A N N UU AA LL RR EE P OO RRR TTT 22 00 1 444
OUR MISSION
To offer the community banking products and services
shaped by emerging ideas and technologies, combined
with time-honored values of trust and integrity; to provide
the highest quality service with a sense of urgency.
SELECTED FINANCIAL DATA
(dollars in thousands)
TOTAL ASSETS
TOTAL DEPOSITS
$508,069
$467,068
$438,399
$390,931
$395,125
$363,358
$328,802
$339,733
$252,190
$265,020
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
TOTAL DEMAND DEPOSITS
TOTAL LOANS
$172,165
$177,252
$189,204
$379,652
$294,471
$218,488
$212,876
$243,687
$45,765
$38,024
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2
| EMPIRE BANCORP, INC.
NON-PERFORMING LOANS TO TOTAL LOANS
NET INTEREST INCOME
1.02%
1.03%
1.09%
$16,863
$14,437
$13,428
$12,249
$11,155
0.81%
0.31%
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
TOTAL STOCKHOLDERS’ EQUITY
TIER 1 LEVERAGE RATIO (BANK ONLY)
$62,421
12.65%
10.80%
9.47%
9.52%
9.01%
$42,216
$37,432
$38,460
$29,965
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
ANNUAL REPORT 2014 |
3
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
For the year ended December 31,
2014
2013
2012
2011
2010
FINANCIAL CONDITION DATA:
Total Assets
Total Loans
Total Deposits
Total Demand Deposits
Total Stockholders’ Equity
SELECTED STATISTICAL DATA:
Net Interest Margin
Return on Average Assets
Return on Average Equity
Efficiency Ratio
RATIOS:
Net Charge-offs to Average Loans
Non-performing Loans to Total Loans
Non-performing Assets to Total Assets
Allowance for Loan Losses to Total Loans
Tier 1 Leverage Capital Ratio
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
OPERATING DATA:
Net Interest Income
Provision for Loan Losses
Other Income
Other Expense
Net Income
PER SHARE DATA:
Diluted Earnings Per Share
Book Value, as converted
$ 508,069
$ 467,068 $ 438,399
$ 339,733 $ 328,802
$ 379,652
$ 294,471 $ 243,687
$ 212,876 $ 218,488
$ 395,125
$ 390,931 $ 363,358
$ 265,020 $ 252,190
$ 189,204
$ 177,252 $ 172,165
$ 45,765
$ 38,024
$ 62,421
$ 38,460
$ 42,216
$ 37,432
$ 29,965
3.55%
0.38%
4.43%
3.29%
0.29%
3.19%
3.48%
0.90%
3.82%
1.39%
8.90%
13.92%
3.85%
0.64%
6.33%
77.37%
84.31%
89.30%
86.12%
92.02%
0.01%
0.31%
0.23%
1.17%
12.65%
0.08%
0.81%
0.51%
1.44%
9.01%
0.01%
1.09%
0.61%
1.84%
–
1.03%
0.65%
1.98%
9.52%
10.80%
0.01%
1.02%
0.68%
1.93%
9.47%
16.02%
12.78%
14.65%
15.36%
13.31%
17.17%
14.03%
15.90%
16.62%
14.56%
$ 16,863
$ 14,437
$ 13,428
$ 12,249
$ 11,155
$
243
–
$
285
–
$
772
$ 1,033
$
898
$ 1,941
$ 2,630
$ 2,302
$ 13,825
$ 13,054
$ 12,532
$ 10,989
$ 10,740
$ 1,844
$ 1,286
$ 3,624
$ 4,609
$ 1,945
$
$
0.41
9.07
$
$
0.29
8.78
$
$
0.83
9.64
$
$
1.09
8.60
$
$
0.46
7.11
NOTE: Selected financial data and financial highlights for 2014 were derived from the audited consolidated financial statements of Empire Bancorp, Inc.
Selected financial data and financial highlights for periods prior to 2013 were derived from the audited financial statements of Empire National Bank.
Regulatory capital ratios presented on bank-only basis. Book value, as converted, treats the Series A preferred stock as having been converted into
common stock because it has been structured as a nonvoting common stock equivalent.
4
| EMPIRE BANCORP, INC.
DEAR
SHAREHOLDER
We closed 2014 strengthened by our recent sale of capital
stock and ready to deploy the new equity to boost our returns
and shareholder value. Our earnings for 2014 were solid, even
after absorbing a one-time after-tax write off of approximately
$386 thousand. Net income for the year totaled $1.8 million or
$0.41 per diluted share, compared to $1.3 million or $0.29 per
share for the year ended December 31, 2013, an increase of
$558 thousand. Profits before income taxes increased more
than $1.5 million, or approximately 68% compared to the prior
year, generated largely by an increase in net interest income
of $2.4 million or 16.8%, which was due primarily to our loan
growth. We believe that our simple, stable business model
and strategy will be the cornerstone to our asset and earnings
growth over the coming years.
As discussed above, our 2014 earnings were materially
impacted by a one-time expense, which was related to a
change in the New York state tax laws. During 2014, New
York State made a significant change to its corporate tax
code by repealing the banking corporation franchise tax
and subjecting banks to the general business franchise
tax. For community banks such as us, the tax code now
provides a tax benefit for a portion of interest earned on
both small business loans up to $5 million and residential
mortgages made to New York borrowers. Since most of
our loan portfolio meets the criteria for the tax benefit,
these modifications are especially meaningful to us as we
expect a material reduction in our state tax liability over the
long term. However, as a result of the change in the law,
we were required to write down the value of our state
deferred tax asset by $386 thousand, which considerably
lowered our 2014 earnings. The state deferred tax asset
represented a state tax benefit that we expected to be able
to utilize under the prior tax rules, which was eliminated as a
result of the tax law changes. We estimate that we will fully
recover the amount of the write down through lower state
taxes within two years. Excluding the impact of this write off
which is reflected as income tax expense, our net income
year over year increased $944 thousand or 73.4%. Our
combined effective tax rate for 2014, excluding the impact
of the write off of the state deferred tax asset, decreased to
41.8% from 43.6% for the year ended December 31, 2013.
In 2014, we completed a private placement of our capital
stock that resulted in net proceeds to us of $18.7 million. As
one of the last remaining community banking organizations
on Long Island, our aim is to use the net proceeds from this
offering to support our continued organic growth. Although
the stock issuance was slightly dilutive to book value, we
believe that the capital raise allowed us to reposition our
balance sheet to bolster opportunities for growth and
enhance shareholder value in 2015 and beyond.
Douglas C. Manditch, Chairman & Chief Executive Officer (left)
with Thomas M. Buonaiuto, President & Chief Operating Officer
We continued to firmly hold our pricing and credit standards
while at times observing certain competitors give way
to secure asset growth. Notwithstanding our selective
underwriting process, loan growth exceeded 28%, totaling
$85.2 million for the year, chiefly fueled by an increase in
our multifamily loan portfolio. The New York City multifamily
market is differentiated from other cities in the country
not only by its number and share of residents that live in
rental properties, but also by the City’s immense array of
rent regulation. The majority of our deals are located in
Kings, Queens and Manhattan counties, where we best
understand the economic realities of the communities.
Multifamily rentals are the largest segment of the housing
stock in New York City. Through the third quarter of 2014
the industry wide delinquency rate and reported charge
ANNUAL REPORT 2014 |
5
offs on multifamily loans continued to trend downward.
Nationwide, we see a shift toward rentals versus home
ownership, which is reflected in lower vacancy rates as
demand for rental housing grows. Multifamily lending is a
nice fit for our credit culture, a culture averse to taking on
loans with higher credit risks.
Our historical delinquency rates remained low as our asset
quality continued to mirror our conservative credit standards,
and our provision for loan losses booked during 2014
reflected our low level of loan delinquencies. As of year-end,
our percentage of non performing assets comprised 0.23%
of total assets, significantly below many of our peers. Looking
forward, we plan to further diversify our mix of loans.
With the recent renewal of our core processing contract, we
committed to improving our customers’ experience including
a forthcoming enhanced system for online wire transfers.
Our electronic product offerings continue to expand as we
plan the roll out a consumer mobile remote deposit product.
Joining our staff in 2014 was Susanne Pheffer as Senior Vice
President and Chief Technology Officer. Susanne earned
both her graduate and undergraduate degrees at Adelphi
University. Her career includes over thirty years of working
expertise in the financial technology arena. Most recently
she spent eight years consulting on information technology
for financial institutions throughout the nation, including
the management and successful completion of many core
conversion projects. Previously she held the position of
Chief Information Officer at the then largest independent
commercial bank headquartered on Long Island, managing
all of the bank’s technology and directing all of the in-house
data center’s operations. During the first quarter of 2015,
we rolled out a newly redesigned website to better engage
with our mobile products. Over the past year we initiated a
presence on social media expanding our traditional marketing
distribution channels. Cybersecurity is now essential for all
companies - especially community banks - and Susanne
leads a team who are relentless in everyday monitoring to
protect the assets and personal information of our customers.
Economic news remained mixed throughout the past year.
Speaking with small business owners on a daily basis,
we detect cautious optimism about the local economy.
Apprehension regarding the timing and direction of
interest rate movements continues not only in the financial
services industry, but across different sectors. Trepidation
regarding future business conditions remains as managers
tackle taxes, availability of credit, and the cost of increasing
regulations. Economists look at the same data and draw
different conclusions, many questioning the validity of
reported numbers, such as our official unemployment rate.
6
| EMPIRE BANCORP, INC.
Government regulation and red tape remain the noose
around the neck of community banking. In the early months
of 2015, witnesses were testifying to Congress on the
onerous impact on community banks of the regulations
introduced in 2010 by the Dodd-Frank Act. Banking
trade groups have spearheaded efforts for regulatory
relief, including gathering support for easing the effects of
Dodd-Frank to establish more efficient approaches for risk
management in this time of historically low net interest
margins. To put this in perspective, for every dollar that
we generated in revenue, we spent thirteen cents on total
compliance and governance costs in 2014 and fourteen
cents in 2013.
During 2015, we are well positioned to add market share at
our existing branch locations. As a community bank we are
continually focused on relationships. Our service philosophy
affords us enviable customer retention rates, and we are
strategizing to refine and sharpen our sales model and
product offerings. Our branches in Islandia, Shirley and Port
Jefferson Station, coupled with our state of the art remote
deposit services, provide additional opportunities for loan
and deposit growth. Moreover, we are only beginning to tap
the prospects of our branch located on Old Country Road in
Mineola, which opened in October 2013.
Our current infrastructure, coupled with improved capital
levels, establishes the foundation for our future growth
and for enhanced returns for our shareholders. During the
de novo stage of our development, at times we chose to
forgo short term profitability with the intent to create a
platform for enhancing long term value for our shareholders.
However, growing earnings per share is now our focus, and
building franchise value remains our priority.
We applaud the dedication of our staff and Board of
Directors. Again, as a shareholder, we remind you to please
keep us top of mind when discussing banking needs with
your family, friends and colleagues. On behalf of our Board
of Directors and the entire team, we thank you for your
continued support as a valued shareholder. We look forward
to seeing you at our shareholder meeting on Thursday, May
21, 2015, being held at the Islandia Marriott Long Island at
3635 Express Drive North in Islandia.
God Bless America!
Douglas C. Manditch
Chairman and Chief Executive Officer
Thomas M. Buonaiuto
President and Chief Operating Officer
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and 21E of the Securities Exchange Act of 1934. These forward-looking statements include statements that
reflect the current views of our senior management with respect to our financial performance and future events with
respect to our business and the banking industry in general. These statements are often, but not always, made through
the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,”
“expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and
similar expressions of a future or forward-looking nature. These statements involve estimates, assumptions and risks
and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ
materially from those indicated in these statements.
We believe that these factors include, but are not limited to the following: our ability to successfully implement
our growth strategy; the accuracy of the assumptions underlying the elements of our growth strategy; changes in the
strength of the United States economy in general, as well as the economy in our local market areas, and the
corresponding impact of those changes on the ability of our customers to transact business with us on profitable terms,
including the ability of our borrowers to repay their loans according to their terms or the sufficiency of any related
collateral; changes in interest rates and market prices and the corresponding impact of those changes on our net interest
margin, asset valuations and expense expectations; changes in the levels of loan prepayments and the resulting effects
on the value of our loan portfolio; increased competition for deposits and loans adversely affecting rates and terms; our
ability to adequately measure and monitor the credit risk inherent in our loan and securities portfolios; the failure of
assumptions underlying our allowance for credit losses; a determination or downgrade in the credit quality and credit
agency ratings of the securities in our securities portfolio; increased asset levels and changes in the composition of
assets and the resulting impact on our capital levels and regulatory capital ratios; changes in the availability of funds
resulting in increased costs or reduced liquidity; the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels; our ability to adequately manage the risks
associated with technology and security; our ability to access capital markets on acceptable terms as necessary to
support the continued growth and safety and soundness of our organization; legislative or regulatory developments,
including changes in laws and regulations concerning taxes, banking, securities, insurance and other aspects of the
financial securities industry, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-
Frank Act”), and the extensive rule making required to be undertaken by various regulatory agencies under the Dodd-
Frank Act; further government intervention in the U.S. financial system; changes in statutes and government regulations
or their interpretations applicable to us, including changes in tax requirements and tax rates; acts of terrorism, an
outbreak of hostilities or other international or domestic calamities, weather or other acts of God and other matters
beyond our control; and other risks and uncertainties listed from time to time in our reports and documents filed with
the Office of the Comptroller of the Currency (“OCC”).
The foregoing factors should not be construed as exhaustive and should be read together with the other
cautionary statements included in this Annual Report. If one or more events related to these or other risks or
uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially
from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements.
Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation
to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made
or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and we cannot predict all
such factors. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
Unless we state otherwise or the context otherwise requires, references in this management’s discussion and
analysis to “we,” “our” and “us” refer to Empire Bancorp, Inc. and Empire National Bank, on a consolidated basis.
1
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial and operating data regarding our organization. As
the holding company reorganization was completed on August 22, 2013, the historical financial information for periods
prior to 2013 is presented on a bank-only basis, while 2013 and 2014 information is presented on a consolidated basis.
You should review this information together with the discussion that follows and the audited financial statements and
related notes included elsewhere in this Annual Report. Substantially all average balances were computed based on
daily balances. Our historical results may not be indicative of our future performance. All dollars are in thousands,
except per share data.
2014
As of and for the year ended December 31,
2012
2011
2013
Income Statement Data:
Interest income ......................................................... $ 18,540
1,677
Interest expense ........................................................
16,863
Net interest income ...................................................
243
Provision for loan losses...........................................
16,620
Net interest income after provision ..........................
1,033
Other income ............................................................
13,825
Other expense ...........................................................
3,828
Income before income taxes .....................................
1,984
Income tax expense (benefit)....................................
1,844
Net income ............................................................... $
Period-End Balance Sheet Data:
Investment securities, available-for-sale .................. $ 100,617
375,199
Loans, net of allowance for loan losses ....................
4,453
Allowance for loan losses .........................................
508,069
Total assets ...............................................................
189,204
Noninterest-bearing deposits ....................................
205,921
Interest-bearing deposits...........................................
Stockholders’ equity .................................................
62,421
Per Share Data:
Diluted earnings ....................................................... $
Basic earnings ..........................................................
Book value, as converted(1) .....................................
Weighted average common shares outstanding ........
Weighted average preferred shares outstanding .......
Performance Ratios:
Return on average equity ..........................................
Return on average assets ..........................................
Net interest margin ...................................................
Efficiency ratio(2) ....................................................
Asset Quality Ratios:
Nonperforming assets to total assets(3)(4) ...............
Nonperforming loans to total loans(3)(4) .................
Allowance for loan losses to total loans(4) ...............
Net charge-offs to average loans ..............................
Capital Ratios (bank level only):
Tier 1 leverage capital ..............................................
Tier 1 risk-based capital ...........................................
Total risk-based capital ............................................
0.41
0.42
9.07
4,427,830
41,182
4.43%
0.38
3.55
77.37
0.23%
0.31
1.17
0.01
12.65%
16.02
17.17
$ 16,216
1,779
14,437
—
14,437
898
13,054
2,281
995
1,286
$
$ 152,639
290,227
4,244
467,068
177,252
213,679
38,460
$
$
0.29
0.29
8.78
4,379,970
—
$ 15,696
2,268
13,428
285
13,143
1,941
12,532
2,552
(1,072)
3,624
$
$ 180,202
239,211
4,476
438,399
172,165
191,193
42,216
$
$
0.83
0.83
9.64
4,373,279
—
$
$
14,765
2,516
12,249
—
12,249
2,630
10,989
3,890
(719)
4,609
$ 114,502
208,660
4,216
339,733
45,765
219,255
37,432
$
$
1.09
1.09
8.60
4,213,866
—
$
$
$
2010
13,999
2,844
11,155
772
10,383
2,302
10,740
1,945
—
1,945
92,696
214,272
4,216
328,802
38,024
214,166
29,965
$
$
0.46
0.46
7.11
4,212,330
—
3.19%
0.29
3.29
84.31
0.51%
0.81
1.44
0.08
9.01%
12.78
14.03
8.90%
0.90
3.48
89.30
0.61%
1.09
1.84
0.01
9.52%
14.65
15.90
13.92%
1.39
3.82
86.12
0.65%
1.03
1.98
—
10.80%
15.36
16.62
6.33%
0.64
3.85
92.02
0.68%
1.02
1.93
0.01
9.47%
13.31
14.56
(1) Book value, as converted, treats the Series A preferred stock as having been converted into common stock because it has been structured as a
nonvoting common stock equivalent.
(2) Efficiency ratio is the ratio of noninterest expense to net interest income and noninterest income.
(3) For the periods presented, nonperforming assets consist solely of nonperforming loans and nonperforming loans consist solely of nonaccrual
loans.
(4) Total loans are net of unearned discounts and deferred fees and costs.
2
Overview
OUR BUSINESS
We are a bank holding company, headquartered in Islandia, New York, which offers a broad range of
financial services through our wholly-owned banking subsidiary, Empire National Bank. Our primary market is the
counties of Suffolk, Nassau, Kings, Queens and New York in the State of New York which we serve from our main
office located at 1707 Veterans Highway, Suite 8, Islandia, New York and from our three branch offices located in
Shirley, Port Jefferson Station and Mineola, New York. We believe that our market presents attractive demographic
attributes and favorable competitive dynamics, providing long-term growth opportunities for our organization.
We are led by a team of experienced bankers, all of whom have substantial banking experience and
relationships on Long Island. We believe that recent changes and disruption within our primary market has created
an underserved base of small and medium sized businesses, professionals and other organizations that are interested
in banking with a company headquartered in, and with decision-making authority based in, this market. We believe
that our management’s long-standing presence in the area gives us insight into the local market and, as a result, the
ability to tailor our products and services, particularly the structure of our loans, more closely to the needs of our
targeted customers. We seek to develop comprehensive, long-term banking relationships by cross-selling loans and
core deposits, offering a diverse array of products and services and delivering high quality customer service.
Our operating strategy
Our business model focuses on a traditional, relationship-based, community bank structure guided by the
following principles: disciplined risk management; responsive, high-quality service; focus on building long-term
relationships; credibility within our communities; and efficiency. We believe our flexible organizational structure,
service philosophy, and depth of market knowledge acquired by our management over their banking careers
differentiates us from other financial institutions. Our operating strategy focuses on steady, long-term growth and
increased profitability.
To execute our business model, we have implemented a number of operating strategies, including:
• Hiring and retaining qualified banking officers with extensive experience in our market;
• Utilizing technology and strategic outsourcing to provide a broad array of secure and convenient
products and services in a cost-effective manner;
• Developing a suite of focused products and services tailored for professional practice customers in our
market;
• Operating from highly visible and accessible banking offices in close proximity to a concentration of
targeted commercial businesses and professionals;
• Expanding our geographic footprint within our primary market through additional branch locations;
• Providing individualized attention with consistent, prompt local decision-making authority; and
• Leveraging the diverse community involvement, client referrals and professional expertise of our
directors and officers.
Our competitive strengths
We believe that we are well-positioned to create value for our shareholders, particularly as a result of the
following competitive strengths:
3
Cohesive core management team with extensive local banking experience. Our senior management team is
led by Douglas C. Manditch and Thomas M. Buonaiuto. Mr. Manditch has 49 years of banking experience, all of
which have been on and around Long Island, including approximately 25 years as Chief Executive Officer of Long
Island-based financial institutions. Mr. Buonaiuto has more than 22 years of banking experience, substantially all of
which have been in executive officer capacities of financial institutions in the New York metropolitan area. Janet
Verneuille, Chief Financial Officer, has over 27 years banking experience primarily in finance roles including
serving as Executive Vice President and Chief Financial Officer at another Long Island-based financial institution.
John Pinna, Chief Information Officer, has over 22 years banking experience centered in technology and operations.
He worked with Messrs. Manditch and Buonaiuto managing another commercial banking franchise in our market
area. Susanne Pheffer, Senior Vice President and Chief Technology Officer, has over 30 years of working expertise
in the financial technology arena. Most recently, she spent eight years providing consulting services with respect to
information technology for financial institutions across the country. Previously, she served as Chief Information
Officer at the then largest independent commercial bank headquartered on Long Island. Each member of our senior
management team has experience at growing financial institutions in the New York metropolitan area.
Stable and scalable platform. Throughout our operating history, we have maintained a stable banking
platform with strong capital levels and sound asset quality. At December 31, 2014, the Bank had a 12.65% Tier 1
leverage capital ratio, a 16.02% Tier 1 risk-based capital ratio and a 17.17% total risk-based capital ratio. In
addition, we maintain no debt or other long-term liabilities at the holding company level. Contributing to our
stability is our track record of sound asset quality. Our highest annual rate of net loan charge-offs to average loans
over the past five years was 0.08% or $232 thousand in 2013, and our average annual rate of net loan charge-offs to
average loans over the same period was 0.02%. Utilizing the prior experience of our management team at larger
banks operating within our primary market, we believe that we have built a scalable corporate infrastructure,
including technology and banking processes, capable of supporting continued growth, while improving operational
efficiencies. We enhanced our capital strength during the fourth quarter of 2014 when we completed a private
placement of our capital stock, generating $18.7 million in net proceeds. We believe that our strong capital and
asset quality levels will allow us to grow and that our operating platform will allow us to manage that growth
effectively, resulting in greater efficiency and improved profitability.
Growing deposit base. A significant driver of our franchise is the growth and stability of our deposits,
which we use to fund our loans and investment portfolio. At December 31, 2014, our total deposits were $395.1
million, representing a compounded annual growth rate of 11.2% since December 31, 2010. Our deposit growth has
been driven significantly by the growth in our noninterest-bearing demand deposits, which represented
approximately 47.9% of our total deposits at December 31, 2014, up from 15.1% of our total deposits at December
31, 2010. Although the rate of deposit growth decreased during 2014, we continued our shift in composition to a
higher proportion of noninterest-bearing demand deposits. The shift in deposit mix over this period has resulted in
lowering the average cost of our deposit liabilities. We seek to cross-sell deposit products at loan origination, which
provide a basis for expanding our banking relationships and a stable source of funding.
Our challenges
In implementing our business model, we have faced, and expect to continue to face, a number of challenges
that could impact our financial condition, operating results and prospects in future periods. We believe that the most
consequential risks to our business include the following:
• Our business is concentrated on Long Island and in certain boroughs of New York City, and we are
more sensitive than our more geographically diversified competitors to adverse changes in the local
economy;
• The fair value of our investment securities can fluctuate due to factors outside of our control;
• We face significant competition to attract and retain customers;
• We operate in a highly regulated environment, which could restrain our growth and profitability;
4
• We depend heavily on our information technology and telecommunications systems, which are subject
to systems failures, interruptions and security risks; and
• We may not be able to adequately measure and limit our credit risk, which could impact our
profitability.
Our market
Our primary market is the counties of Suffolk County and Nassau County, New York, although we also
conduct significant business in the counties of Kings, Queens and Manhattan in the State of New York. The
economy of our markets reflects a diverse cross section of employment sectors, with a mix of services;
wholesale/retail trade; federal, state and local government; healthcare; banking and education.
Our primary market is diverse, in terms of educational attainment, income level and ethnic
background. According to data provided by the U.S. Census Bureau, the population of Suffolk County was
approximately 1,499,738 residents as of July 1, 2013, which represents a 0.4% increase in population since April 1,
2010. Similarly, the population of Nassau County was approximately 1,352,146 residents as of July 1, 2013, which
represents a 0.9% increase in population since April 1, 2010. This population growth has attracted businesses to the
area and led to growth in the local service economy, and, while it is not certain, we expect that this trend will
continue. In addition, as of 2013, the median household incomes in Suffolk County and Nassau County were
$87,763 and $97,690, compared to a New York state household income average of $58,003. Further, according to
data provided by the FDIC, between June 30, 2010 and June 30, 2014, FDIC-insured deposits in Suffolk County and
Nassau County have increased by approximately 23.4% and 15.2%, respectively. We believe that our primary
market area presents attractive growth opportunities with a diversified and growing customer base. As a community
bank, we are focused on serving the needs of the small-and medium-sized businesses, professionals, nonprofit
organizations, and other organizations primarily in Suffolk and Nassau Counties on Long Island, and as well as
individual consumers within the communities that we serve.
We compete with a wide range of financial institutions in our market, including local, regional and national
commercial banks, thrifts and credit unions. Consolidation activity involving financial institutions based outside of
Long Island has altered the competitive landscape in our market within recent years. As of June 30, 2005,
approximately 46% of the deposits in Suffolk and Nassau counties were held in banks that were based on Long
Island; where as of June 30, 2014, that number had decreased to less than 20%, due in large part to the acquisitions
of locally-based financial institutions by larger banks based outside of our primary market area. Although
competition within our market area is strong, we believe that the customer disruption associated with these
acquisitions, as well as the loss of in-market decision-making and relationship-based banking, will continue to
provide us with additional growth opportunities. We also compete with mortgage companies, investment banking
firms, brokerage houses, mutual fund managers, investment advisors, and other “non-bank” companies for certain of
our products and services. Some of our competitors are not subject to the degree of supervision and regulatory
restrictions that we are.
Interest rates, both on loans and deposits, and prices on fee-based services are significant competitive
factors among financial institutions generally. Many of our competitors are much larger financial institutions that
have greater financial resources than we do and that compete aggressively for market share. These competitors
attempt to gain market share through their financial product mix, pricing strategies and banking center locations.
Due to the benefits of scale, our larger regional and national bank competitors can, in many cases, offer pricing that
is more attractive than that which we can offer, although this pricing has historically been reserved for customers of
a size for which we generally would not compete. Other important competitive factors in our market area include
office locations and hours, quality of customer service, community reputation, continuity of personnel and services,
capacity and willingness to extend credit, and ability to offer sophisticated cash management and other commercial
banking services. Many of our competitors are organized along lines of business and use efficient but impersonal
approaches to providing products and services to customers.
While we seek to be competitive with respect to rates, we believe that we compete most successfully on the
basis of our service and relationship-based culture. Because we are unburdened by legacy main frame computer
5
systems, we believe that our technology platform enables us to be more flexible in developing and implementing
new services in a competitive marketplace.
Loans
General. Lending has the highest priority for our asset utilization. Our primary lending focus is to serve
small and medium sized businesses, professionals, nonprofit organizations, and other organizations in our primary
market with a variety of financial products and services, while maintaining strong and disciplined credit policies and
procedures. We offer a full array of commercial and consumer lending products to serve the needs of our customers.
Commercial lending products include commercial real estate loans, multi-family loans, real estate construction and
development loans and general commercial loans (such as business term loans, equipment financing and lines of
credit). Consumer lending products include home equity loans and lines of credit and consumer installment loans,
such as loans to purchase cars, boats and other recreational vehicles. We do not engage in a material amount of
consumer lending, which is offered primarily as an accommodation to our commercial customers, and their
executives and employees. In addition, our lending policies do not provide for any loans that are highly speculative,
sub-prime, or that have high loan-to-value ratios.
We market our lending products and services to qualified borrowers through conveniently located banking
offices, relationship networks and high touch personal service. Our relationship managers actively target long-
standing businesses operating in the communities we serve. We seek to attract new lending customers through
professional service, relationship networks and competitive pricing.
Commercial real estate loans. We offer real estate loans for commercial property that is owner-occupied
as well as commercial property owned by real estate investors. Commercial real estate loan terms generally are
limited to 10 to 15 years or less, although payments may be structured on a longer amortization basis. The interest
rates on our commercial real estate loans may be fixed or adjustable, although rates typically are not fixed for a
period exceeding five to ten years. We generally charge a documentation or loan processing fee for our services.
With the exception of our multi-family lending which is generally non-recourse, we require personal guarantees
from the principal owners of the business supported by a review of the principal owners’ personal financial
statements. We make efforts to limit our risks with respect to commercial real estate loans by analyzing borrowers’
cash flow and collateral value. The real estate securing our existing commercial real estate loans includes a wide
variety of property types, such as offices/warehouses/production facilities, office buildings, hotels, mixed-use
residential/commercial, retail centers and multi-family properties.
Construction loans. We finance the construction of owner occupied and income producing properties.
Construction financing generally requires preapproved permanent financing, unless made on a speculative basis.
Construction and development loans are generally made with a term of one to two years and interest is paid
monthly. The ratio of the loan principal to the value of the collateral, as established by independent appraisal,
typically will not exceed industry standards. Any speculative loans are based on the borrower’s financial strength
and ability to generate cash flow. Loan proceeds are disbursed based on the percentage of completion and only after
the project has been inspected by an experienced construction lender or third-party inspector.
Commercial loans. We offer a wide range of commercial loans, including business term loans, equipment
financing and lines of credit to small and midsized businesses. Our target commercial loan market is professional
establishments and small to medium sized businesses. The terms of these loans vary by purpose and by type of
underlying collateral, if any. Our commercial loans primarily are underwritten on the basis of the borrower’s ability
to service the loan from cash flow. We make equipment loans with conservative margins generally for a term of
five years or less at fixed or variable rates, with the loan fully amortizing over the term. Loans to support working
capital typically have terms not exceeding one year and usually are secured by accounts receivable, inventory and
personal guarantees of the principals of the business. For loans secured by accounts receivable or inventory,
principal typically is repaid as the assets securing the loan are converted into cash, and for loans secured with other
types of collateral, principal amortizes over the term of the loan. The quality of the commercial borrower’s
management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its
markets for products and services and to effectively respond to such changes are significant factors in a commercial
borrower’s creditworthiness. Although most loans are made on a secured basis, loans may be made on an unsecured
basis where warranted by the overall financial condition of the borrower.
6
Consumer loans. We make a variety of loans to individuals for personal purposes, including secured and
unsecured installment loans and home equity lines of credit. The amortization of second mortgages generally does
not exceed 15 years and the rates generally are not fixed for over 12 months. Consumer loans secured by
depreciable assets, such as boats, cars and trailers, are typically amortized over the useful life of the asset. We
review the borrower’s past credit history, past income level, debt history and, when applicable, cash flow and
evaluate the impact of all these factors on the ability of the borrower to make future payments as agreed.
Investments
In addition to loans, we purchase investment securities that are principally either direct debt obligations of
the United States Treasury or one of the agencies of the United States government. We may also invest in
mortgage-backed securities issued by the Government National Mortgage Association, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, the Federal Home Loan Bank and the Federal
Farm Credit Bureau. Each of these issuer’s securities are backed by mortgages conforming to its underwriting
guidelines and each issuer guarantees the timely payment of principal and interest on its securities. Our approved
policies also allow for investment in both tax exempt and taxable municipal securities, corporate securities and
certain equity securities as might be required to deal with various government agencies or banking associations. We
regularly evaluate the composition of this category as changes occur with respect to the interest rate yield curve.
Overall investment goals are established by the bank’s Investment Committee, which reviews the investment
portfolio on a periodic basis, and monitors and makes adjustments as necessary based upon current market interest
rates and the economic environment, as well as our established policies and strategies. The Bank's investment
strategies seeks to maximize long-term investment earnings through management of both securities gains and losses
as well as interest income. Day-to-day activities pertaining to the investment portfolio are conducted under the
supervision of the Bank’s President and Chief Operating Officer.
Deposits
Deposits are our primary source of funds to support our earning assets. We offer traditional depository
products, including checking, savings, money market and certificates of deposit with a variety of rates. Deposit
products are structured to be competitive with rates, fees, and features offered by other local institutions. The
primary sources of core deposits are professional practice monies, small to medium sized businesses and their
employees, and consumers located within our primary market. We generate deposits through our business
development efforts as well as referrals from our existing customers, officers and directors as well as various
marketing campaigns. In 2012, we met the requirements established by the United States Trustee for deposits of
bankruptcy funds. In addition, we participate in the Certificate of Deposit Account Registry Service (“CDARS®”)
program, which allows us to accept deposits in excess of the FDIC insurance limits for larger depositors and obtain
“pass through” insurance for the total deposit by placing the portion of the deposit in excess of FDIC insurance
limits with other FDIC-insured institutions that are members of the CDARS® network.
Our deposit mix has changed substantially over our seven year history. At inception, we relied heavily on
savings, N.O.W. and money market deposits, as well as certificates of deposit, which require limited customer
interaction or convenience in location, while our transactional account customer base and branch networks
expanded. We also relied significantly on advances from the Federal Home Loan Bank of New York. Since that
time, we have built out a network of four deposit-taking banking offices and attracted significant transaction account
business through our relationship-based approach. As of December 31, 2009, the end of our first full calendar year
of operations, demand deposits comprised only 15.7% of our total deposits. Since that time, we have shifted the
composition of our deposit mix so that demand deposits now comprise our largest source of deposits. As of
December 31, 2014, demand deposits comprised 47.9% of our total deposits. The growth in demand deposits has
resulted in a lower overall cost of funding for our balance sheet.
Supervision and regulation
We are subject to extensive regulation and supervision that govern almost all aspects of our operations at
the holding company and bank levels. We are regulated by the Federal Reserve at the holding company level and by
the Office of the Comptroller of the Currency at the bank level. Banking laws, regulations and policies, and the
supervisory framework that oversees their administration, are primarily intended to protect consumers, depositors,
7
the Deposit Insurance Fund and the banking system as a whole, and not shareholders and counterparties. In
addition, these laws, regulations and policies are subject to continual review by governmental authorities, and
changes to these laws, regulations and policies, including changes in their interpretation or implementation, or the
adoption of new laws, regulations or policies, can affect us in substantial and unpredictable ways.
In the aftermath of the most recent recession, new legislation has been enacted, and new regulations
promulgated, that were designed to strengthen the financial system as a whole. These laws and regulations have
imposed significant additional costs on all financial institutions and impacted the banking industry in numerous
other ways. A number of the most significant changes in laws and regulations affecting the banking industry are
discussed below. However, the discussion that follows is only a brief summary of certain of these laws and
regulations, and there are many other laws and regulations that affect our operations, other than those discussed
below.
Dodd-Frank Act
The Dodd-Frank Act, enacted on July 21, 2010, aimed to restore responsibility and accountability to the
financial system by significantly altering the regulation of financial institutions and the financial services industry.
The Act, among other things: (i) established the Consumer Financial Protection Bureau, an independent organization
within the Federal Reserve dedicated to promulgating and enforcing consumer protection laws applicable to all
entities offering consumer financial products or services; (ii) established the Financial Stability Oversight Council,
tasked with the authority to identify and monitor institutions and systems that pose a systemic risk to the financial
system, and to impose standards regarding capital, leverage, liquidity, risk management, and other requirements for
financial firms; (iii) changed the base for FDIC insurance assessments; (iv) increased the minimum reserve ratio for
the Deposit Insurance Fund from 1.15% to 1.35%; (v) permanently increased federal deposit insurance coverage
from $100,000 to $250,000; (vi) directed the Federal Reserve to establish interchange fees for debit cards pursuant
to a restrictive “reasonable and proportional cost” per transaction standard; (vii) limited the ability of banking
organizations to sponsor or invest in private equity and hedge funds and to engage in proprietary trading;
(viii) granted the U.S. government authority to liquidate or take emergency measures with respect to troubled
nonbank financial companies that fall outside the existing resolution authority of the FDIC; (ix) increased regulation
of asset-backed securities; (x) increased regulation of consumer protections regarding mortgage originations,
including originator compensation, minimum repayment standards, and prepayment considerations; and
(xi) established new disclosure and other requirements relating to executive compensation and corporate
governance.
Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and
changing the activities in which we choose to engage. The specific impact on our current activities or new financial
activities that we may consider in the future, our financial performance and the markets in which we operate will
depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of
market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to
rulemaking that will take effect over the next several years, making it difficult to anticipate the overall financial
impact on the financial industry, in general, and on us.
Regulatory capital requirements
On July 2, 2013, the federal banking agencies adopted a final rule revising the regulatory capital framework
applicable to all top tier bank holding companies with consolidated assets of $500 million or more and all banks,
regardless of size, although threshold for bank holding company is expected to increase to $1 billion during 2015.
The Basel III framework became effective on January 1, 2015, although the capital conservation buffer, which is
discussed in greater detail below, will be phased in over a three-year period, beginning January 1, 2016.
Under the final rule, we are required to maintain the following minimum regulatory capital ratios:
• A new ratio of common equity Tier 1 capital to total risk-weighted assets of not less than 4.5%;
• A Tier 1 risk-based capital ratio of 6.0% (an increase from 4.0%);
8
• A total risk-based capital ratio of 8.0%; and
• A leverage ratio of 4.0%.
The final rule also changes the regulatory capital requirements for purposes of the prompt corrective action
regulations. Accordingly, as of January 1, 2015, to be categorized as well capitalized, the bank must have a
minimum common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%, a
total risk-based capital ratio of at least 10.0%, and a leverage capital ratio of at least 5.0%. The final rule also
implements a requirement for all banking organizations to maintain a capital conservation buffer above the
minimum capital requirements to avoid certain restrictions on capital distributions and discretionary bonus payments
to executive officers. The capital conservation buffer must be composed of common equity tier 1 capital. The
capital conservation buffer requirement will effectively require banking organizations to maintain regulatory capital
ratios at least 50 basis points higher than well capitalized levels with respect to the risk-weighted capital measures to
avoid the restrictions on capital distributions and discretionary bonus payments to executive officers. In addition,
the final rule establishes more conservative standards for including instruments in regulatory capital and imposes
certain deductions from and adjustments to the measure of tier 1 capital and tier 2 capital. The final rule alters the
method under which banking organizations must calculate risk-weighted assets in an effort to make the calculation
of risk-weighted assets more risk-sensitive, to better account for risk mitigation techniques, and to create substitutes
for credit ratings (in accordance with the Dodd-Frank Act).
Although management is continuing to evaluate the impact the final rule will have on our organization, we
were in compliance with all applicable minimum regulatory capital requirements as of December 31, 2014 and
expect to meet all minimum regulatory capital requirements under the final rule when it becomes effective, as if
fully phased in.
The final Basel III framework also requires banks and bank holding companies to measure their liquidity
against specific liquidity tests. However, under the proposed rules, the Basel III liquidity framework would apply
only to banking organizations with $250 billion or more in consolidated assets or $10 billion or more in foreign
exposures. As a result, unless modified, the Basel III liquidity framework would not apply to us.
9
MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents management’s perspective on our financial condition and
results of operations on a consolidated basis. However, because we conduct all of our material business operations
through Empire National Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary
level. The discussion is intended to highlight and supplement other data and information presented elsewhere in this
annual report, including our audited consolidated financial statements and the related notes. Please note that the
performance related to the prior periods described in this annual report may not be indicative of our future financial
performance.
As a bank holding company that operates through one segment, community banking, we generate most of
our revenue from interest on loans and investments, service charges and gains on the sale of investment securities.
Our primary source of funding for our loans is deposits, and our largest expenses are interest of these deposits and
salaries and related employee benefits. We measure our performance through our net interest margin, return on
average assets and return on average equity, while maintaining appropriate regulatory leverage and risk-based
capital ratios.
Performance summary
Our total assets increased $41.0 million, or 8.8%, to $508.1 million as of December 31, 2014, compared to
$467.1 million as of December 31, 2013. Our asset growth was largely driven by loan growth of $85.2 million, or
28.9%, partially offset by a decrease of $52.0 million in securities available for sale. Asset quality remained strong,
with total non-performing loans comprising 0.31% of total loans as of December 31, 2014, compared to 0.81% as of
December 31, 2013. Total deposits increased $4.2 million, or 1.1%, to $395.1 million as of December 31, 2014,
compared to $390.9 million as of December 31, 2013. Our deposit growth was driven primarily by growth across
deposit categories, other than other time deposits, which represent our highest cost of funding. Noninterest-bearing
deposits, which represent our lowest cost of funding, grew $12.0 million, or 6.7%, during 2014, and the percentage
of noninterest-bearing deposits to total deposits grew from 45.3% to 47.9%. Short-term borrowings, which
represent advances from the Federal Home Loan Bank of New York grew $11.6 million from $34.5 million as of
December 31, 2013 to $46.1 million as of December 31, 2014. Total stockholders’ equity increased $23.9 million to
$62.4 million as of December 31, 2014, from $38.5 million as of December 31, 2013, primarily as a result of the
Company’s private placement, which was completed on December 19, 2014 and generated net proceeds, after
offering expenses, of approximately $18.7 million. Stockholders’ equity also was impacted by an increase of $3.4
million in the value of our securities available for sale, net of applicable taxes, as well as our operating earnings of
$1.8 million.
Net income for the year ended December 31, 2014 was $1.8 million or $0.41 per diluted share, compared to
net income of $1.3 million, or $0.29 per diluted share, in 2013, an increase of $558 thousand, or 43.4%. The
increase in net income during 2014 was positively impacted by an increase in net interest income of $2.4 million, or
16.8%, to $16.9 million, which resulted from an increase of $36.9 million, or 8.4%, in our average interest-earning
assets, as well as the expansion of our net interest margin from 3.29% to 3.55%, as compared to the year ended
December 31, 2013. Other income increased by $135 thousand or 15.0% to $1.0 million for year ended December
31, 2014 primarily as a result of the net increase of $176 thousand for net securities gains/losses, offset by the
decline of $98 thousand in professional practice revenue. Other expenses increased $771 thousand, or 5.9%, as
compared to the year ended December 31, 2013, primarily as a result of an increase in salaries and employee
benefits of $399 thousand, or 6.3%. The increase in net income was most negatively impacted by the write-off of
approximately $386 thousand in book value of certain deferred tax assets as a result of a change in the New York
corporate tax laws, which is discussed in greater detail below. Excluding the impact of the write-off, our net income
for 2014 increased $944 thousand, or 73.4%, over 2013.
Our efficiency ratio improved to 77.37% for the year ended December 31, 2014, as compared to 84.31%
for the year ended December 31, 2013, primarily as a result of our increased operating leverage and an increase in
our net interest income. Basic and diluted earnings per share for the year ended December 31, 2014 were $0.42 and
$0.41, respectively, compared to $0.29 for both in 2013. Our return on average assets was 0.38% for 2014, as
compared to 0.29% for 2013, and our return on average equity was 4.43% for 2014, as compared to 3.19% for 2013.
The increase in our return on average equity reflects the improvement in operating performance in 2014.
10
Comparison of operating results for the years ended December 31, 2014 and 2013
Analysis of net interest income
Net interest income, the primary contributor to our earnings, represents the difference between the income
that we earn on our interest-earning assets and the cost to us of our interest-bearing liabilities. Our net interest
income depends upon the volume of interest-earning assets and interest-bearing liabilities and the interest rates that
we earn or pay on them.
The following table presents, for the periods indicated, the average balances of our interest-earning assets
and interest-bearing liabilities, average yields and costs, and certain other information. Nonaccrual loans are
included in loans, and interest on nonaccrual loans is included only to the extent recognized on a cash basis.
Average
Balance
2014
Interest
Earned/Paid
$
330,476
$
15,280
140,633
3,440
914
3,092
165
3
21
5
475,489
$
1
-
18,541
$
Year Ended December 31,
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2013
Interest
Earned/Paid
Average
Yield/Cost
4.62 %
2.20
4.80
0.33
4.76
-
3.90
$
257,718
$
12,534
176,513
3,497
565
3,526
147
5
287
-
438,580
$
7
-
16,219
$
4.86 %
2.00
4.20
0.88
2.40
-
3.70
Interest earning assets:
Loans, net (including fee income)
Securities available for sale(1)
Securities, restricted
Deposits with banks
Securities, tax exempt(2)
Federal funds sold
Total interest-earning assets
Non interest-earning assets:
Cash and due from banks
Other assets
Total assets
6,295
5,001
486,785
$
5,482
7,802
451,864
$
Interest bearing liabilities:
Savings, N.O.W. and money
market deposits
Certificates of deposit of
$100,000 or more
Other time deposits
Borrowed funds
Total interest-bearing liabilities
$
156,573
$
900
0.57%
$
139,344
$
926
0.66%
43,323
22,241
33,882
256,019
$
347
305
125
1,677
$
0.80
1.37
0.37
0.66
31,756
32,815
35,959
239,874
$
268
450
135
1,779
$
0.84
1.37
0.38
0.74
184,950
4,181
445,150
41,635
Non interest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
equity
Net interest income
Net interest spread(3)
Net interest margin(4)
(1) Unrealized gains / (losses) on securities available for sale are included in other assets.
486,785
$
$
16,864
168,561
3,134
411,569
40,295
$
451,864
3.24%
3.55%
$
14,440
2.96%
3.29%
(2) T he above table is presented on a tax equivalent basis.
(3) Net interest spread is the weighted average yield on interest-earning assets minus the weighted average rate on interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets.
11
Net interest income increased $2.4 million for the year ended December 31, 2014, as compared to the prior
year. The increase was attributable to growth in total interest income of $2.3 million and a decrease in total interest
expense of $102 thousand. The growth in total interest income was attributable both to the growth in the average
balance of interest-earning assets of $36.9 million and to the shift in asset mix from investment securities to loans,
which represent our highest yielding asset. For the year ended December 31, 2014, average loans represented 69.5%
of our average interest-earning assets, as compared to 58.8% for the year ended December 31, 2013. The shift in
asset composition resulted in an increase in our yield on interest-earning assets from 3.70% for 2013 to 3.90% for
2014, although our yield on loans decreased slightly by 4.2% from the continued historically low interest rate
environment and market competition. The decrease in total interest expense for 2014 was attributable to a reduction
in the cost of average interest-bearing liabilities to 0.66% for the year ended December 31, 2014 from 0.74% for the
prior year partially offset by an increase in the average balance of interest-bearing deposits of $18.2 million. The
decrease in the cost of average interest-bearing liabilities was primarily due to the continued low interest rate
environment. Average balances of borrowed funds decreased by $2.1 million, which represents our lowest cost of
interest-bearing funding. The increase in net interest income also was positively impacted by an increase of $16.4
million, or 9.7% in the average balance of noninterest-bearing demand deposits for the year ended December 31,
2014, as compared to the prior year. Net interest margin for the years ended December 31, 2014 and 2013 was
3.55% and 3.29%, respectively, for the reasons described above.
Rate/volume analysis
The following table analyzes the dollar amount of changes in interest income and interest expense for the
primary components of interest-earning assets and interest-bearing liabilities. The table shows the amount of the
change in interest income or expense caused by either changes in outstanding balances (volume) or changes in
interest rates. The effect of a change in volume is measured by applying the average rate during the first period to
the volume change between the two periods. The effect of changes in rate is measured by applying the change in
rate between the two periods to the average volume during the first period. Changes attributable to both rate and
volume that cannot be segregated have been allocated proportionately to the absolute value of the change due to
volume and the change due to rate.
Interest income on interest-earning assets:
Loans (including fee income)
Securities available for sale
Securities, restricted
Securities, tax exempt (1)
Deposits with banks
Total increase (decrease) in interest income
Interest expense on interest-bearing liabilities:
Savings, N.O.W. and money market deposits
Certificates of deposit of $100,000 or more
Other time deposits
Borrowed money
Total increase (decrease) in interest expense
Total increase (decrease) in net interest income
(1) T he above table is presented on a tax equivalent basis.
Year Ended December 31, 2014 Over 2013
Increase/(Decrease) Due To
Average Volume
Average Rate
Net Change
(in thousands)
$
3,390
(765)
(2)
$
(644)
331
20
$
2,746
(434)
18
(10)
2
2,615
4
(4)
(293)
(6)
(2)
2,322
107
93
(145)
(8)
47
2,568
$
(133)
(14)
-
(2)
(149)
(144)
$
(26)
79
(145)
(10)
(102)
2,424
$
12
Provision for loan losses
We consider a number of factors in determining the required level of our allowance for loan losses and the
provision required to achieve that level, including loan growth, loan quality rating trends, nonperforming loan levels,
delinquencies, net charge-offs, industry concentrations and economic trends in our market and throughout the
nation. We recorded a $243 thousand provision for loan losses for the year ended December 31, 2014. We recorded
no provision for loan losses for the year ended December 31, 2013. The increase in the provision for loan losses in
2014 was attributable to the growth in the loan portfolio.
Other income
Total other income, which was comprised of customer-related fees and service charges, net securities
gains/losses and other operating income, increased $135 thousand for the year ended December 31, 2014, as
compared to the same period in 2013, primarily as a result of the net increase of $176 thousand for net securities
gains/losses offset by the decline of $98 thousand in professional practice revenue. We experienced moderate
increases in customer-related fees and service charges, as well as other operating income, which were associated
with the continued growth in our customer base. Miscellaneous service charges and fees include revenues such as
electronic funds transfer fees, assignment fees on loans, and wire transfer fees.
Other expense
Our other expense consists primarily of salary and employee benefits, occupancy and other expenses
related to our operation and expansion. Other expense increased by approximately $771 thousand, or 5.9%, during
2014, as compared to 2013, primarily from expenses associated with our continued growth. The biggest
components of the growth in other expense was salaries and benefits, which increased $399 thousand, or 6.3%,
during 2014, which was largely due to base salary increases, new employees hired to support growth and branch
expansion, and an increase in employee benefit costs. We also experienced an increase of $188 thousand in software
services, or 13.2%, primarily as a result of the introduction of the bank’s call center as well as other software
enhancements. Net occupancy and equipment costs also increased $174 thousand, or 8.0%, primarily resulting from
the expenses associated with the bank’s new Mineola branch office. As of December 31, 2014 and 2013, we
employed 68.8 and 64.5 full time equivalents, respectively. Full time equivalents increased as additional personnel
were hired for the branch network, as well as back office operations and lending areas, although assets per employee
increased to $7.4 million as of December 31, 2014 from $7.2 million as of December 31, 2013.
Provision for income taxes
Income tax expense for the year ended December 31, 2014 was approximately $2.0 million, as compared to
$995 thousand for the year ended December 31, 2013. The increase in income tax expense, primarily resulting from
an increase in earnings before income taxes of $1.5 million or 67.8%, also was materially impacted by the write-off
of approximately $386 thousand in book value of certain deferred tax assets. The write-off was required as a result
of revisions to the New York corporate tax laws, which changed the manner in which our income is taxed for state
tax purposes. As a result of the changes, we determined that it was not probable that we would be able to utilize
$386 thousand in state deferred tax assets that were carried on our balance sheet. Accordingly, we were required to
write-off that portion of our deferred tax assets, which resulted in an increase in our income tax expense. We
believe that the 2014 revisions to the New York corporate tax laws will result in a decrease in our future state
income tax liability as compared to the state tax laws applicable to us prior to the 2014 revisions. Our combined
effective tax rate for 2014, excluding the impact of the write off of the state deferred tax asset, decreased to 41.8%
from 43.6% for the year ended December 31, 2013.
Financial condition
Our total assets increased $41.0 million, or 8.8%, to $508.1 million as of December 31, 2014, compared to
$467.1 million as of December 31, 2013. Net loans increased $85.0 million, or 29.3%, to $375.2 million as of
December 31, 2014, compared to $290.2 million as of December 31, 2013. As a result of management’s assessment
of the credit quality of the loan portfolio, the allowance for loan losses to total loans was 1.17%, or $4.5 million, at
December 31, 2014 as compared to 1.44%, or $4.2 million, as of December 31, 2013. Securities available for sale
13
decreased $52.0 million, or 34.1%, to $100.6 million as of December 31, 2014, from $152.6 million as of December
31, 2013. The decrease in securities available for sale was due primarily to dispositions of securities as well as the
calls and redemptions on such securities, the proceeds of which were utilized to fund loan growth, but was also
affected by an increase in market value as a result of decreasing market interest rates.
Our asset growth for the year ended December 31, 2014 was funded primarily by short-term borrowings
and deposit growth. Short-term borrowings increased $11.6 million or 33.6% year over year. Total deposits
increased $4.2 million, or 1.1%, to $395.1 million as of December 31, 2014, compared to $390.9 million as of
December 31, 2013. Our deposit growth was driven by growth across all deposit categories, other than other time
deposits, which represent our highest cost of funding. Demand deposits, which represent a value funding source,
increased $11.9 million, or 6.7%, to $189.2 million as of December 31, 2014. Savings, N.O.W. and money market
deposits increased $2.8 million, or 2.0%, to $142.3 million as of December 31, 2014. Certificates of deposit of
$100,000 or more increased $0.1 million, or 0.2%, to $44.5 million as of December 31, 2014, while other time
deposits decreased by $10.6 million, or 35.6%, to $19.2 million as of December 31, 2014. As of December 31,
2014, our loan to deposit ratio was 96.1% as of December 31, 2014, as compared to 75.3% as of December 31,
2013.
Total stockholders’ equity increased $23.9 million to $62.4 million as of December 31, 2014, from $38.5
million as of December 31, 2013. The increase in stockholders’ equity was primarily as a result of the Company’s
private placement, which was completed in December 2014 and generated $18.7 million in net proceeds.
Stockholders’ equity also was impacted by an increase of $3.4 million in the value of our securities available for
sale, net of applicable taxes, as well as our operating earnings of $1.8 million. As of December 31, 2014, the Bank
was “well capitalized” under applicable regulatory capital guidelines and was in compliance with all applicable
regulatory capital standards, with leverage, Tier 1 risk-based and total risk-based capital ratios of 12.65%, 16.02%
and 17.17%, respectively.
Loans
Our primary source of income is interest on loans. Our primary target market is small and medium sized
businesses and real estate investors in our market area. Our loan portfolio consists primarily of commercial and
industrial loans and real estate loans secured by multi-family and commercial real estate properties located in our
primary area. Our loan portfolio represents the highest yielding component of our earning asset base.
The following table sets forth the amount of loans, by category, as of the respective periods:
December 31, 2014
December 31, 2013
Amount
Percent
Amount
Percent
(dollars in thousands)
Commercial real estate mortgages
Commercial real estate - multi-family
Commercial and industrial
One-to-four family
Real estate - construction
Home equity lines of credit
Lease financing
Installment/consumer
Total
Net deferred loan costs and fees
Allowance for loan losses
Net loans
$
130,369
149,105
50,955
26,499
14,124
4,028
3,232
549
378,861
791
(4,453)
375,199
$
$
34.4 %
39.4
13.4
7.0
3.7
1.1
0.9
0.1
100.0
$
127,977
98,586
48,338
8,276
3,591
3,148
3,094
872
293,882
589
(4,244)
290,227
$
$
43.5 %
33.5
16.5
2.8
1.2
1.1
1.1
0.3
100.0
Over the past three years, we have experienced significant growth in our loan portfolio, and our primary
focus has been on commercial real estate mortgages and multi-family lending, which constituted 73.8% of our loan
14
portfolio as of December 31, 2014. Although we expect continued growth with respect to our loan portfolio, we do
not expect any significant changes over the foreseeable future in the composition of our loan portfolio.
The following table sets forth the contractual maturity ranges, and the amount of loans with fixed and
variable rates, in each maturity range as of December 31, 2014:
Within One
Year
After One But
Within Five
Years
After Five
Years
Total
(in thousands)
$
$
$
$
Commercial real estate mortgages
Commercial real estate - multi-family
Commercial and industrial
One-to-four family
Real estate - construction
Home equity lines of credit
Lease financing
Installment/consumer
Total
Rate provisions:
Amounts with fixed interest rates
Amounts with variable interest rates
Total
Nonperforming assets
25,385
26,747
12,849
1,188
7,758
2,992
3,175
349
80,443
32,640
47,803
80,443
99,765
121,875
9,301
24,861
-
1,036
-
-
256,838
26,874
229,964
256,838
130,369
149,105
50,955
26,499
14,124
4,028
3,232
549
378,861
67,810
311,051
378,861
$
$
$
$
$
$
$
$
$
$
$
$
5,219
483
28,805
450
6,366
-
57
200
41,580
8,296
33,284
41,580
Nonperforming assets consist of nonperforming loans, other real estate owned and other repossessed assets.
Nonperforming loans consist of loans that are on nonaccrual status and non-performing restructured loans, which are
loans on which we have granted a concession on the interest rate or original repayment terms due to financial
difficulties with the borrower. Other real estate owned consists of real property that we have acquired through
foreclosure. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows discounted at the loan’s contractual rate or at the fair value of collateral
if repayment is expected solely from collateral. Troubled debt restructurings are accounted for in accordance with
FASB ASC 310, “Receivables.”
We have maintained low levels of nonperforming assets since our inception in 2008. Our total non-
performing loans comprised 0.31% of total loans as of December 31, 2014, compared to 0.81% as of December 31,
2013. We believe that our historically low level of nonperforming assets reflects our long-term knowledge and
relationships with a significant percentage of our borrowers, management’s experience and knowledge with respect
to our market and our underwriting discipline. Additional information regarding our past due and nonaccrual loans,
as well as our troubled debt restructurings, is included in the notes to our consolidated financial statements included
in this Annual Report.
Allowance for loan losses
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and
risks inherent in the loan portfolio. In determining the allowance for loan losses, we estimate losses on specific
loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the
allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates,
changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends,
current economic factors and the estimated impact of current economic conditions on certain historical loan loss
15
rates, among other things. The allowance for loan losses is increased by our loan loss provision, which was
discussed above, and reduced by net loan charge-offs. Loans are charged-off when we determine that collection has
become unlikely. Recoveries are recorded only when cash payments are received. The allowance for loan losses
was $4.5 million, or 1.17% of total loans as of December 31, 2014, compared to $4.2 million, or 1.44% of total
loans, as of December 31, 2013.
In 2014, we had charge-offs of $36 thousand and recoveries of $2 thousand. We had net charge-offs of
$232 thousand and $25 thousand for the years ended December 31, 2013 and 2012, respectively. However,
historical performance is not necessarily an indicator of future performance, particularly considering our limited
operating history. Future results could differ materially. However, management believes, based upon known
factors, management’s judgment and regulatory methodologies, that the current methodology used to determine the
adequacy of the allowance for loan losses is reasonable. An analysis of our allowance for loan losses and net
charge-offs is presented in the notes to our consolidated financial statements, which are included in this Annual
Report.
The following table sets forth the allocation of the total allowance for loan losses by loan type and sets
forth the percentage of loans in each category to gross loans. The allocation of the allowance for loan losses as
shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that
charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions.
2014
2013
Commercial real estate mortgages
Commercial real estate - multi-family
Commercial and industrial
One-to-four family
Real estate - construction
Home equity lines of credit
Lease financing
Installment/consumer
Total
Amount
$
Amount
$
Percentage
of Loans to
Total Loans
34.0 %
35.4
23.1
4.5
2.5
0.2
0.3
-
100.0 %
1,513
1,471
1,156
186
106
8
12
1
4,453
Percentage
of Loans to
Total Loans
39.0 %
26.5
31.1
-
0.7
1.9
0.3
0.5
100.0 %
1,653
1,126
1,321
-
27
81
13
23
4,244
$
$
Although we believe that our allowance for loan losses was adequate to provide for probable incurred
losses in our loan portfolio as of December 31, 2014, future provisions will be subject to ongoing evaluations of the
risks in our loan portfolio.
Securities
Our securities portfolio is used to make various term investments, to provide a source of liquidity and to
serve as collateral for certain types of deposits and borrowings and to provide interest income. We manage our
investment portfolio according to a written investment policy approved by our Board of Directors. Investment
balances in our securities portfolio are subject to change over time based on our funding needs and interest rate risk
management objectives. Our liquidity levels take into account anticipated future cash flows and all available
sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in
meeting our anticipated funding needs.
16
As of December 31, 2014, our securities portfolio consisted primarily of U.S. Government agency
obligations and mortgage-backed securities with varying contractual maturities. However, these maturities do not
necessarily represent the expected life of the securities as the securities may be called or paid down without penalty.
No investment in any of those instruments exceeds any applicable limitation imposed by law or regulation. The
Investment Committee reviews the investment portfolio on an ongoing basis in order to ensure that the investments
conform to our investment policy as approved by the Board of Directors. As of December 31, 2014, our investment
portfolio consisted entirely of available for sale securities. As a result, the carrying values of our investment
securities are adjusted for unrealized gain or loss as a valuation allowance, and any gain or loss is reported on an
after-tax basis as a component of stockholders’ equity.
The following table presents a summary of the amortized cost and estimated fair value of our investment
portfolio as of the dates presented:
December 31, 2014
December 31, 2013
December 31, 2012
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
(in thousands)
Available for sale:
U.S. government agency securities
Mortgage backed securities – residential
Total
Held to maturity:
Municipal securities
Total
$
24,558
76,245
100,803
$
$
24,471
76,146
100,617
$
$
28,530
130,437
158,967
$
$
27,634
125,005
152,639
$
$
24,975
152,531
177,506
$
$
25,267
154,935
180,202
$
$
-
$
-
$
-
$
-
$
$
300
300
$
$
300
300
$
-
$
-
$
-
$
-
All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie
Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured
investment vehicles, private label collateralized mortgage obligations, sub-prime, Alt-A, or second lien elements in
our investment portfolio. At December 31, 2014, our investment portfolio did not contain any securities that are
directly backed by subprime or Alt-A mortgages.
The following table sets forth the fair value, amortized cost, maturities and approximated weighted average
yield based on estimated annual income divided by the average amortized cost of our securities portfolio at
December 31, 2014. Expected maturities will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment penalties.
Available for sale
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage backed securities – residential
Amortized Cost
Fair Value
(dollars in thousands)
Yield
$
-
18,990
5,568
-
76,245
100,803
$
-
$
18,817
5,654
-
76,146
100,617
$
- %
1.58
2.42
-
2.35
2.21 %
Deposits
Deposits are our primary source of funds to support our earning assets. Total deposits were $395.1 million
as of December 31, 2014 compared to $390.9 million as of December 31, 2013. To expand and diversify our
deposit base the following strategies are deployed:
17
• Expansion of our suite of products and services targeting professional practices;
• Growth of our retail branch network to provide deposit-taking services from four banking locations;
• Focus on developing and maintaining long-term relationships between our relationship bankers and
customers through high quality service; and
• Commitment to the implementation of technology to enhance customer access to banking products and
services.
In addition to our deposit growth, the composition of our deposit base has changed substantially since our
inception. In our initial years of operation, we relied significantly on certificates of deposit, including brokered
deposits, due to our limited branch network, deposit pricing and the timing of our funding needs. Since that time,
we have expanded our geographic footprint with two additional branch locations and have attracted significant
transaction account business through many of the factors described above. The transition has resulted in a more
stable core deposit portfolio with a lower overall cost of funds as the composition of the deposit portfolio shifts from
higher cost deposits toward noninterest-bearing demand deposits.
The following table shows the growth of our deposit portfolio, and the shift in the composition of our
deposits, since December 31, 2012:
2014
Amount
Percent
$
189,204
47.9 %
As of December 31,
2013
Amount
Percent
(dollars in thousands)
$
177,252
45.3 %
2012
Amount
Percent
$
172,165
47.4 %
142,286
36.0
139,524
35.7
129,451
35.6
44,484
19,151
395,125
$
11.3
4.8
100.0 %
44,382
29,773
390,931
$
11.4
7.6
100.0 %
23,215
38,527
363,358
$
6.4
10.6
100.0 %
Demand deposits
Savings, N.O.W. and money
market deposits
Certificates of deposit of
$100,000 or more
Other time deposits
Total deposits
Capital resources
Total stockholders’ equity increased $23.9 million to $62.4 million as of December 31, 2014, from $38.5
million as of December 31, 2013. The increase in stockholders’ equity was primarily attributable to the results of
our private placement offering, which was completed in December 2014 and generated $18.7 million in net proceeds
from the sale of 1,343,750 shares of common stock and 1,156,250 shares of preferred stock at a price of $8.00 per
share. The preferred stock sold in the offering was structured as a nonvoting common stock equivalent and is
entitled to dividends or distributions on the same basis as our common stockholders. The preferred stock is expected
to be converted into nonvoting common stock, subject to the approval of an amendment authorizing a class of
nonvoting common stock at the 2015 annual meeting of stockholders. Stockholders’ equity was also impacted by an
increase of $3.4 million in the value of our securities available for sale, net of applicable taxes, as well as our
operating earnings of $1.8 million. Historically, we have not paid cash dividends on our common stock, but instead
have retained our earnings to support the continued growth of our organization. We expect to continue this practice
for the foreseeable future.
18
We are subject to various regulatory capital requirements administered by the federal banking agencies. At
this time, these regulatory capital requirements apply only at the bank level. As of December 31, 2014, we were in
compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized,” for
purposes of the OCC’s prompt corrective action regulations, with leverage, Tier 1 risk-based and total risk-based
capital ratios of 12.65%, 16.02% and 17.17%, respectively. “Well capitalized” is the highest capital classification
for FDIC-insured financial institutions in the United States. As we employ our capital and continue to grow our
operations, our capital levels may decrease depending on our level of earnings. However, we expect to monitor and
control our growth in order to remain a “well capitalized” under the applicable regulatory guidelines and in
compliance with all regulatory capital standards applicable to us.
19
CONSOLIDATED STATEMENTS OF CONDITION
At December 31,
2014
2013
(dollars in thousands, except
share and per share data)
5,631
12,354
17,985
100,617
—
3,962
379,652
(4,453)
375,199
5,989
1,494
2,309
514
508,069
189,204
142,286
44,484
19,151
395,125
46,105
106
4,312
445,648
$
$
$
5,486
480
5,966
152,639
300
3,450
294,471
(4,244)
290,227
6,743
1,420
5,326
997
467,068
177,252
139,524
44,382
29,773
390,931
34,500
114
3,063
428,608
8,950
—
57
54,809
(1,283)
62,533
(112)
62,421
508,069
44
45,061
(3,127)
41,978
(3,518)
38,460
467,068
$
ASSETS:
Cash and due from banks ............................................................................... $
Interest earning deposits with banks ..............................................................
Total cash and cash equivalents ..................................................................
Securities available for sale, at fair value ......................................................
Securities held to maturity (fair value of $0 and $300) .................................
Securities, restricted .......................................................................................
Loans .............................................................................................................
Less: Allowance for loan losses ....................................................................
Loans, net ......................................................................................................
Premises and equipment, net .........................................................................
Accrued interest receivable ............................................................................
Deferred tax asset ..........................................................................................
Other assets ....................................................................................................
Total assets ................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits ........................................................................................... $
Savings, N.O.W and money market deposits ................................................
Certificates of deposit of $100,000 or more ..................................................
Other time deposits ........................................................................................
Total deposits ..............................................................................................
Short-term borrowings ...................................................................................
Accrued interest payable ...............................................................................
Other liabilities ..............................................................................................
Total liabilities .............................................................................................
Stockholders’ equity:
Preferred stock, par value $0.01 per share; 30,000,000 authorized shares;
Convertible Non-Cumulative Series A, 1,156,250 issued and outstanding
at December 31, 2014 and 0 issued and outstanding at December 31,
2013 ............................................................................................................
Common stock, par value $0.01 per share; 100,000,000 authorized shares;
5,723,720 issued and outstanding at December 31, 2014 and 4,379,970
issued and outstanding at December 31, 2013 ............................................
Surplus ...........................................................................................................
Accumulated deficit .......................................................................................
Accumulated other comprehensive income (loss): ........................................
Total stockholders’ equity ...........................................................................
Total liabilities and stockholders’ equity ................................................... $
See accompanying notes to the Consolidated Financial Statements.
20
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2013
2014
(dollars in thousands,
except per share data)
15,280
3,092
165
—
3
18,540
900
347
305
125
1,677
16,863
243
16,620
453
329
224
27
1,033
6,740
2,340
1,612
756
561
285
1,531
13,825
3,828
1,984
1,844
0.42
0.41
$
$
$
$
12,534
3,526
147
4
5
16,216
926
268
450
135
1,779
14,437
—
14,437
432
293
322
(149)
898
6,341
2,166
1,424
717
612
273
1,521
13,054
2,281
995
1,286
0.29
0.29
Interest income:
Loans (including fee income) ........................................................................ $
Securities available for sale ...........................................................................
Securities, restricted ......................................................................................
Securities held to maturity ............................................................................
Deposits with banks ......................................................................................
Total interest income ..................................................................................
Interest expense:
Savings, N.O.W and money market deposits ................................................
Certificates of deposit of $100,000 or more ..................................................
Other time deposits .......................................................................................
Other borrowed funds ...................................................................................
Total interest expense .................................................................................
Net interest income .......................................................................................
Provision for loan losses ...............................................................................
Net interest income after provision for loan losses .......................................
Other income:
Service charges on deposit accounts .............................................................
Other service charges and fees ......................................................................
Professional practice revenue ........................................................................
Net securities gains (losses) ..........................................................................
Total other income .....................................................................................
Other expense:
Salaries and employee benefits .....................................................................
Occupancy and equipment, net .....................................................................
Software services ..........................................................................................
Advertising and business development .........................................................
Professional fees ...........................................................................................
FDIC insurance .............................................................................................
Other operating expenses ..............................................................................
Total other expenses ...................................................................................
Income before income taxes .......................................................................
Income tax expense ...................................................................................
Net income ................................................................................................. $
Basic earnings per share ................................................................................ $
Diluted earnings per share ............................................................................. $
See accompanying notes to the Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31,
2013
2014
(in thousands)
Comprehensive income (loss):
Net income ................................................................................................. $
1,844
$
1,286
Unrealized holding gains (losses) arising during the period .........................
Reclassification adjustment for (gains) losses included in net securities
gains (losses) on the consolidated statements of income ...........................
Change in unrealized net gains (losses) ..................................................
Tax effect ......................................................................................................
Other comprehensive income (loss) ...........................................................
Total comprehensive income (loss) ......................................................... $
See accompanying notes to the Consolidated Financial Statements.
6,169
(27)
6,142
(2,736)
3,406
5,250
$
(9,173)
149
(9,024)
3,880
(5,144)
(3,858)
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Non-Cumulative Series
A Preferred Stock
Shares
Common Stock
Shares
Outstanding Amount
Outstanding Amount
Surplus
Accumulated
Other
Comprehensive
Income (Loss)
Total
Accumulated
Deficit
(dollars in thousands, except shares)
Balance at January 1, 2013 ...........
—
—
4,379,970
$ 4,380 $ 40,623
$
(4,413) $
1,626
$ 42,216
Exchange of shares of Empire
National Bank, $1.00 par
value, for shares of Empire
Bancorp, Inc., $0.01 par value ...
Stock option compensation
expense ......................................
Total comprehensive income ........
Balance at December 31, 2013 .....
—
—
—
—
—
—
Issuance of common stock ............
Issuance of preferred stock ...........
Capitalized offering costs .............
Stock option compensation
expense ......................................
Total comprehensive income ........
Balance at December 31, 2014 .....
—
1,156,250
—
—
8,950
—
—
—
—
—
1,156,250 $ 8,950
—
(4,336)
4,336
—
—
—
—
—
4,379,970
1,343,750
—
—
—
—
5,723,720 $
—
—
44
13
—
—
102
—
45,061
10,737
300
(1,340)
—
1,286
(3,127)
—
—
—
—
(5,144)
(3,518)
102
(3,858)
38,460
—
—
—
10,750
9,250
(1,340)
—
—
57 $ 54,809 $
51
—
—
1,844
(1,283) $
—
51
5,250
3,406
(112) $ 62,421
See accompanying notes to the Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2014
2013
(in thousands)
Operating activities:
Net income .................................................................................................. $
1,844
$
1,286
Adjustment to reconcile net cash provided by operating activities:
Provision for loan losses .......................................................................
Depreciation and amortization ..............................................................
Amortization and accretion ...................................................................
Share based compensation expense ......................................................
Net securities (gains) losses ..................................................................
Increase in accrued interest receivable ..................................................
Decrease in other assets ........................................................................
Increase in accrued and other liabilities ................................................
Decrease in deferred income tax ...........................................................
Net cash provided by operating activities ..................................................
Investing activities:
Purchases of securities available for sale ....................................................
Sales of securities available for sale ...........................................................
Calls/redemptions of securities available for sale .......................................
Purchase of securities held to maturity…………………………………….
Maturities, calls and principal payments of securities held to maturity ......
Purchases of securities, restricted ...............................................................
Sales of securities, restricted .......................................................................
Net increase in loans, net of charge-offs .....................................................
Purchase of banking premises and equipment, net of disposals .................
Net cash used by investing activities ..........................................................
Financing activities:
Net increase in deposits ..............................................................................
Increase in other borrowings.......................................................................
Net proceeds from issuance of stock ..........................................................
Net cash provided by financing activities ..................................................
Increase in cash and cash equivalents ........................................................
Cash and cash equivalents beginning of period ..........................................
Cash and cash equivalents end of period ................................................ $
243
1,029
770
51
(27)
(74)
483
1,241
281
5,841
—
39,585
17,836
(100)
400
(14,746)
14,234
(85,215)
(275)
(28,281)
4,194
11,605
18,660
34,459
12,019
5,966
17,985
Supplemental information-cash flows:
Cash paid for:
Interest ..................................................................................................... $
Income taxes ............................................................................................ $
1,685
1,630
See accompanying notes to the Consolidated Financial Statements.
$
$
$
—
987
1,378
102
149
(5)
376
461
248
4,982
(27,964)
19,408
25,569
(300)
—
(12,633)
12,366
(51,016)
(1,318)
(35,888)
27,573
4,391
—
31,964
1,058
4,908
5,966
1,830
499
24
EMPIRE BANCORP, INC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Empire Bancorp, Inc. (“Corporation”) and its wholly-
owned subsidiary Empire National Bank. Throughout these Notes, “Corporation” refers to Empire Bancorp, Inc.
and its consolidated subsidiaries, except as the context otherwise requires, and “Bank” refers only to Empire
National Bank.
The Corporation was incorporated on March 22, 2013 for the purpose of becoming a bank holding company for the
Bank. The holding company reorganization transaction was effected by means of a statutory share exchange,
whereby each share of Bank common stock was exchanged for one share of common stock of the Corporation. The
reorganization transaction became effective on August 22, 2013.
Because the Bank is the sole material asset of the Corporation, other than cash, the Corporation’s financial condition
and operating results principally reflects those of the Bank. The Bank is a national banking association domiciled in
Islandia, New York, which commenced operations on February 25, 2008. The principal business office of the
Corporation and Bank is located at 1707 Veterans Highway, Suite 8, Islandia, New York.
The financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”) and to general practices within the financial institution industry. Certain reclassifications
have been made to prior year amounts to conform to the current year presentation. The following is a description of
the significant accounting policies that the Corporation follows in preparing its financial statements.
a)
Use of Estimates
In preparing the financial statements, management has made estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reported periods. Such estimates are subject
to change in the future as additional information becomes available or previously existing circumstances are
modified. Actual future results could differ significantly from those estimates.
b)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold, which mature overnight. Cash flows are reported net for customer loan and deposit transactions
and overnight borrowings.
c)
Securities
Current accounting standards require that investment securities be classified as held to maturity, trading or available
for sale. Held to maturity securities are where management has a positive intent and ability to hold to maturity,
which are to be reported at amortized cost. The trading category is not applicable to any securities in the
Corporation’s portfolio because the Corporation does not buy or hold debt or equity securities principally for the
purpose of selling in the near term. Available for sale securities, or debt and equity securities which are neither held
to maturity securities nor trading securities, are reported at fair value, with unrealized gains and losses, net of the
related income tax effect, included in other comprehensive income, a separate component of stockholders’ equity.
Restricted securities, as disclosed on the balance sheet consisting of Federal Home Loan Bank stock and Federal
Reserve Bank stock, are carried at cost.
Interest income includes amortization of purchase premium or accretion of discount. Premiums and discounts on
securities are amortized or accreted on the level-yield method. Prepayments are anticipated for mortgage-backed
securities. Realized gains and losses on the sale of securities are determined using the specific identification
method.
25
Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.
In determining other-than-temporary losses, management considers many factors, including: (1) the length of time
and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of
the issuer, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the
Corporation has the intent to sell the debt security or more likely than not will be required to sell the debt security
before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high
degree of subjectivity and judgment and is based on the information available to management at a point in time.
When other-than-temporary loss occurs, management considers whether it intends to sell, or, more likely than not,
will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either
of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For
securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited
to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive
income.
d)
Federal Home Loan Bank and Federal Reserve Bank Stock
The Bank is a member of and owns stock in the Federal Home Loan Bank of New York (“FHLB of New York”) and
the Federal Reserve Bank of New York. The FHLB of New York requires member banks to own a certain amount of
stock based on the level of borrowings and other factors, and additional amounts may be invested. Both stocks are
carried at cost, classified as restricted securities and periodically evaluated for impairment based on the prospects for
the ultimate recovery of par value. Both cash and stock dividends, if any, are reported as income.
e)
Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
stated at the principal amount outstanding less any charge-offs, net of deferred origination fees and costs, and an
allowance for loan losses. Interest on loans is credited to income based on the principal amount outstanding. Loan
origination and commitment fees and certain direct and indirect costs incurred in connection with loan originations
are deferred and amortized to income over the life of the related loans without anticipating prepayments and as an
adjustment to yield. When a loan prepays, the remaining unamortized net deferred origination fees and costs are
recognized immediately upon payoff.
Past due status is based on the contractual terms of the loan. Unless a loan is well secured and in the process of
collection, the accrual of interest income is discontinued when a loan’s principal or interest payments become ninety
days past due. Loans that are deemed uncollectable according to the terms of the loan agreement, or are 90 days past
due, are automatically placed on nonaccrual and previously accrued interest is reversed and charged against interest
income. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful. Interest received on nonaccrual loans is accounted for on the cash basis or cost-
recovery method until the loans qualify for return to an accrual status. However, if the Corporation believes that the
loan will be fully collectible based upon the individual loan evaluation assessing factors such as collateral and
collectability, accrued interest will be recognized upon attainment of certain events. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought current for a period of time, and
future payments are reasonably assured. When the accrual of interest income is discontinued on a loan, any accrued
but unpaid interest is reversed against current period income. Unless otherwise noted, the above policy is applied
consistently to all loan classes.
The allowance for loan losses is established through provisions for loan losses charged against income. When
available information confirms that specific loans or portions thereof, are uncollectible, these amounts are charged
against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. Although the
allowance for loan losses has two separate components, a specific component for impairment losses on individual
loans and a general component for collective impairment losses on pools of loans, the entire allowance for loan
losses is available to absorb realized losses as they occur whether they relate to individual loans or pools of loans.
The allowance for loan losses is an amount that management currently believes will be adequate to absorb probable
incurred losses in the Corporation’s loan portfolio. The process for estimating credit losses and determining the
26
allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual
results could differ significantly from those estimates.
Management currently estimates the general component of the allowance based upon factors including but not
limited to an evaluation of inherent risks in the loan portfolio, industry experience, credit risk grades assigned to
loans, adverse situations that may affect the borrowers’ ability to repay, the estimated value of any underlying
collateral, and current economic conditions. Future additions to the allowance may be necessary based on changes
in economic conditions or other factors used in management’s determination as well as probable incurred losses. In
addition, as part of their examination process, regulatory agencies may require additions to the allowance based on
their judgments about information available to them.
Estimated losses for loans individually deemed to be impaired are based on either the fair value of collateral, less
costs to sell, or the discounted value of expected future cash flows. For all collateral dependent impaired loans,
impairment losses are measured based on the fair value of the collateral, less costs to sell. A loan is considered to be
impaired when, based on current information and events, it is probable that the Corporation will be unable to collect
the scheduled principal and interest when due according to the contractual terms of the current loan agreement.
Loans that experience minor payment delays and payment shortfall generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on 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. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and interest payments when due.
Troubled debt restructurings are renegotiated loans for which concessions have been granted to the borrower that the
Corporation would not have otherwise granted and the borrower is experiencing financial difficulty. Troubled debt
restructurings are separately identified for impairment disclosures. Troubled debt restructurings are by definition
impaired loans and are generally reported at the present value of estimated future cash flows using the loan’s
effective rate at inception. However, if a troubled debt restructuring is considered to be a collateral dependent loan,
the loan is reported at the loan’s observable market price or the fair value of the collateral, less costs to sell. For
troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in
accordance with the accounting policy for the allowance for loan losses. Unless otherwise noted, the above policy is
applied consistently to all portfolio segments and loan classes.
f)
Concentration of Credit Risk
The Corporation’s portfolio segments are comprised of commercial real estate loans, commercial real estate – multi-
family loans, one-to-four family, real estate – construction loans, commercial and industrial loans, lease financing,
home equity lines of credit and installment/consumer loans. Risk characteristics of the Corporation’s commercial
real estate and real estate construction loans tend to be subjective due to vacancy rates, cash flows and the
underlying real estate values located in the Corporation’s market and primary service area of the counties of Suffolk,
Nassau, Kings, Queens and New York. Commercial and industrial and lease financing risk characteristics are driven
by economic conditions and the management and capital strength of the borrower.
g)
Premises and Equipment
Buildings, furniture and fixtures and equipment are stated at cost less accumulated depreciation. Equipment,
computer hardware and software, and furniture and fixtures are depreciated using the straight-line method with a
range for useful lives of two to ten years. Leasehold improvements are amortized over the lives of the respective
leases, including any option extensions when expected to exercise, or the service lives of the improvements
whichever is shorter.
Improvements and major repairs are capitalized, while the cost of ordinary maintenance, repairs and minor
improvements is charged to operations.
27
h)
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and stand-by
letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure
to loss, before considering customer collateral or ability to repay.
i)
Income Taxes
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using tax rates. Temporary differences are
differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that
will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred
tax assets if the Corporation cannot determine that the benefits will more likely than not be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than fifty percent likely of being realized on examination. For tax positions not meeting
the “more likely than not” test, no tax benefit is recorded.
j)
Earnings per Share
Basic earnings per common share is computed by dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share, which reflect the potential dilution of the mandatory
convertible preferred stock outstanding as well as the dilution that could occur if outstanding options and warrants
were exercised and resulted in the issuance of common stock that then shared in the earnings of the Corporation, is
computed by dividing net income by the weighted average number of common shares and common stock
equivalents.
k)
Stock Based Compensation Plans
The Empire National Bank 2008 Stock Incentive Plan provides for the issuance of “incentive stock options” and
“nonqualified stock options” to certain qualified individuals. At the time of the holding company reorganization, the
plan and all stock options issued by the Bank prior to the reorganization were assumed by the Corporation. All
stock options that have been issued under the plan have a ten-year term and vest at a rate of twenty percent on each
of the annual anniversary dates from the date of grant. Each option entitles the holder to purchase one share of the
Corporation’s common stock at an exercise price not less than fair market value at the time of issuance. The
Corporation recognizes expense for options awarded under the stock incentive plan over the vesting period at the
fair market value of the options on the date they were awarded in accordance with FASB ASC 718, “Compensation
– Stock Compensation.”
l)
Comprehensive Income
Comprehensive income includes net income and other comprehensive income. Other comprehensive income
includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in
comprehensive income but excluded from net income. Comprehensive income and accumulated other
comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the
Corporation includes unrealized holding gains or losses on available for sale securities. Such gains or losses are net
of reclassification adjustments for realized gains (losses) on sales of available for sale securities.
m)
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment
28
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
n)
New Accounting Standards
There were no new accounting standards issued in the current year that had a material impact on the Corporation’s
financial position, results of operations or disclosures.
o)
Subsequent Events
The Corporation has evaluated subsequent events for recognition and disclosure through March 30, 2015, which is
the date the financial statements were available to be issued.
2.
SECURITIES
The following tables summarize the amortized cost and fair value of securities available-for-sale and securities held-
to-maturity at December 31, 2014 and 2013 and the corresponding amounts of gross unrealized gains and losses
recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:
Available for sale:
U.S. government agency securities
Mortgage-backed securities-residential
Total available for sale securities
Available for sale:
U.S. government agency securities
Mortgage-backed securities-residential
Total available for sale securities
Held to maturity:
Tax-exempt municipal debt
Total held to maturity
Amortized
Cost
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
$
24,558
76,245
100,803
$
$
$
86
761
847
173
860
1,033
$
$
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Amortized Cost
$
28,530
130,437
158,967
$
$
-
149
149
$
$
896
5,581
6,477
$
Estimated
Fair Value
$
$
$
24,471
76,146
100,617
Estimated
Fair Value
$
$
$
27,634
125,005
152,639
$
$
300
300
$
-
$
-
$
-
$
-
$
$
300
300
29
Securities with unrealized losses at December 31, 2014 aggregated by category and length of time that
individual securities have been in a continuous unrealized loss position are as follows:
December 31, 2014
Less than 12 months
Greater than 12 months
U.S government agency securities
Mortgage-backed securities-residential
Total
Fair Value
$
-
-
$
-
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
$
$
-
-
$
-
18,817
28,672
47,489
$
$
173
860
1,033
$
At December 31, 2014, all of the mortgage-backed securities and U.S. government agency securities held by the
Corporation were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae and Fannie
Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is
attributable to changes in interest rates and illiquidity, and not credit quality, and because the Corporation does not
have the intent to sell these mortgage-backed securities and U.S. government agency securities, and it is likely that it
will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these
securities to be other-than-temporarily impaired at December 31, 2014.
The fair value of debt securities and carrying amount, if different, at December 31, 2014 by contractual maturity
were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown
separately.
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage-backed securities-residential
Total
December 31, 2014
Available for Sale
Amortized Cost
Fair Value
(in thousands)
$
-
18,990
5,568
-
76,245
100,803
$
$
-
18,817
5,654
-
76,146
100,617
$
Proceeds from sales and calls of securities available for sale were $57.4 million and $45.0 million for the years
ended December 31, 2014 and 2013, respectively. Gross gains of $460 thousand were realized on the sale of
securities during 2014 as compared to gross gains of $34 thousand in 2013. There were gross losses on the sale of
securities in 2014 and 2013 of $433 and $183 thousand, respectively.
At December 31, 2014, investment securities with a carrying value of $53 million were pledged as collateral to
secure public and bankruptcy deposits, of $36 million and $17 million, respectively.
30
3.
LOANS
The following table sets forth the major classifications of loans:
December 31,
2014
2013
(in thousands)
$
$
Commercial real estate loans
Commercial real estate-multi family
Commercial and industrial loans
One-to-four family loans
Real estate - construction loans
Home equity lines of credit
Lease financing
Installment/consumer loans
Total
130,369
149,105
50,955
26,499
14,124
4,028
3,232
549
378,861
$
$
127,977
98,586
48,338
8,276
3,591
3,148
3,094
872
293,882
Net deferred loan costs and fees
Allowance
Net loans
791
(4,453)
375,199
$
589
(4,244)
290,227
$
31
Allowance for Loan Losses
An evaluation of the allowance for loan losses is performed on a quarterly basis. To adequately assess the
allowance for loan losses the following quantitative and qualitative factors are considered:
Quantitative factors:
• Delinquency trends of the Corporation and reported delinquency trends for peer banks;
• Historical loss experience of the Corporation;
• Historical loss experience for peer banks;
• Risk rating migrations; and
• Results of internal and external loan reviews.
Qualitative factors:
• Allowance levels and trends for peer banks;
• Changes in lending policies, procedures, underwriting criteria, as well as collection, charge-off and
recovery practices;
• Changes in international, national, regional, and local economic and business conditions;
• Changes in portfolio nature and volume;
• Changes in the experience, ability, and depth of lending management and related staff;
• Changes in the volume and severity of past due loans, nonaccrual loans, criticized and classified loans;
• Changes in the quality of the Corporation’s loan review system;
• Changes in the value of underlying collateral for collateral-dependent loans;
• Existence and effect of any concentrations of credit and changes in the level of each such
concentration;
• Effect of other external factors such as competition and legal and regulatory requirements; and
• Comparison of the Corporation’s performance versus that of its peer group.
32
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by
portfolio segment and based on impairment methods as of December 31, 2014 and 2013:
2014
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs/recoveries
Ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Commercial
real estate
loans
Commercial
real estate-
multi
family
Commercial
and industrial
loans
One-to-
four
family
Real estate-
construction
loans
Home equity
lines of
credit
Lease
financing
Installment/
consumer
loans
Total
$
$
$
$
$
$
1,595
(82)
-
-
-
1,513
1,126
345
-
-
-
1,471
(in thousands)
$
1,321
(131)
(36)
2
(34)
1,156
58
128
-
-
-
186
27
79
-
-
-
106
$
81
(73)
-
-
-
$
8
13
(1)
-
-
-
12
$
23
(22)
-
-
-
$
1
4,244
243
(36)
2
(34)
4,453
$
$
$
$
$
$
$
$
99
$
-
$
197
$
-
$
-
$
-
$
-
$
-
$
296
$
1,414
$
1,471
$
959
$
186
$
106
$
8
$
12
$
1
$
4,157
Loans
$
130,369
$
149,105
$
50,955
$
26,499
$
14,124
$
4,028
$
3,232
$
549
$
378,861
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
$
413
$
2,195
$
770
$
-
$
-
$
-
$
-
$
-
$
3,378
$
129,956
$
146,910
$
50,185
$
26,499
$
14,124
$
4,028
$
3,232
$
549
$
375,483
2013
Beginning balance
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs/recoveries
Ending balance
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
Commercial
real estate
loans
Commercial
real estate-
multi
family
Commercial
and industrial
loans
One-to-
four
family
Real estate-
construction
loans
Home equity
lines of
credit
Lease
financing
Installment/
consumer
loans
Total
$
$
$
$
$
$
2,028
(433)
-
-
-
1,595
764
362
-
-
-
1,126
1,606
(53)
(232)
-
(232)
1,321
15
43
-
-
-
58
23
4
-
-
-
27
-
$
81
-
-
-
81
$
8
$
5
-
-
-
13
$
(in thousands)
$
32
(9)
-
-
-
23
4,476
-
(232)
-
(232)
4,244
$
$
$
$
$
$
$
$
-
$
-
$
351
$
-
$
-
$
-
$
-
$
-
$
351
$
1,595
$
1,126
$
970
$
58
$
27
$
81
$
13
$
23
$
3,893
Loans
$
127,977
$
98,586
$
48,338
$
8,276
$
3,591
$
3,148
$
3,094
$
872
$
293,882
Ending balance: individually evaluated
for impairment
Ending balance: collectively evaluated
for impairment
$
-
$
2,173
$
2,427
$
-
$
-
$
-
$
-
$
-
$
4,600
$
127,977
$
96,413
$
45,911
$
8,276
$
3,591
$
3,148
$
3,094
$
872
$
289,282
Troubled Debt Restructurings
As of December 31, 2014 and 2013, the Corporation had a recorded investment in troubled debt restructurings of
$3.0 million and $4.6 million, respectively. The Corporation had allocated $197 thousand and $351 thousand of
specific reserves for those loans at December 31, 2014 and 2013 and has not committed to lend additional amounts.
Based upon continued performance two of the three troubled debt restructured loans, totaling $2.2 million at
December 31, 2014, are on accrual status. A fourth troubled debt restructured loan on the books at December 31,
2013 fully repaid during the year ended December 31, 2014.
There were no troubled debt restructured loans identified during the years ending December 31, 2014 and 2013. No
loans modified as troubled debt restructurings in previous years subsequently defaulted within twelve months
following the modification.
33
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the
probability that the borrower will be in payment default on any of its debt in the foreseeable future without the
modification. This evaluation is performed under the Corporation’s internal underwriting policy.
Past Due and Nonaccrual Loans
The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual
by class of loans as of December 31, 2014 and 2013:
2014
2013
Loan Past
Due Over 90
Days still
Accruing
Nonaccrual
(in thousands)
$
-
-
-
-
-
-
-
-
$
-
$
-
-
2,389
-
-
-
-
-
2,389
$
Loan Past
Due Over 90
Days still
Accruing
$
-
-
-
-
-
-
-
-
$
-
Nonaccrual
$
413
-
749
-
-
-
-
-
1,162
$
Commercial real estate loans
Commercial real estate- multi-family
Commercial and industrial loans
One-to-four family
Real estate - construction loans
Home equity lines of credit
Lease financing
Installment/consumer loans
Total
At December 31, 2014, the Corporation had two loans on nonaccrual status, one of which had an outstanding
balance of $413 thousand and a specific reserve of $99 thousand. Subsequent to December 31, 2014, that loan was
paid off and the Corporation did not incur additional loss beyond the amount of the specific reserve at December 31,
2014.
The amounts of foregone interest on nonaccrual loans for the years ended December 31, 2014 and December 31,
2013 were $146 thousand and $145 thousand, respectively. The Corporation’s ratio of nonaccrual loans to total
loans was at 0.31% as of December 31, 2014 as compared to a ratio of 0.81% as of December 31, 2013.
One loan totaling $237 thousand was past due greater than thirty days at December 31, 2014. No loans were past
due greater than thirty days as of December 31, 2013.
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers
to service their debt such as current financial information, historical payment experience, credit documentation,
public information, and current economic trends, among other factors. The Corporation analyzes loans individually
by rating the loans based on credit risk. A loan is assigned a risk rating at booking. A risk rating for a loan is
reviewed periodically in conjunction with annual credit reviews, external loan review or when one or more events
occur such as an event requiring credit approval, changes to an existing credit facility or whenever material
favorable or unfavorable information regarding the credit is obtained. The Corporation uses the following
definitions for risk ratings:
Pass – Non-criticized and non-classified asset.
Special Mention - A special mention asset has potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the asset, or, in the institutions credit position at some future date. Special mention assets are
34
not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
A special mention loan is not a “classified” asset.
Substandard - A substandard asset is inadequately protected by the current creditworthiness and paying
capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses that jeopardize the liquidation of debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - An asset classified as doubtful has all the weaknesses inherent in one classified substandard with
the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Loss - An asset classified as loss is considered uncollectible and of such little value that continuance as a
bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery
or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset
even though partial recovery may be affected in the future.
The following tables present risk grades and classified loans by class of loans as of December 31, 2014 and 2013.
Classified loans included loans in risk categories of Pass, Special Mention, Substandard, Doubtful and Loss.
Commercial real estate loans
Commercial real estate - multi-family
Commercial and industrial loans
One-to-four family
Real estate - construction loans
Home equity lines of credit
Lease financing
Installment/consumer loans
Commercial real estate loans
Commercial real estate - multi-family
Commercial and industrial loans
One-to-four family
Real estate - construction loans
Home equity lines of credit
Lease financing
Installment/consumer loans
$
$
$
Pass
Special
Mention
December 31, 2014
Sub-
standard
(in thousands)
Doubtful
$
$
$
123,850
149,105
48,279
26,499
14,124
4,028
3,232
549
369,666
Pass
123,032
98,586
43,794
8,276
3,591
3,148
3,094
872
284,393
3,226
-
259
-
-
-
-
-
3,485
3,293
-
2,417
-
-
-
-
-
5,710
-
$
-
-
-
-
-
-
-
$
-
Special
Mention
December 31, 2013
Sub-
standard
(in thousands)
-
$
-
3,388
-
-
-
-
-
3,388
$
4,945
-
1,156
-
-
-
-
-
6,101
Doubtful
-
$
-
-
-
-
-
-
-
$
-
$
$
$
$
Loss
-
$
-
-
-
-
-
-
-
$
-
Loss
-
$
-
-
-
-
-
-
-
$
-
35
Related Party Loans
Certain directors and their related parties, including their immediate families and companies in which they are
principal owners, were loan customers of the Corporation during 2014. The balance of related party loans for the
years ended December 31, 2014 and December 31, 2013 were $7.4 million and $1.5 million, respectively. There
were no loans to directors or executive officers that were nonaccrual at December 31, 2014.
Loans to principal officers, directors, and their affiliates during 2014 were as follows:
Beginning Balance:
New loans
Advances on existing lines
Paydowns
Ending Balance
2014
(in thousands)
1,523
$
4,587
2,359
(1,070)
7,399
$
4.
PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
2014
2013
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
$
(in thousands)
6,119
$
6,072
12,191
(6,202)
5,989
$
5,884
6,032
11,916
(5,173)
6,743
$
The total amount of depreciation expense at December 31, 2014 and 2013 was $1,029 thousand and $987 thousand,
respectively.
5.
DEPOSITS
Time Deposits
The following table sets for the remaining maturities of the Corporation’s time deposits at December 31, 2014:
Less than
$100,000
$100,000 or
Greater
(in thousands)
Total
2015
2016
2017
2018
2019
Thereafter
$
$
$
14,429
3,029
737
607
349
-
19,151
21,699
14,528
7,862
-
-
395
44,484
36,128
17,557
8,599
607
349
395
63,635
$
$
$
36
The total amount of time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2014
and 2013 was $10.7 million and $8.7 million respectively. The total amounts of brokered deposits at December 31,
2014 and 2013 were $13.1 million and $17.5 million, respectively. Deposits from principal officers, directors, and
their affiliates at year-end 2014 and 2013 were $12.3 million and $12.8 million respectively.
6.
SHORT-TERM BORROWINGS
At December 31, 2014, the Corporation had $46.1 million of short-term borrowings outstanding with the Federal
Home Loan Bank at a rate of 0.32% with a maturity date of January 2, 2015. FHLB advances were collateralized by
a blanket lien on commercial mortgages with a lendable value of $201.8 million at December 31, 2014 and $148.2
million at December 31, 2013.
During 2014, the Bank maintained an overnight line of credit with the Federal Home Loan Bank of New York. The
Bank has the ability to borrow against its unencumbered mortgages and investment securities owned by the Bank.
As a member of the Federal Reserve Bank, the Bank may borrow on a collateralized basis at the discount window.
There were no borrowings from the discount window at December 31, 2014.
At December 31, 2014, the Bank had aggregate lines of credit of $23 million with unaffiliated correspondent banks
to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $19 million were available
on an unsecured basis. As of December 31, 2014, the Bank had no such borrowings outstanding.
7.
INCOME TAXES
Income tax expense (benefit) was as follows:
Current:
Federal
State
Deferred:
Federal
State
Change in valuation allowance
Total
For the years ended December 31,
2014
2013
(in thousands)
$
1,331
372
1,703
$
973
(195)
778
(90)
(15)
(105)
386
1,984
$
271
(54)
217
-
995
$
37
The reconciliation of the expected Federal income tax expense at the statutory tax rate to the actual provision
follows:
For the years ended December 31,
2014
2013
Amount
Percentage
of Pre-tax
Earnings
Amount
(dollars in thousands)
Percentage
of Pre-tax
Earnings
Federal income tax benefit computed by applying the
statutory rate to income before income taxes
State tax, net of federal
Incentive stock options
Other
Valuation allowance
Provision for income taxes
$
$
1,301
230
18
49
386
1,984
34 %
6
-
2
10
52 %
$
$
776
143
28
48
-
995
34 %
6
1
3
-
44 %
Deferred tax assets and liabilities are comprised of the following:
Deferred tax assets:
Allowance for loan losses
Organizational and start-up costs
Nonqualified stock options
Deferred rent expense
Nonaccrual loan interest income
Other
Net unrealized loss on available for sale securities
Deferred tax liabilities:
Net deferred loan costs
Depreciation
Other
Valuation allowance
Net deferred tax asset
For the year ended December 31,
2014
2013
(in thousands)
$
1,616
544
229
630
58
68
74
3,219
$
1,520
610
229
624
72
98
2,810
5,963
(314)
(174)
(36)
(524)
(386)
(234)
(369)
(34)
(637)
-
$
2,309
$
5,326
During 2014, New York State enacted significant changes to its corporate tax code by repealing the banking
corporation franchise tax and subjecting banks to the general business corporation franchise tax. As a result of the
enacted changes, the Corporation expects for the foreseeable future that it will no longer incur New York State tax
liability absent the presence of nonrecurring gains or a significant change in the nature of its operations. While the
Corporation expects that this change will result in a lower effective tax rate on a going forward basis, the enacted
38
changes also resulted in the elimination of a $386 thousand deferred tax asset that had been created under the New
York banking corporation franchise tax laws, as that deferred tax asset is no longer expected to be realized.
At December 31, 2014 and December 31, 2013, the Corporation had no unrecognized tax benefits. The Corporation
does not expect the amount of unrecognized tax benefits to significantly change within the next twelve months. The
Corporation is not currently under Federal or New York State audit.
The Corporation is subject to U.S. federal and New York state income tax. The tax years 2011 through 2013 remain
open to examination by the Internal Revenue Service and New York State. New York State completed an
examination of the Corporation's 2010 through 2012 tax years during 2014. The examination was completed with
no additional tax liability owed by the Corporation.
8.
STOCKHOLDERS’ EQUITY
On December 19, 2014, the Corporation completed a private placement of its capital stock, generating $18.7 million
in net proceeds from the sale of 1,343,750 shares of common stock and 1,156,250 shares of Series A preferred stock
at a price of $8.00 per share. The Series A preferred stock sold in the offering was structured as a nonvoting
common stock equivalent and is entitled to dividends or distributions on the same basis as common stock. At
December 31, 2014, the Corporation had outstanding 1,156,250 shares of Series A preferred stock outstanding. The
shares of Series A preferred stock rank pari passu with respect to dividends and upon liquidation as the shares of
common stock of the Corporation. Upon the occurrence of a change of control involving the Corporation, each
share of Series A preferred stock will be treated as having been converted into the type and amount of consideration
into which a holder of the same number of shares of common stock would be converted as a result of the change of
control transaction. Series A preferred stock is mandatorily convertible into voting common stock of the
Corporation on a one-for-one basis upon (i) the consummation of the transfer by a holder of Series A preferred stock
to third parties in a widely dispersed offering or (ii) in the case of an investor whose ownership of the common stock
issuable upon a proposed conversion is conditioned upon the execution of passivity commitments in a form
acceptable to the Board of Governors of the Federal Reserve System (acting itself or on delegated authority), upon
the execution of such passivity commitments. Series A preferred stock is also mandatorily convertible into
nonvoting common stock of the Corporation on a one-for-one basis, subject to the approval by the shareholders of
the Corporation and effectiveness of an amendment to the Certificate of Incorporation of the Corporation
authorizing a class of nonvoting common stock providing for conversion rights into shares of voting common stock
on the same terms and conditions as are provided for the conversion of Series A preferred stock to voting common
stock and otherwise with terms acceptable to the holder. Holders of Series A preferred stock have no voting rights,
except as required by law.
9.
EMPLOYEE BENEFITS
401(K) Plan
The Corporation participates in a contributory retirement and savings plan, which meets the requirements of Section
401(k) of the Internal Revenue Code and covers substantially all current employees. Newly hired employees can
elect to participate in the savings plan after completing one year and 1,000 hours of service. Under the provisions of
the savings plan, employee contributions are partially matched by the Corporation with cash contributions.
Participants can invest their account balances into several investment alternatives. As of December 31, 2014, the
savings plan did not allow for investment in the common stock of the Corporation. During the years ended
December 31, 2014 and 2013, the Corporation recorded compensation expense related to the plan of approximately
$180 thousand and $209 thousand, respectively.
Equity Incentive Plan
The Corporation maintains the Empire National Bank 2008 Stock Incentive Plan (“Plan”), which authorizes the
issuance of an aggregate of 600,000 stock options to such individuals and in such amounts as may be designated by
the Board of Directors or its Compensation Committee. All stock options issued by the Bank prior to the holding
company reorganization transaction were assumed by the Corporation as of the effective date of the reorganization.
39
At December 31, 2014, options to purchase 134,000 shares of common stock remained available for issuance under
the Plan. During the years ended December 31, 2014 and 2013, the Corporation did not grant any stock options.
The Corporation accounts for awards issued under this Plan under FAS ASC 718, “Compensation – Stock
Compensation.”
A summary of activity related to the Corporation’s stock options as of December 31, 2014 follows:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Vested or expected to vest
Range of exercise prices
Number of
Options
515,250
-
-
49,250
466,000
423,400
466,000
Number of
Shares
466,000
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life
$
$
$
$
$
$
10.00
10.00
-
10.00
10.00
10.00
10.00
Price
$
10.00
4.81 years
4.33 years
4.81 years
All options shown on the table above vest ratably over five years beginning one year from the date of grant and have
a ten year duration. Compensation expense attributable to these options was $51 thousand and $102 thousand for
the years ended December 31, 2014 and 2013, respectively. As of December 31, 2014, there was $125 thousand of
total unrecognized compensation costs related to nonvested stock options granted under the Plan.
10.
WARRANTS
At December 31, 2014, the Corporation had 594,376 warrants issued and outstanding. Of this amount, 307,500
warrants were issued by the Bank at inception to the members of its organizational group in exchange for amounts
advanced during the organizational stage. Additionally, 57,500 warrants were issued by the Bank at inception to
two vendors in exchange for services rendered in connection with the Bank’s organization. Each of the warrants
originally issued by the Bank was assumed by the Corporation at the time of the holding company reorganization,
has an exercise price of $10.00 per share and is exercisable though February 24, 2018. These warrants may be
subject to exercise or forfeiture in the event that the Corporation’s capital levels have fallen below regulatory
minimums (or higher levels as the regulatory agencies may determine). On December 19, 2014, the Corporation
issued a total of 229,376 warrants to certain institutional investors as a part of their respective equity investments in
the Corporation made on the same date. These warrants have an exercise price of $9.00 per share and a term of 5
years from the grant date.
40
11.
EARNINGS PER SHARE
The following is a reconciliation of earnings per share for December 31, 2014 and 2013.
For the years ended December 31,
2014
2013
Net income
(in thousands, except per share data)
$
1,286
$
1,844
Common equivalent shares:
Weighted average common shares outstanding
Weighted average common equivalent shares for dilutive
effects of Series A Convertible Preferred Stock
Weighted average common and common equivalent shares
4,428
41
4,469
4,380
-
4,380
Basic earnings per share
Diluted earnings per share
$
$
0.42
0.41
$
$
0.29
0.29
There are approximately 466,000 options and 594,376 warrants outstanding at December 31, 2014 that were not
included in the computation of diluted earnings per share because the exercise prices were greater than the average
market price of common stock and were, therefore, antidilutive.
12.
COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
In the normal course of business, the Corporation has various outstanding commitments and contingent liabilities,
such as claims and legal actions, minimum annual rental payments under non-cancelable operating leases,
guarantees and commitments to extend credit, which are not reflected in Corporation’s financial statements. No
material losses are anticipated as a result of these actions or claims.
Leases
The Corporation is obligated to make minimum annual rental payments under non-cancelable operating leases on its
premises. Projected minimum rentals under existing leases are as follows:
2015
2016
2017
2018
2019
Thereafter
December 31, 2014
(in thousands)
$
808
834
860
869
606
8,441
Certain leases contain renewal options and rent escalation clauses. In addition, certain leases provide for additional
payments based upon real estate taxes, interest and other charges. Rental expenses under these leases for the years
ended December 31, 2014 and 2013 approximated $761 thousand and $676 thousand, respectively. The above chart
includes the minimum annual rental payments through lease renewal periods based upon management’s intentions to
execute the renewal options.
41
Loan Commitments
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are
issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others,
as long as conditions established in the contract are met, and usually have expiration dates. Commitments may
expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are used to make such commitments as are
used for loans, often including obtaining collateral at exercise of the commitment.
The following represents commitments outstanding:
December 31,
2014
Fixed Rate Variable Rate
2013
Fixed Rate Variable Rate
Standby letters of credit
Commercial letters of credit
Unused loan commitments
Commitments to make loans
Total commitments outstanding
1,273
-
281
-
1,554
$
$
$
$
(in thousands)
172
-
59,594
15,374
75,140
$
683
-
1,171
350
2,204
72
-
46,516
22,290
68,878
$
$
$
13.
ESTIMATED FAIR VALUE MEASUREMENTS
FAS ASC, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used to in the
industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
42
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2014 using:
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Significant
Observable Inputs
(Level 2)
(in thousands)
Significant
Unobservable Inputs
(Level 3)
$
-
$
-
$
$
24,471
76,146
$
-
$
-
Fair Value Measurements at December 31, 2013 using:
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
$
-
$
-
Significant
Observable Inputs
(Level 2)
(in thousands)
$
$
27,634
125,005
Significant
Unobservable Inputs
(Level 3)
$
-
$
-
Assets:
U.S government agency securities
Mortgage-backed securities-residential
Assets:
U.S government agency securities
Mortgage-backed securities-residential
At December 31, 2014 and 2013 there were no impaired loans carried at fair value.
As of December 31, 2014 and 2013, the carrying amounts and estimated fair values of financial instruments, not
previously presented, were as follows:
Level of
Fair Value
Hierarchy Carrying Amount
December 31, 2014
Fair Value
Financial assets:
Cash and cash equivalents
Securities, restricted
Loans
Accrued interest receivable:
Investment Securities
Loans
(in thousands)
Level 1
Level 1
Level 3
Level 2
Level 3
$
17,985
3,962
379,652
$
17,985
n/a
378,209
305
1,189
305
1,189
Financial liabilities:
Demand, savings, N.O.W. and money market deposits
Certificates of deposits of $100,000 or more and other time
deposits
Short-term borrowings
Accrued interest payable:
Demand, savings, N.O.W. and money market deposits
Certificates of deposits of $100,000 or more and other time
deposits
Level 1
$
331,490
$
331,490
Level 2
Level 1
Level 1
Level 2
63,635
46,105
106
7
99
63,567
46,105
106
7
99
43
Level of
Fair Value
Hierarchy Carrying Amount
December 31, 2013
Fair Value
Financial assets:
Cash and cash equivalents
Securities, held to maturity
Securities, restricted
Loans
Accrued interest receivable:
Investment Securities
Loans
Financial liabilities:
Demand, savings, N.O.W. and money market deposits
Certificates of deposits of $100,000 or more and other time
deposits
Short-term borrowings
Accrued interest payable:
Demand, savings, N.O.W. and money market deposits
Certificates of deposits of $100,000 or more and other time
deposits
(in thousands)
$
5,966
300
3,450
294,471
$
5,966
300
n/a
295,476
449
971
449
971
Level 1
Level 1
Level 3
Level 2
Level 3
Level 1
$
316,776
$
316,776
Level 2
Level 1
Level 1
Level 2
74,155
34,500
12
102
74,221
34,500
12
102
The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1. The fair
values of securities held to maturity are determined in the same manner as securities available for sale disclosed
earlier in this note. It is not practical to determine the fair value of restricted securities due to restrictions placed on
its transferability. The fair value of loans is computed by calculating the new present value of estimated future cash
flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for
the remaining maturities and terms, resulting in a Level 3 classification. The fair values disclosed for demand,
savings, N.O.W. and money market deposits are, by definition, equal to the amount payable on demand at the
reporting date resulting in Level 1 classification. The fair value for certificates of deposit is computed by calculating
the net present value of estimated future cash flows, using the current rates at which similar certificates of deposit
would be issued to depositors, resulting in a Level 2 classification. The short term borrowings generally maturing
within 90 days approximate their fair values resulting in a Level 2 classification. For accrued interest receivable and
payable, the recorded book value is a reasonable estimate of fair value and the fair value level follows the
underlying contract.
14.
REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet
items calculated under regulatory accounting practices. The Bank’s capital amounts and classification also are
subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk weighted assets, and of Tier 1
capital to average assets, as those terms are defined in applicable OCC regulations.
44
As of December 31, 2014, the Bank was classified as “well capitalized,” for purposes of the OCC’s prompt
corrective action regulations. “Well capitalized” is the highest capital classification for FDIC-insured financial
institutions in the United States. To be categorized as “well capitalized,” the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. Management believes, as of
December 31, 2014, that the Bank met all capital adequacy requirements.
The Bank’s actual capital amounts and ratios are presented in the following table:
As of December 31,
2014
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
Actual
Amount
Ratio
$
66,449
61,996
61,996
17.17 %
16.02 %
12.65 %
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Tier 1 leverage ratio
$
46,001
41,901
41,901
14.03 %
12.78 %
9.01 %
To be Adequately
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
(dollars in thousands)
$
30,959
15,479
19,608
>8.00 %
>4.00 %
>4.00 %
2013
(dollars in thousands)
$
26,228
13,114
18,611
>8.00 %
>4.00 %
>4.00 %
To be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$
38,699
23,219
24,510
>10.00 %
>6.00 %
>5.00 %
$
32,785
19,671
23,264
>10.00 %
>6.00 %
>5.00 %
15.
PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Empire Bancorp, Inc. (Parent Company only) follows:
CONDENSED STATEMENTS OF CONDITION
At December 31,
2014
2013
(in thousands)
ASSETS:
Cash
Other assets
Investment in the Bank
Total assets
$
$
590
98
61,884
62,572
76
-
38,384
38,460
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other Liabilities
Total liabilities
151
151
-
-
Total stockholders' equity
Total liabilities and stockholders' equity
62,421
62,572
$
38,460
38,460
$
45
CONDENSED STATEMENTS OF OPERATIONS
Year Ended December 31,
2014
2013 (1)
(in thousands)
Dividends from Bank
Other expense
(Loss) Income before income taxes and equity in undistributed earnings of the Bank
$
-
65
(65)
$
100
24
76
Income tax benefit
(Loss) Income before equity in undistributed earnings of the Bank
Equity in undistributed earnings of the Bank
Net income
26
(39)
1,883
1,844
$
-
76
389
465
$
(1) Empire Bancorp, Inc. organization was completed on August 22, 2013 and therefore net income is not a full year.
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net cash provided by operating activities:
Equity in undistributed earnings of the Bank
Increase in other assets
Increase in other liabilities
Net cash provided by operating activities
Investing activities:
Investments in the Bank
Net cash used by investing activities
Financing activities:
Net proceeds from issuance of stock
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2014
2013
(in thousands)
$
1,844
$
465
(1,883)
(98)
151
14
(18,160)
(18,160)
18,660
18,660
(389)
-
-
76
-
-
-
-
514
76
590
$
76
-
76
$
46
Crowe Horwath LLP
Independent Member Crowe Horwath International
INDEPENDENT AUDITOR’S REPORT
Board of Directors and Stockholders
Empire Bancorp, Inc.
Islandia, New York
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Empire Bancorp, Inc., which comprise the
consolidated statements of condition as of December 31, 2014 and 2013, and the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related
notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
47
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Empire Bancorp, Inc. as of December 31, 2014 and 2013, and the results of its operations and its
cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of
America.
New York, New York
March 30, 2015
Crowe Horwath LLP
48
INVESTOR
INFORMATION
Empire Bancorp, Inc. is a registered bank holding company for Empire National Bank.
Empire Bancorp, Inc.’s, common stock is listed on the OTCQB marketplace, which is the
middle tier of the OTC market, under the symbol “EMPK.” Empire National Bank is a Long
Island-based independent bank that specializes in serving the financial needs of small and
medium-sized businesses, professionals, nonprofit organizations, real estate investors, and
consumers. The bank has four banking offices located in Islandia, Shirley, Port Jefferson
Station, and Mineola. The bank takes pride in understanding the needs of each and every
customer so that it can deliver the highest quality service with a sense of urgency.
Additional copies of Empire Bancorp. Inc.’s Annual Report can be obtained in PDF form from
the Bank’s website (www.empirenb.com) in the Investor Relations section.
LEGAL COUNSEL
Geoffrey Scot Kay
Fenimore, Kay, Harrison & Ford, LLP
Austin, TX
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Crowe Horwath LLP
New York, NY
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
Philadelphia, PA
(877) 830-4936
ANNANNANANANANANNAAANAANNANAAAANNANNNAANNNNNNANNANNANANNANNANNNNNNNNANNA 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 LLLUALLALLLUAUALUUALUALUUUAUAUUALAUAUAAAAAAAUALUALALALUALALALALLUAUUAUALUUUUUALAUAUAUAALAUALAAAUALUALALLLALLLALLUALUUAUALUAUUAUUALUALALUAAUAUALUAAALAUALALUAAUAALAALLALLALLLUALLUALUUUUUAUAUUAUAUAALUAAUAAUAUAALALLUALLALLUALUUALUAUUAUAUAUAUAUALUALALLUALUUUAUAUALUUUALUAAUALAAAUAAALALUALUALALUALLLLUUAAAUAAUALLALUUUUUUAUAAALLALALUUUALUUUAAAUAUALLLALLUUUUUUAAAAAAUALLLUALLUUUUUAUAALLLLUUUAUUAALAAUALLALUALUUUALLUUUAUAUUUALAAAALUALLLLUUUUUUAUUAAUAALLLUUUALUUUALUUUUUAAALLUALLUUUUUUUUAAAAALUUUUUUAAAAAAALLLL RERRRRRRRRERRRERRRRREREREEEEEEERERERERERRRRRERRRRRRRREEEEEEEERRRRRRRRRRREEREREEEEREREREEERERRRRRRRERRRRRREREEEEEEEEEEEEERRRERERREREEEEEEEEEEEERRRRERERRERRRRREREEEEREEEEERERRERRRRRREEEERRRERERRREREEEEREERERRRERERRREEEEEEERRRRRREEEEEEEERERRRRRERRREEREEEEEEEEEERRREEEEEEEEERERERRREEEEEERRRRRREEEERRRRRRREEEEEEERERREERRRRREREEEERRRREEEEEERREEEEEPORPORPPORPPOPORPOROPORORPORORPORORORPOROOORORPORORORPOROPOROORPORPPORRORORORRPORRRPORPPPPORPORPOOOOOOOOORPOROORRPORPORPORPORRORRORPOPORPPORPPORPORPOROROROOPOOOOROOPORRRPORRORRPORRRPORRPPPPORPOROOOPOOOROOROOORORORRPORPORPORPORORPORORRRORPPPORPOROOOOROOORORPORRORRRPORPORRPPOROROOORORRPORRRPORPPORPPOOOOOOROOORORRRRRORRRRORORPPPPOOOOOOROORORRRRRRPPOPOOOOOOOOOOOORPORRRRRPPORPOROOPOORRRRRPOPPOROOPOOOOOOORRRRPPOPPPOOOOOOOORRRRRRRPPOOOOOOOORRRRPPPOROOOROOOOPORRRPPOOOOOOOOOORRRRPPPOOOOOOOORRRPORPPPOROOOOOORPPPOOOOOORRRPPPOOOOOOORRRRRTTTTTT 2TTTT 2T TTT 2TTT 2T 22222T 2T 22222TTTT 2TTT TTT 2TT 2TTTT 2T 22T 2T 2TTTT 2T T 2TTTTTT 222T 222TTTTTT TT 2TTTTT 22222T 2T 22TTTT 2TTTTTTTTT 22222222TTTT 2TTTTTTTTTTT 2TT 22222222222TTTTTTTTTTT 2222222222TTTTTTTTTT 222TTTTTTT 222222TTTTTT 2222222TTTTTTTTTTT 22222TTTTTTTTT 222TTTTTTTT 2TT 222222TTTTTTT 22TTTTTT 222222TTTTTTT 222TTT 22222T 222TTT 222011014014014414444100141011401440144144014414141014001401010014014001401401414011114014010144440141440140140000000101114111141141110141444014140140140144444014014014014001411111144401401444400000014014114141011114444401401444000000141111144014014444014000101411114444440140001411444141401141411444444001111114140144014111141014444411144401411144441444440141111144440111111144400111444440111111144444400111444444 ||||||||||||||
ANNUAL REPORT 2014 |
77777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777777
7
BOARD OF
DIRECTORS*
8
| EMPIRE BANCORP, INC.
Douglas C. Manditch
Chairman of the Board &
Chief Executive Officer
Empire National Bank
Thomas M. Buonaiuto, CPA
President & Chief Operating Officer
Empire National Bank
John P. Bracken, Esq.
Organizer & Vice Chairman of the Board
Managing Partner, Bracken Margolin
Besunder, LLP, Retired
Francis F. Boulton
Organizer & Director
CEO, Long Island Ducks Professional
Baseball Club, LLC
John D. Caffrey, Jr.
Organizer & Director
Owner, Castle Financial Advisors, LLC &
Castle Asset Management, LLC
John L. Ciarelli, Esq.
Organizer & Director
President, Ciarelli & Dempsey P.C.
Dr. Alan M. Coren
Organizer & Director
President, West Hills Animal Hospital P.C.
Larry R. Davis, Esq.
Organizer & Director
Principal, Davis & Prager, P.C.
Frank A. DiFazio
Organizer & Director
President, Dekal Services, Inc.
Robert D. Falese
Owner & President
Falese Investments, LLC
Salvatore Ferro
Organizer & Director
President & CEO, Alure Home Improvements,
Alure Designs & Alure Basements
Dr. Robert J. Frey
Research Professor; Director of the Program
in Quantitative Finance in the Dept. of
Applied Mathematics & Statistics, Stony
Brook University
Mukeshkumar Patel
Organizer & Director
President, Shirley Motel, Inc.
Charles C. Russo, Esq.
Organizer & Director
Senior Partner, Russo Karl Widmaier
& Cordano, PLLC
Joseph S. Tantillo, Jr.
Organizer & Director
Founder & CEO, Nassau Suffolk Electrical
& Mechanical
Paul J. Tonna
Organizer & Director
Molloy College’s Executive Director for the
Energeia Partnership
Jeffrey M. Weiner
Organizer & Director
Managing Partner, Marcum, LLP
*Each director serves on the Boards of Empire National Bank and Empire Bancorp, Inc.
ANNUAL REPORT 2014 |
9
OFFICERS
EMPIRE BANCORP, INC.
EXECUTIVE OFFICERS
Douglas C. Manditch
Chairman of the Board, Chief Executive Officer & Secretary
John P. Bracken, Esq.
Vice Chairman of the Board
Thomas M. Buonaiuto, CPA
President, Chief Operating Officer & Assistant Secretary
John Pinna
Vice President
Janet T. Verneuille, CPA
Vice President & Chief Financial Officer
Diane L. Murray, CPA
Assistant Secretary
EMPIRE NATIONAL BANK
EXECUTIVE OFFICERS
Douglas C. Manditch
Chairman of the Board & Chief Executive Officer
Thomas M. Buonaiuto, CPA
President & Chief Operating Officer
John Pinna
Executive Vice President & Chief Information Officer
Janet T. Verneuille, CPA
Executive Vice President & Chief Financial Officer
SENIOR VICE PRESIDENTS
Diane L. Murray, CPA
Chief Risk Officer & Deputy Compliance BSA Officer
Susanne Pheffer
Chief Technology Officer & Security Officer
Robert S. Schepis
Chief Lending Officer
10
| EMPIRE BANCORP, INC.
VICE PRESIDENTS
Richard Corrado
Sr. Credit Analyst
Danielle DiGrazia
Operations Officer
William T. Franz
Director of Marketing & Investor Relations
Catherine Giamundo, CPA
Controller
Craig Goldstein
Commercial Loan Officer
Erik Griemsmann
IT Manager
William Guiducci
Branch Manager, Shirley
Edy Meyer
Branch Manager, Port Jefferson Station
Richard A. Miceli
Loan Administration
Patricia Modena
Commercial Loan Officer
Dorothy Overton
Branch Manager, Islandia
Raffaella Palazzo
Credit Administration
Jane Reid
Human Resources
Matthew Ruppert
Portfolio Manager
Marguerite Smith
BSA & Compliance Officer
Michael R. Soffer
Commercial Loan Officer
John P. Solensky
Commercial Loan Officer
EXECUTIVE OFFICERS: Susanne Pheffer; John Pinna; Thomas M. Buonaiuto; Janet T. Verneuille; Robert S. Schepis;
Diane L. Murray; Douglas C. Manditch
MANAGERS
Assistant Branch Managers
Suzanne Fox
Assistant Branch Manager, Islandia
Theresa Naumann
Assistant Branch Manager, Shirley
Sueann Rando
Assistant Branch Manager, Port Jefferson Station
Michael Wilk
Assistant Branch Manager, Islandia
ASSISTANT VICE PRESIDENTS
Krista M. Braccia
Branch Manager, Mineola
Jeanne M. Dahl
Assistant Branch Manager, Port Jefferson Station
Miranda M. D’Angelis
Assistant Controller
Margaret Downing
Assistant Branch Manager, Shirley
Deborah McCullough
Assistant Branch Manager, Mineola
Jessica M. Michalski
Staff Accountant
Steven Post
Electronic Banking Manager
Janet Weissman
Assistant Branch Manager, Islandia
ANNUAL REPORT 2014 | 11
ISLANDIA
Headquarters
1707 Veterans Highway, Suite 8
Islandia, NY 11749
631-348-4444
12
| EMPIRE BANCORP, INC.
MINEOLA
170 Old Country Road, Suite 1WA
Mineola, NY 11501
516-741-0444
PORT JEFFERSON STATION
4747 Nesconset Highway, Unit 36
Port Jefferson Station, NY 11776
631-928-4444
SHIRLEY
1044 William Floyd Parkway
Shirley, NY 11967
631-395-9500
ANNUAL REPORT 2014 | 13
SUPPORTING
OUR COMMUNITY
We are well aware that a large part of our success is tied to the strength of the local
economy. As a community bank, we embrace our position within each community and
look to facilitate helping businesses and individuals grow and prosper.
Our commitment to community is in everyone’s best interest. We are proud to work
with so many important, local organizations.
2014 U.S. Women’s Amateur Golf
Colonial Youth & Family Services
Garden City Chamber of Commerce, Inc.
Championship
Association for Children with
Down Syndrome
Advancement for Commerce Industry
and Technology
AHRC Suffolk
ALS Ride for Life
Commercial Industrial Brokers Society
Girl Scouts of Suffolk County
Community Family Literacy Project
Greater Long Island Running Club
Community Mainstreaming Associates
Great River Fire Department
Comsewogue Youth Club
Contractors for Kids
Cooley’s Anemia Foundation, Inc.
Anniversary Fund
Hauppauge Industrial Association
Hauppauge Public Schools
Heckscher Museum
Hope House Ministries
Hyperbaric Associates of America, LLC.
Interfaith Nutrition Network
Island Harvest
Islip Travel Baseball
James V. Kavanaugh Knights of
Columbus
Jocelyn’s Operation Holiday Spirit
Kara’s Hope Foundation, Inc.
Kiwanis Club of the Mastics
Leukemia & Lymphoma Society
Long Island Council on Alcoholism and
Alzheimer’s Foundation of America
Crohn’s & Colitis Foundation of America
American Heart Association
Cure MS Foundation of New York, Inc.
Angela’s House
Doc Fallot Scholarship Fund
Arthritis Foundation – LI Chapter
Dominican Sisters Family Health Service
Association for A Better Long Island
East End Arts Council
Brookhaven Women and Youth
Services
Eden II and Genesis Foundation
Energeia Partnership at Molloy College
Catholic Kolping Society of America
Erika Josephson Foundation
Central Nassau Guidance & Counseling
Father John Papallo Lodge
Chamber of Commerce of the Mastics
Federation of Organizations
Child Care Council of Nassau, Inc.
Frank Catalanotto Foundation
Child Care Council of Suffolk, Inc.
Friends and Family of Chris Barnes
Christmas Magic, Inc.
Fuoco Memorial Golf Festival
Drug Dependence
Clark Gilles Foundation
Gallery North
Long Island Association
14 | EMPIRE BANCORP, INC.
Long Island Builders Institute, Inc.
National Multiple Sclerosis Society
Stony Brook Foundation
Long Island Community Chest
New Ground, Inc.
Long Island Imagine Awards
Noyac Civic Council
Long Island Metropolitan Lacrosse
Nassau Suffolk Autism Society of
Suffolk County Coalition Against
Domestic Violence
Suffolk Sports Hall of Fame
Foundation
Long Island Museum of American Art,
History and Carriages
Long Island Real Estate Group
Marine Corp Veterans
Marcum Workplace Challenge
Mastic Fire Department
Maureen’s Haven
Medford North Patchogue Lions Club
Mercy Haven, Inc.
Michael W. McCarthy Foundation, Inc.
Middle Country Library Foundation
Miller Place Athletic Booster Club
America
Telecare
Our Lady Queen of Apostles
Theodore Roosevelt Association
Pal-O-Mine Equestrian, Inc.
Townwide Fund of Huntington, Inc.
Port Jefferson Village
Tomorrow’s Hope Foundation
Real Estate Practitioners Institute
United Cerebral Palsy of Suffolk
Resurrection Lutheran Church,
Garden City
The Richard J. O’Brien Foundation
Risk Management Association -
Long Island Chapter
Royal Educational Foundation of
Port Jefferson
United Veterans Beacon House
United Way of Long Island
Vietnam Veterans of America
Visiting Nurse Service & Hospice
of Suffolk
Wall of Wars Fund
Ward Melville Heritage Organization
SCOPE Education Services
William Floyd Alumni Association
Metropolitan Mortgage Officers Society
Rotary Club of the Ronkonkomas
Mineola Chamber of Commerce
Shanti Fund
William Floyd Community Summit
Molloy College
Morgan Center
St. Jude RC Church Golf Committee
William Floyd Scholarship Fund
St. Charles Hospital Foundation
Wounded Warrior Project
Muscular Dystrophy Association
St. Louis De Monfort Church
YMCA of Long Island, Inc.
ANNUAL REPORT 2014 |
ANNUAL REPORT 2014 |
13
15
HEADQUARTERS
1707 Veterans Highway
Suite 8
Islandia, NY 11749
631-348-4444
empirenb.com
I
| EMPIRE BANCORP, INC.
Member FDIC