UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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As of NovemberAugust 3, 20172018 there were 32,582,47248,314,556 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

General

Interest Income

Interest income for the three and ninesix months ended SeptemberJune 30, 20172018 increased to $48.0$70.1 million and $140.9$132.9 million, respectively, as compared to $37.3$46.9 million and $93.5$92.9 million, respectively, in the corresponding prior year periods. Average interest-earning assets increased $1.086by $1.919 billion and $1.574$1.650 billion respectively, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to the same prior year periods. The averages for the three and ninesix months ended SeptemberJune 30, 2017,2018, were favorably impacted by $1.727 billion and $1.452 billion, respectively, of interest-earning assets acquired from Sun. Average loans receivable, net, increased by $1.585 billion and $1.363 billion for the Acquisition Transactions.three and six months ended June 30, 2018, respectively, as compared to the same prior year periods. The increases attributable to the acquisition of Sun were $1.461 billion and $1.226 billion, respectively. For the three and six months ended June 30, 2018, the yield on average interest-earning assets increased to 4.22% and 4.20%, respectively, from 3.97% and 3.96% in the corresponding prior periods. The yields on average interest-earning assets decreasedbenefited from the accretion of purchase accounting adjustments on the Sun acquisition and to 3.91% and increased to 3.93%, respectively, fora lesser extent the three and nine months ended September 30, 2017, from 3.92% and 3.88%, respectively, for the same prior year periods.impact of Federal Reserve rate increases.

Interest Expense

Interest expense for the three and ninesix months ended SeptemberJune 30, 20172018 was $5.0$8.6 million and $14.2$15.8 million, respectively, as compared to $3.4$4.7 million and $9.0$9.2 million, respectively, in the corresponding prior year periods. Average interest-bearing liabilities increased $792.7 million$1.488 billion and $1.224$1.298 billion respectively, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to the same prior year periods. For the three and ninesix months ended SeptemberJune 30, 2017,2018, the cost of average interest-bearing liabilities increased to 0.50%0.65% and 0.49%0.62%, respectively, from 0.43% and 0.46%, respectively,0.49% in theboth corresponding prior year periods.

bearing deposits) was 0.29%0.35% and 0.28%, respectively,0.34% for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to 0.25% for both0.28% and 0.27%, respectively, in the three and nine months ended September 30, 2016.same prior year periods.

Net Interest Income

Provision for Loan Losses

For the three and ninesix months ended SeptemberJune 30, 2017,2018, the provision for loan losses was $1.2 million$706,000 and $3.0$2.1 million, respectively, as compared to $888,000$1.2 million and $2.1$1.9 million, respectively, for the corresponding prior year periods. Net loan charge-offs were $832,000 and $1.1 million and $1.6 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to net loan charge-offs of $1.9 million$759,000 and $3.2 million,$491,000, respectively, in the corresponding prior year periods. Net charge-offs for the three months ended June 30, 2018, included $946,000 of specific reserves on non-performing loans established in the prior quarter, which were separately identified in the allowance for loan losses. Non-performing loans increased to $15.1totaled $18.1 million at SeptemberJune 30, 2017,2018, as compared to $13.6$16.3 million at December 31, 2016. The increase was primarily due to the addition of two commercial real estate relationships totaling $7.4 million, partially offset by the payoff of two non-performing loans totaling $1.7 million. An increase in non-performing residential mortgage loans was offset by the bulk sale of $7.8 million in non-performing residential loans in the second and third quarters ofJune 30, 2017.

Other Income

For the three and ninesix months ended SeptemberJune 30, 2017,2018, other income increased to $7.4$8.9 million and $20.3$17.8 million, respectively, as compared to $5.9$7.0 million and $14.2$13.0 million, respectively, for the corresponding prior year periods. The increases were primarily due to the impact of the Acquisition Transactions,Sun acquisition, which added $1.1$2.3 million and $4.9$3.7 million respectively, to other income for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to the same prior year periods. Excluding the Acquisition Transactions,Sun acquisition, the remaining increasedecrease in other income for the three months ended SeptemberJune 30, 2017,2018, was primarily due to higher deposit and bank card related fees of $272,000 and $71,000, respectively, as compared toan increase in the same prior year period. In addition, incomeloss from other real estate operations excludingof $1.1 million, of which $500,000 related to a write-down attributable to the Acquisition Transactions, increased $364,000 which wasoperations of a hotel, golf, and banquet facility, partially offset by a decreaseincreases in fees and service charges of $428,000 and in the net gain on investment securities of $182,000. Excluding the sale of loans available for sale (included in other income) of $360,000. For the nine months ended September 30, 2017, excluding the Acquisition Transactions,Sun acquisition, the increase in other income for the six months ended June 30, 2018, was primarily due to higher depositincreases in fees and bank cardservice charges of $627,000, the gain on sales of loans of $566,000, mostly related fees of $1.0 million and $153,000, respectively, as compared to the same prior year period. Excludingsale of one non-performing commercial loan relationship during the Acquisition Transactions, anfirst quarter of 2018, and rental income of $483,000 received primarily for January and February 2018 on the Company’s recently acquired executive office building, partially offset by the increase in incomethe loss from other real estate operations of $609,000 was offset by a decrease in$765,000, including the net gain on the sale of loans (included in other income) of $697,000.$500,000 write-down noted above.

Operating Expenses

Operating expenses increased to $30.7$50.9 million and $98.8$107.7 million respectively, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to $25.0$37.1 million and $70.4$68.1 million, respectively, in the same prior year periods. Operating expenses for the three and ninesix months ended SeptemberJune 30, 20172018, included $3.2$8.4 million and $13.2$26.7 million, respectively, of merger related and branch consolidation expenses, as compared to $1.3$8.6 million and $9.9$10.1 million, respectively, in the same prior year periods. Excluding the impact of merger and branch consolidation expenses, the increase in operating expenses over the prior year was primarily due to the Acquisition Transactions,Sun acquisition, which added $2.4$11.0 million and $18.9$19.2 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively. ForExcluding the Sun acquisition, the remaining increase in operating expenses for the three months ended SeptemberJune 30, 2017, excluding2018 over the Acquisition Transaction expenses, there were increases in marketing expense and loan related expenses. For the nine months ended September 30, 2017, excluding the Acquisition Transaction expenses, there wereprior year period was primarily due to increases in compensation and employee benefits expense equipmentof $1.7 million as a result of higher incentive and stock plan expenses, including $220,000 of accelerated stock compensation expense marketingdue to director retirements, service bureau expense of $700,000, and professional fees.occupancy expense of $327,000. Excluding the Sun acquisition, the remaining increase in operating expenses for the six months ended June 30, 2018 over the prior year period was primarily due to increases in compensation and employee benefits expense of $2.3 million as a result of higher incentive and stock plan expenses, service bureau expense of $882,000 and occupancy expense of $786,000.

Provision for Income Taxes

The provision for income taxes was $5.7$3.0 million and $12.7$4.0 million respectively, for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to $4.8$3.2 million and $9.2$7.0 million, respectively, for the same prior year periods. The effective tax rate was 30.8%16.1% and 28.0%, respectively,16.0% for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, as compared to 34.4%29.2% and 35.0%26.1%, respectively, for the same prior year periods. The lower effective tax rate for the three and ninesix months ended SeptemberJune 30, 20172018 primarily resulted from the adoptionTax Cuts and Jobs Act (“Tax Reform”) enacted during the fourth quarter of ASU 2016-09 “Compensation - Stock Compensation,” which decreased income tax expense by $158,000 and $1.7 million, respectively. Excluding the impact of ASU 2016-09, the effective tax rate would have been 31.6% and 31.8% for the three and nine months ended September 30, 2017, respectively. Under the ASU, the tax benefits of exercised stock options and vested stock awards are recognized as a benefit to income tax expense in the reporting period in which they occur. The tax benefit relating to the Company’s stock plans was $62,000 for the year ended December 31, 2016, which was recorded directly into stockholders equity. The elevated tax benefit for the three and nine months ended September 30, 2017, was related to the2017.

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, Federal Home Loan Bank (FHLB)(“FHLB”) advances and other borrowings and, to a lesser extent, investment maturities and proceeds from the sale of loans. While scheduled amortization of loans is a predictable source of funds, deposit flows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including various lines of credit.

As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the Company and the Bank exceed all regulatory capital requirements currently applicable as follows (in thousands):

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include undrawn lines of credit and commitments to extend credit. 

The Company enters into loan sale agreements with investors in the normal course of business. The loan sale agreements generally require the Company to repurchase loans previously sold in the event of a violation of various representations and warranties customary to the mortgage banking industry. The Company is also obligated under a loss sharing arrangement with the FHLB relating to loans sold into the Mortgage Partnership Finance program. In the opinion of management, the potential exposure related to the loan sale agreements and loans sold to the FHLB is adequately provided for in the reserve for repurchased loans and loss sharing obligations included in other liabilities. At SeptemberJune 30, 20172018 and December 31, 2016,2017, the reserve for repurchased loans and loss sharing obligations amounted to $463,000$1.5 million and $846,000,$463,000, respectively.

The following table shows the contractual obligations of the Company by expected payment period as of SeptemberJune 30, 20172018 (in thousands):

Debt obligations include advances from the FHLB and other borrowings and have defined terms.

Commitments to fund undrawn lines of credit and commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company’s exposure to credit risk is represented by the contractual amount of the instruments.

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”), as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for loan losses and judgments regarding securities and goodwill impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations. These judgments and policies involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. Goodwill will be evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances

In addition to historical information, this quarterly report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “will,” “should,” “may,” “view,” “opportunity,” “potential,” or similar expressions or expressions of confidence. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, levels of unemployment in the Bank’s lending area, real estate market values in the Bank’s lending area, future natural disasters and increases to flood insurance premiums, the level of prepayments on loans and mortgage-backed securities, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines and the Bank’sCompany’s ability to successfully integrate acquired operations. These risks and uncertainties are further discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 and subsequent securities filings and should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Further description of the risks and uncertainties to the business are included in Item 1, Business, and Item 1A, Risk Factors, of the Company’s 20162017 Form 10-K.10-K, as amended by its subsequent SEC filings.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company’s interest rate sensitivity is monitored through the use of an interest rate risk (“IRR”) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at SeptemberJune 30, 2017,2018, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.