4,146
   
$
3,148
 
Loans transferred to held-for-sale
 
$
48,670
   
$
24,164
 
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.

On June 26, 2016, the Company entered into an Agreement and Plan of Merger (the “merger agreement”) with People’s United Financial, Inc. (“People’s United”) pursuant to which the Company will merge into People’s United (the “merger”). People’s United will be the surviving corporation in the merger. Subject to the terms and conditions of the merger agreement, the Company’s shareholders will have the right to receive 2.225 shares of People’s United common stock in exchange for each share of Company common stock. The merger agreement was adopted by the Company’s shareholders on October 13, 2016. The closing of the merger remains subject to regulatory approvals and other customary conditions.

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 September 30, 2016, its condensed consolidated statements of income for the three and nine months ended September 30, 2016 and 2015, its condensed consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015, its condensed consolidated statements of changes in stockholders’ equity for the nine months ended September 30, 2016 and 2015 and its condensed consolidated statements of cash flows for the nine months ended September 30, 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 and nine months ended September 30, 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 and nine months ended September 30, 2016 and 2015 follows.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Weighted average common shares outstanding
   
11,788,825
     
11,674,697
     
11,752,237
     
11,636,155
 
Weighted average unvested restricted shares
   
113,041
     
111,034
     
116,753
     
106,921
 
Weighted average shares for basic earnings per share
   
11,901,866
     
11,785,731
     
11,868,990
     
11,743,076
 
Additional diluted shares:
                               
Stock options
   
98,485
     
77,568
     
81,605
     
74,823
 
Weighted average shares for diluted earnings per share
   
12,000,351
     
11,863,299
     
11,950,595
     
11,817,899
 
 
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 September 30, 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 August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230), “Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. For public business entities that are U.S. Securities and Exchange Commission filers, like the Company, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model and provides for recording credit losses on available-for-sale debt securities through an allowance account. The ASU also requires certain incremental disclosures. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of the ASU on its consolidated financial statements.

In March 2016, the FASB issued 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, ASU 2016-10 which clarifies identifying performance obligations and the licensing implementation guidance and ASU 2016-12 which clarifies the guidance on assessing collectability, presenting sales taxes, measuring noncash consideration and certain transition matters, but these do not 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 and nine months ended September 30, 2016 and 2015 follow (in thousands).

   
Three Months Ended September 30, 2016
   
Three Months Ended September 30, 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
 
$
3,602
   
$
(484
)
 
$
(8,617
)
 
$
(5,499
)
 
$
2,108
   
$
(1,724
)
 
$
(7,675
)
 
$
(7,291
)
Other comprehensive (loss) income before reclassifications
   
(826
)
   
-
     
-
     
(826
)
   
1,087
     
-
     
-
     
1,087
 
Amounts reclassified from AOCI
   
(309
)
   
411
     
-
     
102
     
(79
)
   
55
     
-
     
(24
)
Net other comprehensive (loss) income
   
(1,135
)
   
411
     
-
     
(724
)
   
1,008
     
55
     
-
     
1,063
 
Ending balance
 
$
2,467
   
$
(73
)
 
$
(8,617
)
 
$
(6,223
)
 
$
3,116
   
$
(1,669
)
 
$
(7,675
)
 
$
(6,228
)

   
Nine Months Ended September 30, 2016
   
Nine Months Ended September 30, 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
   
1,354
     
-
     
-
     
1,354
     
670
     
-
     
-
     
670
 
Amounts reclassified from AOCI
   
(323
)
   
1,322
     
-
     
999
     
(191
)
   
136
     
-
     
(55
)
Net other comprehensive income
   
1,031
     
1,322
     
-
     
2,353
     
479
     
136
     
-
     
615
 
Ending balance
 
$
2,467
   
$
(73
)
 
$
(8,617
)
 
$
(6,223
)
 
$
3,116
   
$
(1,669
)
 
$
(7,675
)
 
$
(6,228
)
 
Reclassifications out of AOCI for the three and nine months ended September 30, 2016 and 2015 follow (in thousands).

   
Amount Reclassified from AOCI
   
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
Affected Line Item in the Statement
Details about AOCI
Components
 
2016
   
2015
   
2016
   
2015
 
Where Net Income is
Presented
Unrealized gains and losses on available for sale securities
 
$
523
   
$
133
   
$
547
   
$
319
 
Net gain on sale of securities available for sale
Unrealized losses on securities transferred from available for sale to held to maturity
   
(690
)
   
(69
)
   
(2,200
)
   
(203
)
Interest income - U.S. Government agency obligations
Subtotal, pre-tax
   
(167
)
   
64
     
(1,653
)
   
116
   
Income tax effect
   
65
     
(40
)
   
654
     
(61
)
Income tax expense
Total, net of tax
 
$
(102
)
 
$
24
   
$
(999
)
 
$
55
   
 
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 securities. 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 September 30, 2016 and December 31, 2015 were as follows (in thousands):

   
September 30, 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
 
$
-
   
$
-
   
$
-
   
$
-
   
$
28,977
   
$
2
   
$
(463
)
 
$
28,516
 
Obligations of states and political subdivisions
   
69,239
     
2,719
     
-
     
71,958
     
100,215
     
4,467
     
-
     
104,682
 
Collateralized mortgage obligations
   
18,412
     
57
     
(73
)
   
18,396
     
15,795
     
2
     
(248
)
   
15,549
 
Mortgage-backed securities
   
93,442
     
1,864
     
(12
)
   
95,294
     
93,719
     
39
     
(1,316
)
   
92,442
 
Corporate bonds
   
9,000
     
-
     
(375
)
   
8,625
     
6,000
     
-
     
(90
)
   
5,910
 
Total available for sale securities
   
190,093
     
4,640
     
(460
)
   
194,273
     
244,706
     
4,510
     
(2,117
)
   
247,099
 
Held to maturity:
                                                               
U.S. Government agency securities
   
2,375
     
125
     
-
     
2,500
     
43,570
     
1,450
     
-
     
45,020
 
Obligations of states and political subdivisions
   
10,521
     
449
     
-
     
10,970
     
11,739
     
536
     
-
     
12,275
 
Corporate bonds
   
6,000
     
163
     
-
     
6,163
     
6,000
     
7
     
(30
)
   
5,977
 
Total held to maturity securities
   
18,896
     
737
     
-
     
19,633
     
61,309
     
1,993
     
(30
)
   
63,272
 
Total investment securities
 
$
208,989
   
$
5,377
   
$
(460
)
 
$
213,906
   
$
306,015
   
$
6,503
   
$
(2,147
)
 
$
310,371
 

At September 30, 2016 and December 31, 2015, investment securities carried at $180 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 September 30, 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.

   
September 30, 2016
 
   
Amortized
Cost
   
Fair
Value
 
Securities available for sale:
           
Due in one year or less
 
$
22,134
   
$
22,402
 
Due from one to five years
   
129,676
     
133,050
 
Due from five to ten years
   
38,283
     
38,821
 
Total securities available for sale
   
190,093
     
194,273
 
Securities held to maturity:
               
Due in one year or less
   
2,636
     
2,714
 
Due from one to five years
   
1,344
     
1,393
 
Due from five to ten years
   
8,375
     
8,663
 
Due after ten years
   
6,541
     
6,863
 
Total securities held to maturity
   
18,896
     
19,633
 
Total investment securities
 
$
208,989
   
$
213,906
 
 
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 September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Proceeds
 
$
6,615
   
$
3,077
   
$
6,615
   
$
10,080
 
                                 
Gross realized gains
 
$
523
   
$
133
   
$
547
   
$
334
 
Gross realized losses
   
-
     
-
     
-
     
(15
)
Net realized gains
 
$
523
   
$
133
   
$
547
   
$
319
 
 
Information pertaining to securities with unrealized losses at September 30, 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
 
September 30, 2016
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Collateralized mortgage obligations
 
$
6,159
   
$
(50
)
 
$
1,868
   
$
(23
)
 
$
8,027
   
$
(73
)
Mortgage-backed securities
   
6,512
     
(12
)
   
-
     
-
     
6,512
     
(12
)
Corporate bonds
   
2,925
     
(75
)
   
5,700
     
(300
)
   
8,625
     
(375
)
Total
 
$
15,596
   
$
(137
)
 
$
7,568
   
$
(323
)
 
$
23,164
   
$
(460
)
 
   
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
)
 
The CMOs with unrealized losses for twelve months or longer at September 30, 2016 are issued or guaranteed by U.S. Government agencies or sponsored enterprises. The corporate bonds with unrealized losses for twelve months or longer at September 30, 2016 carry investment grade ratings by all major credit rating agencies including Moody’s and Standard & Poor’s. In all cases, the unrealized losses on these bonds were a result of overall market conditions including the current interest rate environment and general market liquidity. The losses were not related to a deterioration of the quality of the issuer or any company-specific adverse events. 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 September 30, 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 September 30, 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 September 30, 2016 and 2015, $87 thousand and $73 thousand, respectively, in such carrying costs was expensed. For the nine months ended September 30, 2016 and 2015, $243 thousand and $214 thousand, respectively, in such carrying costs was expensed. The Company has pledged mortgage-backed securities of U.S. Government-sponsored enterprises held in its available for sale portfolio, with a market value of approximately $3 million at September 30, 2016, as collateral for the derivative swap contracts. The Company had pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $3 million at December 31, 2015, as collateral for such 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 September 30, 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 September 30, 2016 and December 31, 2015, net loans disaggregated by class consisted of the following (in thousands):
 
   
September 30, 2016
   
December 31, 2015
 
Commercial and industrial
 
$
210,510
   
$
189,769
 
Commercial real estate
   
728,562
     
696,787
 
Multifamily
   
418,108
     
426,549
 
Mixed use commercial
   
82,527
     
78,787
 
Real estate construction
   
43,190
     
37,233
 
Residential mortgages
   
180,831
     
186,313
 
Home equity
   
42,407
     
44,951
 
Consumer
   
4,651
     
6,058
 
Gross loans
   
1,710,786
     
1,666,447
 
Allowance for loan losses
   
(20,465
)
   
(20,685
)
Net loans at end of period
 
$
1,690,321
   
$
1,645,762
 
 
There were no loans in the process of foreclosure collateralized by residential real estate property at September 30, 2016.

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands).
 
   
Three Months Ended September 30, 2016
   
Three Months Ended September 30, 2015
 
   
Balance at
beginning of
period
   
Charge-
offs
   
Recoveries
   
Provision
(credit) for
loan losses
   
Balance at
end of
period
   
Balance at
beginning of
period
   
Charge-
offs
   
Recoveries
   
(Credit) provision
for loan
losses
   
Balance at
end of
period
 
Commercial and industrial
 
$
1,814
   
$
(216
)
 
$
48
   
$
226
   
$
1,872
   
$
2,073
   
$
(252
)
 
$
138
   
$
(62
)
 
$
1,897
 
Commercial real estate
   
7,746
     
-
     
14
     
48
     
7,808
     
6,000
     
-
     
10
     
420
     
6,430
 
Multifamily
   
4,898
     
-
     
-
     
(721
)
   
4,177
     
4,065
     
-
     
-
     
252
     
4,317
 
Mixed use commercial
   
842
     
-
     
-
     
(78
)
   
764
     
465
     
-
     
-
     
129
     
594
 
Real estate construction
   
456
     
-
     
-
     
48
     
504
     
478
     
-
     
-
     
8
     
486
 
Residential mortgages
   
2,193
     
-
     
-
     
(104
)
   
2,089
     
2,571
     
-
     
4
     
120
     
2,695
 
Home equity
   
580
     
-
     
4
     
(40
)
   
544
     
672
     
-
     
10
     
(6
)
   
676
 
Consumer
   
60
     
(1
)
   
1
     
1
     
61
     
150
     
(1
)
   
5
     
(29
)
   
125
 
Unallocated
   
2,376
     
-
     
-
     
270
     
2,646
     
3,577
     
-
     
-
     
(482
)
   
3,095
 
Total
 
$
20,965
   
$
(217
)
 
$
67
   
$
(350
)
 
$
20,465
   
$
20,051
   
$
(253
)
 
$
167
   
$
350
   
$
20,315
 
 
   
Nine Months Ended September 30, 2016
   
Nine Months Ended September 30, 2015
 
   
Balance at
beginning of
period
   
Charge-
offs
   
Recoveries
   
Provision
(credit) for
loan losses
   
Balance at
 end of
period
   
Balance at
beginning of
period
   
Charge-
offs
   
Recoveries
   
(Credit)
provision
for loan
losses
   
Balance at
end of
period
 
Commercial and industrial
 
$
1,875
   
$
(216
)
 
$
121
   
$
92
   
$
1,872
   
$
1,560
   
$
(744
)
 
$
1,174
   
$
(93
)
 
$
1,897
 
Commercial real estate
   
7,019
     
-
     
32
     
757
     
7,808
     
6,777
     
-
     
28
     
(375
)
   
6,430
 
Multifamily
   
4,688
     
-
     
-
     
(511
)
   
4,177
     
4,018
     
-
     
-
     
299
     
4,317
 
Mixed use commercial
   
766
     
-
     
-
     
(2
)
   
764
     
261
     
-
     
-
     
333
     
594
 
Real estate construction
   
386
     
-
     
-
     
118
     
504
     
383
     
-
     
-
     
103
     
486
 
Residential mortgages
   
2,476
     
-
     
5
     
(392
)
   
2,089
     
3,027
     
-
     
31
     
(363
)
   
2,695
 
Home equity
   
639
     
(8
)
   
9
     
(96
)
   
544
     
709
     
-
     
17
     
(50
)
   
676
 
Consumer
   
106
     
(68
)
   
5
     
18
     
61
     
166
     
(11
)
   
20
     
(50
)
   
125
 
Unallocated
   
2,730
     
-
     
-
     
(84
)
   
2,646
     
2,299
     
-
     
-
     
796
     
3,095
 
Total
 
$
20,685
   
$
(292
)
 
$
172
   
$
(100
)
 
$
20,465
   
$
19,200
   
$
(755
)
 
$
1,270
   
$
600
   
$
20,315
 

At September 30, 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 September 30, 2016 and December 31, 2015 disaggregated by class and impairment methodology (in thousands).
 
 
Allowance for Loan Losses
   
Loan Balances
 
September 30, 2016
 
Individually
evaluated for
impairment
   
Collectively
evaluated for
impairment
   
Ending balance
   
Individually
evaluated for
impairment
   
Collectively
evaluated for
impairment
   
Ending balance
 
Commercial and industrial
 
$
-
   
$
1,872
   
$
1,872
   
$
4,157
   
$
206,353
   
$
210,510
 
Commercial real estate
   
-
     
7,808
     
7,808
     
3,590
     
724,972
     
728,562
 
Multifamily
   
-
     
4,177
     
4,177
     
-
     
418,108
     
418,108
 
Mixed use commercial
   
-
     
764
     
764
     
-
     
82,527
     
82,527
 
Real estate construction
   
-
     
504
     
504
     
-
     
43,190
     
43,190
 
Residential mortgages
   
426
     
1,663
     
2,089
     
4,909
     
175,922
     
180,831
 
Home equity
   
136
     
408
     
544
     
1,655
     
40,752
     
42,407
 
Consumer
   
25
     
36
     
61
     
214
     
4,437
     
4,651
 
Unallocated
   
-
     
2,646
     
2,646
     
-
     
-
     
-
 
Total
 
$
587
   
$
19,878
   
$
20,465
   
$
14,525
   
$
1,696,261
   
$
1,710,786
 
 
   
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 September 30, 2016 and December 31, 2015 (in thousands).

   
September 30, 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
 
$
4,157
   
$
4,157
   
$
-
   
$
2,869
   
$
2,869
   
$
-
 
Commercial real estate
   
4,009
     
3,590
     
-
     
4,753
     
4,334
     
-
 
Residential mortgages
   
3,021
     
2,892
     
-
     
3,076
     
2,947
     
-
 
Home equity
   
1,301
     
1,301
     
-
     
1,233
     
1,233
     
-
 
Consumer
   
121
     
121
     
-
     
207
     
207
     
-
 
Subtotal
   
12,609
     
12,061
     
-
     
12,138
     
11,590
     
-
 
                                                 
With an allowance recorded:
                                               
Commercial and industrial
   
-
     
-
     
-
     
3
     
3
     
-
 
Residential mortgages
   
2,017
     
2,017
     
426
     
2,870
     
2,870
     
559
 
Home equity
   
371
     
354
     
136
     
586
     
450
     
170
 
Consumer
   
93
     
93
     
25
     
172
     
172
     
48
 
Subtotal
   
2,481
     
2,464
     
587
     
3,631
     
3,495
     
777
 
Total
 
$
15,090
   
$
14,525
   
$
587
   
$
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 and nine months ended September 30, 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 September 30,
   
Nine Months Ended September 30,
 
   
2016
   
2015
   
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
   
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
 
$
4,322
   
$
68
   
$
2,322
   
$
226
   
$
4,034
   
$
103
   
$
3,331
   
$
485
 
Commercial real estate
   
3,567
     
59
     
6,213
     
48
     
4,090
     
135
     
8,590
     
647
 
Residential mortgages
   
4,936
     
52
     
5,817
     
166
     
5,248
     
148
     
5,604
     
245
 
Home equity
   
1,658
     
17
     
1,752
     
15
     
1,658
     
48
     
1,687
     
43
 
Consumer
   
215
     
3
     
349
     
5
     
270
     
10
     
374
     
11
 
Total
 
$
14,698
   
$
199
   
$
16,453
   
$
460
   
$
15,300
   
$
444
   
$
19,586
   
$
1,431
 

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 $473 thousand and $534 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of September 30, 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 September 30, 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 September 30, 2016 and December 31, 2015 are as follows (dollars in thousands):
 
   
September 30, 2016
   
December 31, 2015
 
TDRs Outstanding
 
Number of
Loans
   
Outstanding
Recorded
Balance
   
Number of
Loans
   
Outstanding
Recorded
Balance
 
Commercial and industrial
   
11
   
$
2,924
     
17
   
$
1,116
 
Commercial real estate
   
4
     
2,953
     
5
     
4,131
 
Residential mortgages