Empire Bancorp Inc.
Annual Report 2015

Plain-text annual report

A N N U A L R E P O R T T W O T H O U S A N D F I F T E E N OUR MISSION SELECTED FINANCIAL DATA TOTAL ASSETS TOTAL DEPOSITS 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 TOTAL LOANS NON-PERFORMING LOANS TO TOTAL LOANS 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2 | EMPIRE BANCORP, INC. NET INTEREST INCOME TOTAL STOCKHOLDERS’ EQUITY 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 OPERATING EFFICIENCY RATIO NET INTEREST MARGIN 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 ANNUAL REPORT 2015 | 3 FINANCIAL HIGHLIGHTS For the year ended December 31, 2015 2014 2013 2012 2011 FINANCIAL CONDITION DATA: SELECTED STATISTICAL DATA: RATIOS: OPERATING DATA: PER SHARE DATA: 4 | EMPIRE BANCORP, INC. DEAR SHAREHOLDER Douglas C. Manditch, Chairman & Chief Executive Officer (left) with Thomas M. Buonaiuto, President & Chief Operating Officer ANNUAL REPORT 2015 | 5 6 | EMPIRE BANCORP, INC. ANNUAL REPORT 2015 | 7 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 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, 2014, and 2015 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. As of and for the year ended December 31, 2015 2014 2013 2012 2011 14,765 2,516 12,249 - 12,249 2,630 10,989 3,890 (719) 4,609 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 152,639 290,227 4,244 467,068 177,252 213,679 38,460 100,617 375,199 4,453 508,069 189,204 205,921 62,421 151,043 456,512 5,268 629,133 189,200 328,833 64,154 21,504 1,689 19,815 867 18,948 1,005 15,998 3,955 1,421 2,534 16,216 1,779 14,437 - 14,437 898 13,054 2,281 995 1,286 18,540 1,677 16,863 243 16,620 1,033 13,825 3,828 1,984 1,844 15,696 2,268 13,428 285 13,143 1,941 12,532 2,552 (1,072) 3,624 Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision Other income Other expense Income before income taxes Income tax expense (benefit) Net income Period-End Balance Sheet Data: Investment securities, available-for-sale Loans, net of allowance for loan losses Allowance for loan losses Total assets Noninterest-bearing deposits Interest-bearing deposits Stockholders’ equity Per Share Data: Diluted earnings Basic earnings Book value, as converted(1) Weighted average common shares outstanding(2) Weighted average preferred shares outstanding(2) Performance Ratios: Return on average equity Return on average assets Net interest margin Efficiency ratio(3) Asset Quality Ratios: Nonperforming assets to total assets(4)(5) Nonperforming loans to total loans (4)(5) Allowance for loan losses to total loans (5) Net charge-offs to average loans Capital Ratios (bank level only)(6): Tier 1 leverage capital Common equity tier 1 risk-based capital Tier 1 risk(cid:827)based capital Total risk(cid:827)based capital (1) For the year ended December 31, 2014, 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. 180,202 239,211 4,476 438,399 172,165 191,193 42,216 3.19 % 0.29 3.29 84.31 3.98 % 0.47 3.75 76.58 4.43 % 0.38 3.55 77.37 8.90 % 0.90 3.48 89.30 12.22 % 16.83 16.83 18.01 12.65 % - 16.02 17.17 9.01 % - 12.78 14.03 9.52 % - 14.65 15.90 1.44 0.08 1.17 0.01 1.84 0.01 1.14 0.03 0.41 0.42 0.29 0.29 0.37 0.42 0.83 0.83 6,100,689 4,427,830 4,379,970 4,373,279 779,281 0.23 % 0.09 % 0.51 % 0.61 % 41,182 9.32 9.07 8.78 9.64 0.31 0.12 0.81 1.09 $ $ $ $ $ - - 114,502 208,660 4,216 339,733 45,765 219,255 37,432 1.09 1.09 8.60 - 4,213,866 13.92 % 1.39 3.82 86.12 0.65 % 1.03 1.98 - 10.80 % - 15.36 16.62 (2) During the third quarter of 2015, the Corporation converted all of its issued and outstanding Series A preferred stock for an equivalent number of shares of the Corporation's non-voting common stock. (3) Efficiency ratio is the ratio of noninterest expense to net interest income and noninterest income. (4) For the periods presented, nonperforming assets consist solely of nonperforming loans and nonperforming loans consist solely of nonaccrual loans. (5) Total loans are net of unearned discounts and deferred fees and costs. (6) Capital ratios at December 31, 2015 are calculated under Basel III guidelines. 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, Bronx and New York in the State of New York, which we serve from our main office located at 1707 Veterans Highway, Islandia, New York, three branch offices located in Shirley, Port Jefferson Station and Mineola, New York and a loan and deposit production office located in Manhattan, 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 and throughout New York City. 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: (cid:120) Hiring and retaining qualified banking officers with extensive experience in our market; (cid:120) Utilizing technology and strategic outsourcing to provide a broad array of secure and convenient products and services in a cost-effective manner; (cid:120) Developing a suite of focused products and services tailored for professional practice customers in our market; (cid:120) Operating from highly visible and accessible banking offices in close proximity to a concentration of targeted commercial businesses and professionals; (cid:120) (cid:120) (cid:120) 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. 3 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: Each member of our senior management team has experience at growing financial institutions in the New York metropolitan area. Cohesive core management team with extensive local banking experience. Our senior management team is led by Douglas C. Manditch, Chairman and Chief Executive Officer, and Thomas M. Buonaiuto, President and Chief Operating Officer. Mr. Manditch has 50 years of banking experience, all of which have been on and around Long Island, including approximately 26 years as Chief Executive Officer of Long Island-based financial institutions. Mr. Buonaiuto, a Certified Public Accountant, has more than 23 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, Executive Vice President and Chief Financial Officer, is a Certified Public Accountant with over 28 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, Executive Vice President and Chief Information Officer, has over 23 years banking experience centered in technology and operations. Susanne Pheffer, Executive Vice President and Chief Technology Officer, has over 31 years of working expertise in the financial technology arena serving as a consultant and Chief Information Officer at the then largest independent commercial bank headquartered on Long Island. Michael P. Locorriere, Executive Vice President and Director of Municipal Banking, has more than 25 years of banking and government experience. Prior to joining the bank in 2015, Mr. Locorriere served in similar roles at other commercial financial institutions on Long Island. Diane Murray, Senior Vice President and Chief Risk Officer, is a Certified Public Accountant, with approximately 38 years of accounting experience, including 13 years in public accounting at a Big Four accounting firm and her last 14 years in banking. Raffaella Palazzo, Senior Vice President and Deputy Chief Credit Officer, has over 15 years of commercial lending experience. Prior to joining Empire National Bank in 2008, she spent 10 years at another Long Island-based financial institution where she completed formal credit training and managed a loan portfolio. Matthew Ruppert, Senior Vice President and Deputy Chief Credit Officer, has over 13 years of experience in community banking, specifically the commercial lending and credit areas. Prior to joining Empire National Bank shortly after its inception, he began his career at the then largest independent commercial bank headquartered on Long Island where he was formally credit trained. Robert Schepis, Senior Vice President and Chief Lending Officer, has over 25 years of commercial and industrial as well as commercial real estate lending expertise in the financial services and banking industry on Long Island and in New York City. His experience includes business development as well as risk management. 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, 2015, the Bank had a 12.22% tier 1 leverage capital ratio, a 16.83% common equity tier 1 risk-based capital ratio, a 16.83% tier 1 risk-based capital ratio and a 18.01% total risk-based capital ratio. 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, 2015, our total deposits were $518.0 million, representing a compounded annual growth rate of 17.9% since December 31, 2011. Our deposit growth has been driven significantly by the growth in our savings, N.O.W. and money market deposits primarily from new municipal banking relationships. Savings, N.O.W. and money market deposits represented approximately 55.3% of our total deposits at December 31, 2015, up from 47.7% of our total deposits at December 31, 2011. Active solicitation of municipal deposits in the latter half of 2015 helped reduce our cost of funds and significantly contributed to total 4 deposit growth. 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: (cid:120) 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; (cid:120) The fair value of our investment securities can fluctuate due to factors outside of our control; (cid:120) We face significant competition to attract and retain customers; (cid:120) We operate in a highly regulated environment, which could restrain our growth and profitability; (cid:120) We depend heavily on our information technology and telecommunications systems, which are subject to systems failures, interruptions and security risks; and (cid:120) 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, Bronx 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 1,502,968 residents as of July 1, 2014, which represents a 0.6% increase in population since April 1, 2010. Similarly, the population of Nassau County was approximately 1,358,627 residents as of July 1, 2014, which represents a 1.4% 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 2014, the median household incomes in Suffolk County and Nassau County were $88,323 and $98,401, compared to a New York state household income median of $58,687. Further, according to data provided by the FDIC, between June 30, 2010 and June 30, 2015, FDIC-insured deposits in Suffolk County and Nassau County have increased by approximately 35.7% and 26.1%, 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, 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 35% of the deposits in Suffolk and Nassau counties were held in banks that were based on Long Island; where as of June 30, 2015, that number had decreased to less than 17%, 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 5 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 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 ten to fifteen 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 may not require personal guarantees when lending to not-for-profit entities, religious organizations, condominium associations, financial institutions and municipal entities. 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 as offices/warehouses/production facilities, office buildings, hotels, mixed-use residential/commercial, retail centers, one-to-four family properties and multi-family properties. a wide variety of property commercial includes types, estate loans such real 6 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 medium-sized 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. 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 fifteen years and the rates generally are not fixed for over twelve 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 our lending activities, 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 seek to maximize long-term investment earnings through managing 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 In well as referrals from our existing customers, officers and directors as well as various marketing campaigns. 7 2014, we joined ICS®, an Insured Cash Sweep® service to manage our growing public fund deposit base. 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, or CDARS®, 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 eight-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, 2015, demand deposits comprised 36.5% of our total deposits. 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, 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. 8 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 Effective January 1, 2015, we became subject to new rules designed to implement the recommendations with respect to regulatory capital standards, commonly known as Basel III, approved by the International Basel Committee on Banking Supervision. The Basel III framework is applicable to all top tier bank holding companies with consolidated assets of $1.0 billion or more and all banks, regardless of size. Accordingly, at this time, we are subject to Basel III only at the bank level. The new Basel III rules establish the following minimum regulatory capital ratios: (cid:120) A leverage ratio of 4.0%; (cid:120) A new ratio of common equity tier 1 capital to total risk-weighted assets of not less than 4.5%; (cid:120) A tier 1 risk-based capital ratio of 6.0% (an increase from 4.0%); and (cid:120) A total risk-based capital ratio of 8.0%. The Basel III rules also changed the regulatory capital requirements for purposes of the prompt corrective action regulations. Accordingly, to be categorized as well capitalized, the bank must have a minimum leverage capital ratio of at least 5.0%, common equity tier 1 capital ratio of at least 6.5%, a tier 1 risk-based capital ratio of at least 8.0%, and a total risk-based capital ratio of at least 10.0%. The rules also implemented 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 is being phased in over a three year period, beginning January 1, 2019. 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, 2015 and expect to meet all minimum regulatory capital requirements under the final rule, 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 applies only to banking organizations with $250 billion or more in consolidated assets or $10 billion or more in foreign exposures. to us. As result, unless modified, framework does not the Basel liquidity apply III a 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 $121.0 million, or 23.8%, to $629.1 million as of December 31, 2015, compared to $508.1 million as of December 31, 2014. Our asset growth was largely driven by loan growth of $82.1 million, or 21.6% and an increase of $50.4 million in securities available for sale. Asset quality remained strong, with total nonperforming loans comprising 0.12% of total loans as of December 31, 2015, compared to 0.31% as of December 31, 2014. Total deposits increased $122.9 million, or 31.1%, to $518.0 million as of December 31, 2015, compared to $395.1 million as of December 31, 2014. Our deposit growth was driven primarily by savings, N.O.W. and money market growth. The growth in these deposits was driven in large part by new municipal banking relationships. Noninterest-bearing deposits, which represent our lowest cost of funding, remained constant at $189.2 million during 2015 and 2014. The percentage of noninterest-bearing deposits to total deposits declined from 47.9% to 36.5% due to the growth in savings, N.O.W. and money market accounts outpacing the growth in noninterest- bearing deposits. Short-term borrowings, which represent advances from the Federal Home Loan Bank of New York, declined $20.0 million from $46.1 million as of December 31, 2014 to $26.1 million as of December 31, 2015. On December 17, 2015, we completed a private placement of $14.7 million, net of issuance costs, in aggregate principal amount of subordinated notes. Total stockholders’ equity increased $1.8 million to $64.2 million as of December 31, 2015, from $62.4 million as of December 31, 2014. Stockholders’ equity was impacted by a decrease of $1.0 million in the value of our securities available for sale, net of applicable taxes, as well as our operating earnings of $2.5 million. Net income for the year ended December 31, 2015 was $2.5 million or $0.37 per diluted share, compared to net income of $1.8 million, or $0.41 per diluted share, in 2014, an increase of $690 thousand, or 37.4%. The increase in net income during 2015 was positively impacted by an increase in net interest income of $3.0 million, or 17.5%, to $19.8 million, which resulted from an increase of $53.1 million, or 11.2%, in our average interest-earning assets, as well as the expansion of our net interest margin from 3.55% to 3.75%, as compared to the year ended December 31, 2014. Other income decreased by $28 thousand, or 2.7%, to $1.0 million for year ended December 31, 2015 primarily as a result of the net decrease of $98 thousand for net securities gains/losses, offset by the increase of $53 thousand in professional practice revenue. Other expenses increased $2.2 million, or 15.7%, as compared to the year ended December 31, 2014, primarily as a result of an increase in salaries and employee benefits of $1.4 million, or 20.6%. Increase in other expenses also reflected the New York State and New York City capital based taxes introduced in 2015, which replaced our New York State and New York City income tax liability. The 2014 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 2014 net income was $2.2 million. Our efficiency ratio improved to 76.58% for the year ended December 31, 2015, as compared to 77.37% for the year ended December 31, 2014, 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, 2015 were $0.42 and $0.37, respectively, compared to $0.42 and $0.41, respectively, for 2014. Our return on average assets was 0.47% for 10 2015, as compared to 0.38% for 2014, and our return on average equity was 3.98% for 2015, as compared to 4.43% for 2014. Comparison of operating results for the years ended December 31, 2015 and 2014 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 2015 Interest Earned/Paid $ 408,794 $ 19,012 2,293 175 24 - - 21,504 $ 107,307 3,240 9,284 - 5 528,630 $ 7,511 6,131 542,272 $ Year Ended December 31, Average Yield/Cost Average Balance (dollars in thousands) 2014 Interest Earned/Paid Average Yield/Cost 4.65 % 2.14 5.40 0.26 - - 4.07 $ 330,476 $ 15,280 3,092 165 3 1 - 18,541 $ 140,633 3,440 914 21 5 475,489 $ 6,295 5,001 486,785 $ 4.62 % 2.20 4.80 0.33 4.76 - 3.90 $ 207,410 $ 992 0.48% $ 156,573 $ 900 0.57% 347 305 125 - 1,677 $ 0.80 1.37 0.37 - 0.66 375 203 73 46 1,689 $ 0.95 1.25 0.39 7.53 0.60 $ 39,292 16,300 18,888 611 282,501 191,265 4,806 478,572 63,700 $ 43,323 22,241 33,882 - 256,019 184,950 4,181 445,150 41,635 $ 542,272 $ 486,785 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 Interest bearing liabilities: Savings, N.O.W. and money market deposits Certificates of deposit of $100,000 or more Other time deposits Borrowed funds Subordinated debentures Total interest-bearing liabilities 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. $ 19,815 3.47 % 3.75 % $ 16,864 3.24 % 3.55 % (2) The 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 $3.0 million for the year ended December 31, 2015, as compared to the prior year, primarily resulting from the growth in total interest income of $3.0 million year over year. Growth in the average balance of interest-earning assets of $53.1 million as well as a shift in the asset mix from investing securities to loans, our highest yielding asset, primarily attributed to this increase. For the year ended December 31, 2015, average loans represented 77.3% of our average interest-earning assets, as compared to 69.5% for the year ended December 31, 2014. The shift in asset composition resulted in an increase in our yield on interest-earning assets from 3.90% for 2014 to 4.07% for 2015. The decrease in total interest expense for 2015 was attributable to a reduction in the cost of average interest-bearing liabilities to 0.60% for the year ended December 31, 2015 from 0.66% for the prior year partially offset by an increase in the average balance of interest-bearing deposits of $40.9 million. The decrease in the cost of average interest-bearing liabilities was primarily due to the continued low interest rate environment as well as growth in municipal banking deposits, which replaced higher cost wholesale funding sources. Average balances of short-term borrowings, which represent our lowest cost of interest-bearing funding, decreased by $15.0 million. The increase in net interest income also was positively impacted by an increase of $6.3 million, or 3.4%, in the average balance of noninterest-bearing demand deposits for the year ended December 31, 2015, as compared to the prior year. Net interest margin for the years ended December 31, 2015 and 2014 was 3.75% and 3.55%, 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 Subordinated debentures Total increase (decrease) in interest expense Total increase (decrease) in net interest income (1) The above table is presented on a tax equivalent basis. Year Ended December 31, 2015 Over 2014 Increase/(Decrease) Due To Average Volume Average Rate (in thousands) Net Change $ $ 3,642 (714) (10) (1) 22 2,939 260 (34) (76) (58) 46 138 2,801 $ $ 90 (85) 20 - (1) 24 (168) 62 (26) 6 - (126) 150 $ $ 3,732 (799) 10 (1) 21 2,963 92 28 (102) (52) 46 12 2,951 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 an $867 thousand provision for loan losses for the year ended December 31, 2015. We recorded a $243 thousand provision for loan losses for the year ended December 31, 2014. The increase in the provision for loan losses in 2015 was primarily 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, decreased $28 thousand for the year ended December 31, 2015, as compared to the same period in 2014, primarily as a result of the net decrease of $98 thousand in net securities gains/losses offset by the increase of $53 thousand in professional practice revenue. We experienced a decrease in customer-related fees and service charges of $64 thousand, as well as an increase in other operating income of $81 thousand, which were associated with miscellaneous service charges and fees that 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 operating expenses also reflect both New York State and New York City capital based taxes, which were enacted in 2015. Other expense increased by approximately $2.2 million, or 15.7%, during 2015, as compared to 2014, primarily from expenses associated with our continued growth. The biggest component of the growth in other expense was salaries and benefits, which increased $1.4 million, or 20.6%, during 2015, largely due to base salary increases, new employees hired to support growth and branch expansion and an increase in employee benefit costs. As of December 31, 2015 and 2014, we employed 72.4 and 68.8 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 $8.7 million as of December 31, 2015 from $7.4 million as of December 31, 2014. Net occupancy and equipment costs increased $237 thousand, or 10.1%, primarily resulting from the expenses associated with the expansion of office space in the bank’s main office and the opening of a loan and deposit production office in Manhattan. Our 2015 estimated New York State and New York City capital based taxes totaled $156 thousand. Provision for income taxes Income tax expense for the year ended December 31, 2015 was approximately $1.4 million, as compared to $2.0 million for the year ended December 31, 2014. The decrease in income tax expense primarily resulted from the establishment of a valuation allowance on certain deferred tax assets in 2014, as well a change in the manner in which our income is taxed for state tax purposes starting in 2015. The 2014 income tax expense was materially impacted by the required valuation allowance of approximately $386 thousand related to certain deferred tax assets resulting from these revisions to the New York corporate tax laws. As a result of the changes, we determined that it was not more likely than not 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 record a valuation allowance for our deferred tax assets, which resulted in an increase in our income tax expense. During 2015, the Corporation’s operations in New York City became subject to New York City taxes, and we began accruing for estimated New York City capital based taxes. We believe that the 2014 revisions to the New York State and New York City corporate tax laws will continue to decrease our future state and local income tax liability. The elimination of our state income tax liability in 2015 reduced our combined effective tax rate for 2015 to 35.9% from 41.8% for the year ended December 31, 2014. 13 Financial condition Our total assets increased $121.0 million, or 23.8%, to $629.1 million as of December 31, 2015, compared to $508.1 million as of December 31, 2014. Net loans increased $81.3 million, or 21.7%, to $456.5 million as of December 31, 2015, compared to $375.2 million as of December 31, 2014. As a result of management’s assessment of the credit quality of the loan portfolio, the allowance for loan losses to total loans was 1.14%, or $5.3 million, at December 31, 2015 as compared to 1.17%, or $4.5 million, as of December 31, 2014. Securities available for sale increased $50.4 million, or 50.1%, to $151.0 million as of December 31, 2015, from $100.6 million as of December 31, 2014. Our asset growth for the year ended December 31, 2015 was funded primarily by deposit growth. Total deposits increased $122.9 million, or 31.1%, to $518.0 million as of December 31, 2015, compared to $395.1 million as of December 31, 2014. Demand deposits, which represent a value funding source, remained relatively flat. Savings, N.O.W. and money market deposits increased $144.3 million, or 101.4%, to $286.6 million as of December 31, 2015. The growth in these deposits was driven in large part by new municipal banking relationships. Certificates of deposit of $100,000 or more decreased $12.7 million, or 28.5%, to $31.8 million, while other time deposits decreased by $8.8 million, or 45.8%, to $10.4 million as of December 31, 2015. These represent the Corporation’s highest cost deposits and were replaced by lower costing municipal interest bearing deposits. As of December 31, 2015, our loan to deposit ratio was 89.2%, as compared to 96.1% as of December 31, 2014. In December 2015, we issued subordinated debentures, net of debt issuance costs, of $14.7 million. Total stockholders’ equity increased $1.8 million to $64.2 million as of December 31, 2015, from $62.4 million as of December 31, 2014. The increase was due primarily operating earnings of $2.5 million, partially offset by a decrease of $1.0 million in the value of our securities available for sale, net of applicable taxes. As of December 31, 2015, the Bank was “well capitalized” under applicable regulatory capital guidelines and was in compliance with all applicable regulatory capital standards, with leverage, common equity tier 1, tier 1 risk-based and total risk-based capital ratios of 12.22%, 16.83%, 16.83% and 18.01%, 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, 2015 December 31, 2014 Amount Percent Amount (dollars in thousands) Percent Commercial real estate - multi-family Commercial real estate mortgages 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 $ $ $ 187,380 121,202 70,325 54,082 19,997 4,155 2,463 965 460,569 1,211 (5,268) 456,512 40.7 % 26.3 15.3 11.8 4.3 0.9 0.5 0.2 100.0 $ $ $ 149,105 130,369 50,955 26,499 14,124 4,028 3,232 549 378,861 791 (4,453) 375,199 39.4 % 34.4 13.4 7.0 3.7 1.1 0.9 0.1 100.0 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 67.0% of our loan portfolio 14 as of December 31, 2015. 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, 2015: Within One Year After One But Within Five Years After Five Years Total $ $ $ (in thousands) 27,100 $ 34,977 14,083 5,222 3,822 2,991 2,351 259 90,805 $ 158,687 84,228 12,688 47,875 - 1,164 - - 304,642 187,380 121,202 70,325 54,082 19,997 4,155 2,463 965 460,569 74,185 386,384 460,569 $ $ $ $ $ $ $ $ $ $ $ 43,738 47,067 90,805 21,842 282,800 304,642 Commercial real estate - multi-family Commercial real estate mortgages 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 1,593 1,997 43,554 985 16,175 - 112 706 65,122 8,605 56,517 65,122 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 nonperforming 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 nonperforming loans comprised 0.12% of total loans as of December 31, 2015, compared to 0.31% as of December 31, 2014. 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. We continued accruing interest on one real estate line of credit with an outstanding balance of $100 thousand at December 31, 2015, which was 90 days or more past due on its contractual maturity date. This loan continued to make monthly interest payments consistent with the initial contractual payment schedule. This loan is well secured and is expected to be refinanced, and, therefore, remained on accrual status and was deemed a performing asset at the date indicated above. 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. 15 Allowance for loan losses We maintain an allowance for loan losses that represents management’s best estimate of the probable incurred 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 incurred 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 rates, among other things. The allowance for loan losses consists of specific and general components, as well as an unallocated component. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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 $5.3 million, or 1.14% of total loans as of December 31, 2015, compared to $4.5 million, or 1.17% of total loans, as of December 31, 2014. In 2015, we had an unallocated portion totaling $117 thousand. In 2015, we had charge-offs of $130 thousand and recoveries of $78 thousand. We had net charge-offs of $52 thousand and $34 thousand for the years ended December 31, 2015 and 2014, 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. 2015 Percentage of Allowance to Total Allowance Amount (dollars in thousands) 2014 Percentage of Allowance to Total Allowance Amount Commercial real estate - multi-family Commercial real estate mortgages Commercial and industrial One-to-four family Real estate - construction Home equity lines of credit Lease financing Installment/consumer Unallocated Total $ $ 1,852 1,289 1,446 379 150 10 23 2 117 5,268 35.2 % 24.5 27.4 7.2 2.9 0.2 0.4 - 2.2 100.0 % $ $ 1,471 1,513 1,156 186 106 8 12 1 - 4,453 35.4 % 34.0 23.1 4.5 2.5 0.2 0.3 - - 100.0 % 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, 2015, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. 16 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. As of December 31, 2015, 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, 2015, 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, 2015 December 31, 2014 December 31, 2013 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value (in thousands) Available for sale: Mortgage backed securities – residential U.S. government agency securities Total Held to maturity: Municipal securities Total $ 81,239 71,252 152,491 $ $ 80,418 70,625 151,043 $ $ 76,245 24,558 100,803 $ $ 76,146 24,471 100,617 $ $ $ 130,437 28,530 158,967 $ $ 125,005 27,634 152,639 $ - $ - $ - $ - $ - $ - $ - $ - $ $ 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, 2015, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. 17 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, 2015. 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 Deposits Amortized Cost - $ 60,296 10,956 - 81,239 152,491 $ Fair Value (dollars in thousands) $ - 59,695 10,930 - 80,418 151,043 $ Yield - % 1.32 2.40 - 2.16 1.95 % Deposits are our primary source of funds to support our earning assets. Total deposits were $518.0 million as of December 31, 2015 compared to $395.1 million as of December 31, 2014. To expand and diversify our deposit base, we deployed the following strategies: (cid:120) Expansion of our suite of products and services targeting professional practices; (cid:120) Growth of our retail branch network to provide deposit-taking services from four banking locations; (cid:120) (cid:120) (cid:120) Strategic initiative to increase municipal deposit relationships in our market area; 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. In addition to the shift toward noninterest-bearing demand deposits, we experienced significant growth in savings, N.O.W. and money market deposits during 2015, which was primarily attributable to our strategic initiatives focused on municipal deposit growth. The following table shows the growth of our deposit portfolio, and the shift in the composition of our deposits, since December 31, 2013: 2015 Amount Percent As of December 31, 2014 Amount Percent (dollars in thousands) 2013 Amount Percent $ 189,200 36.5 % $ 189,204 47.9 % $ 177,252 45.3 % 286,635 55.4 142,286 36.0 139,524 35.7 31,759 10,439 518,033 $ 6.1 2.0 100.0 % 44,484 19,151 395,125 $ 11.3 4.8 100.0 % 44,382 29,773 390,931 $ 11.4 7.6 100.0 % Demand deposits Savings, N.O.W. and money market deposits Certificates of deposit of $100,000 or more Other time deposits Total deposits 18 Capital resources Total stockholders’ equity increased $1.8 million to $64.2 million as of December 31, 2015, from $62.4 million as of December 31, 2014. The increase was due primarily operating earnings of $2.5 million, partially offset by a decrease of $1.0 million in the value of our securities available for sale, net of applicable taxes. In addition, in September 2015, the shares of Series A preferred stock that we issued in our December 2014 private placement were converted on a one-for-one basis into shares of our nonvoting common stock. The Series A preferred stock had been issued as a nonvoting common stock equivalent and was converted following the approval of an amendment to our certificate of incorporation authorizing a class of nonvoting common stock at our 2015 annual meeting of stockholders. As of December 31, 2015, our equity structure consisted entirely of shares of common stock. 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. 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, 2015, 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, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios of 12.22%, 16.83%, 16.83% and 18.01%, 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, 2015 2014 (dollars in thousands, except share and per share data) $ $ $ ASSETS Cash and due from banks Interest earning deposits with banks Federal funds sold Total cash and cash equivalents Securities available for sale, at fair value Securities, restricted Loans Less: Allowance for loan losses Loans, net Premises and equipment, net Accrued interest receivable Deferred tax asset, net 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 Subordinated debentures, net Total 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, 0 issued and outstanding at December 31, 2015, and 1,156,250 issued and outstanding at December 31, 2014 Common Stock, par value $0.01 per share; 100,000,000 authorized shares; 5,723,720 issued and outstanding at December 31, 2015 and December 31, 2014 Non Voting Common Stock, par value $0.01 per share; 20,000,000 authorized shares; 1,156,250 issued and outstanding at December 31, 2015 and 0 issued and outstanding at December 31, 2014 Surplus Retained earnings (accumulated deficit) $ 4,797 817 7 5,621 $ $ 151,043 3,712 461,780 (5,268) 456,512 6,687 1,895 2,971 692 629,133 189,200 286,635 31,759 10,439 518,033 26,064 14,697 40,761 131 6,054 564,979 - 57 12 63,791 1,251 65,111 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 - 46,105 106 4,312 445,648 8,950 57 - 54,809 (1,283) 62,533 Accumulated other comprehensive loss Total Stockholders' Equity Total Liabilities and Stockholders' Equity (957) 64,154 629,133 $ (112) 62,421 508,069 $ See accompanying notes to the Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF OPERATIONS Interest income: Loans (including fee income) Securities available for sale Securities, restricted 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 Short-term borrowings Subordinated debentures Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income: Other service charges and fees Service charges on deposit accounts Professional practice revenue Net securities (losses) gains 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 Year Ended December 31, 2014 2015 (dollars in thousands, except per share data) $ $ $ $ 19,012 2,293 175 24 21,504 992 375 203 73 46 1,689 19,815 867 18,948 410 389 277 (71) 1,005 8,130 2,577 1,473 794 656 301 2,067 15,998 3,955 1,421 2,534 0.42 0.37 $ $ $ $ 15,280 3,092 165 3 18,540 900 347 305 125 - 1,677 16,863 243 16,620 329 453 224 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 See accompanying notes to the Consolidated Financial Statements. 21 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Comprehensive income: Net income Unrealized holding (losses) gains arising during the period Reclassification adjustment for losses (gains) included in net securities (losses) gains on the consolidated statements of operations Change in unrealized net (losses) gains Tax effect Other comprehensive (loss) income Total comprehensive income See accompanying notes to the Consolidated Financial Statements. Year Ended December 31, 2015 2014 (in thousands) $ 2,534 $ 1,844 (1,333) 6,169 71 (1,262) 417 (845) 1,689 $ (27) 6,142 (2,736) 3,406 5,250 $ 22 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Non-Cumulative Series A Preferred Stock Common Stock Common Stock Non-Voting Shares Outstanding Amount Shares Outstanding Amount Shares Outstanding Amount Surplus (dollars in thousands, except shares) Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Balance at January 1, 2014 - - 4,379,970 $ Issuance of common stock Issuance of preferred stock Capitalized offering costs Stock option compensation expense Total comprehensive income Balance at December 31, 2014 Conversion of preferred stock to non-voting common stock Stock option compensation expense Total comprehensive income Balance at December 31, 2015 - 1,156,250 - - - 1,156,250 (1,156,250) - - - - 8,950 - - - 8,950 (8,950) - - - $ $ 1,343,750 - - - - 5,723,720 - - - 5,723,720 $ $ 44 13 - - - - 57 - - - 57 - - - - - - - 1,156,250 - - 1,156,250 $ $ $ - - - - - - - 12 - - 12 $ 45,061 $ (3,127) $ (3,518) $ 38,460 10,737 300 (1,340) 51 - 54,809 8,938 44 - 63,791 $ $ $ $ - - - - 1,844 (1,283) - - 2,534 1,251 $ $ - - - - 3,406 (112) 10,750 9,250 (1,340) 51 5,250 62,421 $ - - (845) (957) - 44 1,689 64,154 $ See accompanying notes to the Consolidated Financial Statements. 23 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities Provision for loan losses Depreciation and amortization Amortization and accretion Share based compensation expense Net securities losses (gains) Increase in accrued interest receivable (Increase) decrease in other assets Increase in accrued and other liabilities (Increase) decrease deferred income tax Net cash provided by operating activities Cash flows from 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 Purchase of securities, restricted Sales of securities, restricted Net increase in loans Purchase of banking premises and equipment, net of disposals Net cash used by investing activities Cash flows from financing activities: Net increase in deposits (Decrease) increase in short-term borrowings Net proceeds from issuance of subordinated debentures Net proceeds from issuance of stock Net cash provided by financing activities (Decrease) increase in cash and cash equivalents Cash and cash equivalents beginning of period Cash and cash equivalents end of period Supplemental information-cash flows: Cash paid for: Interest Income taxes See accompanying notes to the Consolidated Financial Statements. Year Ended December 31, 2015 2014 (in thousands) $ 2,534 $ 1,844 867 1,021 762 44 71 (401) (178) 1,767 (245) 6,242 (85,748) 18,920 14,307 - - (11,526) 11,776 (82,180) (1,719) (136,170) 122,908 (20,041) 14,697 - 117,564 (12,364) 17,985 5,621 1,664 1,845 $ $ $ $ $ $ 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 1,685 1,630 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. and its wholly-owned subsidiary Empire National Bank. Throughout these notes, “Corporation” refers to Empire Bancorp, Inc. and its consolidated subsidiary, except as the context otherwise requires, and “Bank” refers only to Empire National Bank. 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 Empire Bancorp and the Bank is located at 1707 Veterans Highway, 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 short-term 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. 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 25 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”) and the Federal Reserve Bank of New York. The FHLB 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. The stock of both entities is 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 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 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. 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. 26 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. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable incurred losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 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 - multi-family loans, commercial real estate mortgages, commercial and industrial loans, one-to-four family loans, real estate – construction loans, home equity lines of credit, lease financing, 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 mandatory convertible preferred stock formerly 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 Stock based compensation awards are recorded in accordance with FASB ASC No. 718 and 505, “Accounting for Stock-Based Compensation” which requires companies to record compensation cost for stock options and stock awards granted to employees in return for employee service. The cost is measured at the fair value of the options and awards when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options and awards. 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 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. 28 n) New Accounting Standards ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB amended existing guidance related to the presentation of debt issuance costs. It requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance does not address presentation or subsequent measurement of debt issuance costs related to the line-of-credit arrangements. The Corporation early adopted ASU 2015-03 at December 31, 2015. The adoption of this standard did not have a material effect on the Corporation’s operating results. ASU 2014-12, Compensation – Stock Compensation (718) - Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. In June 2014, the FASB amended existing guidance related to the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. These amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vet in the award if the performance target is achieved. The adoption of this standard is not expected to have a material effect on the Corporation’s operating results; Empire Bancorp, Inc. 2015 Omnibus Stock and Incentive Plan and the Empire National Bank 2008 Stock Incentive Plan do not have a performance target that has to be achieved. o) Subsequent Events The Corporation has evaluated subsequent events for recognition and disclosure through March 31, 2016, 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, 2015 and 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss): Amortized Cost December 31, 2015 Gross Unrealized Gains Gross Unrealized Losses (in thousands) Estimated Fair Value Available for sale: Mortgage-backed securities-residential U.S. government agency securities Total available for sale securities Available for sale: Mortgage-backed securities-residential U.S. government agency securities Total available for sale securities $ $ 81,239 71,252 152,491 $ $ 377 77 454 $ $ (1,198) (704) (1,902) $ $ $ 80,418 70,625 151,043 Amortized Cost December 31, 2014 Gross Unrealized Gains Gross Unrealized Losses (in thousands) $ $ 76,245 24,558 100,803 $ $ 761 86 847 $ (860) (173) (1,033) $ 29 Estimated Fair Value $ $ $ 76,146 24,471 100,617 Securities with unrealized losses at December 31, 2015 and 2014 aggregated by category and length of time that individual securities have been in a continuous unrealized loss position are as follows: Less than 12 months December 31, 2015 Greater than 12 months Total Mortgage-backed securities-residential U.S government agency securities Total Fair Value $ $ 21,867 64,957 86,824 Unrealized Losses Fair Value Unrealized Losses Fair Value $ $ (305) (704) (1,009) (in thousands) 19,886 - 19,886 $ $ (893) - (893) $ $ $ $ 41,753 64,957 106,710 Unrealized Losses $ $ (1,198) (704) (1,902) Less than 12 months December 31, 2014 Greater than 12 months Total Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities-residential U.S government agency securities Total $ $ - - - $ $ - - - $ $ (in thousands) 28,672 18,817 47,489 $ $ (860) (173) (1,033) Fair Value $ $ 28,672 18,817 47,489 Unrealized Losses $ $ (860) (173) (1,033) At December 31, 2015, 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, 2015. The fair value of debt securities and carrying amount, if different, at December 31, 2015 by contractual maturity were as follows. Securities not due at a single maturity date, solely 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, 2015 Available for Sale Amortized Cost Fair Value (in thousands) $ - 60,296 10,956 - 81,239 152,491 $ $ - 59,695 10,930 - 80,418 151,043 $ Proceeds from sales and calls of securities available for sale were $33.2 million and $57.4 million for the years ended December 31, 2015 and 2014, respectively. There were no gross gains realized on the sale of securities during 2015 as compared to gross gains of $460 thousand in 2014. There were gross losses on the sale of securities in 2015 and 2014 of $71thousand and $433 thousand, respectively. At December 31, 2015, investment securities with a carrying value of $66.5 million were pledged as collateral to secure public and bankruptcy deposits of $36.0 million and $30.5 million, respectively. 30 3. LOANS The following table sets forth the major classifications of loans: December 31, 2015 2014 (in thousands) $ $ $ 187,380 121,202 70,325 54,082 19,997 4,155 2,463 965 460,569 1,211 (5,268) 456,512 $ $ $ 149,105 130,369 50,955 26,499 14,124 4,028 3,232 549 378,861 791 (4,453) 375,199 Commercial real estate-multi family Commercial real estate mortgages Commercial and industrial loans One-to-four family loans Real estate - construction loans Home equity lines of credit Lease financing Installment/consumer loans Total Net deferred loan costs and fees Allowance Net loans 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: (cid:120) Delinquency trends of the Corporation; (cid:120) Historical loss experience of the Corporation; (cid:120) (cid:120) Risk rating migrations; and Results of internal and external loan reviews. Qualitative factors: (cid:120) Allowance levels and trends for peer banks; (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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; Comparison of the Corporation’s performance versus that of its peer group; and 31 (cid:120) Delinquency trends for peer banks. 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, 2015 and 2014: 2015 Commercial real estate- multi family Commercial real estate mortgages Commercial and industrial loans One-to- four family 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 Loans Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment $ $ $ $ $ $ $ 1,471 381 - - - 1,852 - 1,852 187,380 2,215 185,165 $ $ $ $ $ $ $ 1,513 (131) (98) 5 (93) 1,289 - 1,289 121,202 878 120,324 $ $ $ $ $ $ $ 1,156 232 - 58 58 1,446 127 1,319 70,325 1,810 $ $ $ $ $ $ 186 193 - - - 379 - 379 54,082 - 68,515 $ 54,082 Real estate- construction loans (in thousands) $ $ 106 44 - - - 150 - 150 19,997 - 19,997 $ $ $ $ $ $ $ $ $ $ $ $ Home equity lines of credit Lease financing Installment/ consumer loans Unallocated Total 8 2 - - - 10 - 10 4,155 - $ $ $ $ $ $ 12 28 (32) 15 (17) 23 - 23 2,463 - 4,155 $ 2,463 $ $ $ $ $ $ $ 1 1 - - - 2 - 2 965 - 965 $ $ $ $ $ $ $ - 117 - - - 117 - 117 - $ $ $ 4,453 867 (130) 78 (52) 5,268 127 $ $ 5,141 460,569 - - $ 4,903 $ 455,666 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 Loans Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Commercial real estate- multi family Commercial real estate mortgages Commercial and industrial loans One-to- four family Real estate- construction loans Home equity lines of credit Lease financing Installment/ consumer loans Unallocated Total $ $ $ $ $ $ $ 1,126 345 - - - 1,471 - 1,471 149,105 2,195 146,910 $ $ $ $ $ $ $ 1,595 (82) - - - 1,513 99 1,414 130,369 413 129,956 $ $ $ $ $ $ $ 1,321 (131) (36) 2 (34) 1,156 197 959 50,955 770 $ $ $ $ $ $ 58 128 - - - 186 - 186 26,499 - 50,185 $ 26,499 $ $ $ $ $ $ $ $ (in thousands) 27 79 - - - 106 $ - 106 14,124 - 14,124 $ $ $ $ $ 81 (73) - - - 8 - 8 4,028 - $ $ $ $ $ $ 13 (1) - - - 12 - 12 3,232 - 4,028 $ 3,232 $ $ $ $ $ $ $ 23 (22) - - - 1 - 1 549 - 549 $ $ $ $ $ $ $ - - - - - - - - - - - $ $ $ 4,244 243 (36) 2 (34) 4,453 296 $ $ 4,157 378,861 $ 3,378 $ 375,483 Troubled Debt Restructurings As of December 31, 2015 and 2014, the Corporation had a recorded investment in troubled debt restructurings of $2.8 million and $3.0 million, respectively. The Corporation had allocated $127 thousand and $197 thousand of specific allowances for those loans at December 31, 2015 and 2014, respectively, 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, 2015, are on accrual status. There were no troubled debt restructured loans identified during the years ending December 31, 2015 and 2014. No loans modified as troubled debt restructurings in previous years subsequently defaulted within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. 32 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 Bank’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, 2015 and 2014: 2015 2014 Loan Past Due Over 90 Days still Accruing Nonaccrual (in thousands) - $ - 100 - - - - - 100 $ - $ 413 749 - - - - - 1,162 $ Loan Past Due Over 90 Days still Accruing - $ - - - - - - - $ - Nonaccrual - $ - 548 - - - - - 548 $ Commercial real estate- multi-family Commercial real estate mortgages 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, 2015, the Corporation had one loan on nonaccrual status, which had an outstanding balance of $548 thousand and a specific reserve of $127 thousand. At December 31, 2014, this same loan had a balance of $749 thousand with a specific reserve of $197 thousand. At December 31, 2014, the Corporation had a commercial real estate mortgage on nonaccrual status, 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 an additional loss in excess of the amount of the specific reserve at December 31, 2014. The amounts of foregone interest on nonaccrual loans for the years ended December 31, 2015 and 2014 were $195 thousand and $146 thousand, respectively. The Corporation continued accruing interest on one real estate line of credit with an outstanding balance of $100 thousand at December 31, 2015, which was 90 days or more past due on its contractual maturity date. This loan continued to make monthly interest payments consistent with the initial contractual payment schedule. This loan is well secured and is expected to be refinanced, and, therefore, remained on accrual status and was deemed a performing asset at the date indicated above. There were no loans past due 30-89 days at December 31, 2015. One loan totaling $237 thousand was past due greater than thirty days at December 31, 2014. 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: 33 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 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, 2015 and 2014. Classified loans included loans in risk categories of Pass, Special Mention, Substandard, Doubtful and Loss. Commercial real estate - multi-family Commercial real estate mortgages 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 - multi-family Commercial real estate mortgages Commercial and industrial loans One-to-four family Real estate - construction loans Home equity lines of credit Lease financing Installment/consumer loans Pass $ $ 187,380 117,944 67,390 54,082 19,997 4,155 2,463 965 454,376 Pass $ $ 149,105 123,850 48,279 26,499 14,124 4,028 3,232 549 369,666 December 31, 2015 Sub- standard (in thousands) - $ 2,789 2,249 - - - - - 5,038 $ Special Mention - $ 469 686 - - - - - 1,155 $ December 31, 2014 Sub- standard (in thousands) $ - 3,293 2,417 - - - - - 5,710 $ Special Mention - $ 3,226 259 - - - - - 3,485 $ Doubtful $ $ Doubtful $ $ - - - - - - - - - - - - - - - - - - Loss $ $ Loss $ $ - - - - - - - - - - - - - - - - - - 34 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 2015. The balance of related party loans for the years ended December 31, 2015 and December 31, 2014 were $5.9 million and $7.4 million, respectively. There were no loans to directors or executive officers that were nonaccrual at December 31, 2015. Loans to principal officers, directors, and their affiliates during 2015 were as follows: Beginning Balance: New loans Advances on existing lines Paydowns Ending Balance 2015 (in thousands) 7,399 $ - 1,331 (2,808) 5,922 $ 4. PREMISES AND EQUIPMENT Premises and equipment consisted of: Furniture and fixtures Leasehold improvements Less: accumulated depreciation and amortization December 31, 2015 2014 (in thousands) 6,154 $ 7,045 13,199 (6,512) 6,687 $ 6,119 6,072 12,191 (6,202) 5,989 $ $ Depreciation and amortization expense was $1.0 million for both 2015 and 2014. 5. DEPOSITS Time Deposits The following table sets forth the remaining maturities of the Corporation’s time deposits at December 31, 2015: Less than $100,000 $100,000 or Greater (in thousands) Total 2016 2017 2018 2019 2020 Thereafter $ 5,591 3,069 771 345 663 - 10,439 $ $ $ 20,590 9,726 549 250 249 395 31,759 $ $ 26,181 12,795 1,320 595 912 395 42,198 35 The total amounts of time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2015 and 2014 were $6.7 million and $10.7 million, respectively. The total amounts of brokered deposits at December 31, 2015 and 2014 were $0.3 million and $13.1 million, respectively. Deposits from principal officers, directors, and their affiliates at year-end 2015 and 2014 were $17.5 million and $12.3 million, respectively. 6. SHORT-TERM BORROWINGS At December 31, 2015, the Corporation had $26.1 million of short-term borrowings outstanding with the Federal Home Loan Bank (“FHLB”) at a rate of 0.52% with a maturity date of January 4, 2016. FHLB advances were collateralized by a blanket lien on commercial mortgages with a lendable value of $234.1 million at December 31, 2015 and $201.8 million at December 31, 2014. During 2015, the Bank maintained an overnight line of credit with the FHLB. 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, 2015. At December 31, 2015, the Bank had aggregate lines of credit of $23.0 million with unaffiliated correspondent banks to provide short-term credit for liquidity requirements. Of these aggregate lines of credit, $19.0 million were available on an unsecured basis. As of December 31, 2015, the Bank had no such borrowings outstanding. 7. SUBORDINATED DEBENTURES In December 2015, the Corporation issued $15.3 million in aggregate principal amount of fixed and fixed-to-floating rate subordinated debentures (“Notes”). Notes of $7.5 million have a stated maturity of December 17, 2025 and bear interest at a fixed annual rate of 7.375% per year, from and including December 17, 2015 up to but excluding December 17, 2025. The fixed rate Notes are subject to redemption beginning on December 17, 2020 at an amount equal to 103% of the principal amount outstanding, plus accrued and unpaid interest, with the redemption premium decreasing by 50 basis points on each subsequent anniversary. The remaining $7.75 million of the Notes have a stated maturity of December 17, 2025 and bear interest at a rate of 6.50% per year, from and including December 17, 2015 up to but excluding December 20, 2020. From and including December 20, 2020 to the maturity date or early redemption date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three- month LIBOR plus 488 basis points. The fixed-to-floating Notes are subject to redemption beginning on December 17, 2020 at par. The fixed and fixed-to-floating Notes are subject to redemption under certain limited circumstances at par prior to December 17, 2020. The Notes were structured to qualify as Tier 2 capital under Federal Reserve regulations. The Corporation early adopted ASU 2015-03, Simplifying Presentation of Debt Issuance Costs. The Notes are recorded net of unamortized issuance costs of $553 thousand at December 31, 2015. 36 8. INCOME TAXES Income tax expense (benefit) was as follows: Current: Federal State and local Deferred: Federal State and local Change in valuation allowance Total For the years ended December 31, 2015 2014 (in thousands) $ 1,666 - 1,666 $ 1,331 372 1,703 (245) (264) (509) 264 1,421 $ (90) (15) (105) 386 1,984 $ 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, 2015 2014 Federal income tax benefit computed by applying the statutory rate to income before income taxes State and local tax, net of federal Incentive stock options Other Valuation allowance Provision for income taxes Amount $ $ 1,344 (264) 15 62 264 1,421 Percentage of Pre-tax Earnings Amount (dollars in thousands) Percentage of Pre-tax Earnings 34 % (5) - 2 5 36 % $ $ 1,301 230 18 49 386 1,984 34 % 6 - 2 10 52 % 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, 2015 2014 (in thousands) $ 2,075 506 243 726 83 280 491 4,404 $ 1,616 544 229 630 58 68 74 3,219 (504) (210) (69) (783) (650) (314) (174) (36) (524) (386) $ 2,971 $ 2,309 37 During 2014, New York State enacted significant changes to its corporate tax code by merging the bank code into general corporate tax law. As a result of the enacted changes, the Corporation expects for the foreseeable future that it will no longer incur a State income tax liability absent the presence of nonrecurring gains or a significant change in the nature of its operations. While it is anticipated this will result in a lower effective tax rate for the Corporation on a going forward basis, the enacted changes required the Corporation to record a full valuation allowance in 2014 against the $386 thousand of net deferred tax assets related to New York State. During 2015, the Corporation’s operations in New York City became subject to New York City taxes. As the Corporation does not expect to incur New York City income taxes in the foreseeable future, a valuation allowance of $264 thousand on net deferred tax assets related to New York City was recorded in 2015. At December 31, 2015 and December 31, 2014, 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 2012 through 2014 remain open to examination by the Internal Revenue Service and 2013 through 2014 by 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. 9. 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. In September 2015, following the effectiveness of an amendment to the Corporation’s certificate of incorporation authorizing a class of nonvoting common stock, all shares of Series A preferred stock were converted on a one-for-one basis to shares to nonvoting common stock. The nonvoting common 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 nonvoting common 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. Holders of nonvoting common stock have no voting rights, except as required by law. 10. 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, 2015, the savings plan did not allow for investment in the common stock of the Corporation. During the years ended December 31, 2015 and 2014, the Corporation recorded compensation expense related to the plan of approximately $237 thousand and $180 thousand, respectively. Equity Incentive Plan The Corporation maintains the Empire National Bank 2008 Stock Incentive Plan (“2008 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. This plan provides for the issuance of “incentive stock options” and “nonqualified stock options” to certain qualified individuals. 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. All stock options that have been issued under the plan have a ten-year term and vest at a rate of 38 twenty percent on each of the first five 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. During the years ended December 31, 2015 and 2014, the Corporation did not grant any stock options. In 2015, the Empire Bancorp, Inc. 2015 Omnibus Stock and Incentive Plan (“2015 Plan”) was adopted, effective May 21, 2015. The plan provides for the issuance of stock options, restricted stock, restricted stock units, stock appreciation rights and other cash and equity-based awards to qualified persons. As of December 31, 2015, no awards had been issued under the 2015 Plan. Upon the effectiveness of the 2015 Plan, no further awards were issued under the 2008 Plan. 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, 2015 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 466,000 - - 22,000 444,000 422,000 444,000 Weighted Average Exercise Price 10.00 $ - - 10.00 10.00 10.00 10.00 $ $ $ $ Number of Shares 444,000 Price $ 10.00 Weighted Average Remaining Contractual Life 2.72 years 2.53 years 2.72 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 $44 thousand and $51 thousand for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, there were $58 thousand of total unrecognized compensation costs related to nonvested stock options granted under the Plan. 11. WARRANTS At December 31, 2015, 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 five years from the grant date. At December 31, 2015 the issued and outstanding warrants have an aggregate intrinsic value of $131 thousand. 39 Earnings Per Share The following is a reconciliation of earnings per share for December 31, 2015 and 2014. For the years ended December 31, 2015 2014 Net income (in thousands, except per share data) $ 1,844 $ 2,534 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 6,101 779 6,880 4,428 41 4,469 Basic earnings per share Diluted earnings per share $ $ 0.42 0.37 $ $ 0.42 0.41 There are 444,000 options and 594,376 warrants outstanding at December 31, 2015 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, 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: 2016 2017 2018 2019 2020 Thereafter December 31, 2015 (in thousands) $ 974 1,004 1,018 1,047 1,052 11,811 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, 2015 and 2014 approximated $990 thousand and $761 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. 40 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, 2015 Fixed Rate Variable Rate 2014 Fixed Rate Variable Rate (in thousands) Standby letters of credit Commercial letters of credit Unused loan commitments Commitments to make loans Total commitments outstanding $ $ 1,303 - 150 - 1,453 172 - 61,390 8,749 70,311 $ $ 1,273 - 281 - 1,554 $ $ $ $ 172 - 59,594 15,374 75,140 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 within 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). 41 Assets and liabilities measured at fair value on a recurring basis are summarized below: Fair Value Measurements at December 31, 2015 using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total (in thousands) Assets: Mortgage-backed securities-residential U.S government agency securities Total $ $ - - - $ $ 80,418 70,625 151,043 $ $ - - - $ $ 80,418 70,625 151,043 Fair Value Measurements at December 31, 2014 using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total (in thousands) Assets: Mortgage-backed securities-residential U.S government agency securities Total $ $ - - - $ $ 76,146 24,471 100,617 $ $ - - - $ $ 76,146 24,471 100,617 At December 31, 2015 and 2014, there were no impaired loans carried at fair value. As of December 31, 2015 and 2014, 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, 2015 Fair Value Financial assets: Cash and cash equivalents 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 Subordinated debentures Accrued interest payable: Demand, savings, N.O.W. and money market deposits Certificates of deposits of $100,000 or more and other time deposits Subordinated debentures (in thousands) $ 5,621 3,712 461,780 $ 5,621 n/a 456,887 479 1,416 479 1,416 Level 1 Level 1 Level 3 Level 2 Level 3 Level 1 $ 475,835 $ 475,835 Level 2 Level 1 Level 3 Level 1 Level 2 Level 3 42,198 26,064 14,697 8 79 44 42,052 26,064 14,697 8 79 44 42 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) $ 17,985 3,962 379,652 $ 17,985 n/a 378,209 305 1,189 305 1,189 Level 1 Level 1 Level 3 Level 2 Level 3 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 7 99 63,567 46,105 7 99 The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1. 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. The estimated fair value of subordinated debt is derived using discounted cash flow methodology based on a spread to the London Interbank Offered Rate (“LIBOR”) curve at the time of issuance and assuming the debt was issued at PAR resulting in Level 3 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 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, common equity tier 1 risk-based capital ratio, and of tier 1 capital to average assets, as those terms are defined in applicable OCC regulations. Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Capital amounts and ratios for December 31, 2014 are calculated using Basel I rules. Management believes as of December 31, 2015, the Bank met all capital adequacy requirements to which they are subject. 43 As of December 31, 2015 and 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, tier 1 common equity risk-based and tier 1 leverage capital ratios as set forth in the table below. The Bank’s actual capital amounts and ratios are presented in the following table: As of December 31, 2015 Actual Amount Ratio Tier 1 leverage capital ratio Common equity tier 1 risk-based capital ratio Tier 1 risk-based capital ratio Total risk-based capital ratio $ 74,670 74,670 74,670 79,938 12.22 % 16.83 % 16.83 % 18.01 % Tier 1 leverage ratio Tier 1 risk-based capital ratio Total risk-based capital ratio Actual Amount Ratio $ 61,996 61,996 66,449 12.65 % 16.02 % 17.17 % To be Adequately Capitalized Under Prompt Corrective Action Provisions Ratio Amount (dollars in thousands) $ >4.00 % >4.50 % >6.00 % >8.00 % 24,444 19,969 26,626 35,501 2014 To be Adequately Capitalized Under Prompt Corrective Action Provisions Ratio Amount (dollars in thousands) >4.00 % $ >4.00 % >8.00 % 19,608 15,479 30,959 To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 30,556 28,845 35,501 44,376 > 5.00 % > 6.50 % > 8.00 % >10.00 % To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 24,510 23,219 38,699 > 5.00 % > 6.00 % >10.00 % 15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed parent company only financial information of Empire Bancorp, Inc. is shown below. The parent company has no significant operating activities. CONDENSED STATEMENTS OF CONDITION At December 31, 2015 2014 (in thousands) ASSETS Cash Investment in the Bank Other assets Total Assets $ $ 5,222 73,714 28 78,964 590 61,884 98 62,572 $ $ LIABILITIES AND STOCKHOLDERS' EQUITY Subordinated debentures, net Accrued interest payable Other liabilities Total Liabilities Total Stockholders' Equity Total Liabilities and Stockholders' Equity 14,697 44 69 14,810 64,154 78,964 $ - - 151 151 62,421 62,572 $ 44 CONDENSED STATEMENTS OF OPERATIONS Interest expense Other expense Loss before income taxes and equity in undistributed earnings of the Bank Income tax benefit Loss before equity in undistributed earnings of the Bank Equity in undistributed earnings of the Bank Net income Year Ended December 31, 2015 2014 (in thousands) $ 46 99 (145) $ - 65 (65) 49 (96) 2,630 2,534 $ 26 (39) 1,883 1,844 $ CONDENSED STATEMENTS OF CASH FLOWS Operating activities: Net income Adjustments to reconcile net cash (used by) provided by operating activities: Equity in undistributed earnings of the Bank Decrease (increase) in other assets Increase in accrued interest payable (Decrease) increase in other liabilities Net cash (used by) 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 proceeds from issuance of subordinated debentures 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, 2015 2014 (in thousands) $ 2,534 $ 1,844 (2,630) 69 44 (82) (65) (1,883) (98) - 151 14 (10,000) (10,000) (18,160) (18,160) - 14,697 14,697 18,660 - 18,660 4,632 590 5,222 $ 514 76 590 $ 45 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, 2015 and 2014, 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. 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, 2015 and 2014, 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 31, 2016 Crowe Horwath LLP [THIS PAGE INTENTIONALLY LEFT BLANK] INVESTOR INFORMATION LEGAL COUNSEL INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS TRANSFER AGENT ANNUAL REPORT 2015 | 9 BOARD OF DIRECTORS* 10 | EMPIRE BANCORP, INC. Frank A. DiFazio Organizer & Director President, Dekal Services, Inc. Robert D. Falese, Jr. Director Owner & President Falese Investments, LLC Salvatore Ferro Organizer & Director Owner, President/CEO, Alure Home Improvements & Alure Designs Mukeshkumar Patel Organizer & Director Managing Member PSA Realty Corp. DBA La Quinta Hotels & Priya Hospitality LLC 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 2015 | 11 ANNUAL REPORT 2015 | 11 OFFICERS EMPIRE BANCORP, INC. EXECUTIVE OFFICERS SENIOR VICE PRESIDENTS VICE PRESIDENTS EMPIRE NATIONAL BANK EXECUTIVE OFFICERS 12 | EMPIRE BANCORP, INC. EXECUTIVE OFFICERS Standing, Left to Right: Douglas C. Manditch, Janet T. Verneuille, Michael P. Locorriere, Susanne Pheffer, Thomas M. Buonaiuto, Robert S. Schepis, Matthew Ruppert Sitting, Left to Right: John Pinna, Diane L. Murray, Raffaella Palazzo ASSISTANT VICE PRESIDENTS MANAGERS ASSISTANT BRANCH MANAGERS PRIVATE BANKING ANNUAL REPORT 2015 | 13 ISLANDIA 14 | EMPIRE BANCORP, INC. MINEOLA PORT JEFFERSON STATION SHIRLEY MANHATTAN ANNUAL REPORT 2015 | 15 SUPPORTING OUR COMMUNITY 16 | EMPIRE BANCORP, INC. ANNUAL REPORT 2015 | HEADQUARTERS 1707 Veterans Highway Islandia, NY 11749 631-348-4444 empirenb.com Member FDIC 

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