A N N U A L 2 0 1 6
R E P O R T
O U R M I S S I O N
To offer the community banking
products and services shaped by
emerging ideas and technologies,
combined with time-honored values
of trust, integrity, and commitment;
to provide the highest quality service
with a sense of urgency.
SELECTED FINANCIAL DATA
(dollars in thousands)
TOTAL ASSETS
Total Assets
Total Assets
$781,435
$629,133
$438,399
$467,068
$508,069
TOTAL DEPOSITS
Total Deposits
Total Deposits
$670,683
$518,033
$363,358
$390,931 $395,125
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Total Assets
Total Assets
Total Deposits
Total Deposits
TOTAL LOANS
Total Loans
Total Loans
$494,274
$461,780
$379,652
$294,471
$243,687
Non-Performing Loans to Total Loans
NON-PERFORMING LOANS TO TOTAL LOANS
Non-Performing Loans to Total Loans
1.09%
0.81%
0.48%
0.31%
0.12%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2
| EMPIRE BANCORP, INC.
Total Loans
Total Loans
Non-Performing Loans to Total Loans
Non-Performing Loans to Total Loans
Net Income
Net Income
Total Stockholder’s Equity
Total Stockholder’s Equity
Operating Efficiency Ratio
Operating Efficiency Ratio
Net Interest Margin
Net Interest Margin
Net Income
Net Income
Total Stockholder’s Equity
Total Stockholder’s Equity
Operating Efficiency Ratio
Operating Efficiency Ratio
Net Interest Margin
Net Interest Margin
Total Assets
Total Assets
Total Deposits
Total Deposits
Total Loans
Total Loans
Non-Performing Loans to Total Loans
Non-Performing Loans to Total Loans
NET INCOME
Net Income
Net Income
$3,624
$2,790
$2,534
$1,844
$1,286
TOTAL STOCKHOLDER’S EQUITY
Total Stockholder’s Equity
Total Stockholder’s Equity
Operating Efficiency Ratio
Operating Efficiency Ratio
Net Interest Margin
Net Interest Margin
$62,421
$64,154
$62,992
$42,216
$38,460
Total Assets
Total Assets
Total Deposits
Total Deposits
Total Loans
Total Loans
Non-Performing Loans to Total Loans
Non-Performing Loans to Total Loans
Net Income
Net Income
Total Stockholder’s Equity
Total Stockholder’s Equity
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
OPERATING EFFICIENCY RATIO
Operating Efficiency Ratio
Operating Efficiency Ratio
Net Interest Margin
NET INTEREST MARGIN
Net Interest Margin
89.30%
84.31%
77.37%
76.58%
79.60%
3.48%
3.29%
3.75%
3.55%
3.05%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
ANNUAL REPORT 2016 |
3
FINANCIAL HIGHLIGHTS
(in thousands, except per share data and financial ratios)
For the year ended December 31,
2016
2015
2014
2013
2012
FINANCIAL CONDITION DATA:
Total Assets
Total Loans
Total Deposits
Total Demand Deposits
Total Stockholders’ Equity
SELECTED STATISTICAL DATA:
Net Interest Margin
Return on Average Assets
Return on Average Equity
Efficiency Ratio
RATIOS:
Net Charge-offs to Average Loans
Non-performing Loans to Total Loans
Non-performing Assets to Total Assets
Allowance for Loan Losses to Total Loans
$781,435
$ 629,133 $ 508,069
$ 467,068 $ 438,399
$494,274
$ 461,780 $ 379,652
$ 294,471 $ 243,687
$670,683
$ 518,033 $ 395,125
$ 390,931 $ 363,358
$177,299
$1 89,200 $ 189,204
$ 177,252 $ 172,165
$ 62,992
$ 64,154
$ 62,421
$ 38,460
$ 42,216
3.05%
0.39%
4.19%
3.75%
0.47%
3.98%
3.55%
0.38%
4.43%
3.29%
0.29%
3.19%
3.48%
0.90%
8.90%
79.60%
76.58%
77.37%
84.31%
89.30%
0.02%
0.48%
0.30%
1.17%
0.03%
0.12%
0.09%
1.14%
0.01%
0.31%
0.23%
1.17%
0.08%
0.81%
0.51%
1.44%
9.01%
–
0.01%
1.09%
0.61%
1.84%
9.52%
–
Tier 1 Leverage Capital Ratio
10.22%
12.22%
12.65%
Common Equity Tier 1 Risk-Based Capital Ratio
16.26%
16.83%
–
Tier 1 Risk-Based Capital Ratio
Total Risk-Based Capital Ratio
16.26%
16.83%
16.02%
12.78%
14.65%
17.46%
18.01%
17.17%
14.03%
15.90%
OPERATING DATA:
Net Interest Income
Provision for Loan Losses
Other Income
Other Expense
Net Income
PER SHARE DATA:
Diluted Earnings Per Share
Book Value
$ 21,567
$ 19,815
$ 16,863
$ 14,437
$ 13,428
$ 632
$
867
$
243
–
$
285
$ 1,477
$ 1,005
$ 1,033
$
898
$ 1,941
$ 18,068
$ 15,998
$ 13,825
$ 13,054
$ 12,532
$ 2,790
$ 2,534 $ 1,844
$ 1,286
$ 3,624
$ 0.40
$ 9.07
$
$
0.37
9.32
$
$
0.41
9.07
$
$
0.29
8.78
$
$
0.83
9.64
NOTE: Selected financial data and financial highlights from 2013 through 2016 were derived from the audited consolidated financial statements of
Empire Bancorp, Inc. Selected financial data and financial highlights for periods prior to 2013 were derived from the audited financial statements of
Empire National Bank. Regulatory capital ratios presented on bank-only basis.
4
| EMPIRE BANCORP, INC.
DEAR SHAREHOLDER
Net income, measured on a consolidated basis, for
2016 increased $256 thousand, or 10.1%, to $2.8
million from 2015. Total assets exceeded $781
million, a 24.2% increase from our footings one year
earlier, and a 78.2% increase from our closing assets
at our fiscal year end five years ago. As we continue
our growth trek towards one billion dollars in assets,
we are working on improving operating efficiency
and growing into our existing infrastructure.
Emphasis will be on improving returns for our
shareholders while tempering the pace of our growth.
Building shareholder value remains our underlying
prime objective, and we are cognizant of the impact
of our business decisions as we continue to build our
book value.
We absorbed a full year of debt service at the parent
level relative to the 2015 subordinated debt raise,
yet net interest income increased $1.8 million, or
8.8%, for the year ended December 31, 2016 over
the prior year. The low rate environment for most of
2016 weighed on our net interest margin of 3.05%, a
decrease from 3.75% for the year ended December
31, 2015. The heightened loan prepayment
pressure we experienced in 2015 lessened with the
uptick in interest rates as the ten year benchmark
rate increased one hundred basis points between
July and the end of November. A substantial decline
in the revenues from prepayment fees in 2016, as
compared to 2015, contributed to the decrease in
the average yield on loans year over year.
Our risk management processes throughout the
bank remain integral to our success. The year 2016
saw a slowdown in the amount of commercial real
estate mortgages written within our market area.
Capitalization rates, which were reaching precariously
low levels, began to normalize-perhaps as a result
of heightened scrutiny of banking regulators that
began heating up in 2015, as we noted a break in
the quantity of multi-family properties refinanced.
Douglas C. Manditch, Chairman & Chief Executive Officer (left)
with Thomas M. Buonaiuto, President & Chief Operating Officer
ANNUAL REPORT 2016 |
5
Competition for these loans changed as some financial
institutions took a more measured approach in financing
these deals. Pricing improved slightly and we observed
a return toward more sensible structuring of these
credits. Our risk monitoring process of commercial
real estate loans is comprehensive. Concentration
thresholds are strictly monitored, and the loan portfolio
is regularly stress tested. Recent evidence suggests
a slight move toward a renter’s market in Manhattan
and Brooklyn. Landlords, in some cases, are offering
concessions to draw renters, and vacancy rates on
luxury style apartments have increased, primarily due
to new construction coming to market and the time it
takes to absorb it. In regard to commercial real estate
originations, including multi-family properties, we look
for reasonable projects with non-speculative business
purposes. We keep a close watch on rental trends,
maintain a clear understanding of our borrowers, and
stay within our comfortable space in the market. We
avoid the luxury market, watching from the sidelines as
production causes supply to outpace demand initially.
While maintaining conservative underwriting standards
we grew the loan portfolio 7.0% to $494.3 million from
$461.8 million at December 31, 2015. Preserving
future asset credit quality remains our priority. We
continued to realign our loan mix to manage credit
concentrations. Loan origination volume was high for
both years although it was offset by loan satisfactions
and pay downs. Recorded provision for loan losses
was $632 thousand for the year ended December
31, 2016 as compared to $867 thousand recorded
for the previous fiscal year. Our allowance for loan and
lease losses as of year-end was 1.17% of total loans.
Our loan default rates remain low with a ratio of non-
performing loans to total loans of 0.48%. The slight
uptick in non-performing loans is attributable to loans
in Nassau and Suffolk Counties and not attributable
to our multi-family portfolio. Loans are considered
non-performing based on management’s assessment
of the borrower’s ability to make contractually agreed
upon payments under the terms of original agreement.
6
| EMPIRE BANCORP, INC.
Under such circumstances of default, we strive to work
with the borrower to minimize the strain and monetary
loss for all parties.
The net interest margin was adversely impacted by the
cost of subordinated debentures issued in December
2015 at the holding company level. To expand our
interest earning assets we added investment securities,
representing a greater percentage of the earning asset
mix in 2016 as compared to the prior year. The increase
in investment securities was funded by significant
growth in deposits, primarily public funds. Using these
public funds to manage our deposit pricing and mix, we
reduced our average cost of funds on deposits for 2016
as compared to 2015. Our loan to deposit ratio leaves
room for additional assets to be deployed into loans.
Although we have seen the Federal Reserve Bank raise
short term interest rates twice prior to year end, there
is yet to be a notable increase in deposit costs within
our market. As we enter a rising rate environment
managing sensitivity to interest rate risk will include
corresponding adjustments to our balance sheet mix.
We expect two or three rate increases from the Federal
Reserve in 2017, the first of which already occurred
in March 2017 .
After raising capital in the form of a subordinated debt
offering in 2015, we chose to keep a portion of the
proceeds at the parent. We remain “well capitalized”
by regulatory standards, and our earnings are trending
upward. Our bank regulatory ratios are strong with
the Tier One leverage capital ratio over ten percent
at year end. We are cautiously optimistic about the
changes in Washington D.C. that may lead to an
easing of the overbearing regulations that weigh
down our organization as well as all community banks
throughout the nation. An overhaul of the Dodd Frank
requirements may reduce the tremendous amount of
unnecessary paperwork in the industry. Regulations
in the last three years increased exponentially, and
the bulk of the oversight requirements directly impact
our customer base. For 2016 we estimate we spent
close to $3.1 million on our costs for compliance due to
regulation, an increase from an estimated $2.7 million
in 2015, and $2.5 million in 2014. As a percentage of
total revenue, the expense totaled 12% in both 2016
and 2015. A decrease in the corporate tax rate would
defer a portion of these costs allowing us to redeploy
resources into cultivating our core business.
By continuing to enhance our products and services, we
are optimizing the customer experience. Our excellent
reputation for customer service is further complemented
by our commitment to offering electronic products and
services that make banking easier and more convenient
for our customers. Millennials also demand banking
on their own terms, forcing the industry to constantly
improve its delivery methods. Everyday banking service
revolves around the user experience – both in person
and through electronic channels. We are pleased to
announce that mobile remote deposit capture for
businesses and person to person payments (P2P) for
consumers are now available for our customers. We
also recently implemented lockbox services, not a new
innovation but one important to many commercial and
municipal customers.
Cybersecurity remains at the forefront of concern for all
companies but especially for financial institutions. Over
the past two years email attacks alone have surged as
the attackers became more sophisticated, targeted and
proficient. The attacks come in many forms, including
malware, phishing and ransomware. As a Company,
we are obligated to keep our customer data safe
by earmarking the appropriate human and financial
resources to this ongoing effort.
Our service culture remains the cornerstone of our
corporate culture. Over the past year we watched with
incredulity as a bigger, and more powerful, competitor
was caught in a web of deceiving customers to meet
sales goals. Our Company strives to develop its people
into well rounded bankers, professionals that can meet
the needs of our customers while maintaining honesty
and integrity. We are proud of our leaders, managers,
officers and staff who are skilled, educated and
eager to please.
The stock market as a whole benefited from the
“Trump Bump” since the election. Across our nation
investors are reacting with confidence to the current
administration’s agenda, one which speaks to reversing
government regulation with the intent to make it easier
for businesses to operate in our country. It is our hope
that the Congress will come together and work towards
legislation based on compromise in an effort to ease
regulation; create a thriving economy; invest in the
military to protect our nation; as well as address the
needs of the middle class which has been struggling
for so long. So far in the first three months of 2017
that seems to be a naïve hope. It seems to us, more
than ever, that term limits for Congress may be the
only way to get our elected officials to understand that
they work for all of us and not for individual segments of
our citizens. Term limits will allow for a faster turnover
of lawmakers so new ideas and less acrimony could
exist bringing fresh leadership while eliminating lifelong
agendas which hurt our nation.
Once again, on behalf of our Board of Directors
and management team, we close by thanking our
shareholders, employees and other stakeholders for
their support and dedication to our success. We look
forward to seeing you at our shareholder meeting on
May 18, 2017, being held at the Hyatt Regency Long
Island, 1717 Motor Parkway, Hauppauge, New York.
God bless the United States of America.
Douglas C. Manditch
Chairman and Chief Executive Officer
Thomas M. Buonaiuto
President and Chief Operating Officer
ANNUAL REPORT 2016 |
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, 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” are to Empire Bancorp, Inc. and Empire National Bank, on a consolidated basis, and
references to “Bank” or “the bank” are to Empire National Bank, on a bank-only 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 2012 is
presented on a bank-only basis, while 2013 through 2016 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.
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)
Performance Ratios:
Return on average equity
Return on average assets
Net interest margin
Efficiency ratio(2)
Asset Quality Ratios:
Nonperforming assets to total assets(3)
Nonperforming loans to total loans(3)
Allowance for loan losses to total loans
Net charge-offs to average loans
(4)
:
As of and for the year ended December 31,
2016
2015
2014
2013
2012
$
$
$
24,868
3,301
21,567
632
20,935
1,477
18,068
4,344
1,554
2,790
264,734
488,475
5,799
781,435
177,299
493,384
62,992
0.40
0.40
9.07
$
$
$
$
21,504
1,689
19,815
867
18,948
1,005
15,998
3,955
1,421
2,534
151,043
456,512
5,268
629,133
189,200
328,833
64,154
0.37
0.42
9.32
$
$
$
$
18,540
1,677
16,863
243
16,620
1,033
13,825
3,828
1,984
1,844
100,617
375,199
4,453
508,069
189,204
205,921
62,421
0.41
0.42
9.07
$
$
$
$
16,216
1,779
14,437
-
14,437
898
13,054
2,281
995
1,286
152,639
290,227
4,244
467,068
177,252
213,679
38,460
0.29
0.29
8.78
$
$
$
$
15,696
2,268
13,428
285
13,143
1,941
12,532
2,552
(1,072)
3,624
180,202
239,211
4,476
438,399
172,165
191,193
42,216
0.83
0.83
9.64
4.19 %
0.39
3.05
79.60
3.98 %
0.47
3.75
76.58
4.43 %
0.38
3.55
77.37
3.19 %
0.29
3.29
84.31
8.90 %
0.90
3.48
89.30
0.30 %
0.09 %
0.23 %
0.51 %
0.61 %
0.48
1.17
0.02
0.12
1.14
0.03
0.31
1.17
0.01
0.81
1.44
0.08
1.09
1.84
0.01
Capital Ratios (bank level only)
9.52 %
Tier 1 leverage capital
-
Common equity tier 1 risk-based capital
14.65
Tier 1 risk(cid:827)based capital
15.90
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.
10.22 %
16.26
16.26
17.46
12.65 %
-
16.02
17.17
9.01 %
-
12.78
14.03
12.22 %
16.83
16.83
18.01
(2) Efficiency ratio is the ratio of noninterest expense to net interest income and noninterest income.
(3) For the periods presented, nonperforming assets consist solely of nonperforming loans and nonperforming loans consist solely of nonaccrual loans.
(4) Capital ratios at December 31, 2016 and 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 private banking-style branch 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 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 executive and senior management
team is comprised of seasoned local bankers. For many in this group, their entrepreneurial skills steered them to our
organization, attracted to the opportunity to grow and develop a de novo start up national bank. Several of them
started before, or shortly after, the official opening of our bank in February 2008 while others joined as our growth
demanded more leaders with different proficiencies. Our entire senior management team has experience in all facets
of banking having worked at various other financial institutions that were mostly located in our market area on and
around Long Island and in New York City. Their areas of expertise include strategic and tactical planning, capital
management, commercial and industrial lending, real estate lending and consumer lending, as well as accounting
and finance, branch and back office operations, financial technology, business development, municipal banking,
human resources, risk management and regulatory compliance.
Stable and scalable platform. Throughout our operating history, we have maintained a stable banking platform with
strong capital levels and sound asset quality. Because we have total consolidated assets of less than $1 billion, our
regulatory capital levels are evaluated on a bank-only basis. At December 31, 2016, the Bank had a 10.22% tier 1
leverage capital ratio, a 16.26% common equity tier 1 risk-based capital ratio, a 16.26% tier 1 risk-based capital
ratio and a 17.46% 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
0.03%. 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, 2016, our total deposits were $670.7 million,
representing a compounded annual growth rate of 18.4% since December 31, 2012. 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 69.5% of our total
deposits at December 31, 2016, up from 35.6% of our total deposits at December 31, 2012. Active solicitation of
municipal deposits over the past two years significantly contributed to total deposit growth. The shift in deposit mix
over this period resulted in lowering the average cost of our deposit liability. 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) We face significant competition to attract and retain customers;
4
(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;
(cid:120) We may not be able to adequately measure and limit our credit risk, which could impact our
profitability; and
(cid:120) Our profitability largely depends on our ability to manage our assets and liabilities during periods of
changing interest rates. Accordingly, the fair value of our investment securities can fluctuate due to
factors outside of our control.
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 New York 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 1,501,587
residents as of July 1, 2015, which represents a 0.5% increase in population since April 1, 2010. Similarly, the
population of Nassau County was approximately 1,361,350 residents as of July 1, 2015, which represents a 1.6%
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 2015, the median household incomes in Suffolk County and Nassau County were $88,663 and $99,465,
compared to a New York state household income median of $53,373. Further, according to data provided by the
FDIC, between June 30, 2010 and June 30, 2016, FDIC-insured deposits in Suffolk County and Nassau County have
increased by approximately 51.8% and 28.5%, 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,
municipalities, real estate investors and consumers.
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, 2016, less than
30% of the deposits in Suffolk and Nassau counties were held in banks that were based on Long Island, due in large
part to the acquisitions of locally-based financial institutions by larger banks based outside of our primary market
area. Although competition within our market area is strong, we believe that the customer disruption associated
with these acquisitions, as well as the loss of in-market decision-making and relationship-based banking, will
continue to provide us with additional growth opportunities. We also compete with mortgage companies,
investment banking firms, brokerage houses, mutual fund managers, investment advisors, and other “non-bank”
companies for certain of our products and services. Some of our competitors are not subject to the degree of
supervision and regulatory restrictions that we are.
Interest rates, both on loans and deposits, and prices on fee-based services are significant competitive factors among
financial institutions generally. Many of our competitors are much larger financial institutions that have greater
financial resources than we do and that compete aggressively for market share. These competitors attempt to gain
market share through their financial product mix, pricing strategies and banking center locations. Due to the
benefits of scale, our larger regional and national bank competitors can, in many cases; offer pricing that is more
attractive than that which we can offer, although this pricing has historically been reserved for customers of a size
for which we generally would not compete. Other important competitive factors in our market area include office
locations and hours, quality of customer service, community reputation, continuity of personnel and services,
capacity and willingness to extend credit, and ability to offer sophisticated cash management and other commercial
banking services. Many of our competitors are organized along lines of business and use efficient but impersonal
5
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.
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, 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 twenty 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
and multi-family properties.
a wide variety of property
commercial
includes
types,
estate
loans
such
real
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. 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
6
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
well as referrals from our existing customers, officers and directors as well as various marketing campaigns. In
2014, we joined ICS®, an Insured Cash Sweep® service to provide an additional collateral product for 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 provide unlimited FDIC insurance for depositors 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.
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.
7
A number of the most significant changes in laws and regulations affecting the banking industry are discussed
below. However, the discussion that follows is only a brief summary of certain of these laws and regulations, and
there are many other laws and regulations that affect our operations, other than those discussed below.
Dodd-Frank Act
The Dodd-Frank Act, enacted on July 21, 2010, aimed to restore responsibility and accountability to the financial
system by significantly altering the regulation of financial institutions and the financial services industry. The Act,
among other things: (i) established the Consumer Financial Protection Bureau, an independent organization within
the Federal Reserve dedicated to promulgating and enforcing consumer protection laws applicable to all entities
offering consumer financial products or services; (ii) established the Financial Stability Oversight Council, tasked
with the authority to identify and monitor institutions and systems that pose a systemic risk to the financial system,
and to impose standards regarding capital, leverage, liquidity, risk management, and other requirements for financial
firms; (iii) changed the base for FDIC insurance assessments; (iv) increased the minimum reserve ratio for the
Deposit Insurance Fund from 1.15% to 1.35%; (v) permanently increased federal deposit insurance coverage from
$100,000 to $250,000; (vi) directed the Federal Reserve to establish interchange fees for debit cards pursuant to a
restrictive “reasonable and proportional cost” per transaction standard; (vii) limited the ability of banking
organizations to sponsor or invest in private equity and hedge funds and to engage in proprietary trading;
(viii) granted the U.S. government authority to liquidate or take emergency measures with respect to troubled
nonbank financial companies that fall outside the existing resolution authority of the FDIC; (ix) increased regulation
of asset-backed securities; (x) increased regulation of consumer protections regarding mortgage originations,
including originator compensation, minimum repayment standards, and prepayment considerations; and
(xi) established new disclosure and other requirements relating to executive compensation and corporate
governance.
Some of these provisions have the consequence of increasing our expenses, decreasing our revenues, and changing
the activities in which we choose to engage. The specific impact on our current activities or new financial activities
that we may consider in the future, our financial performance and the markets in which we operate will depend on
the manner in which the relevant agencies develop and implement the required rules and the reaction of market
participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking that
will take effect over the next several years, making it difficult to anticipate the overall financial impact on the
financial industry, in general, and on us.
Regulatory capital requirements
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
8
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, 2016 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.
As a result, unless modified, the Basel III liquidity framework does not apply to us.
9
MANAGEMENT’S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents management’s perspective on our financial condition and results of
operations on a consolidated basis. However, because we conduct all of our material business operations through
Empire National Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.
The discussion is intended to highlight and supplement other data and information presented elsewhere in this
annual report, including our audited consolidated financial statements and the related notes. Please note that the
performance related to the prior periods described in this annual report may not be indicative of our future financial
performance.
As a bank holding company that operates through one segment, community banking, we generate most of our
revenue from interest on loans and investments, service charges and gains on the sale of investment securities. Our
primary source of funding for our loans is deposits, and our largest expenses are interest of these deposits and
salaries and related employee benefits. We measure our performance through our net income, 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 $152.3 million, or 24.2%, to $781.4 million as of December 31, 2016, compared to $629.1
million as of December 31, 2015. Our asset growth was largely driven by loan growth of $32.5 million, or 7.0% and
an increase of $113.7 million or 75.3% in securities available for sale. Asset quality remained strong, with total
nonperforming loans comprising 0.48% of total loans as of December 31, 2016, compared to 0.12% as of December
31, 2015. Total deposits increased $152.7 million, or 29.5%, to $670.7 million as of December 31, 2016, compared
to $518.0 million as of December 31, 2015. Our deposit growth was driven primarily by savings, N.O.W. and
money market growth of $179.3 million or 62.5% to $465.9 million as of December 31, 2016. The growth in these
deposits was driven in large part by new and existing municipal banking relationships, which were largely invested
in the investment securities portfolio and classified as available for sale. Noninterest-bearing deposits, which
represent our lowest cost of funding, decreased $11.9 million or 6.3% to $177.3 million as of December 31, 2016,
compared to $189.2 million as of December 31, 2015. The average balance of noninterest-bearing deposits
increased minimally from $191.3 million at December 31, 2015 to $192.1 million at December 31, 2016. The
percentage of noninterest-bearing deposits to total deposits declined from 36.5% to 26.4% due to the growth in
savings, N.O.W. and money market accounts, comprised of primarily public fund deposits, outpacing the growth in
noninterest-bearing deposits. Short-term borrowings, which represent advances from the Federal Home Loan Bank
of New York, increased $0.4 million from $26.1 million as of December 31, 2015 to $26.5 million as of December
31, 2016. Total stockholders’ equity decreased $1.2 million to $63.0 million as of December 31, 2016, from $64.2
million as of December 31, 2015. Stockholders’ equity was impacted by an increase of $4.3 million in accumulated
other comprehensive loss, partially offset by our operating earnings of $2.8 million. The increase in accumulated
other comprehensive loss was a result of a negative change in the fair value of our securities available for sale, net of
applicable taxes.
Net income for the year ended December 31, 2016 was $2.8 million or $0.40 per diluted share, compared to net
income of $2.5 million, or $0.37 per diluted share, in 2015, an increase of $256 thousand, or 10.1%. The increase in
net income during 2016 was positively impacted by an increase in net interest income of $1.8 million, or 8.8%, to
$21.6 million. Other income increased year over year by $472 thousand, or 47.0%, to $1.5 million for year ended
December 31, 2016 primarily as a result of the net increase of $417 thousand for net securities gains/losses. Other
expenses increased $2.1 million, or 12.9%, as compared to the year ended December 31, 2015. The increase in
other expense was primarily attributable to an increase in salaries and employee benefits expense of $1.5 million, or
18.6%, over the previous year, due primarily to the hiring of new employees to support growth and strategic plans as
well as the implementation of a recognition and retention plan for key employees. Net occupancy and equipment
costs increased $245 thousand, or 9.5%, over the same period last year, primarily as a result of the increased
footprint of the bank’s main office lease and the opening of a loan and deposit production office in Manhattan.
Costs associated with the collateralization of higher municipal deposits increased $97 thousand over the same period
last year. Advertising and business development expense increased $191 thousand, or 24.1%, as compared to the
same period in 2015 primarily as a result of expanding sponsorships and delivery channels. FDIC insurance
10
increased $51 thousand, or 16.9%, during 2016 as compared to same period in 2015, as a direct result of the increase
in average assets.
Increases in non-interest expenses year over year were the principal reason for the efficiency ratio increase to
79.60% from 76.58% from the year ended December 31, 2015. Basic and diluted earnings per share for the year
ended December 31, 2016 were $0.40, compared to $0.42 and $0.37, respectively, for 2015. Our return on average
assets was 0.39% for 2016, as compared to 0.47% for 2015, and our return on average equity was 4.19% for 2016,
as compared to 3.98% for 2015.
Comparison of operating results for the years ended December 31, 2016 and 2015
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 reflected in the consolidated statements of
income.
Average
Balance
2016
Interest
Earned/Paid
Year Ended December 31,
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2015
Interest
Earned/Paid
Average
Yield/Cost
$
470,380
$
20,275
4.31 %
$
408,794
$
19,012
4.65 %
227,689
9,014
80
707,163
4,545
48
-
24,868
2.00
0.53
-
3.52
110,547
9,284
5
528,630
2,468
24
-
21,504
2.23
0.26
-
4.07
Interest earning assets:
Loans (including fee income)
(1)
(2)
Securities, taxable
Deposits with banks
Federal funds sold
Total interest-earning assets
Non interest-earning assets:
Cash and due from banks
Other assets
Total assets
7,826
6,735
721,724
$
7,511
6,131
542,272
$
Interest bearing liabilities:
Savings, N.O.W. and money
market deposits
Certificates of deposit of
$100,000 or more
Other time deposits
Subordinated debentures
Borrowed funds
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)
$
394,230
$
1,740
0.44%
$
207,410
$
992
0.48%
27,741
10,079
14,717
9,420
456,187
192,121
6,866
655,174
66,550
290
118
1,092
61
3,301
1.05
1.17
7.42
0.65
0.72
40,471
15,121
611
18,888
282,501
191,265
4,806
478,572
63,700
375
203
46
73
1,689
0.93
1.34
7.53
0.39
0.60
$
721,724
$
542,272
$
21,567
$
19,815
2.80 %
3.05 %
$
246,129
3.47 %
3.75 %
Net interest earning assets
$
250,976
Net interest margin
(1) Amounts are net of deferred origination costs/(fees) and the allowance for loan loss.
(4)
(2) Unrealized gains / (losses) on securities available for sale are included in other assets.
(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 $1.8 million, or 8.8%, for the year ended December 31, 2016 over the prior year.
Interest from loans and securities available for sale were primarily responsible for the growth in total interest income
while the cost of the subordinated debentures and savings, N.O.W., and money market deposits made up the growth
of total interest expense. Net interest margin was 3.05% for 2016, a decrease from 3.75% from the year ended
December 31, 2015. The decrease in net interest margin was primarily attributable to a decrease of 55 basis points
in our yield on average earning assets for 2016, driven largely by two factors. First, the average yield on loans
decreased to 4.31% for 2016 from 4.65% for 2015, primarily due to loan prepayment fees being materially lower in
2016, as the significant refinancing activity that occurred in 2015 slowed in 2016. Second, we shifted the mix of our
asset composition in 2016. The average balance of investment securities, a lower yielding investment than loans,
increased to $227.7 million for the year ended December 31, 2016 or 106.0% from the prior year. Consequently, for
year ended December 31, 2016, average loans represented 66.5% of our average interest-earning assets as compared
to 77.3% for the year ended December 31, 2015. For the year ended December 31, 2016 average investment
securities represented 32.2% of average earning assets as compared to 20.9% for the year ended December 31, 2015.
Notwithstanding the decrease in the yield on average earning assets for 2016, total interest income for 2016
increased $3.4 million over the same period in 2015, as a result of the increase of average earning assets by $178.5
million, or 33.8%.
The decrease in net interest margin also was impacted by an increase of 12 basis points in the cost of average
interest-bearing liabilities to 0.72% for the year ended December 31, 2016 from 0.60% for the prior year. This
increase was primarily attributable to the issuance of subordinated debentures in December of 2015 at the holding
company level with a weighted average cost of 7.42%. Interest expense on the subordinated debentures totaled $1.1
million for year ended December 31, 2016 as compared to $46 thousand for the prior year. While the average cost of
savings, N.O.W. and money market deposits decreased to 0.44% for 2016 from 0.48% for the same period in 2015,
the increase in the average volume of these accounts was the primary driver in the increase in interest expense by
$748 thousand year over year. Average savings, N.O.W. and money market deposits increased 90.1% to $394.2
million over the prior year average, reflecting the large increase in public funds. The average balance of
noninterest-bearing demand deposits for the year ended December 31, 2016 remained relatively flat when compared
to the prior year average balance.
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, taxable
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
Year Ended December 31, 2016 Over 2015
Increase/(Decrease) Due To
Average Volume
Average Rate
(in thousands)
Net Change
$
2,723
2,302
(1)
5,024
$
(1,460)
(225)
25
(1,660)
$
1,263
2,077
24
3,364
830
(129)
(61)
(47)
1,047
1,640
3,384
$
(82)
44
(24)
35
(1)
(28)
(1,632)
$
748
(85)
(85)
(12)
1,046
1,612
1,752
$
12
Provision for loan losses
We consider a number of factors in determining the required level of our allowance for loan losses and the provision
required to achieve that level, including loan growth, loan quality rating trends, nonperforming loan levels,
delinquencies, net charge-offs, industry concentrations and economic trends in our market and throughout the
nation. We recorded a $632 thousand provision for loan losses for the year ended December 31, 2016 and an $867
thousand provision for loan losses for the year ended December 31, 2015.
Other income
Total other income, which was comprised of customer-related fees and service charges, net securities gains/losses
and other operating income, increased $472 thousand for the year ended December 31, 2016, as compared to the
same period in 2015, primarily as a result of the net increase of $417 thousand in net securities gains/losses. We
experienced a decrease in customer-related fees and service charges of $10 thousand, as well as an increase in other
operating income of $42 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 $2.1 million, or 12.9%, during
2016, as compared to 2015, primarily from expenses associated with our continued growth. The biggest component
of the growth in other expense was salaries and benefits, which increased $1.5 million, or 18.6%, during 2016,
largely due to base salary, short term incentive and long-term incentive increases, new employees hired to support
growth and branch expansion and an increase in employee benefit costs. Assets per employee increased to $10.9
million as of December 31, 2016 from $8.7 million as of December 31, 2015. Net occupancy and equipment costs
increased $245 thousand, or 9.5%, 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. As a result of
our continual growth, advertising and business development increased $191 thousand or 24.1%; FDIC insurance
expense increased $51 thousand or 16.9% and costs associated with the collateralization of municipal deposits
increased $97 thousand over the same period last year.
Provision for income taxes
Income tax expense for the year ended December 31, 2016 was approximately $1.6 million, as compared to $1.4
million for the year ended December 31, 2015. For years ended December 31, 2016 and 2015, we were subject to
New York State and New York City capital taxes. Because of legislation enacted in 2014 and 2015, we do not
expect to be in a taxable income position for the foreseeable future in New York State and New York City. As a
result, we determined that it was not more likely than not that we would be able to utilize state and city deferred tax
assets. Accordingly, we maintain a valuation allowance against all state and city deferred tax assets. We believe
that the revisions to the New York State and New York City corporate income tax laws will continue to decrease our
future state and local income tax liability. Our combined effective tax rate for 2016 and 2015 was 35.8% and
35.9%, respectively.
Financial condition
Our total assets increased $152.3 million, or 24.2%, to $781.4 million as of December 31, 2016, compared to $629.1
million as of December 31, 2015. Net loans increased $32.0 million, or 7.0%, to $488.5 million as of December 31,
2016, compared to $456.5 million as of December 31, 2015. As a result of management’s assessment of the credit
quality of the loan portfolio, the allowance for loan losses to total loans was 1.17%, or $5.8 million, at December 31,
2016 as compared to 1.14%, or $5.3 million, as of December 31, 2015. Securities available for sale increased
$113.7 million, or 75.3%, to $264.7 million as of December 31, 2016, from $151.0 million as of December 31,
2015.
13
Our asset growth for the year ended December 31, 2016 was funded primarily by deposit growth. Total deposits
increased $152.7 million, or 29.5%, to $670.7 million as of December 31, 2016, compared to $518.0 million as of
December 31, 2015. Demand deposits, which represent a value funding source, decreased $11.9 million or 6.3% to
$177.3 million as of December 31, 2016, compared to $189.2 million as of December 31, 2015. The average
balance of these noninterest-bearing deposits remained relatively flat. Savings, N.O.W. and money market deposits
increased $179.3 million, or 62.6%, to $465.9 million as of December 31, 2016. The growth in these deposits was
driven in large part by new and existing municipal banking relationships. Certificates of deposit of $100,000 or
more decreased $13.7 million, or 43.1%, to $18.1 million while other time deposits decreased by $1.0 million, or
9.7%, to $9.4 million as of December 31, 2016. These represent our highest cost deposits and were replaced by
lower costing municipal interest bearing deposits. As of December 31, 2016, our loan to deposit ratio was 73.7%, as
compared to 89.1% as of December 31, 2015. This decrease is largely due to our rapid growth in public fund
deposits over the past year. The balance of subordinated debentures, net of debt issuance costs, remained relatively
unchanged at $14.7 million, from 2015 to 2016.
Total stockholders’ equity decreased $1.2 million to $63.0 million as of December 31, 2016, from $64.2 million as
of December 31, 2015. Stockholders’ equity was impacted by an increase of $4.3 million in accumulated other
comprehensive loss, partially offset by our operating earnings of $2.8 million. The increase in accumulated other
comprehensive loss was a result of a negative change in the fair value of our securities available for sale, net of
applicable taxes. As of December 31, 2016, 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 10.22%, 16.26%, 16.26% and 17.46%, 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, 2016
December 31, 2015
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
Allowance for loan losses
Net loans
$
$
192,168
133,432
87,649
59,801
13,540
5,068
2,319
297
494,274
(5,799)
488,475
38.9 %
27.0
17.7
12.1
2.7
1.0
0.5
0.1
100.0 %
187,885
121,330
70,630
54,277
19,970
4,217
2,505
966
461,780
(5,268)
456,512
$
$
40.7 %
26.3
15.3
11.8
4.3
0.9
0.5
0.2
100.0 %
We continued to experience growth in our loan portfolio, and the composition of our loan portfolio continues to
evolve while maintaining a primary focus on commercial real estate mortgages and multi-family lending, to also
increase the percentage of commercial and industrial loans as well as one-to-four family loans in our overall mix.
14
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, 2016:
Within One
Year
After One But
Within Five
Years
After Five
Years
Total
$
$
$
$
(in thousands)
22,311
33,599
26,156
7,383
-
2,991
2,065
155
94,660
50,515
44,145
94,660
169,620
95,370
14,665
51,629
-
2,077
-
-
333,361
313,829
19,532
333,361
192,168
133,432
87,649
59,801
13,540
5,068
2,319
297
494,274
424,786
69,488
494,274
$
$
$
$
$
$
$
$
$
$
$
$
237
4,463
46,828
789
13,540
-
254
142
66,253
60,442
5,811
66,253
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 variable interest rates
Amounts with fixed interest rates
Total
Asset Quality
The Corporation has identified certain assets as risk elements. These assets include nonaccrual loans, other real
estate owned, loans that are contractually past due 90 days or more as to principal or interest payments and still
accruing and troubled debt restructurings (“TDRs”). These assets present more than the normal risk. Information
about the Corporation’s risk elements is set forth below:
December 31,
2016
2015
(dollars in thousands)
Nonaccrual loans
Troubled debt restructuring
Other
Total nonaccrual loans
Loans past due 90 days or more and still accruing
Other real estate owned
Total nonperforming assets
Troubled debt restructurings - performing
Total risk elements
$
$
317
2,033
2,350
-
-
2,350
2,198
4,548
548
-
548
100
-
648
2,218
2,866
$
$
Gross interest income on nonaccrual loans and troubled debt restructurings:
Amount that has not been paid or recorded during the year under original terms
Actual amount recorded during the year
$
49
273
$
52
202
The allowance for loan losses to total loans (reserve coverage ratio) was 1.17% at December 31, 2016 compared to
1.14% at year-end 2015. The reserve coverage ratio increased primarily due to an increase in specific reserves on
loans individually deemed to be impaired as well as an increase in the general allocation based on volume of growth
as well as a greater percentage of commercial and industrial loans in the portfolio. The credit quality of the Bank’s
loan portfolio remained excellent at December 31, 2016, with nonaccrual loans amounting to $2.4 million, or 0.48%
of total loans outstanding. Troubled debt restructurings totaled $2.5 million at December 31, 2016. Of this amount,
$2.2 million were performing in accordance with their modified terms and $316 thousand were nonaccrual and
included in the aforementioned amount of nonaccrual loans.
The credit quality of our securities portfolio also remained excellent at December 31, 2016. The portfolio consisted
of U.S. government agency obligations and mortgage-backed securities backed by the full faith and credit
15
obligations of the U.S. government, or by obligations of U.S. government sponsored entities. The portfolio
contained one corporate debt obligation as of December 31, 2016.
We have maintained low levels of nonperforming assets since our inception in 2008. Our nonaccrual loans
comprised 0.48% of total loans as of December 31, 2016, compared to 0.12% as of December 31, 2015. 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. In 2016, we had charge-offs of $111 thousand and recoveries of $10 thousand. We had
net charge-offs of $101 thousand and $52 thousand for the years ended December 31, 2016 and 2015, 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.
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. In 2016, we had an unallocated portion totaling $54 thousand. 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. We held no other real estate owned at any of the reported periods.
We consider a loan to be impaired when, based on current information and events, it is probable that we will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the
loan agreement. Factors considered by management in determining impairment include payment status and the
probability of collecting scheduled principal and interest payments when due. Loans for which the terms have been
modified as a concession to the borrower due to the borrower experiencing financial difficulties are considered
troubled debt restructurings and are classified as impaired. Loans considered to be troubled debt restructurings can
be categorized as nonaccrual or performing. The impairment of a loan is measured at the value of expected future
cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the
collateral less costs to sell if the loan is collateral dependent. Generally, we measure impairment of such loans by
reference to the fair value of the collateral less costs to sell. Loans that experience minor payment delays and
payment shortfall generally are not classified as impaired.
16
The following table sets forth changes in the allowance for loan losses:
Beginning balance
Charge-offs:
Commercial real estate mortgages
Commercial and industrial
Lease financing
Total
Recoveries:
Commercial real estate mortgages
Commercial and industrial
Lease financing
Total
Net charge-offs
Provision for loan losses charged to operations
Ending balance
Ratio of net charge-offs during period to
average loans outstanding
Year ended December 31,
2016
(dollars in thousands)
2015
$
5,268
$
4,453
-
(111)
-
(111)
(98)
-
(32)
(130)
10
-
-
10
(101)
632
5,799
$
5
58
15
78
(52)
867
5,268
$
0.02%
0.03%
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.
2016
2015
Percentage of
Loans to Total
Loans
Amount
(dollars in thousands)
Percentage of
Loans to Total
Loans
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
1,705
1,373
2,110
417
109
10
20
1
54
5,799
38.9 %
27.0
17.7
12.1
2.7
1.0
0.5
0.1
-
100.0 %
1,852
1,289
1,446
379
150
10
23
2
117
5,268
$
$
40.7 %
26.3
15.3
11.8
4.3
0.9
0.5
0.2
-
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, 2016, future provisions will be subject to ongoing evaluations of the risks in our
loan portfolio.
Securities
Our securities portfolio is used to make various term investments, to provide a source of liquidity, and to serve as
collateral for certain types of deposits and borrowings and to provide interest income. We manage our investment
portfolio according to a written investment policy approved by our Board of Directors. Investment balances in our
securities portfolio are subject to change over time based on our funding needs and interest rate risk management
17
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, 2016, 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, 2016, our investment
portfolio consisted almost entirely of available for sale securities. During 2016, we added a corporate debt
obligation to the portfolio. The carrying values of our available for sale 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, 2016
December 31, 2015
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:
Corporate bonds
Total
$
$
143,496
129,191
272,687
$
$
139,385
125,349
264,734
$
81,239
71,252
152,491
$
$
80,418
70,625
151,043
$
$
$
3,000
3,000
$
$
3,032
3,032
-
$
$
-
-
$
$
-
All of our mortgage-backed securities are agency securities. We do not hold any Fannie Mae or Freddie Mac
preferred stock, 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, 2016, our investment portfolio did not contain any securities that are directly backed by
subprime or Alt-A mortgages.
The following table sets forth the fair value, amortized cost, maturities and approximated weighted average yield
based on estimated annual income divided by the average amortized cost of our securities portfolio at December 31,
2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Available for sale
Due in one year or less
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage backed securities – residential
Amortized Cost
$
-
18,650
110,541
-
143,496
272,687
$
Fair Value
(dollars in thousands)
$
-
18,472
106,876
-
139,386
264,734
$
Yield
- %
1.41
2.11
-
2.68
2.36 %
Held to maturity:
Due from five to ten years
Amortized Cost
Fair Value
(dollars in thousands)
Yield
$
$
3,000
3,000
$
$
3,032
3,032
5.11 %
5.11 %
18
Deposits
Deposits are our primary source of funds to support our earning assets. Total deposits were $670.7 million as of
December 31, 2016 compared to $518.0 million as of December 31, 2015. To expand and diversify our deposit
base, we deployed the following strategies:
(cid:120)
(cid:120)
Expansion of our suite of products and services targeting professional practices;
Strategic initiative to increase municipal deposit relationships in our market area;
(cid:120) Growth of our retail branch network to provide deposit-taking services from four banking locations;
(cid:120)
(cid:120)
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 2008. 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 attracting professional practice
relationship deposits, and executed on a strategic initiative to attract public fund deposits. The transition has
resulted in a lower overall cost of funds as the composition of the deposit portfolio shifted. We experienced
significant growth in savings, N.O.W. and money market deposits during 2016 and 2015 as a result of our strategic
initiatives focused on municipal deposit growth.
The following table shows the average balances and weighted average interest rates for each type of deposit since
December 31, 2015:
For the year ended December 31,
2016
Average
Balance
Percent
Weighted
Average
Rate
Average
Balance
(dollars in thousands)
2015
Percent
Weighted
Average
Rate
$
394,230
192,121
27,741
10,079
624,171
$
63.2 %
30.8
4.4
1.6
100.0 %
0.44 %
-
$
207,410
191,265
1.05
1.17
0.34 %
40,471
15,121
454,267
$
45.7 %
42.1
8.9
3.3
100.0 %
0.48 %
-
0.93
1.34
0.35 %
Savings, N.O.W. and
money market deposits
Demand deposits
Certificates of deposit of
$100,000 or more
Other time deposits
Total deposits
The following table presents a summary of the Corporation’s time deposits in amounts of $100,000 or more by
remaining term to maturity at December 31, 2016:
Time Deposits of $100,000 or More Maturing Within
0-3 Months
Over 3 to 6
Months
$
4,609
$
4,459
Over 6 to 12
Months
(in thousands)
6,054
$
Over 12
Months
Total
$
2,946
$
18,068
19
Capital resources
Stockholders’ equity totaled $63.0 million at December 31, 2016, a decrease of $1.2 million from $64.2 million at
December 31, 2015. The decrease was primarily attributable to a decrease of $4.3 million in accumulated other
comprehensive income, partially offset by operating earnings of $2.8 million. Accumulated other comprehensive
income decreased due to a decrease in the after tax amount of unrealized gains on available for sale securities.
During 2016, 775 thousand shares of common stock were exchanged for an equivalent number of shares of non-
voting common stock. In addition, we issued 60,732 shares of restricted stock under our 2015 Omnibus Stock and
Incentive Plan, and 5,800 shares of our common stock were issued upon the exercise of stock options. In September
2015, the shares of Series A preferred stock that we issued in our December 2014 private placement were exchanged
on a one-for-one basis for shares of our non-voting common stock. The Series A preferred stock had been issued as
a non-voting common stock equivalent and was exchanged following the approval of an amendment to our
certificate of incorporation authorizing a class of non-voting common stock at our 2015 annual meeting of
stockholders. As of December 31, 2016, 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, 2016, 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 10.22%, 16.26%, 16.26% and 17.46%, 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.
20
CONSOLIDATED STATEMENTS OF CONDITION
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, held to maturity (fair value of $3,032)
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:
Common stock, par value $0.01 per share; 100,000,000 authorized shares;
5,015,252 issued and outstanding at December 31, 2016 and 5,723,720 issued
and outstanding at December 31, 2015
Non-voting common stock, par value $0.01 per share; 20,000,000 authorized shares;
1,931,250 issued and outstanding at December 31, 2016 and 1,156,250 issued and
outstanding at December 31, 2015
Surplus
Retained earnings
At December 31,
2016
2015
(dollars in thousands, except
share and per share data)
$
4,386
1,962
6
6,354
$
4,797
817
7
5,621
264,734
3,000
4,131
494,274
(5,799)
488,475
151,043
-
3,712
461,780
(5,268)
456,512
6,052
2,610
5,602
477
781,435
$
6,687
1,895
2,971
692
629,133
$
$
177,299
465,890
18,068
9,426
670,683
$
189,200
286,635
31,759
10,439
518,033
26,477
14,735
41,212
110
6,438
718,443
50
19
64,131
4,041
68,241
26,064
14,697
40,761
131
6,054
564,979
57
12
63,791
1,251
65,111
Accumulated other comprehensive loss
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
(5,249)
62,992
781,435
$
(957)
64,154
629,133
$
See accompanying notes to the Consolidated Financial Statements.
21
CONSOLIDATED STATEMENTS OF INCOME
Interest income:
Loans (including fee income)
Securities, taxable
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
Net securities gains (losses)
Professional practice revenue
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
Year Ended December 31,
2015
2016
(dollars in thousands,
except per share data)
$
20,275
4,545
48
24,868
$
19,012
2,468
24
21,504
1,740
290
118
61
1,092
3,301
21,567
632
20,935
452
379
346
300
1,477
9,643
2,822
1,430
985
664
352
2,172
18,068
4,344
1,554
992
375
203
73
46
1,689
19,815
867
18,948
410
389
(71)
277
1,005
8,130
2,577
1,473
794
656
301
2,067
15,998
3,955
1,421
Net income
$
2,790
$
2,534
Basic earnings per share
Diluted earnings per share
$
$
0.40
0.40
$
$
0.42
0.37
See accompanying notes to the Consolidated Financial Statements.
22
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Net income
Other comprehensive (loss) income:
Unrealized holding (losses) arising during the period
Reclassification adjustment for (gains) losses included in net
securities gains (losses) on the consolidated statements of operations
Change in unrealized net (losses) before income taxes
Tax effect
Other comprehensive (loss)
Total comprehensive (loss) income
See accompanying notes to the Consolidated Financial Statements.
Year Ended December 31,
2016
2015
(in thousands)
$
2,790
$
2,534
(6,159)
(1,333)
(346)
(6,505)
71
(1,262)
2,213
(4,292)
(1,502)
$
417
(845)
1,689
$
23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Non-Cumulative Series A
Preferred Stock
Common Stock
Non-Voting Common
Stock
Shares
Outstanding
Amount
Shares
Outstanding
Amount
Shares
Outstanding
Amount
Surplus
(dollars in thousands, except shares)
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Loss
Total
Balance at January 1, 2015
1,156,250
$
8,950
5,723,720
$
57
-
$
-
$
54,809
$
(1,283)
$
(112)
$
62,421
Exchange of preferred stock to
non-voting common stock
Share based compensation expense
Net Income
Other comprehensive loss, net of
deferred income taxes
Balance at December 31, 2015
Exchange of voting common stock
to non-voting common stock
Exercise of Stock Options
Issuance of voting common
restricted stock
Share based compensation expense
Net Income
Other comprehensive loss, net of
deferred income taxes
Balance at December 31, 2016
(1,156,250)
-
-
(8,950)
-
-
-
-
-
-
5,723,720
(775,000)
5,800
60,732
-
-
-
-
-
-
57
(7)
-
-
-
-
1,156,250
-
-
-
1,156,250
775,000
-
-
-
-
12
-
-
-
12
7
-
-
-
-
8,938
44
-
-
63,791
-
58
-
282
-
-
-
2,534
-
1,251
-
-
-
-
2,790
-
-
-
-
44
2,534
(845)
(957)
(845)
64,154
-
-
-
-
-
-
58
-
282
2,790
-
-
-
-
-
-
-
-
$
-
-
5,015,252
-
50
$
-
1,931,250
-
19
$
-
64,131
$
-
4,041
$
$
(4,292)
(5,249)
(4,292)
62,992
$
-
-
-
-
-
-
-
-
-
See accompanying notes to the Consolidated Financial Statements.
24
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 of premium and accretion of discount on investment
securities, net
Amortization of debt issuance costs
Share based compensation expense
Net securities (gains) losses
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase in accrued and other liabilities
Increase in 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
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
Increase (decrease) in short-term borrowings
Proceeds from exercise of stock options
Net proceeds from issuance of subordinated debentures
Net cash provided by financing activities
Year Ended December 31,
2016
2015
(in thousands)
$
2,790
$
2,534
632
1,062
744
38
282
(346)
(715)
215
363
(418)
4,647
(367,937)
71,910
175,433
(3,000)
(11,694)
11,275
(32,595)
(427)
(157,035)
152,650
413
58
-
153,121
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
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents beginning of period
Cash and cash equivalents end of period
733
5,621
6,354
$
(12,364)
17,985
5,621
$
Supplemental information-cash flows:
Cash paid for:
Interest
Income taxes
$
$
3,322
2,121
$
$
1,664
1,845
See accompanying notes to the Consolidated Financial Statements.
25
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 the
Corporation 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 Flows
Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days,
and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing
deposits in other financial institutions, and federal funds purchased and repurchase agreements.
c)
Securities
Current accounting standards require that investment securities be classified as held to maturity, trading or available
for sale. 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.
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive
intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be
sold before maturity. 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 Atlantic Community Bankers Bank stock, 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.
Investment securities are evaluated for other-than-temporary (“OTTI”) no less often than quarterly. In determining
OTTI, 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
26
decline was affected by macroeconomic conditions; and (4) whether management 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 information available to management at a point in time.
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. Loans that are deemed uncollectable according to the
terms of the loan agreement, or are 90 days past due, are placed on nonaccrual and previously accrued interest is
reversed and charged against interest income. An exception is made for 90-day past due loans that are well secured
and in the process of collection. 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 a valuation allowance for probable incurred credit losses. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past
loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s judgement, should be charged off.
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.
27
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. The
allowance consists of specific and general components. The specific component relates to loans that are individually
classified as impaired when, based on current information and events, it is probably that the Corporation will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the
terms have been modified resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.
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.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
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 using the loan’s existing rate or at the fair value of collateral if repayment is expected
solely from the collateral.
Troubled debt restructurings are individually evaluated for impairment and included in the separately identified
impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s
effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the
fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the
allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans
individually identified as impaired.
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.
28
Improvements and major repairs are capitalized, while the cost of ordinary maintenance, repairs and minor
improvements is charged to operations.
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
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. 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. All outstanding unvested, share-based payment awards that contain rights to non-forfeitable
dividends are considered participating securities for this calculation.
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, restricted
stock awards 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.
29
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.
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 did not have upon
adoption and is not expected to have going forward 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)
Impact of Issued but Not Yet Effective Accounting Standards
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB amended existing guidance related to revenue from contracts with customers. This
amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific
guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue
is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and
expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some
costs to obtain or fulfill a contract with a customer. The amendments in ASU 2014-09 for public entities such as the
Corporation, is effective for interim and annual reporting periods beginning after December 15, 2017. The
amendment is being evaluated for the impact that ASU 2014-09 will have on the Corporation’s financial position,
results of operations and disclosures, but we do not believe that such impact will be material.
ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities
In January 2016, the FASB amended existing guidance that requires equity investments (except those accounted for
under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair
value with changes in fair value recognized in net income. It requires public business entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes. It requires separate
presentation of financial assets and financial liabilities by measurement category and form of financial asset. It
30
eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to
estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The
amendments in ASU 2016-01 for public entities such as the Corporation is effective for interim and annual reporting
beginning after December 15, 2017. The amendment is being evaluated for the impact that ASU 2016-01 will have
on the Corporation’s financial position, results of operations and disclosures, but we do not believe that such impact
will be material.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB amended existing guidance that requires lessees recognize the following for all leases
(with the exception of short-term leases) at the commencement date (1) A lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made
to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from
Contracts with Customers. The amendments in ASU 2016-02 for public entities such as the Corporation is effective
for interim and annual reporting periods beginning after December 15, 2018. The amendment is being evaluated for
the impact that ASU 2016-02 will have on the Corporation’s financial position, results of operations and disclosures.
Upon adoption of the ASU, the Corporation’s assets and liabilities will increase due to the recognition of a lease
asset and a lease obligation.
ASU 2016-09, Compensation- Stock Compensation (Topic 718)
In March 2016, the FASB amended existing guidance to simplify several aspects of the accounting for employee
share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes,
forfeitures, and statutory tax withholding requirements as well as classification in the statement of cash flows. ASU
2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December
15, 2016, with early adoption permitted. The Company adopted ASU 2016-09 in the first quarter of 2016. The
adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)
In June 2016, FASB issued guidance to replace the incurred loss model with an expected loss model, which is
referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of
credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity debt
securities, and reinsurance receivables. It also applies to off-balance sheet credit exposures not accounted for as
insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net
investments in leases recognized by a lessor. For debt securities with other-than temporary impairment (OTTI), the
guidance will be applied prospectively. Existing purchased credit impaired (PCI) assets will be grandfathered and
classified as purchased credit deteriorated (PCD) assets at the date of adoption. The asset will be grossed up for the
allowance for expected credit losses for all PCD assets at the date of adoption and will continue to recognize the
noncredit discount in interest income based on the yield of such assets as of the adoption date. Subsequent changes
in expected credit losses will be recorded through the allowance. For all other assets within the scope of CECL, a
cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period
in which the guidance is effective. The amendments in ASU 2016-13 for public entities such as the Corporation is
effective for interim and annual reporting periods beginning after December 15, 2020. The amendment is being
evaluated for the impact that ASU 2016-13 will have on the Corporation’s financial position, results of operations
and disclosures. The overall impact of the amendment will be affected by the portfolio composition and quality at
the adoption date as well as economic conditions and forecast at that time.
p)
Subsequent Events
The Corporation has evaluated subsequent events for recognition and disclosure through March 30, 2017, which is
the date the financial statements were available to be issued.
31
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, 2016 and 2015:
Amortized
Cost
December 31, 2016
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
Held to maturity:
Corporate bonds
Total held to maturity
Available for sale:
Mortgage-backed securities-residential
U.S. government agency securities
Total available for sale securities
$
$
143,496
129,191
272,687
$
$
$
$
95
-
95
(4,206)
(3,842)
(8,048)
$
$
139,385
125,349
264,734
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Estimated
Fair Value
(in thousands)
$
$
3,000
3,000
$
$
32
32
$
-
$
-
$
$
3,032
3,032
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Estimated
Fair Value
$
$
$
$
377
77
454
(1,198)
(704)
(1,902)
80,418
70,625
151,043
$
$
$
$
81,239
71,252
152,491
Held to maturity:
Corporate bonds
Total held to maturity
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Estimated
Fair Value
(in thousands)
$
-
$
-
$
-
$
-
$
-
$
-
-
$
$
-
Securities with unrealized losses at December 31, 2016 and 2015 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, 2016
Greater than 12 months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
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
$
$
$
$
$
$
117,762
125,349
243,111
(3,661)
(3,842)
(7,503)
10,774
-
10,774
$
$
$
$
(545)
-
(545)
128,536
125,349
253,885
$
$
(4,206)
(3,842)
(8,048)
Less than 12 months
December 31, 2015
Greater than 12 months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
$
$
$
$
$
$
21,867
64,957
86,824
(305)
(704)
(1,009)
19,886
-
19,886
(893)
-
(893)
41,753
64,957
106,710
(1,198)
(704)
(1,902)
$
$
$
$
$
$
At December 31, 2016, 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
32
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, 2016.
The fair value of debt securities and carrying amount, if different, at December 31, 2016 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
Due from five to ten years
Total
December 31, 2016
Available for Sale
Amortized Cost
Fair Value
(in thousands)
-
$
18,650
110,541
-
143,496
272,687
$
$
-
18,472
106,876
-
139,386
264,734
$
Held to Maturity
Amortized Cost
Fair Value
$
$
(in thousands)
3,000
3,000
$
$
3,032
3,032
Proceeds from sales and calls of securities available for sale were $247.3 million and $33.2 million for the years
ended December 31, 2016 and 2015, respectively. There were gross gains of $406 thousand realized on the sale and
call of securities during 2016 as compared to no gross gains in 2015. There were gross losses on the sale and call of
securities in 2016 and 2015 of $60 thousand and $71 thousand, respectively.
At December 31, 2016, investment securities with a carrying value of $221.4 million were pledged as collateral to
secure public and bankruptcy deposits.
3.
LOANS
The following table sets forth the major classifications of loans:
December 31,
2016
(1)
2015
(in thousands)
$
$
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
Allowance
Net loans
192,168
133,432
87,649
59,801
13,540
5,068
2,319
297
494,274
(5,799)
488,475
187,885
121,330
70,630
54,277
19,970
4,217
2,505
966
461,780
(5,268)
456,512
$
$
$
$
(1) P rior year loan amounts are shown net of deferred costs to conform to the current year presentation.
33
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; and
(cid:120)
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
(cid:120) Delinquency trends for peer banks.
34
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, 2016 and 2015:
2016
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
(in thousands)
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
$
$
$
$
$
$
$
$
$
1,852
(147)
-
-
-
1,705
1,289
74
-
10
10
1,373
1,446
775
(111)
-
(111)
2,110
379
38
-
-
-
417
150
(41)
-
-
-
109
10
-
-
-
-
10
23
(3)
-
-
-
20
2
$
(1)
-
-
-
$
1
117
(63)
-
-
-
54
5,268
632
(111)
10
(101)
5,799
$
$
$
$
$
$
$
$
$
-
-
538
-
-
-
-
-
-
538
$
1,705
$
1,373
$
1,572
$
417
$
109
$
10
$
20
$
1
$
54
$
5,261
$
192,168
$
133,432
$
87,649
$
59,801
$
13,540
$
5,068
$
2,319
$
297
$
-
$
494,274
2,198
854
1,496
-
-
-
-
-
-
4,548
$
189,970
$
132,578
$
86,153
$
59,801
$
13,540
$
5,068
$
2,319
$
297
$
-
$
489,726
2015
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
(in thousands)
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
1,513
(131)
(98)
5
(93)
1,289
1,156
232
-
58
58
1,446
186
193
-
-
-
379
106
44
-
-
-
150
$
8
2
-
-
-
10
$
12
28
(32)
15
(17)
23
$
1
1
-
-
-
$
2
$
-
117
-
-
-
117
$
$
$
4,453
867
(130)
78
(52)
5,268
$
$
$
$
$
$
-
-
127
-
-
-
-
-
-
127
$
1,852
$
1,289
$
1,319
$
379
$
150
$
10
$
23
$
2
$
117
$
5,141
$
187,885
$
121,330
$
70,630
$
54,277
$
19,970
$
4,217
$
2,505
$
966
$
-
$
461,780
2,215
878
1,810
-
-
-
-
-
-
4,903
$
185,670
$
120,452
$
68,820
$
54,277
$
19,970
$
4,217
$
2,505
$
966
$
-
$
456,877
Troubled Debt Restructurings
A restructuring constitutes a troubled debt restructuring when the restructuring includes a concession by the Bank
and the borrower is experiencing financial difficulty. 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 modification. The Bank performs the evaluation under its internal
underwriting policy.
As of December 31, 2016 and 2015, the Corporation had a recorded investment in three troubled debt restructurings
totaling $2.5 million and $2.8 million, respectively. The Corporation had allocated $38 thousand and $127 thousand
of specific allowances for those loans at December 31, 2016 and 2015, respectively, and has not committed to lend
additional amounts.
Based upon continued performance, one of the three troubled debt restructured loans, totaling $2.2 million at
December 31, 2016, is on accrual status.
During 2016 there was one new troubled debt restructuring, which consisted of a modification to a $29 thousand
commercial and industrial loan. There were no troubled debt restructurings for which there was a payment default
during 2016 and 2015 that were modified during the twelve-month period prior to default. A loan is typically
declared to be in payment default once it is contractually past due and reaches 90 days or it is deemed uncollectable
under the modified terms.
35
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, 2016 and 2015:
2016
2015
Loan Past
Due Over 90
Days still
Accruing
Nonaccrual
(in thousands)
-
$
-
-
-
-
-
-
-
$
-
-
$
-
548
-
-
-
-
-
548
$
Loan Past
Due Over 90
Days still
Accruing
-
$
-
100
-
-
-
-
-
100
$
Nonaccrual
$
-
854
1,496
-
-
-
-
-
2,350
$
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
The following table presents information related to impaired loans by class of loans as of and for the year ended
December 31, 2016 and 2015:
December 31, 2016
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
Related
Allowance
(in thousands)
$
2,198
854
-
3,052
$
2,258
854
-
3,112
-
$
-
-
-
$
2,278
866
-
3,144
$
160
53
-
213
1,496
1,496
4,548
$
1,732
1,732
4,844
$
538
538
538
$
1,873
1,873
5,017
$
60
60
273
$
December 31, 2015
Recorded
Investment
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
Related
Allowance
(in thousands)
$
2,215
878
1,259
4,352
$
2,430
878
1,259
4,567
-
$
-
-
-
$
2,302
877
1,200
4,379
$
201
50
60
311
551
551
4,903
$
746
746
5,313
$
127
127
127
$
849
849
5,228
$
1
1
312
$
With no related allowance recorded:
Commercial real estate-multi family
Commercial real estate mortgages
Commercial and industrial loan
Subtotal
With an allowance recorded:
Commercial and industrial loan
Subtotal
Total
With no related allowance recorded:
Commercial real estate-multi family
Commercial real estate mortgages
Commercial and industrial loan
Subtotal
With an allowance recorded:
Commercial and industrial loan
Subtotal
Total
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,
36
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 as part of the underwriting process. A risk
rating for a loan is reviewed periodically in conjunction with annual credit reviews, external loan review or when
one or more events occur such as an event requiring credit approval, changes to an existing credit facility or
whenever material favorable or unfavorable information regarding the credit is obtained. The Corporation uses the
following definitions for risk ratings:
Pass - Non-criticized and non-classified asset.
Special Mention - A special mention asset has potential weaknesses that deserve management’s close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the asset, or, in the institutions credit position at some future date. Special mention assets are
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, 2016 and 2015.
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
$
$
Special
Mention
December 31, 2016
Sub-
standard
(in thousands)
-
$
2,695
3,200
-
-
-
-
-
5,895
$
2,198
2,403
1,926
-
-
-
-
-
6,527
Doubtful
-
$
-
-
-
-
-
-
-
$
-
Loss
-
$
-
-
-
-
-
-
-
$
-
Pass
189,970
128,334
82,523
59,801
13,540
5,068
2,319
297
481,852
$
$
December 31, 2015
(1)
Special
Mention
-
$
469
686
-
-
-
-
-
1,155
$
Sub-
standard
(in thousands)
-
$
2,789
2,249
-
-
-
-
-
5,038
$
Doubtful
Loss
-
$
-
-
-
-
-
-
-
$
-
-
$
-
-
-
-
-
-
-
$
-
Pass
$
187,885
118,072
67,695
54,277
19,970
4,217
2,505
966
455,587
$
(1) P rior year loan amounts are shown net of deferred costs to conform to the current year presentation.
37
Two substandard commercial and industrial loans totaling $1.3 million were modified subsequent to year end and
were deemed impaired and to be troubled debt restructurings. Three substandard commercial and industrial loans
totaling $1.2 million were paid off subsequent to year end.
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 2016. The balance of related party loans for the
years ended December 31, 2016 and December 31, 2015 were $7.6 million and $5.9 million, respectively. There
were no loans to directors or executive officers that were nonaccrual at December 31, 2016.
Loans to principal officers, directors, and their affiliates during 2016 were as follows:
Beginning Balance:
New loans
Advances on existing lines
Paydowns
Ending Balance
2016
(in thousands)
5,922
$
121
2,429
(845)
7,627
$
4.
PREMISES AND EQUIPMENT
Premises and equipment consisted of:
December 31,
2016
2015
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
$
(in thousands)
6,516
7,060
13,576
(7,524)
6,052
$
6,154
7,045
13,199
(6,512)
6,687
$
$
Depreciation and amortization expense was $1.1 million and $1.0 million for 2016 and 2015, respectively.
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:
2017
2018
2019
2020
2021
Thereafter
December 31, 2016
(in thousands)
$
1,210
1,265
1,294
1,299
1,329
12,066
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, 2016 and 2015 approximated $1.1 million and $1.0 million, respectively. The above chart
includes the minimum annual rental payments through lease renewal periods based upon management’s intentions to
execute the renewal options.
38
5.
DEPOSITS
Time Deposits
The following table sets forth the remaining maturities of the Corporation’s time deposits at December 31, 2016:
Less than
$100,000
$100,000 or
Greater
(in thousands)
Total
2017
2018
2019
2020
2021
Thereafter
$
$
$
5,449
3,038
384
400
155
-
9,426
15,122
1,555
251
487
258
395
18,068
20,571
4,593
635
887
413
395
27,494
$
$
$
The total amounts of time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2016
and 2015 were $6.2 million and $6.7 million, respectively. The total amounts of brokered deposits at December 31,
2016 and 2015 were $108.5 million and $93.1 million, respectively. Deposits from principal officers, directors, and
their affiliates at year-end 2016 and 2015 were $17.3 million and $17.5 million, respectively.
6.
SHORT-TERM BORROWINGS
At December 31, 2016, the Corporation had $26.5 million of short-term borrowings outstanding with the Federal
Home Loan Bank (“FHLB”) at a rate of 0.74% with a maturity date of January 3, 2016. FHLB advances were
collateralized by a blanket lien on commercial mortgages with a lendable value of $232.8 million at December 31,
2016 and $234.1 million at December 31, 2015.
During 2016, 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, 2016.
At December 31, 2016, 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, 2016, 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”). $7.5 million of the Notes 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.
39
The Notes are recorded net of unamortized issuance costs of $515 thousand and $553 thousand at December 31,
2016 and December 31, 2015, respectively.
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,
2016
2015
(in thousands)
$
1,973
1,973
$
1,666
-
1,666
(419)
(920)
(1,339)
920
1,554
$
(245)
(264)
(509)
264
1,421
$
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
2016
Amount
Percentage
of Pre-tax
Earnings
Amount
(dollars in thousands)
Percentage
of Pre-tax
Earnings
Federal income tax benefit computed by applying the
statutory rate to income before income taxes
State and local tax, net of federal
Incentive stock options
Other
Valuation allowance
Provision for income taxes
$
$
1,477
(920)
13
64
920
1,554
34 %
(21)
-
2
21
36 %
1,344
(264)
15
62
264
1,421
$
$
34 %
(5)
-
2
5
36 %
40
Deferred tax assets and liabilities are comprised of the following:
Deferred tax assets:
Allowance for loan losses
NYS and NYC net operating loss
Organizational and start-up costs
Nonqualified stock options
Deferred rent expense
Nonaccrual loan interest income
Stock compensation
Other
Net unrealized loss on available for sale securities
Deferred tax liabilities:
Net deferred loan costs
Depreciation
Other
Valuation allowance
For the year ended December 31,
2016
2015
(in thousands)
$
2,298
927
430
240
769
104
83
237
2,704
7,792
$
2,075
57
506
243
726
83
-
223
491
4,404
(499)
(33)
(88)
(620)
(1,570)
(504)
(210)
(69)
(783)
(650)
Net deferred tax asset
$
5,602
$
2,971
At year-end 2016, the Company had no federal net operating loss carryforwards. The Company also had New York
State and New York City net operating loss carryforwards of $10.7 million and $5.8 million, respectively, which
expire at various dates from 2035 to 2036. Deferred tax assets are not recognized for New York State and New
York City net operating losses as the benefit of such losses is not more likely than not to be realized.
Due to legislation enacted in 2014 and 2015, the Corporation will not be in a taxable income position for the
foreseeable future in New York State and New York City. As a result, we determined that it was not more likely
than not that we would be able to utilize state and city deferred tax assets. Accordingly, the Corporation maintains a
valuation allowance against all state and city deferred tax assets. We believe that the revisions to the New York
State and New York City corporate income tax laws will continue to decrease our future state and local income tax
liability.
At December 31, 2016 and December 31, 2015, 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 2016 remain
open to examination by the Internal Revenue Service and 2013 through 2016 by New York State.
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 non-voting common stock, all shares of Series A preferred stock
were converted on a one-for-one basis to shares to non-voting common stock.
The non-voting 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 non-voting common stock to third parties in a
41
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 non-voting common stock have no voting rights, except as required by law.
During 2016, 775 thousand shares of common stock were converted to non-voting common stock.
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, 2016, the
savings plan did not allow for investment in the common stock of the Corporation. During the years ended
December 31, 2016 and 2015, the Corporation recorded compensation expense related to the plan of approximately
$158 thousand and $237 thousand, respectively.
Stock Based Compensation
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
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. Upon the effectiveness of the 2015 Plan discussed below, no further awards have been
issued under this plan.
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. During 2016, 60,732 restricted
stock awards were granted to non-employee directors and employees under the plan.
Stock Options
A summary of the status of the Corporation’s stock options as of December 31, 2016 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
444,000
-
5,800
1,700
436,500
426,200
436,500
Weighted
Average
Exercise Price
10.00
$
-
-
10.00
10.00
10.00
10.00
$
$
$
$
Number of
Shares
436,500
Price
$
10.00
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value
1.70 years
1.61 years
1.70 years
$
$
$
1,196,010
1,167,788
1,196,010
42
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 $37 thousand and $44 thousand for the
years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there were $20 thousand of total
unrecognized compensation costs related to nonvested stock options granted under the Plan. The cost is expected to
be recognized in full during 2017.
A summary of activity related to the stock options follows:
December 31,
2016
2015
(in thousands)
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit realized from option exercised
Weighted average fair value of options granted
$
16
58
-
-
-
$
-
-
-
Restricted Stock Awards
The 2015 Omnibus Plan provides for the issuance of shares to directors and officers. Compensation expense is
recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of
the stock was determined using the fair value on the date of the grant. Of the shares granted in 2016, 37,990 shares
vest ratably over five years. The balance of shares totaling 22,742 shares vest over one year. Total shares issuable
under the plan are 241,268 at year-end 2016 and 60,732 shares were issued in 2016. Such shares are subject to
restrictions based on continued service as employees of the Corporation or its subsidiaries.
A summary of the status of the Corporation’s shares of unvested restricted stock for the year ended December 31,
2016 follows:
Unvested, January 1, 2016
Granted
Vested
Forfeited
Unvested, December 31, 2016
Shares
-
60,732
-
-
60,732
Weighted
Average
Grant-Date
Fair Value
-
9.21
-
-
9.21
$
$
Compensation expense attributable to these awards was approximately $245 thousand for the year ended December
31, 2016. The total fair value of shares nonvested during the years ended December 31, 2016 was $559 thousand.
As of December 31, 2016, there was $314 thousand of total unrecognized compensation costs related to non-vested
restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted-average
period of 2.60 years.
11.
WARRANTS
At December 31, 2016, 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
43
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, 2016 the issued and outstanding warrants have an aggregate intrinsic
value of $1.9 million.
12.
EARNINGS PER SHARE
The restricted stock awards and certain restricted stock units granted by the Company contain non-forfeitable rights
to dividends and therefore are considered participating securities. The two-class method for calculating basic EPS
excludes dividends paid to participating securities and any undistributed earnings attributable to participating
securities.
The following is a reconciliation of earnings per share for December 31, 2016 and 2015.
For the years ended December 31,
2016
2015
Net income
Earnings allocated to participating securities
Income attributable to common stock
Weighted average common shares outstanding,
including participating securities
Weighted average participating securities
Weighted average common shares outstanding
(in thousands, except per share data)
$
2,534
-
2,534
2,790
(23)
2,767
$
$
$
6,936,561
(56,338)
6,880,223
6,100,689
-
6,100,689
Basic earnings per share
$
0.40
$
0.42
Income attributable to common stock
$
2,767
$
2,534
Weighted average common shares outstanding
Incremental shares from conversions of
Series A Convertible Preferred Stock
Incremental shares from conversion of stock warrants
Weighted average common shares outstanding
6,880,223
6,100,689
-
19,432
6,899,655
779,281
-
6,879,970
Diluted earnings per share
$
0.40
$
0.37
There are 436,500 options and 365,000 warrants outstanding at December 31, 2016 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.
13.
OTHER OPERATING EXPENSES
Expenses included in other operating expenses that exceed one percent of the aggregate of total interest income and
noninterest income in the years shown are as follows:
Directors Compensation
$
531
$
356
2016
2015
(in thousands)
14.
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.
44
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,
2016
2015
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Standby letters of credit
Commercial letters of credit
Unused loan commitments
Commitments to make loans
Total commitments outstanding
$
$
$
$
1,544
-
-
796
2,340
(in thousands)
1,755
-
63,424
17,200
82,379
1,303
-
150
-
1,453
172
-
61,390
8,749
70,311
$
$
$
$
15.
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).
45
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2016 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
-
$
-
$
-
$
$
139,385
125,349
264,734
-
$
-
$
-
$
$
139,385
125,349
264,734
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
At December 31, 2016 and 2015, there were no material impaired loans carried at fair value.
As of December 31, 2016 and 2015, 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, 2016
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)
$
6,354
4,131
488,475
$
6,354
n/a
482,906
1,018
1,592
1,018
1,592
Level 1
Level 1
Level 3
Level 2
Level 3
Level 1
$
643,189
$
643,189
Level 2
Level 1
Level 3
Level 1
Level 2
Level 3
27,494
26,477
14,735
12
66
32
27,453
26,477
15,342
12
66
32
46
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
456,512
$
5,621
n/a
451,619
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
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. 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.
16.
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. Under the Basel III rules, the Company must hold a capital conservation buffer
above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from
0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%. The net unrealized gain or
loss on available for sale securities is not included in computing regulatory capital. Management believes as of
December 31, 2016, the Bank met all capital adequacy requirements to which they are subject.
47
As of December 31, 2016 and December 31, 2015, 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,
2016
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
$
78,532
78,532
78,532
84,334
10.22 %
16.26
16.26
17.46
To be Adequately
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
(dollars in thousands)
$
4.00 %
4.50
6.00
8.00
30,745
21,733
28,978
38,637
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
$
38,432
31,392
38,637
48,296
5.00 %
6.50
8.00
10.00
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
2015
(dollars in thousands)
$
4.00 %
4.50
6.00
8.00
24,444
19,969
26,626
35,501
$
30,556
28,845
35,501
44,376
5.00 %
6.50
8.00
10.00
17.
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,
2016
2015
(in thousands)
ASSETS
Cash
Investment in the Bank
Other assets
Total Assets
$
$
4,472
73,283
43
77,798
5,222
73,714
28
78,964
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures, net
Accrued interest payable
Other liabilities
Total Liabilities
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
14,735
32
39
14,806
$
14,697
44
69
14,810
62,992
77,798
$
64,154
78,964
$
48
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
2016
2015
Interest expense
Other expense
Loss before income taxes and equity in undistributed earnings of the Bank
$
$
(in thousands)
1,092
104
(1,196)
46
99
(145)
Income tax benefit
Loss before equity in undistributed earnings of the Bank
Equity in undistributed earnings of the Bank
Net income
407
(789)
3,579
2,790
$
49
(96)
2,630
2,534
$
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Adjustments to reconcile net cash (used by) provided by operating activities:
Amortization of debt issuance costs
Equity in undistributed earnings of the Bank
(Increase) decrease in other assets
(Decrease) increase in accrued interest payable
Decrease 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:
Proceeds from exercise of stock options
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,
2016
2015
(in thousands)
$
2,790
$
2,534
38
(3,579)
(15)
(12)
(30)
(808)
-
-
58
-
58
-
(2,630)
69
44
(82)
(65)
(10,000)
(10,000)
-
14,697
14,697
(750)
5,222
4,472
$
4,632
590
5,222
$
49
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, 2016 and 2015, and the related consolidated statements of
operations, comprehensive (loss) 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.
50
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, 2016 and 2015, and the results of its operations and its
cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of
America.
New York, New York
March 30, 2017
(cid:3)
Crowe Horwath LLP
51
[THIS PAGE INTENTIONALLY LEFT BLANK]
INVESTOR RELATIONS
Empire Bancorp, Inc. is a registered bank holding company for Empire National Bank. Empire
Bancorp, Inc.’s common stock is listed on the OTCQB marketplace, which is the middle tier of
the OTC market, under the symbol “EMPK.” Empire National Bank is a Long Island-based
independent bank that specializes in serving the financial needs of small and medium-sized
businesses, professionals, nonprofit organizations, municipalities, real estate investors, and
consumers. The bank has four full-service banking offices located in Islandia, Shirley, Port
Jefferson Station and Mineola and a private banking branch office in Manhattan, New York.
The bank takes pride in understanding the needs of each and every customer so that it can
deliver the highest quality service with a sense of urgency.
Additional copies of Empire Bancorp, Inc.’s Annual Report can be obtained in PDF form from
the Bank’s website (www.empirenb.com) in the Investor Relations section.
INVESTOR RELATIONS DIRECTOR
William T. Franz, Senior Vice President
Islandia, NY
631-881-5375
LEGAL COUNSEL
Geoffrey Scot Kay
Fenimore, Kay, Harrison & Ford, LLP
Austin, TX
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Crowe Horwath LLP
New York, NY
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
Brentwood, NY
877-830-4936
EMPIRE BANCORP, INC. | 9
BOARD OF DIRECTORS*
Douglas C. Manditch
Chairman of the Board &
Chief Executive Officer
Empire National Bank
Thomas M. Buonaiuto, CPA
President &
Chief Operating Officer
Empire National Bank
John D. Caffrey, Jr.
Organizer & Vice Chairman
of the Board
Owner, Castle Financial
Advisors, LLC & Castle Asset
Management, LLC
John P. Bracken, Esq.
Organizer & Director
Managing Partner, Bracken
Margolin Besunder, LLP, Retired
Francis F. Boulton
Organizer & Director
CEO, Long Island Ducks
Professional Baseball Club, LLC
John L. Ciarelli, Esq.
Organizer & Director
President, Ciarelli &
Dempsey P.C.
Dr. Alan M. Coren
Organizer & Director
President, West Hills Animal
Hospital P.C.
Larry R. Davis, Esq.
Organizer & Director
Principal, Davis & Prager, P.C.
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 2016 |
11
EXECUTIVE TEAM
EMPIRE BANCORP, INC.
EXECUTIVE OFFICERS
Douglas C. Manditch
Chairman of the Board, Chief Executive Officer & Secretary
John D. Caffrey, Jr.
Vice Chairman of the Board
Thomas M. Buonaiuto, CPA
President, Chief Operating Officer & Assistant Secretary
John Pinna
Vice President
Janet T. Verneuille, CPA
Vice President & Chief Financial Officer
Diane L. Murray, CPA
Assistant Secretary
EMPIRE NATIONAL BANK
EXECUTIVE OFFICERS
Douglas C. Manditch
Chairman of the Board & Chief Executive Officer
Thomas M. Buonaiuto, CPA
President & Chief Operating Officer
Michael P. Locorriere
Executive Vice President & Director of Municipal Banking
Susanne Pheffer
Executive Vice President, Chief Technology Officer
& Security Officer
John Pinna
Executive Vice President & Chief Information Officer
Janet T. Verneuille, CPA
Executive Vice President & Chief Financial Officer
William T. Franz
Senior Vice President & Director of Marketing
& Investor Relations
Diane L. Murray, CPA
Senior Vice President & Chief Risk Officer
Raffaella Palazzo
Senior Vice President & Co-Chief Credit Officer
Matthew Ruppert
Senior Vice President & Co-Chief Credit Officer
Robert S. Schepis
Senior Vice President & Chief Lending Officer
12
| EMPIRE BANCORP, INC.
SENIOR VICE PRESIDENTS
Craig Goldstein
Commercial Loan Officer
Dorothy Overton
Branch Manager, Islandia
VICE PRESIDENTS
Richard Corrado
Senior Credit Analyst
Frank DeRosa
Commercial Loan Officer
Danielle DiGrazia
Operations Officer
Catherine Giamundo, CPA
Controller
Erik Griemsmann
IT Manager
William Guiducci
Branch Manager, Shirley
Edy Meyer
Branch Manager, Port Jefferson Station
Steven Post
Electronic Banking Manager
Jane Reid
Human Resources
Jeffrey B. Reid
Commercial Loan Officer
Neil Roberts
Senior Credit Analyst
Marguerite Smith
BSA & Compliance Officer
EXECUTIVE OFFICERS Left to Right: Matthew Ruppert, Raffaella Palazzo, Michael P. Locorriere, William T. Franz, Thomas M. Buonaiuto,
Douglas C. Manditch, Janet T. Verneuille, Diane L. Murray, Robert S. Schepis, Susanne Pheffer, John Pinna
ASSISTANT VICE PRESIDENTS
Linda Carman
Electronic Banking
Krista M. Classie
Branch Manager, Mineola
Tracey Cullen
Senior Credit Analyst
Jeanne M. Dahl
Assistant Branch Manager, Port Jefferson Station
Miranda M. D’Angelis
Assistant Controller
Margaret Downing
Assistant Branch Manager, Shirley
Gregory Durso
Senior Credit Analyst
Suzanne Fox
Assistant Branch Manager, Islandia
Nancy Leonard
Deposit Operations
Yi Lu
Loan Administration
Deborah McCullough
Assistant Branch Manager, Mineola
Jessica M. Michalski
Staff Accountant
Janet Weissman
Assistant Branch Manager, Islandia
MANAGERS
ASSISTANT BRANCH MANAGERS
Dorothy Lamboy
Assistant Branch Manager, Shirley
Theresa Naumann
Assistant Branch Manager, Shirley
Sueann Rando
Assistant Branch Manager, Port Jefferson Station
PRIVATE BANKING
Michael Wilk
Private Banking Officer
FINANCE
Andrew Meltzer
Accounting Officer
ANNUAL REPORT 2016 |
13
BRANCH LOCATIONS
ISLANDIA
Headquarters
1707 Veterans Highway
Islandia, NY 11749
631-348-4444
14
| EMPIRE BANCORP, INC.
MINEOLA
170 Old Country Road, Suite 1WA
Mineola, NY 11501
516-741-0444
PORT JEFFERSON STATION
4747 Nesconset Highway, Unit 36
Port Jefferson Station, NY 11776
631-928-4444
SHIRLEY
1044 William Floyd Parkway
Shirley, NY 11967
631-395-9500
MANHATTAN
99 Park Ave, Suite 1510
New York, NY 10016
212-986-4444
ANNUAL REPORT 2016 |
15
SUPPORTING OUR COMMUNITY
We are well aware that a large part of our success is tied to the strength of the local economy.
As a community bank, we embrace our position within each community and look to facilitate
helping businesses and individuals grow and prosper.
Our commitment to community is in everyone’s best interest. We are proud to work with so
many important, local organizations.
Association for Children with Down
Colonial Youth & Family Services
Girl Scouts of Suffolk County
Syndrome
Advancement for Commerce Industry
and Technology
ADDAPT
AHRC Suffolk
ALS Ride for Life
Commack Gridiron Club
Great River Fire Department
Community Library Friends of the Arts
Half Hollow Hills East
Community Family Literacy Project
Hauppauge Eagles Lacrosse Booster
Community Mainstreaming Associates
Hauppauge Industrial Association
Comsewogue Youth Lacrosse
Alzheimer’s Foundation of America
Cooley’s Anemia Foundation, Inc.
American Diabetes Association
Crohn’s & Colitis Foundation of America
American Kidney Foundation
Doc Fallot Scholarship Fund
American Heart Association
East End Arts & Humanities Council,
Ancient Order of Hiberians
Angela’s House
Inc.
Eden II and Genesis Foundation
Arthritis Foundation - LI Chapter
EMI Network
Enegeia Partnership at Molloy College
Family Service League
Father John Papallo Lodge
Federation of Organizations
Feed The Children
Hauppauge Public Schools
Hofstra University
Holocaust Memorial and Tolerance
Center
Hope House Ministries
Interfaith Nutrition Network
Island Harvest
James V. Kavanaugh Knights of
Columbus
JTM Foundation
The Jewish Academy
Jocelyn’s Operation Holiday Spirit
The Kelly Memorial Charitable Fund
Kiwanis Club of the Mastics
Friends and Family of Chris Barnes
Lions Club of Medford - N. Patchogue
The Fuoco Memorial Golf Festival
Long Island Council on Alcoholism and
Garden City Chamber of Commerce,
Drug Dependence
Inc.
Long Island Against Domestic Violence
Boy Scouts of America
Bonei Olam
Central Nassau Guidance & Counseling
Chamber of Commerce Shirley & The
Mastics
Children’s Medical Fund of NY
Child Care Council of Suffolk, Inc.
Christmas Magic, Inc.
Clark Gilles Foundation
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| EMPIRE BANCORP, INC.
Long Island Against Trafficking
Nassau Suffolk Chapter of Autism
Steven Antaki Memorial Golf Outing
Long Island Builders Institute, Inc.
New Ground, Inc.
Long Island Childrens Museum
Never Alone Never Afraid
Long Island Convention & Visitors
North Shore Child & Family Guidance
Bureau
Long Island Hispanic Chamber of
Commerce
NYOSIA Grand Lodge Foundation, Inc.
Our Lady Queen of Apostles
Telecare
Stony Brook Foundation
Suffolk County Fire District
Suffolk Sports Hall of Fame
Long Island Imagine Awards
Outreach
Long Island Museum of American Art,
Pal-O-Mine Equestrian, Inc.
The Paul Conroy Foundation
Theodore Roosevelt Association
History and Carriages
Long Island Village Clerks & Treasurer
Association
Lustgraten Foundation
Mandy’s Mark Memorial Golf Outing
Marcum Workplace Challenge
Mastic Beach Yacht Club
Mastic Fire Department
Maurer Foundation
Mercy Haven, Inc.
Port Jefferson Yacht Club
Three Village Kiwanis / SEPTA
Public Library Directors Association
United Veterans Beacon House
The Richard J. O’Brien Foundation
Rotary Club of the Patchogue
Rotary Club of the Ronkonkomas
Rotary Club of Shirley & The Mastics
Shanti Fund
Smithtown Booster Club
Shootout for Soldiers
United Way of Long Island
Viscardi Center
Ward Melville Heritage Organization
William Floyd Alumni Association
William Floyd Community Summit
William Floyd Scholarship Fund & H.S.
Michael McCarthy Foundation
St. Baldrick’s Foundation
YMCA of Long Island, Inc.
Middle Country Library Foundation
St. Charles Hospital Foundation
Miller Place Athletic Booster Club
St. Jude R.C. Church
Miller Place Lacrosse
St. Louis De Monfort Church
ANNUAL REPORT 2016 | 17
HEADQUARTERS
1707 Veterans Highway
Islandia, NY 11749
631-348-4444
empirenb.com