10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: MARCH 31, 2014

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File No. 000-13580

SUFFOLK BANCORP

(Exact Name of Registrant as Specified in Its Charter)

NEW YORK	11-2708279
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

4 WEST SECOND STREET, P.O. BOX 9000, RIVERHEAD, NY

(Address of Principal Executive Offices) (Zip Code)

(631) 208-2400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

As of April 15, 2014, there were 11,573,014 shares of registrant’s Common Stock outstanding.

SUFFOLK BANCORP

Form 10-Q

For the Quarterly Period Ended March 31, 2014

Table of Contents

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Statements of Condition (Unaudited) as of March 31, 2014 and December 31, 2013	2
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2014 and 2013	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2014 and 2013	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2014 and 2013	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and 2013	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
	PART II
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults upon Senior Securities	40
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	41
Item 6.	Exhibits	41
	Signatures	42

1

PART I

ITEM 1. – FINANCIAL STATEMENTS

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

March 31, 2014 and December 31, 2013

(dollars in thousands, except per share data)

	March 31, 2014			December 31, 2013
ASSETS
Cash and cash equivalents
Cash and non-interest-bearing deposits due from banks	$	52,422		$	69,065
Interest-bearing deposits due from banks		33,743			62,287
Federal funds sold		1,038			1,000
Total cash and cash equivalents		87,203			132,352
Interest-bearing time deposits in other banks		10,000			10,000
Federal Reserve Bank,  Federal Home Loan Bank and other stock		2,863			2,863
Investment securities:
Available for sale, at fair value		364,148			400,780
Held to maturity (fair value of $46,008 and $12,234, respectively)		45,479			11,666
Total investment securities		409,627			412,446
Loans		1,129,818			1,068,848
Allowance for loan losses		17,737			17,263
Net loans		1,112,081			1,051,585
Loans held for sale		190			175
Premises and equipment, net		24,523			25,261
Bank owned life insurance		44,109			38,755
Deferred taxes		12,269			13,953
Accrued interest and loan fees receivable		6,322			5,441
Goodwill and other intangibles		2,994			2,978
Other assets		3,635			4,007
TOTAL ASSETS	$	1,715,816		$	1,699,816
LIABILITIES & STOCKHOLDERS' EQUITY
Demand deposits	$	633,496		$	628,616
Saving, N.O.W. and money market deposits		661,599			656,366
Time certificates of $100,000 or more		164,373			158,337
Other time deposits		63,966			66,742
Total deposits		1,523,434			1,510,061
Unfunded pension liability		167			258
Capital leases		4,588			4,612
Other liabilities		13,456			17,687
TOTAL LIABILITIES		1,541,645			1,532,618
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 15,000,000 shares authorized;13,738,752 shares issued; 11,573,014 shares outstanding)		34,348			34,348
Surplus		43,445			43,280
Retained earnings		105,993			102,273
Treasury stock at par (2,165,738 shares)		(5,414	)		(5,414	)
Accumulated other comprehensive loss, net of tax		(4,201	)		(7,289	)
TOTAL STOCKHOLDERS' EQUITY		174,171			167,198
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,715,816		$	1,699,816

See accompanying notes to unaudited condensed consolidated financial statements.

2

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three Months Ended March 31, 2014 and 2013

(dollars in thousands, except per share data)

	Three Months Ended March 31,
	2014			2013
INTEREST INCOME
Loans and loan fees	$	12,877		$	11,082
U.S. Government agency obligations		628			333
Obligations of states and political subdivisions		1,505			1,500
Collateralized mortgage obligations		250			835
Mortgage-backed securities		501			365
Corporate bonds		90			117
Federal funds sold and interest-bearing deposits due from banks		46			173
Dividends		38			39
Total interest income		15,935			14,444
INTEREST EXPENSE
Saving, N.O.W. and money market deposits		292			286
Time certificates of $100,000 or more		234			300
Other time deposits		111			182
Total interest expense		637			768
Net interest income		15,298			13,676
Provision for loan losses		250			-
Net interest income after provision for loan losses		15,048			13,676
NON-INTEREST INCOME
Service charges on deposit accounts		1,003			924
Other service charges, commissions and fees		679			710
Fiduciary fees		279			273
Net gain on sale of securities available for sale		-			359
Net gain on sale of portfolio loans		-			442
Net gain on sale of mortgage loans originated for sale		93			526
Net gain on sale of branch building		642			-
Income from bank owned life insurance		354			-
Other operating income		42			83
Total non-interest income		3,092			3,317
OPERATING EXPENSES
Employee compensation and benefits		8,861			8,582
Occupancy expense		1,435			1,544
Equipment expense		449			572
Consulting and professional services		551			573
FDIC assessment		267			517
Data processing		573			467
Accounting and audit fees		108			21
Branch consolidation costs		(170	)		-
Reserve and carrying costs related to Visa shares sold		59			-
Other operating expenses		1,176			1,525
Total operating expenses		13,309			13,801
Income before income tax expense		4,831			3,192
Income tax expense		1,111			483
NET INCOME	$	3,720		$	2,709
EARNINGS PER COMMON SHARE - BASIC	$	0.32		$	0.23
EARNINGS PER COMMON SHARE - DILUTED	$	0.32		$	0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC		11,573,014			11,566,347
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED		11,631,462			11,566,347

See accompanying notes to unaudited condensed consolidated financial statements.

3

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

For the Three Months Ended March 31, 2014 and 2013

(in thousands)

	Three Months Ended March 31,
	2014		2013
Net income	$	3,720	$	2,709
Other comprehensive income (loss), net of tax and reclassification adjustments:
Net change in unrealized gain (loss) on securities available for sale arising during the period		3,088		(1,220	)
Total other comprehensive income (loss), net of tax		3,088		(1,220	)
Total comprehensive income	$	6,808	$	1,489

See accompanying notes to unaudited condensed consolidated financial statements.

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

For the Three Months Ended March 31, 2014 and 2013

(in thousands)

	Three Months Ended March 31,
	2014			2013
Common stock
Balance, January 1	$	34,348		$	34,330
Ending balance		34,348			34,330
Surplus
Balance, January 1		43,280			42,628
Stock-based compensation		165			82
Ending balance		43,445			42,710
Retained earnings
Balance, January 1		102,273			89,555
Net income		3,720			2,709
Ending balance		105,993			92,264
Treasury stock
Balance, January 1		(5,414	)		(5,414	)
Ending balance		(5,414	)		(5,414	)
Accumulated other comprehensive (loss) income, net of tax
Balance, January 1		(7,289	)		2,886
Other comprehensive income (loss)		3,088			(1,220	)
Ending balance		(4,201	)		1,666
Total stockholders' equity	$	174,171		$	165,556

See accompanying notes to unaudited condensed consolidated financial statements.

4

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Three Months Ended March 31, 2014 and 2013

(in thousands)

	Three Months Ended March 31,
	2014			2013
NET INCOME	$	3,720		$	2,709
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Provision for loan losses		250			-
Depreciation and amortization		604			684
Stock-based compensation		165			82
Net amortization of premiums		293			317
Originations of mortgage loans for sale		(4,061	)		(20,461	)
Proceeds from sale of mortgage loans originated for sale		4,139			23,073
Gain on sale of mortgage loans originated for sale		(93	)		(526	)
Gain on sale of portfolio loans		-			(442	)
Increase in other intangibles		(16	)		(183	)
Deferred tax (benefit) expense		(78	)		425
Decrease in income tax receivable		-			57
Increase in accrued interest and loan fees receivable		(881	)		(863	)
Decrease in other assets		372			2,028
Adjustment to unfunded pension liability		(91	)		(16	)
Decrease in other liabilities		(4,230	)		(2,724	)
Income from bank owned life insurance		(354	)		-
Gain on sale of branch building		(642	)		-
Gain on sale of securities available for sale		-			(359	)
Net cash (used in) provided by operating activities		(903	)		3,801
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on investment securities		3,854			19,831
Proceeds from sale of investment securities - available for sale		-			10,475
Maturities of investment securities - available for sale		6,040			6,025
Purchases of investment securities - available for sale		-			(49,129	)
Maturities of investment securities - held to maturity		315			163
Purchases of investment securities -  held to maturity		(2,834	)		-
Proceeds from sale of portfolio loans		-			1,349
Loan originations - net		(60,746	)		(48,146	)
Proceeds from sale of branch building		900			-
Proceeds from sale of other real estate owned ("OREO")		-			1,200
Increase in bank owned life insurance		(5,000	)		-
Purchases of premises and equipment - net		(124	)		(327	)
Net cash used in investing activities		(57,595	)		(58,559	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts		13,373			(27,356	)
Decrease  in capital lease payable		(24	)		(13	)
Net cash provided by (used in) financing activities		13,349			(27,369	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(45,149	)		(82,127	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		132,352			385,806
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	87,203		$	303,679
SUPPLEMENTAL DATA:
Interest paid	$	637		$	770
Income taxes paid	$	329		$	-
Investment securities transferred from available for sale to held to maturity	$	31,286		$	-

See accompanying notes to unaudited condensed consolidated financial statements.

5

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim condensed consolidated financial statements include the accounts of Suffolk Bancorp (the “Company”) and its wholly owned subsidiary, the Suffolk County National Bank of Riverhead and its subsidiaries (the “Bank”). The Bank formed Suffolk Greenway, Inc. (the “REIT”), a real estate investment trust, and owns 100% of an insurance agency and two corporations used to acquire foreclosed real estate. The insurance agency and the two corporations used to acquire foreclosed real estate are immaterial to the Company’s operations. Suffolk Bancorp and subsidiaries are collectively referred to hereafter as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of the Company’s management, the preceding unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of its condensed consolidated statements of condition as of March 31, 2014 and December 31, 2013, its condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013, its condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2014 and 2013, its condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2014 and 2013 and its condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013.

The preceding unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results of operations to be expected for the remainder of the year. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 2013 Annual Report on Form 10-K.

Loans and Loan Interest Income Recognition - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs. Unearned discounts on installment loans are credited to income using methods that result in a level yield. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.

Interest income is accrued on the unpaid loan principal balance. Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. Loans of all classes will generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status. Loans start accruing interest again when they become current as to principal and interest for at least six months, and when, after a well-documented analysis by management, it has been determined that the loans can be collected in full.  For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (“TDRs”) and are classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and recoveries, and decreased by loan charge-offs. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance for loan losses. This happens when the loan is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by a continuous analysis of the loan portfolio. Such analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other relevant factors. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. In assessing the adequacy of the allowance for loan losses, management reviews the loan portfolio by separate classes that have similar risk and collateral characteristics. These classes are commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

6

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loans, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every impaired loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-impaired loans and is based on historical loss experience for each loan class from a rolling twelve quarter period and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the estimated collectability of the loan class not captured by historical loss data.  These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. TDRs are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Loans Held For Sale – Loans held for sale are carried at the lower of aggregate cost or fair value, based on observable inputs in the secondary market. Changes in fair value of loans held for sale are recognized in earnings.

Bank Owned Life Insurance - Bank owned life insurance is recorded at the lower of the cash surrender value or the amount that can be realized under the insurance policy and is included as an asset in the consolidated statements of condition. Changes in the cash surrender value and insurance benefit payments are recorded in non-interest income in the consolidated statements of operations.

Derivatives- Derivatives are contracts between counterparties that specify conditions under which settlements are to be made. The only derivatives held by the Company are swap contracts with the purchaser of its Visa Class B shares. The Company records its derivatives on the balance sheet at fair value. The Company’s derivatives do not qualify for hedge accounting. As a result, changes in fair value are recognized in earnings in the period in which they occur. (See also Note 3. Investment Securities contained herein.)

Recent Accounting Guidance – In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Topic 310), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Management intends to adopt ASU 2014-04 on January 1, 2015 and does not believe that the adoption will have a material effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to clarify the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company’s adoption of ASU 2013-11 on January 1, 2014 did not have a material effect on the Company’s consolidated financial statements.

Reclassifications — Certain reclassifications have been made to prior period information in order to conform to the current period’s presentation. Such reclassifications had no impact on the Company’s consolidated results of operations or financial condition.

7

2. ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

The changes in the Company’s AOCI by component, net of tax, for the three months ended March 31, 2014 and 2013 follow (in thousands). The increase in net unrealized gains on available for sale securities for the three months ended March 31, 2014 resulted almost solely from the positive impact of a reduction in interest rates in 2014.

	Three Months Ended March 31, 2014									Three Months Ended March 31, 2013
	Unrealized Gains  and Losses on  Available for Sale Securities			Pension and Post- Retirement  Plan Items			Total			Unrealized Gains  and Losses on  Available for Sale  Securities			Pension and  Post- Retirement Plan Items			Total
Beginning balance	$	(4,095	)	$	(3,194	)	$	(7,289	)	$	10,553		$	(7,667	)	$	2,886
Other comprehensive income (loss) before reclassifications		3,088			-			3,088			(991	)		-			(991	)
Amounts reclassified from AOCI		-			-			-			(229	)		-			(229	)
Net other comprehensive income (loss)		3,088			-			3,088			(1,220	)		-			(1,220	)
Ending balance	$	(1,007	)	$	(3,194	)	$	(4,201	)	$	9,333		$	(7,667	)	$	1,666

The table below presents reclassifications out of AOCI for the three months ended March 31, 2014 and 2013 (in thousands).

	Amount Reclassified from AOCI
	Three Months Ended March 31,					Affected Line Item in the Statement
Details about AOCI Components	2014		2013			Where Net Income is Presented
Unrealized gains and losses on available for sale securities	$	-	$	359		Net gain on sale of securities available for sale
		-		(130	)	Income tax expense
Total reclassifications, net of tax	$	-	$	229

3. INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent. Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any. The Company has the positive intent and ability to hold such securities to maturity. Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax in AOCI as a separate component of stockholders’ equity until realized. Changes in unrealized gains and losses are reported, net of tax, in the consolidated statements of comprehensive income (loss). Interest earned on securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold.

During the first quarter of 2014, investment securities totaling $31 million were transferred from available for sale to held to maturity. At the time of transfer, the securities were at unrealized losses. In accordance with ASC 320-10-35-10, the securities were transferred at fair value, which became the amortized cost. The discount is then accreted to interest income over the remaining life of the security. The unrealized holding losses at the date of transfer remained in AOCI and are amortized simultaneously against interest income. Those entries offset or mitigate each other. For regulatory capital purposes, the unamortized AOCI related to these securities is treated in the same manner as an available for sale debt security.

8

The amortized cost, estimated fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at March 31, 2014 and December 31, 2013 were as follows (in thousands):

	March 31, 2014									December 31, 2013
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency securities	$	70,466	$	-	$	(3,705	)	$	66,761	$	109,315	$	-	$	(9,220	)	$	100,095
Obligations of states and political subdivisions		147,472		8,451		-			155,923		148,664		8,499		-			157,163
Collateralized mortgage obligations		27,108		880		(689	)		27,299		30,335		557		(788	)		30,104
Mortgage-backed securities		102,591		18		(4,128	)		98,481		103,332		19		(5,584	)		97,767
Corporate bonds		15,561		241		(118	)		15,684		15,565		264		(178	)		15,651
Total available for sale securities		363,198		9,590		(8,640	)		364,148		407,211		9,339		(15,770	)		400,780
Held to maturity:
U.S. Government agency securities		31,318		-		(165	)		31,153		-		-		-			-
Obligations of states and political subdivisions		14,161		694		-			14,855		11,666		655		(87	)		12,234
Total held to maturity securities		45,479		694		(165	)		46,008		11,666		655		(87	)		12,234
Total investment securities	$	408,677	$	10,284	$	(8,805	)	$	410,156	$	418,877	$	9,994	$	(15,857	)	$	413,014

At March 31, 2014 and December 31, 2013, investment securities carried at $255 million and $292 million, respectively, were pledged for trust deposits, public funds on deposit and as collateral for the derivative swap contracts.

The amortized cost, contractual maturities and estimated fair value of the Company’s investment securities at March 31, 2014 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	March 31, 2014
	Amortized		Estimated
	Cost		Fair Value
Securities available for sale:
Due in one year or less	$	11,353	$	11,499
Due from one to five years		130,651		136,363
Due from five to ten years		216,194		211,507
Due after ten years		5,000		4,779
Total securities available for sale		363,198		364,148
Securities held to maturity:
Due in one year or less		627		632
Due from one to five years		6,584		7,175
Due from five to ten years		15,154		15,010
Due after ten years		23,114		23,191
Total securities held to maturity		45,479		46,008
Total investment securities	$	408,677	$	410,156

The proceeds from sales of securities available for sale and the associated net realized gains are shown below for the periods indicated (in thousands):

9

	Three Months Ended March 31,
	2014		2013
Proceeds	$	-	$	10,475
Gross realized gains	$	-	$	359
Gross realized losses		-		-
Net realized gains	$	-	$	359

Information pertaining to securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
March 31, 2014	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	88,511	$	3,273	$	9,403	$	597	$	97,914	$	3,870
Collateralized mortgage obligations		-		-		8,634		689		8,634		689
Mortgage-backed securities		85,484		3,566		12,739		562		98,223		4,128
Corporate bonds		2,409		44		2,926		74		5,335		118
Total	$	176,404	$	6,883	$	33,702	$	1,922	$	210,106	$	8,805

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2013	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	86,590	$	7,726	$	13,505	$	1,494	$	100,095	$	9,220
Obligations of states and political subdivisions		3,932		87		-		-		3,932		87
Collateralized mortgage obligations		2,935		160		5,713		628		8,648		788
Mortgage-backed securities		84,869		4,850		12,637		734		97,506		5,584
Corporate bonds		8,681		178		-		-		8,681		178
Total	$	187,007	$	13,001	$	31,855	$	2,856	$	218,862	$	15,857

The Company’s management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available for sale or held to maturity are evaluated for OTTI under FASB ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.” In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company 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 OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost and its estimated fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in AOCI, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

10

The corporate bonds at unrealized losses for twelve months or longer in the table above carry investment grade ratings by all major credit rating agencies including both Moody’s and Standard  & Poor’s. The unrealized losses on these bonds were a result of the current interest rate environment and the corresponding shape of the yield curve.  The losses were not related to a deterioration of the quality of the issuer or any company-specific adverse events. All other securities at unrealized losses for twelve months or longer are issued or guaranteed by U.S. Government agencies or sponsored enterprises and the related unrealized losses resulted solely from the current interest rate environment and the corresponding shape of the yield curve.

Upon review of the considerations mentioned here, no OTTI was deemed to be warranted at March 31, 2014.

The Bank was a member of the Visa USA payment network and was issued Class B shares upon Visa’s initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its balance sheet at zero value.

During the second and third quarters of 2013, the Bank sold 100,000 Visa Class B shares to another Visa USA member financial institution at a gross pre-tax gain of approximately $7.8 million which was recorded in non-interest income in the Company’s statement of operations. In conjunction with the sale, the Company entered into derivative swap contracts with the purchaser of these Visa Class B shares which provide for settlements between the purchaser and the Company based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares.

Also during the second and third quarters of 2013, the Company recorded a total of $932 thousand in operating expenses and in other liabilities on the balance sheet, representing the estimate of the Company’s exposure to the settlement of the Visa litigation or the derivative liability. A relatively high degree of subjectivity was used in estimating the fair value of this derivative liability, but management believes that the estimate of its fair value was reasonable based on the available information. The present value of estimated future fees to be paid to the derivative counterparty, or carrying costs, calculated by reference to the market price of the Visa Class A shares at a fixed rate of interest are expensed as incurred. For the three months ended March 31, 2014, $59 thousand in such carrying costs was expensed.

Management believes that the estimate of the Company’s exposure to the Visa indemnification and fees associated with the derivatives are adequate based on current information. However, future developments in the litigation could require potentially significant changes to the estimate.

The Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $3 million at March 31, 2014, as collateral for the derivative swap contracts.

At March 31, 2014, the Company still owned 38,638 Visa Class B shares subsequent to the sales described here. Based on the existing transfer restriction and the uncertainty of the litigation, these Visa Class B shares continue to be carried on the Company’s balance sheet at zero value. Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

4. LOANS

At March 31, 2014 and December 31, 2013, net loans disaggregated by class consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Commercial and industrial	$	165,019		$	171,199
Commercial real estate		489,958			469,357
Multifamily		221,841			184,624
Real estate construction		14,940			6,565
Residential mortgages		173,347			169,552
Home equity		55,250			57,112
Consumer		9,463			10,439
Gross loans		1,129,818			1,068,848
Allowance for loan losses		(17,737	)		(17,263	)
Net loans at end of period	$	1,112,081		$	1,051,585

11

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands).

	Commercial and industrial			Commercial real estate			Multifamily		Real estate construction		Residential mortgages		Home equity			Consumer			Unallocated			Total
Three months ended March 31, 2014
Balance at beginning of period	$	2,615		$	6,626		$	2,159	$	88	$	2,463	$	745		$	241		$	2,326		$	17,263
Charge-offs		(115	)		-			-		-		-		-			(2	)		-			(117	)
Recoveries		293			12			-		-		4		27			5			-			341
(Credit) provision for loan losses		(312	)		657			481		129		160		(54	)		(58	)		(753	)		250
Balance at end of period	$	2,481		$	7,295		$	2,640	$	217	$	2,627	$	718		$	186		$	1,573		$	17,737
Three months ended March 31, 2013
Balance at beginning of period	$	6,181		$	5,999		$	150	$	141	$	1,576	$	907		$	189		$	2,638		$	17,781
Charge-offs		(348	)		-			-		-		-		-			(11	)		-			(359	)
Recoveries		299			72			-		-		1		1			39			-			412
(Credit) provision for loan losses		(787	)		(353	)		702		704		864		16			28			(1,174	)		-
Balance at end of period	$	5,345		$	5,718		$	852	$	845	$	2,441	$	924		$	245		$	1,464		$	17,834

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan, in full or in part, is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan 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 judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company 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 TDRs and classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a TDR to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. If a loan is impaired, a specific reserve may be recorded so that the loan is reported, net, at the present value of estimated future cash flows including balloon payments, if any, using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. TDRs are separately identified for impairment disclosures and 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 collateral-dependent, the loan is reported at the fair value of the collateral net of estimated costs to sell.  For TDRs that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses.

12

The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors.  The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over a rolling twelve quarter period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class.  These qualitative factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified: commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The Company recorded a $250 thousand provision for loan losses for the three months ended March 31, 2014 due to growth in the loan portfolio. The Company did not record a provision for loan losses in the first quarter of 2013.

For the three months ended March 31, 2014, the ending balance of the Company’s allowance for loan losses increased by $474 thousand when compared to December 31, 2013. During the first quarter of 2014, the Company increased its allowance for loan losses allocated to multifamily loans and commercial real estate loans (“CRE”) by $481 thousand and $669 thousand, respectively, while reducing the amount allocated to commercial and industrial loans (“C&I”) by $134 thousand.

The increases in the allowance for loan losses allocated to multifamily and CRE loans were primarily due to higher balances of unimpaired pass rated multifamily and CRE loans of $37 million and $23 million, respectively, versus December 31, 2013, coupled with increases of 0.01% and 0.08%, respectively, in the ASC 450-20 historical loss factors rates for such unimpaired pass rated loans.

The decrease in the allowance for loan losses allocated to C&I loans during the first quarter of 2014 reflected a $6 million decrease in the balance of unimpaired pass rated C&I loans, as well as a reduction of 0.02% in the ASC 450-20 historical loss factors rate on unimpaired pass rated C&I loans and a decrease of $9 thousand in specific reserves for C&I loans.

The ASC 450-20 loss factors rates incorporate a rolling twelve quarter look back period used in calculating historical losses for each loan segment. In an effort to more accurately represent the Company’s incurred and expected losses by individual loan segment, a twelve quarter period is used to improve the granularity of individual loan segment charge-off history and reduce the volatility associated with improperly weighting short-term trends in the calculation.

At March 31, 2014 and December 31, 2013, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at March 31, 2014 and December 31, 2013 disaggregated by class and impairment methodology (in thousands).

13

March 31, 2014	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	32	$	-	$	-	$	-	$	711	$	94	$	62	$	-	$	899
Ending balance: collectively evaluated for impairment		2,449		7,295		2,640		217		1,916		624		124		1,573		16,838
Ending balance	$	2,481	$	7,295	$	2,640	$	217	$	2,627	$	718	$	186	$	1,573	$	17,737
Loan balances:
Ending balance: individually evaluated for impairment	$	7,468	$	11,220	$	-	$	-	$	4,987	$	681	$	155	$	-	$	24,511
Ending balance: collectively evaluated for impairment		157,551		478,738		221,841		14,940		168,360		54,569		9,308		-		1,105,307
Ending balance	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	-	$	1,129,818

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	41	$	-	$	-	$	-	$	709	$	93	$	102	$	-	$	945
Ending balance: collectively evaluated for impairment		2,574		6,626		2,159		88		1,754		652		139		2,326		16,318
Ending balance	$	2,615	$	6,626	$	2,159	$	88	$	2,463	$	745	$	241	$	2,326	$	17,263
Loan balances:
Ending balance: individually evaluated for impairment	$	7,754	$	11,821	$	-	$	-	$	5,049	$	1,082	$	284	$	-	$	25,990
Ending balance: collectively evaluated for impairment		163,445		457,536		184,624		6,565		164,503		56,030		10,155		-		1,042,858
Ending balance	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	-	$	1,068,848

14

The following table presents the Company’s impaired loans disaggregated by class at March 31, 2014 and December 31, 2013 (in thousands).

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	7,314	$	7,314	$	-	$	6,711	$	6,711	$	-
Commercial real estate		11,638		11,220		-		12,239		11,821		-
Residential mortgages		2,258		2,130		-		2,305		2,176		-
Home equity		489		489		-		891		891		-
Consumer		25		9		-		25		9		-
Subtotal		21,724		21,162		-		22,171		21,608		-
With an allowance recorded:
Commercial and industrial		154		154		32		1,043		1,043		41
Residential mortgages		2,857		2,857		711		2,873		2,873		709
Home equity		328		192		94		328		191		93
Consumer		148		146		62		274		275		102
Subtotal		3,487		3,349		899		4,518		4,382		945
Total	$	25,211	$	24,511	$	899	$	26,689	$	25,990	$	945

The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the three months ended March 31, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for the periods presented.

	Three Months Ended March 31,
	2014				2013
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans
Commercial and industrial	$	7,567	$	107	$	10,947	$	57
Commercial real estate		11,558		99		11,090		69
Real estate construction		-		-		1,401		-
Residential mortgages		5,036		36		5,004		42
Home equity		771		17		751		3
Consumer		170		2		318		5
Total	$	25,102	$	261	$	29,511	$	176

TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $611 thousand and $586 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of March 31, 2014 and December 31, 2013, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of default by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.

A total of $250 thousand was committed to be advanced in connection with TDRs at March 31, 2014 and December 31, 2013, representing the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing interest. It is the Company’s policy to evaluate advances on such loans on a case by case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments, but may do so in certain circumstances.

15

Outstanding TDRs, disaggregated by class, at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

	March 31, 2014				December 31, 2013
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		42	$	6,133		43	$	6,022
Commercial real estate		8		5,937		7		6,022
Residential mortgages		16		3,858		17		3,891
Consumer		3		148		3		150
Total		69	$	16,076		70	$	16,085

The following presents, disaggregated by class, information regarding TDRs executed during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014						2013
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
New TDRs	Loans		Balance		Balance		Loans		Balance		Balance
Commercial and industrial		3	$	377	$	377		2	$	320	$	320
Residential mortgages		-		-		-		3		905		905
Consumer		-		-		-		1		17		17
Total		3	$	377	$	377		6	$	1,242	$	1,242

Presented below and disaggregated by class is information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance
Commercial real estate		2	$	1,596		-	$	-
Total		2	$	1,596		-	$	-

Not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate.

The following presents information regarding modifications and renewals executed during the three months ended March 31, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial real estate		3	$	1,422		11	$	19,703
Total		3	$	1,422		11	$	19,703

16

The following table presents a summary of non-performing assets for each period (in thousands):

	March 31, 2014		December 31, 2013
Non-accrual loans	$	14,059	$	15,183
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	14,059	$	15,183
TDRs accruing interest	$	10,631	$	10,647
TDRs non-accruing	$	5,445	$	5,438

At March 31, 2014 and December 31, 2013, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	March 31, 2014										December 31, 2013
	Non-accrual loans		% of Total			Total Loans		% of Total Loans			Non-accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	4,843		34.4	%	$	165,019		0.4	%	$	5,014		33.0	%	$	171,199		0.4	%
Commercial real estate		6,936		49.3			489,958		0.6			7,492		49.3			469,357		0.7
Multifamily		-		-			221,841		-			-		-			184,624		-
Real estate construction		-		-			14,940		-			-		-			6,565		-
Residential mortgages		1,840		13.1			173,347		0.2			1,897		12.5			169,552		0.2
Home equity		431		3.1			55,250		-			647		4.3			57,112		0.1
Consumer		9		0.1			9,463		-			133		0.9			10,439		-
Total	$	14,059		100.0	%	$	1,129,818		1.2	%	$	15,183		100.0	%	$	1,068,848		1.4	%

Additional interest income of approximately $494 thousand and $406 thousand would have been recorded during the three months ended March 31, 2014 and 2013, respectively, if non-accrual loans had performed in accordance with their original terms.

The following table presents the collateral value securing non-accrual loans for each period (in thousands):

	March 31, 2014				December 31, 2013
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	4,843	$	3,750	$	5,014	$	3,750
Commercial real estate		6,936		9,960		7,492		13,050
Residential mortgages		1,840		4,565		1,897		3,764
Home equity		431		975		647		3,072
Consumer		9		-		133		-
Total	$	14,059	$	19,250	$	15,183	$	23,636
(1) Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

At March 31, 2014 and December 31, 2013, past due loans disaggregated by class were as follows (in thousands).

17

	Past Due
March 31, 2014	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	159		$	83	$	4,843		$	5,085		$	159,934		$	165,019
Commercial real estate		979			-		6,936			7,915			482,043			489,958
Multifamily		-			-		-			-			221,841			221,841
Real estate construction		-			-		-			-			14,940			14,940
Residential mortgages		1,636			-		1,840			3,476			169,871			173,347
Home equity		807			24		431			1,262			53,988			55,250
Consumer		55			9		9			73			9,390			9,463
Total	$	3,636		$	116	$	14,059		$	17,811		$	1,112,007		$	1,129,818
% of Total Loans		0.3	%		-		1.3	%		1.6	%		98.4	%		100.0	%

	Past Due
December 31, 2013	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	13		$	-	$	5,014		$	5,027		$	166,172		$	171,199
Commercial real estate		631			-		7,492			8,123			461,234			469,357
Multifamily		-			-		-			-			184,624			184,624
Real estate construction		-			-		-			-			6,565			6,565
Residential mortgages		1,535			339		1,897			3,771			165,781			169,552
Home equity		795			100		647			1,542			55,570			57,112
Consumer		75			-		133			208			10,231			10,439
Total	$	3,049		$	439	$	15,183		$	18,671		$	1,050,177		$	1,068,848
% of Total Loans		0.3	%		-		1.4	%		1.7	%		98.3	%		100.0	%

The Bank utilizes an eight-grade risk-rating system for commercial and industrial loans, commercial real estate and construction loans. Loans in risk grades 1- 4 are considered pass loans. The Bank’s risk grades are as follows:

Risk Grade 1, Excellent - Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2, Good -  Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3, Satisfactory - Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

· At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.

· At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

· The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

· During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

18

Risk Grade 4, Satisfactory/Monitored - Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5, Special Mention - Loans which possess potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential not defined impairments to the primary source of repayment.

Risk Grade 6, Substandard - One or more of the following characteristics may be exhibited in loans classified Substandard:

· Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

· Loans are inadequately protected by the current net worth and paying capacity of the obligor.

· The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

· Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

· Unusual courses of action are needed to maintain a high probability of repayment.

· The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

· The lender is forced into a subordinated or unsecured position due to flaws in documentation.

· Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

· The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

· There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7, Doubtful - One or more of the following characteristics may be present in loans classified Doubtful:

· Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

· The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

· The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8, Loss - Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at March 31, 2014 and December 31, 2013 (in thousands).

19

March 31, 2014	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	152,091	$	468,449	$	221,841	$	14,940	$	168,755	$	54,819	$	9,306	$	1,090,201		96.5	%
Special mention		3,563		2,786		-		-		-		-		-		6,349		0.6
Substandard		9,365		18,723		-		-		4,592		431		157		33,268		2.9
Total	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	1,129,818		100.0	%

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	158,536	$	445,302	$	184,624	$	6,565	$	164,559	$	56,379	$	10,156	$	1,026,121		96.0	%
Special mention		2,934		2,817		-		-		-		-		-		5,751		0.5
Substandard		9,729		21,238		-		-		4,993		733		283		36,976		3.5
Total	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	1,068,848		100.0	%

The Bank annually reviews the ratings on all commercial and industrial, commercial real estate and real estate construction loans greater than $1 million. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these loan classes. Management uses the results of these reviews as part of its ongoing review process.

5. EMPLOYEE BENEFITS

Retirement Plan- The Company’s retirement plan is noncontributory and covers substantially all eligible employees. The plan conforms to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the Pension Protection Act of 2006, which requires certain funding rules for defined benefit plans. The Company’s policy is to accrue for all pension costs and to fund the maximum amount allowable for tax purposes. Actuarial gains and losses that arise from changes in assumptions concerning future events are amortized over a period that reflects the long-term nature of pension expense used in estimating pension costs.

The Company accounts for its retirement plan in accordance with ASC 715, “Compensation – Retirement Benefits” and ASC 960, “Plan Accounting – Defined Benefit Pension Plans,” which require an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan on its balance sheet; recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligation as of the date of fiscal year-end statement of financial position (with limited exceptions); and disclose in the notes to financial statements additional information about certain effects of net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset and obligation. Plan assets and benefit obligations shall be measured as of the date of its statement of financial position and in determining the amount of net periodic benefit cost. An employer is required to use the same date for the measurement of plan assets as for the statement of condition.

On December 31, 2012, certain provisions of the Company’s retirement plan were changed which affected all participants in this plan and froze the participation of new entrants into the pension plan for all remaining employees in 2012. These changes froze the plan such that no additional pension benefits would accumulate.

20

The following table summarizes the net periodic pension credit (in thousands):

	Three Months Ended March 31,
	2014			2013
Interest cost	$	540		$	498
Expected return on plan assets		(637	)		(575	)
Net amortization		6			61
Net periodic pension credit	$	(91	)	$	(16	)

In December 2012, the Company made an annual minimum contribution of $1 million for the plan year ended September 30, 2013. There was no additional minimum required contribution for the plan year ended September 30, 2013. The Company does not expect to contribute to its pension plan in 2014.

Post-Retirement Benefits other than Pension - The Company formerly provided life insurance benefits to employees meeting eligibility requirements. Employees hired after December 31, 1997 were not eligible for retiree life insurance. No other welfare benefits were provided. In the second quarter of 2013, the Company terminated all post-retirement life insurance benefits and recorded a non-recurring gain of $1.7 million as a credit to employee compensation and benefits expense in the Company’s consolidated statement of operations.

6. STOCK-BASED COMPENSATION

Under the terms of the Company’s stock option plans adopted in 1999 and 2009, options have been granted to key employees and directors to purchase shares of the Company’s stock. Under the 2009 Stock Incentive Plan (“the Plan”), a total of 500,000 shares of the Company’s common stock were reserved for issuance, of which 268,499 shares remain for possible issuance at March 31, 2014. There are no remaining shares reserved for issuance under the 1999 Stock Option Plan. Options are awarded by the Compensation Committee of the Board of Directors. Both plans provide that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less.

No options were granted during the first three months of 2014. Options granted in 2013 and 2012 are exercisable over a three-year period commencing one year from the date of grant at a rate of one third per year. Options granted in 2011 are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year. No options were exercised during the first three months of 2014 and 2013.

Both plans provide for but do not require the grant of stock appreciation rights (“SARs”) that the holder may exercise instead of the underlying option. At March 31, 2014, there were 6,000 SARs outstanding related to options granted before 2011. The SARs had no intrinsic value at March 31, 2014. When the SAR is exercised, the underlying option is canceled. The optionee receives shares of common stock or cash with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise of SARs is treated as the exercise of the underlying option.

In 2011 the Company granted an award of 30,000 non-qualified stock options at an exercise price of $10.79 per share to its President and Chief Executive Officer as a material inducement to employment with the Company. The non-qualified options were not issued as part of any of the Company’s registered stock-based compensation plans. The options are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year.

A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding, January 1, 2014		291,000		$	16.18
Granted		-			-
Exercised		-			-
Forfeited or expired		(9,166	)	$	20.27
Outstanding, March 31, 2014		281,834		$	16.04

21

The following summarizes shares subject to purchase from stock options outstanding and exercisable as of March 31, 2014:

		Outstanding					Exercisable
				Weighted-Average					Weighted-Average
Range of				Remaining	Weighted-Average				Remaining	Weighted-Average
Exercise Prices		Shares		Contractual Life	Exercise Price		Shares		Contractual Life	Exercise Price
$	10.00 - $14.00		140,000	7.9 years	$	12.01		50,003	8.0 years	$	12.81
$	14.01 - $20.00		114,834	9.2 years	$	17.24		11,668	8.8 years	$	14.47
$	20.01 - $30.00		5,000	4.8 years	$	28.30		5,000	4.8 years	$	28.30
$	30.01 - $40.00		22,000	2.3 years	$	32.69		22,000	2.3 years	$	32.69
			281,834	8.0 years	$	16.04		88,671	6.5 years	$	18.83

The Company accounts for stock-based compensation on a modified prospective basis with the fair value of grants of employee stock options recognized in the financial statements. Compensation expense related to stock-based compensation amounted to $165 thousand and $82 thousand for the three months ended March 31, 2014 and 2013, respectively. The remaining unrecognized compensation cost of approximately $728 thousand at March 31, 2014 will be expensed over the remaining weighted average vesting period of approximately 2.3 years.

7. INCOME TAXES

The deferred tax assets and liabilities are netted and presented in a single amount which is included in deferred taxes in the accompanying consolidated statements of condition. The realization of deferred tax assets (“DTAs”) (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carry back losses to available tax years. In assessing the need for a valuation allowance, the Company considers positive and negative evidence, including taxable income in carryback years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies.  The Company applied a carryback of the net operating losses for 2012, which resulted in $5 million included in income tax receivable in the 2012 consolidated statement of condition, and which was received in November 2013. At March 31, 2014 the Company had net operating loss carryforwards of approximately $3.3 million and $20.0 million for Federal and New York State (“NYS”) income tax purposes, respectively, which may be applied against future taxable income. The Company has a full valuation allowance of $464 thousand, tax effected, on the NYS net operating loss due to the Company’s significant tax-exempt investment income in NYS. The valuation allowance may be reversed to income in future periods to the extent that the related DTAs are realized or when the Company returns to consistent, taxable earnings in NYS. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining DTAs. Both the Federal and NYS unused net operating loss carryforwards are expected to expire in varying amounts through the year 2032. It is anticipated that the Federal carryforward will be utilized prior to its expiration based on the Company’s future years’ projected earnings.

On March 31, 2014, Governor Andrew Cuomo signed legislation to implement the New York State fiscal plan for 2014 – 2015.   This legislation encompasses significant changes to New York’s bank tax regime, most notably by merging the bank tax into the general corporate tax law.  In addition, the new budget law simplifies the code by setting forth a single apportionment factor.  The corporate tax rate will be lowered from 7.1% to 6.5% in 2016.  Furthermore, for community banks (all banks and thrifts with $8 billion or less in assets) there is a subtraction modification for a portion of interest earned on all residential and small business loans with a principal amount of up to $5 million made to New York borrowers. All banks in this category that have a REIT on April 1, 2014, and in the applicable tax year would instead get a deduction based on their REIT's dividends paid deduction. The Company had a qualifying REIT on April 1, 2014 and is less than $8 billion in assets. If a change in a tax law or rate occurs, any existing deferred tax liability or asset must be adjusted. The effect is reflected in operations in the period of the enactment of the change in the tax law or rate.  As such, the Company made an adjustment as of March 31, 2014 to increase its DTAs resulting in a net income tax credit of $462 thousand in the first quarter of 2014.

Offsetting the net income tax credit, was a $454 thousand income tax expense related to an adjustment of the Company’s stock based compensation included in the DTAs primarily for stock options that had expired or been forfeited by former employees. The adjustment relates primarily to prior periods, but management has determined that it is not material, and as such, has included it in the current quarter’s results.

The Company had unrecognized tax benefits including interest of approximately $34 thousand for all periods presented.

The Company recognizes interest and penalties accrued relating to unrecognized tax benefits in income tax expense. There is no accrued interest relating to uncertain tax positions as of March 31, 2014. The Company files income tax returns in the U.S. federal jurisdiction and in New York State. Federal returns are subject to audits by tax authorities and the Company is currently under an audit for the tax years 2010 through 2012. The Company does not expect a significant change in income taxes as a result of this audit.  In 2012, New York State audited the Company and Suffolk Greenway, Inc., a subsidiary of the Bank, for the years 2008, 2009 and 2010 and there was no change as a result of these audits. It is not anticipated that the unrecognized tax benefits will significantly change over the next 12 months.

22

8. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and tier 1 capital, as defined in the federal banking regulations, to risk-weighted assets and of tier 1 capital to adjusted average assets (leverage). Management believes, as of March 31, 2014, that the Company and the Bank met all such capital adequacy requirements to which it is subject.

The Bank’s capital amounts (in thousands) and ratios are as follows:

						Minimum					Minimum to be Well
						for capital					Capitalized under prompt
	Actual capital ratios					adequacy					corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2014
Total capital to risk-weighted assets	$	188,551		14.73	%	$	102,394		8.00	%	$	127,992		10.00	%
Tier 1 capital to risk-weighted assets		172,527		13.48	%		51,197		4.00	%		76,795		6.00	%
Tier 1 capital to adjusted average assets (leverage)		172,527		10.20	%		67,629		4.00	%		84,536		5.00	%
December 31, 2013
Total capital to risk-weighted assets	$	181,952		14.92	%	$	97,542		8.00	%	$	121,927		10.00	%
Tier 1 capital to risk-weighted assets		166,683		13.67	%		48,771		4.00	%		73,156		6.00	%
Tier 1 capital to adjusted average assets (leverage)		166,683		9.74	%		68,454		4.00	%		85,567		5.00	%

The Company’s tier 1 leverage, tier 1 risk-based and total risk-based capital ratios were 10.27%, 13.57% and 14.82%, respectively, at March 31, 2014 versus 9.81%, 13.77% and 15.02%, respectively, at December 31, 2013.

The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay dividends in an amount greater than its undivided profits or declare any dividends if such declaration would leave the bank inadequately capitalized. Also, the ability of the Bank to declare dividends will depend on the prior approval of the Federal Reserve Bank (“FRB”).

In July 2013, the OCC approved new rules on regulatory capital applicable to national banks, implementing Basel III. Most banking organizations are required to apply the new capital rules on January 1, 2015. The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. They also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Based on our capital levels and balance sheet composition at March 31, 2014, we believe implementation of the new rules will not have a material impact on our capital needs.

9. FAIR VALUE

Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability in an exchange. The definition of fair value includes the exchange price which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal market for the asset or liability. Market participant assumptions include assumptions about risk, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique, as well as the effect of credit risk on the fair value of liabilities. The Company uses three levels of the fair value inputs to measure assets, as described below.

23

Basis of Fair Value Measurement:

Level 1 – Valuations based on quoted prices in active markets for identical investments.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 inputs include: (i) quoted prices for similar investments in active markets, (ii) quoted prices for identical investments traded in non-active markets (i.e., dealer or broker markets) and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data for substantially the full term of the investment.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities. Such instruments are generally classified within Level 1 and Level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include U.S. Government agency securities, state and municipal obligations, MBS, CMOs and corporate bonds. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The types of instruments valued based on significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability are generally classified within Level 3 of the fair value hierarchy.

ASC 820, “Fair Value Measurements and Disclosures,” presents requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. ASC 820 provides additional guidance in determining fair values when the volume and level of activity for the asset or liability have significantly decreased, particularly when there is no active market or where the price inputs being used represent distressed sales. It also provides guidelines for making fair value measurements more consistent with principles, reaffirming the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets become inactive.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in thousands).

	Level in	March 31, 2014				December 31, 2013
	Fair Value	Carrying		Estimated		Carrying		Estimated
	Heirarchy	Amount		Fair Value		Amount		Fair Value
Cash and due from banks	Level 1	$	86,165	$	86,165	$	131,352	$	131,352
Cash equivalents	Level 2		1,038		1,038		1,000		1,000
Interest-bearing time deposits in other banks	Level 2		10,000		10,000		10,000		10,000
Federal Reserve Bank, Federal Home Loan Bank and other stock	N/A		2,863		N/A		2,863		N/A
Investment securities held to maturity	Level 2		45,479		46,008		11,666		12,234
Investment securities available for sale	Level 2		364,148		364,148		400,780		400,780
Loans held for sale	Level 2		190		190		175		175
Loans, net of allowance	Level 2, 3 (1)		1,112,081		1,112,942		1,051,585		1,056,279
Bank owned life insurance	Level 3		44,109		44,109		38,755		38,755
Accrued interest and loan fees receivable	Level 2		6,322		6,322		5,441		5,441
Non-maturity deposits	Level 2		1,295,095		1,295,095		1,284,982		1,284,982
Time deposits	Level 2		228,339		229,064		225,079		225,946
Accrued interest payable	Level 2		160		160		160		160

(1) Impaired loans are generally classified within Level 3 of the fair value hierarchy.

24

Fair value estimates are made at a specific point in time and may be based on judgments regarding losses expected in the future, risk, and other factors that are subjective in nature. The methods and assumptions used to produce the fair value estimates follow.

The Company records investments available for sale and mortgage servicing rights at fair value. For cash and due from banks, cash equivalents, interest-bearing time deposits in other banks, bank owned life insurance, accrued interest and loan fees receivable, non-maturity deposits and accrued interest payable, the carrying amount is a reasonable estimate of fair value. Time deposits are valued using a replacement cost of funds approach.

Fair values are estimated for portfolios of loans with similar characteristics. The fair value of performing loans was calculated by discounting projected cash flows through their estimated maturity using market discount rates that reflect the general credit and interest rate characteristics of the loan category. The maturity horizon is based on the Bank’s history of repayments for each type of loan and an estimate of the effect of current economic conditions. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using availablemarket information and specific borrower information.

OREO properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less estimated costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as non-recurring Level 3.

Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral less estimated costs to sell or the present value of expected future cash flows. Those measured using the loan’s observable market price or the fair value of collateral are recorded at fair value. For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, the Company establishes a specific reserve and reports the loan as non-recurring Level 3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

The fair value of loans held for sale is based on observable inputs in the secondary market.

The fair value of commitments to extend credit was estimated by either discounting cash flows or using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counter-parties. The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements. The fees charged for the commitments were not material in amount.

During the second and third quarters of 2013, the Company entered into derivative swap contracts with the purchaser of its Visa Class B shares. The fair value of these derivatives is measured using an internal model that includes the use of probability weighted scenarios for estimates of Visa’s aggregate exposure to the litigation matters, with consideration of amounts funded by Visa into its escrow account for this litigation. As a result, the Company estimates a fair value for these derivatives at 12% of the net sale proceeds from the Company’s sale of the related Visa Class B shares. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified as Level 3 within the valuation hierarchy. (See also Note 3. Investment Securities contained herein.)

25

The following presents fair value measurements on a recurring basis at March 31, 2014 and December 31, 2013 (in thousands):

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	March 31, 2014		(Level 2)		(Level 3)
U.S. Government agency securities	$	66,761	$	66,761	$	-
Corporate bonds		15,684		15,684		-
Collateralized mortgage obligations		27,299		27,299		-
Mortgage-backed securities		98,481		98,481		-
Obligations of states and political subdivisions		155,923		155,923		-
Loans held for sale		190		190		-
Mortgage servicing rights		2,179		-		2,179
Total	$	366,517	$	364,338	$	2,179
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	December 31, 2013		(Level 2)		(Level 3)
U.S. Government agency securities	$	100,095	$	100,095	$	-
Corporate bonds		15,651		15,651		-
Collateralized mortgage obligations		30,104		30,104		-
Mortgage-backed securities		97,767		97,767		-
Obligations of states and political subdivisions		157,163		157,163		-
Loans held for sale		175		175		-
Mortgage servicing rights		2,163		-		2,163
Total	$	403,118	$	400,955	$	2,163
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

Reconciliations for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follow (in thousands).

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31,
	2014				2013
	Assets		Liabilities		Assets
	Mortgage Servicing Rights		Derivatives		Mortgage Servicing Rights
Balance, January 1	$	2,163	$	932	$	1,856
Net increase		16		-		183
Balance, March 31	$	2,179	$	932	$	2,039

26

Assets measured at fair value on a non-recurring basis are as follows (in thousands):

Assets:	March 31, 2014		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	15,510	$	15,510
Total	$	15,510	$	15,510

Assets:	December 31, 2013		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	16,942	$	16,942
Total	$	16,942	$	16,942

10. LEGAL PROCEEDINGS

Certain lawsuits and claims arising in the ordinary course of business have been filed or are pending against us or our affiliates. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and expected settlements when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.

To the extent we believe any potential loss relating to such lawsuits and claims may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established accrual. We also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where reasonably practicable, we will provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.

Based upon information available to us and our review of lawsuits and claims filed or pending against us to date, we have not recognized a material accrual liability for these matters, nor do we currently expect it is reasonably possible that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.

27

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement Pursuant to the Private Securities Litigation Reform Act of 1995 - Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These can include remarks about the Company, the banking industry, the economy in general, expectations of the business environment in which the Company operates, projections of future performance, and potential future credit experience. These remarks are based upon current management expectations, and may, therefore, involve risks and uncertainties that cannot be predicted or quantified and are beyond the Company’s control and are subject to a variety of uncertainties that could cause future results to vary materially from the Company’s historical performance, or from current expectations. These remarks may be identified by such forward-looking statements as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Factors that could affect the Company include particularly, but are not limited to: increased capital requirements mandated by the Company’s regulators; the Company’s ability to raise capital; competitive factors, including price competition; changes in interest rates; increases or decreases in retail and commercial economic activity in the Company’s market area; variations in the ability and propensity of consumers and businesses to borrow, repay, or deposit money, or to use other banking and financial services; results of regulatory examinations or changes in law, regulations or regulatory practices; the Company’s ability to attract and retain key management and staff; any failure by the Company to maintain effective internal control over financial reporting; larger-than-expected losses from the sale of assets; the potential that net charge-offs are higher than expected or for further increases in our provision for loan losses; and a failure by the Company to meet the deadlines under SEC rules for filing its periodic reports (or any permitted extension thereof). Further, it could take the Company longer than anticipated to implement its strategic plans to increase revenue and manage non-interest expense, or it may not be possible to implement those plans at all. Finally, new and unanticipated legislation, regulation, or accounting standards may require the Company to change its practices in ways that materially change the results of operations. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. For more information, see the risk factors described in the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

Non-GAAP Disclosure - This discussion includes a non-GAAP financial measure of the Company’s tangible common equity (“TCE”) ratio. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. The Company believes that this non-GAAP financial measure provides both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other financial institutions.

Executive Summary - The Company is a one-bank holding company incorporated in 1985. The Company operates as the parent for its wholly owned subsidiary, the Bank, a national bank founded in 1890. The income of the Company is primarily derived through the operations of the Bank and the REIT.

The Bank is a full-service bank serving the needs of its local residents through 25 branches, in Nassau and Suffolk Counties, New York and loan production offices in Garden City and Melville, New York. The Bank offers a full line of domestic commercial and retail banking services and wealth management services. The Bank’s primary lending area includes all of Suffolk County and the adjacent markets of Nassau County and New York City. The Bank makes commercial real estate floating and fixed rate loans, commercial and industrial loans to manufacturers, wholesalers, distributors, developers/contractors and retailers and agricultural loans. The Bank also makes loans secured by residential mortgages, and both fixed and floating rate second mortgage loans with a variety of plans for repayment. Real estate construction loans are also offered.

In order to expand the Company geographically into western Suffolk and Nassau Counties and to diversify the lending business of the Company, loan production offices were opened in Garden City and Melville in 2013 and 2012, respectively. As part of our strategy to move westward, the loan production office in Garden City serves the major business markets in central and western Long Island. Seasoned banking professionals have joined the Company to augment both interest and fee income through the origination of commercial and industrial loans, the generation of high quality multifamily and jumbo mortgages to be retained in the portfolio and conforming mortgages for sale in secondary markets. The Bank finances most of its activities with deposits, including demand, saving, N.O.W. and money market deposits, as well as time deposits. It may also rely on other sources of funds, including inter-bank overnight loans. The Company’s chief competition includes local banks within its market area, as well as New York City money center banks and regional banks.

28

Financial Performance Summary

As of or for the quarters ended March 31, 2014 and 2013

(dollars in thousands, except per share data)

							Over/
	Quarters ended March 31,						(under)
	2014			2013			2013
Revenue (1)	$	18,390		$	16,993			8.2	%
Operating expenses	$	13,309		$	13,801			(3.6	%)
Provision for loan losses	$	250		$	-			N/	M	(2)
Net income	$	3,720		$	2,709			37.3	%
Net income per common share - diluted	$	0.32		$	0.23			39.1	%
Return on average assets		0.89	%		0.69	%		20		bp
Return on average stockholders' equity		8.81	%		6.69	%		212		bp
Tier 1 leverage ratio		10.27	%		9.83	%		44		bp
Tier 1 risk-based capital ratio		13.57	%		16.37	%		(280	)	bp
Total risk-based capital ratio		14.82	%		17.63	%		(281	)	bp
Tangible common equity ratio (non-GAAP)		9.99	%		10.23	%		(24	)	bp

bp - denotes basis points; 100 bp equals 1%.

(1) Represents net interest income plus total non-interest income.

(2) N/M - denotes % variance not meaningful for statistical purposes.

At March 31, 2014, the Company, on a consolidated basis, had total assets of $1.7 billion, total deposits of $1.5 billion and stockholders’ equity of $174 million. The Company recorded net income of $3.7 million, or $0.32 per diluted common share, for the first quarter of 2014, compared to $2.7 million, or $0.23 per diluted common share, for the same period in 2013. The 37.3% improvement in first quarter 2014 earnings versus 2013 resulted from several factors, most notably a $1.6 million increase in net interest income in 2014 coupled with a reduction in total operating expenses of $492 thousand. Partially offsetting these positive factors was a $250 thousand increase in the provision for loan losses in the first quarter of 2014 versus the comparable 2013 period, a reduction in non-interest income of $225 thousand and an increase in the Company’s effective tax rate in 2014.

The Company’s return on average assets and return on average common stockholders’ equity were 0.89% and 8.81%, respectively, in the first quarter of 2014 versus 0.69% and 6.69%, respectively, in the first quarter of 2013.

The Company experienced an overall increase in the total loan portfolio of $61 million, from $1.07 billion at December 31, 2013 to $1.13 billion at March 31, 2014, a 5.7% quarterly growth rate. The geographic and product diversification strategies implemented in our lending businesses are working well. Each of our lending businesses, commercial, multifamily and residential, are contributing to this momentum. The Company is increasing market share by preserving our eastern Suffolk lending franchise while simultaneously expanding west.

As part of the Bank’s desire to diversify its portfolio on both a product and geographic basis, an initiative aimed at the development of a multifamily mortgage portfolio has given the Bank more exposure to a favorable geographic area that had previously been a minimal segment of the portfolio. This effort is primarily concentrated in the five boroughs of New York City and targets rent-controlled or rent-stabilized buildings. It has been well-established that the incidence of loss in multifamily loan transactions is lower than almost all other loan categories as their performance over time has shown limited defaults, even during the worst period of the recent recession. The property value for these buildings is directly attributable to the cash flow from rents and the rate of return investors need on their invested capital. Rental rates are a function of demand for apartments and the vacancy rates in New York City (where the majority of the Bank’s multifamily loans are located) are currently at historical lows. Average rental rates for an apartment in Manhattan remain above $3,000/month. New apartments are coming to market but are being absorbed rapidly.

The Bank has dedicated credit analysts/underwriters and a portfolio manager for the multifamily product line that have extensive experience in this type of lending. The portfolio of multifamily loans continues to perform satisfactorily with no delinquencies reported and risk ratings solidly in the pass range. At March 31, 2014, the Company’s multifamily loans totaled $222 million, and represented 19.6% of the Company’s total loans, compared to $185 million or 17.3% at December 31, 2013.

The Company’s core deposit franchise continues to be among the best in the region. Core deposits, consisting of demand, N.O.W., saving and money market deposits, totaled $1.3 billion at March 31, 2014, representing 85% of total deposits at that date. Demand deposits totaled $633 million at March 31, 2014 and represented 42% of total deposits at that date. The deposit product mix continues to be an important strength of the Company and resulted in an average cost of funds of 17 basis points during the first quarter of 2014.

29

On the expense side, management continues to work diligently to balance the increased investments needed to grow the lending businesses with offsetting operating expense reductions in other areas, and believe we will see continued improvement as we move forward. Several of the major projects previously announced on the expense reduction side are performing better than expected. During 2013 we announced the phased-in closing of six branches in Suffolk County that, once fully implemented, will reduce annual operating expenses by an estimated $2.4 million. Further, the assumptions used in deciding to close these branches relating to deposit runoff and expense savings are proving to be conservative.

Critical Accounting Policies, Judgments and Estimates - The Company’s accounting and reporting policies conform to U.S. GAAP and general practices within the banking industry. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Allowance forLoan Losses - In management’s opinion, one of the most critical accounting policies impacting the Company’s financial statements is the evaluation of the allowance for loan losses. The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and recoveries, and decreased by loan charge-offs. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance for loan losses. This happens when the loan is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by a continuous analysis of the loan portfolio. Such analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other relevant factors. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. In assessing the adequacy of the allowance for loan losses, management reviews the loan portfolio by separate classes that have similar risk and collateral characteristics. These classes are commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loans, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every impaired loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-impaired loans and is based on historical loss experience for each loan class from a rolling twelve quarter period and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the estimated collectability of the loan class not captured by historical loss data.  These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. There are no formulas for translating them into a specific basis point adjustment of the Company’s historical loss rate for a pool of loans having similar risk characteristics. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. TDRs are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

DeferredTaxAssetsandLiabilities – Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities, computed using enacted tax rates. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.  The realization of deferred tax assets (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carryback losses to available tax years. In assessing the need for a valuation allowance, the Company considers all relevant positive and negative evidence, including taxable income in carryback years, scheduled reversals of deferred tax liabilities, expected future taxable income and available tax planning strategies.

30

OTTIofInvestment Securities – Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the statement of operations and 2) OTTI related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Material Changes in Financial Condition - Total assets of the Company were $1.7 billion at March 31, 2014. When compared to December 31, 2013, total assets increased by $16 million. This change largely reflects an increase in loans of $61 million, partially offset by a decline in cash and cash equivalents of $45 million as we continue our redeployment of lower-yielding overnight interest-bearing deposits into higher yielding assets. Total loans were $1.13 billion at March 31, 2014 compared to $1.07 billion at December 31, 2013. The increase in the loan portfolio largely reflects growth of multifamily and commercial real estate loans of $37 million and $21 million, respectively, during the first quarter of 2014.

Total investment securities were $410 million at March 31, 2014 and $412 million at December 31, 2013. The decrease in the investment portfolio largely reflects principal paydowns of CMOs and MBS of U.S. Government-sponsored enterprises totaling $4 million and calls of U.S. Government agency securities of $5 million during the first quarter of 2014. These were partially offset by purchases of municipal obligations totaling $3 million. A reduction in interest rates in 2014 had a positive impact of $7 million on the fair value of the Company’s available for sale investment portfolio.

At March 31, 2014, total deposits were $1.5 billion, an increase of $13 million when compared to December 31, 2013. This increase was primarily due to higher balances of saving, N.O.W. and money market deposits of $5 million coupled with higher demand deposit balances of $5 million. Higher-cost time certificates of $100,000 or more increased $6 million, while other time deposits decreased $3 million. Core deposit balances, which consist of demand, saving, N.O.W. and money market deposits, represented 85% of total deposits at March 31, 2014 and December 31, 2013. Demand deposit balances represented 42% of total deposits at March 31, 2014 and December 31, 2013. The Company had no borrowed funds outstanding at either March 31, 2014 or December 31, 2013.

Liquidity and Capital Resources - Liquidity management is defined as both the Company’s and the Bank’s ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments and the marketability of securities available for sale. The Company may also leave excess reserve balances at the FRB if the rate being paid is higher than would be available from other short-term investments. Liquid assets, consisting of federal funds sold, securities available for sale and balances at the FRB, decreased to $397 million at March 31, 2014 compared to $462 million at December 31, 2013 as the Company continued to redeploy its lower-yielding cash balances into loans. These liquid assets may include assets that have been pledged against municipal deposits or short-term borrowings. In addition, the Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $2.6 million at March 31, 2014, as collateral for the derivative swap contracts. Liquidity is also provided by the maintenance of a base of core deposits, maturing short-term assets including cash and due from banks, the ability to sell or pledge marketable assets and access to lines of credit.

Liquidity is continuously monitored, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates.

The Company’s primary sources of funds are cash provided by deposits and borrowings, proceeds from maturities and sales of securities available for sale and cash provided by operating activities. At March 31, 2014, total deposits were $1.5 billion, an increase of $13 million when compared to December 31, 2013. Of the total time deposits at March 31, 2014, $187 million are scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits with comparable deposit products. At March 31, 2014 and December 31, 2013, there were no borrowings outstanding. For the three months ended March 31, 2014 and 2013, proceeds from sales and maturities of securities available for sale totaled $6 million and $17 million, respectively.

31

The Company’s primary uses of funds are for the origination of loans and the purchase of investment securities. For the three months ended March 31, 2014, the Company had net loan originations for portfolio of $61 million compared to $48 million for the same period in 2013. The Company purchased investment securities totaling $3 million and $49 million during the three months ended March 31, 2014 and 2013, respectively.

The Bank’s Asset/Liability and Funds Management Policy establishes specific policies and operating procedures governing liquidity levels to assist management in developing plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. At March 31, 2014, access to approximately $353 million in Federal Home Loan Bank (“FHLB”) lines of credit for overnight or term borrowings with maturities of up to thirty years was available. At March 31, 2014, approximately $60 million and $10 million in unsecured and secured lines of credit, respectively, extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. At March 31, 2014, no borrowings were outstanding under lines of credit with the FHLB or correspondent banks.

The Bank also has the ability to access the brokered deposit market. Deposits gathered through the Certificate of Deposit Account Registry Service (“CDARS”) are considered for regulatory purposes to be brokered deposits. At March 31, 2014, the Bank had $3 million in CDARS deposits outstanding.

The Company strives to maintain an efficient level of capital, commensurate with its risk profile, on which a competitive rate of return to stockholders will be realized over both the short and long term. Capital is managed to enhance stockholder value while providing flexibility for management to act opportunistically in a changing marketplace. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines. Total stockholders’ equity amounted to $174 million at March 31, 2014 and $167 million at December 31, 2013. The increase in stockholders’ equity versus December 31, 2013 was due to a combination of net income recorded during the first quarter of 2014 coupled with a $3 million decrease in accumulated other comprehensive loss, net of tax. The decrease in accumulated other comprehensive loss at March 31, 2014 resulted almost solely from the positive impact of a reduction in interest rates in 2014 on the value of the Company’s available for sale investment portfolio.

The Company and the Bank are subject to regulatory capital requirements. The Company’s tier 1 leverage, tier 1 risk-based and total risk-based capital ratios were 10.27%, 13.57% and 14.82%, respectively, at March 31, 2014. The Company’s capital ratios exceeded all regulatory requirements at March 31, 2014. The Bank’s tier 1 leverage, tier 1 risk-based and total risk-based capital ratios were 10.20%, 13.48% and 14.73%, respectively, at March 31, 2014. Each of these ratios exceeds the regulatory guidelines for a well-capitalized institution, the highest regulatory capital category.

The Company did not repurchase any shares of its common stock during the first quarter of 2014. Repurchase of shares will occur only if management believes that the purchase will be at prices that are accretive to earnings per share and is the most efficient use of the Company’s capital.

The Company’s tangible common equity ratio was 9.99% at March 31, 2014 compared to 9.68% at December 31, 2013 and 10.23% at March 31, 2013. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP or as required by bank regulatory agencies. Set forth below are the reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets at March 31, 2014 (in thousands):

Total stockholders' equity	$	174,171
Less: intangible assets		(2,994	)
Tangible common equity	$	171,177
Total assets	$	1,715,816
Less: intangible assets		(2,994	)
Tangible assets	$	1,712,822

32

All dividends must conform to applicable statutory requirements. The Company’s ability to pay dividends depends on the Bank’s ability to pay dividends. Under 12 USC 56-9, a national bank may not pay a dividend on its common stock if the dividend would exceed net undivided profits then on hand. Further, under 12 USC 60, a national bank must obtain prior approval from the OCC to pay dividends on either common or preferred stock that would exceed the bank’s net profits for the current year combined with retained net profits (net profits minus dividends paid during that period) of the prior two years. The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay dividends in an amount greater than its undivided profits or declare any dividends if such declaration would leave the bank inadequately capitalized. Also, the ability of the Bank to declare dividends will depend on the prior approval of the FRB.

Off-Balance Sheet Arrangements - The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and documentary letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit 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 many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At March 31, 2014 and December 31, 2013, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $114 million and $113 million, respectively.

Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most letters of credit expire within one year. At March 31, 2014 and December 31, 2013, letters of credit outstanding were approximately $18 million.

The Company has recorded a liability of $255 thousand for unfunded commitments at March 31, 2014.

Material Changes in Results of Operations – Comparison of the Quarters Ended March 31, 2014 and 2013 - The Company recorded net income of $3.7 million during the first quarter of 2014 versus $2.7 million in the comparable 2013 period. The improvement in 2014 net income resulted principally from a $1.6 million increase in net interest income in the first quarter of 2014 coupled with a decline in total operating expenses of $492 thousand. Partially offsetting these positive factors was a $250 thousand increase in the provision for loan losses in the first quarter of 2014, resulting from growth in loans outstanding, a reduction in non-interest income of $225 thousand and an increase in the effective tax rate in 2014.

The $1.6 million or 11.9% improvement in first quarter 2014 net interest income resulted from a $70 million increase in average total interest-earning assets, coupled with a 26 basis point improvement in the Company’s net interest margin to 4.21% in 2014 versus 3.95% in 2013. The Company’s first quarter 2014 average total interest-earning asset yield was 4.38% versus 4.16% for the comparable 2013 period. Despite lower average yields on the Company’s investment and loan portfolios, down 21 basis points and 86 basis points, respectively, in 2014 versus 2013, reflecting the lower rate environment that has been prevalent, the Company’s average balance sheet mix continued to improve as average loans increased by $299 million (38.0%) versus first quarter 2013 and low-yielding overnight interest-bearing deposits declined by $231 million (79.3%) during the same period. Liquid investments represented 4% of average total interest-earning assets in the first quarter of 2014 versus 20% a year ago. The average securities portfolio increased by $2 million to $415 million in the first quarter of 2014 versus the comparable 2013 period.

33

The Company’s total cost of funds, among the lowest in the industry, declined to 0.17% in the first quarter of 2014 from 0.22% a year ago. The Company’s lower funding cost resulted largely from average core deposits of $1.3 billion in 2014, with average demand deposits representing 41% of first quarter 2014 average total deposits. The average cost of time deposits declined 17 basis points to 0.62% during the first three months of 2014 compared to the same period in 2013. The Company also experienced a $20 million decrease in the average balance of time deposits for the first quarter of 2014 versus the same period in 2013.

NET INTEREST INCOME ANALYSIS

For the Three Months Ended March 31, 2014 and 2013

(unaudited, dollars in thousands)

	2014								2013
	Average					Average			Average					Average
	Balance		Interest			Yield/Cost			Balance		Interest			Yield/Cost
Assets:
Interest-earning assets:
Investment securities (1)	$	415,385	$	3,850			3.76	%	$	413,591	$	4,048			3.97	%
Federal Reserve Bank,  Federal Home Loan Bank and other stock		2,863		38			5.38			3,044		39			5.20
Federal funds sold and interest-bearing deposits		60,551		46			0.31			292,042		173			0.24
Loans (2)		1,088,253		12,976			4.84			788,788		11,082			5.70
Total interest-earning assets		1,567,052	$	16,910			4.38	%		1,497,465	$	15,342			4.16	%
Non-interest-earning assets		128,434								102,689
Total assets	$	1,695,486							$	1,600,154
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Saving, N.O.W. and money market deposits	$	668,941	$	292			0.18	%	$	600,712	$	286			0.19	%
Time deposits		226,191		345			0.62			246,146		482			0.79
Total saving and time deposits		895,132		637			0.29			846,858		768			0.37
Borrowings		-		-			-			23		-			0.36
Total interest-bearing liabilities		895,132		637			0.29			846,881		768			0.37
Demand deposits		610,739								562,281
Other liabilities		18,423								26,682
Total liabilities		1,524,294								1,435,844
Stockholders' equity		171,192								164,310
Total liabilities and stockholders' equity	$	1,695,486							$	1,600,154
Total cost of funds							0.17	%							0.22	%
Net interest rate spread							4.09	%							3.79	%
Net interest income/margin				16,273			4.21	%				14,574			3.95	%
Less tax-equivalent basis adjustment				(975	)							(898	)
Net interest income			$	15,298							$	13,676

(1) Interest on securities includes the effects of tax-equivalent basis adjustments of $876 and $898 in 2014 and 2013, respectively.

(2) Interest on loans includes the effect of a tax-equivalent basis adjustment of $99 in 2014.

The $250 thousand provision for loan losses recorded during the first quarter of 2014 was due to the growth in the loan portfolio experienced during the past twelve months. The Company did not record a provision for loan losses in the first quarter of 2013. The adequacy of the provision and the resulting allowance for loan losses, which was $18 million at March 31, 2014, is determined by management’s ongoing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of criticized and classified loans, collateral values and changes in the size and mix of the loan portfolio. (See also Critical Accounting Policies, Judgments and Estimates and Asset Quality contained herein.)

34

Non-interest income declined by $225 thousand in the first quarter of 2014 versus the comparable 2013 period.  This decrease was principally due to net gains on the sale of securities available for sale ($359 thousand) and on the sale of portfolio loans ($442 thousand) recorded in the first quarter of 2013. No such gains were recorded in 2014. Also contributing to the reduction in non-interest income in the first quarter of 2014 was a decline in the net gain on the sale of mortgage loans originated for sale of $433 thousand or 82.3% resulting from the negative impact of higher mortgage rates on sale and refinance activity in the local housing market. Somewhat offsetting these negative factors was a $642 thousand gain on the sale of the Mattituck branch building during the first quarter of 2014. This branch was closed in February 2014. Also offsetting the aforementioned reductions in non-interest income was a $354 thousand increase in income from the Company’s investment in bank owned life insurance. The Company had no such investment prior to June 2013.

Non-Interest Income

For the quarters ended March 31, 2014 and 2013

(dollars in thousands)

					Over/
	Quarters ended March 31,				(under)
	2014		2013		2013
Service charges on deposit accounts	$	1,003	$	924		8.5	%
Other service charges, commissions and fees		679		710		(4.4	)
Fiduciary fees		279		273		2.2
Net gain on sale of securities available for sale		-		359		(100.0	)
Net gain on sale of portfolio loans		-		442		(100.0	)
Net gain on sale of mortgage loans originated for sale		93		526		(82.3	)
Net gain on sale of branch building		642		-		N/M	(1)
Income from bank owned life insurance		354		-		N/M	(1)
Other operating income		42		83		(49.4	)
Total non-interest income	$	3,092	$	3,317		(6.8	)%
(1) N/M - denotes % variance not meaningful for statistical purposes.

Total operating expenses declined by $492 thousand or 3.6% in the first quarter of 2014 versus 2013 as the result of reductions in several categories, most notably other operating expenses (down $349 thousand), occupancy (down $109 thousand), equipment (down $123 thousand), FDIC assessment (down $250 thousand) and branch consolidation costs (down $170 thousand).

The reduction in other operating expenses resulted primarily from lower OREO expenses and reduced costs associated with fees and subscriptions and property appraisals. The decreased occupancy and equipment expenses reflected cost savings from the Bank’s closing of two branches in the fourth quarter of 2013 and four branches in the first quarter of 2014, partially offset by increased snow removal costs in 2014. Due to the harsh winter weather in the Northeast, the Company recorded $207 thousand in snow removal costs for the first three months of 2014 as compared to $98 thousand for the same period in 2013. The lower FDIC assessment expense for the first quarter of 2014 compared to the same period in 2013 reflected the Bank’s lower assessment rate as it is no longer under a regulatory formal agreement. The credit to branch consolidation costs in the first quarter of 2014 resulted from a better than expected outcome on a lease termination negotiation for one of the Bank’s closed branches where an expense was recorded in the fourth quarter of 2013.

Partially offsetting the foregoing improvements were increases in employee compensation and benefits, data processing and accounting and audit fees of $279 thousand, $106 thousand and $87 thousand, respectively, with the increase in employee compensation and benefits reflecting higher expenses for long-term equity and incentive-based compensation offset, in part, by lower pension and other employee benefit expenses.

35

The Company recorded income tax expense of $1.1 million in the first quarter of 2014 resulting in an effective tax rate of 23.0% versus $483 thousand and an effective tax rate of 15.1% in the comparable period a year ago. The increase in the Company’s effective tax rate in 2014 versus 2013 resulted from growth in taxable income that is taxed at the Company’s marginal rate of 36.3%.

On March 31, 2014, New York Governor Andrew Cuomo signed legislation into law which implements the state’s fiscal plan for the 2014-2015 year. Portions of the new legislation significantly affect the calculation of income taxes imposed on banks operating in New York State. Furthermore, for community banks (all banks and thrifts with $8 billion or less in assets) there is a subtraction modification for a portion of interest earned on all residential and small business loans with a principal amount of up to $5 million made to New York borrowers. All banks in this category that have a REIT on April 1, 2014, and in the applicable tax year would instead get a deduction based on their REIT's dividends paid deduction.  The Company has a REIT and meets the asset size criteria.  For the Company, the impact of the legislation resulted in an increase in the net deferred tax asset at March 31, 2014, with a corresponding reduction in income tax expense, of $462 thousand. Offsetting the net income tax credit was $454 thousand in income tax expense related to the Company’s stock - based compensation included in the deferred tax asset. The adjustment relates primarily to prior periods, but management has determined that it is not material, and as such, has included it in the current quarter’s results.

Operating Expenses

For the quarters ended March 31, 2014 and 2013

(dollars in thousands)

						Over/
	Quarters ended March 31,					(under)
	2014			2013		2013
Employee compensation and benefits	$	8,861		$	8,582		3.3	%
Occupancy expense		1,435			1,544		(7.1	)
Equipment expense		449			572		(21.5	)
Consulting and professional services		551			573		(3.8	)
FDIC assessment		267			517		(48.4	)
Data processing		573			467		22.7
Accounting and audit fees		108			21		414.3
Branch consolidation costs		(170	)		-		N/M	(1)
Reserve and carrying costs related to Visa shares sold		59			-		N/M	(1)
Other operating expenses		1,176			1,525		(22.9	)
Total operating expenses	$	13,309		$	13,801		(3.6	)%
(1) N/M - denotes % variance not meaningful for statistical purposes.

Asset Quality - Non-accrual loans, excluding loans categorized as held for sale, totaled $14 million or 1.24% of total loans outstanding at March 31, 2014 versus $15 million or 1.42% of loans outstanding at December 31, 2013 and $14 million or 1.75% of loans outstanding at March 31, 2013. The allowance for loan losses as a percentage of total non-accrual loans amounted to 126% at March 31, 2014 versus 114% at December 31, 2013 and 124% at March 31, 2013.

36

The Company held no loans 90 days or more past due and still accruing at any of the reported dates. Total loans 30 - 89 days past due and accruing amounted to $4 million or 0.33% of loans outstanding at March 31, 2014 versus $3 million or 0.33% of loans outstanding at December 31, 2013 and $7 million or 0.80% of loans outstanding at March 31, 2013. The Company held no OREO at March 31, 2014 and December 31, 2013. The Company held OREO amounting to $372 thousand at March 31, 2013.

Total criticized and classified loans were $40 million at March 31, 2014, $43 million at December 31, 2013 and $85 million at March 31, 2013. Criticized loans are those loans that are not classified but require some degree of heightened monitoring. Classified loans were $33 million at March 31, 2014, $37 million at December 31, 2013 and $54 million at March 31, 2013. The allowance for loan losses as a percentage of total classified loans was 53%, 47% and 33%, respectively, at the same dates.

At March 31, 2014, the Company had $16 million in TDRs, primarily consisting of commercial and industrial loans, commercial real estate loans and residential mortgages totaling $6 million, $6 million and $4 million, respectively. At March 31, 2014, $11 million of the TDRs were current and accruing and $5 million were on non-accrual status. The Company had TDRs amounting to $16 million at December 31, 2013 and March 31, 2013.

Net loan recoveries of $224 thousand were recorded in the first quarter of 2014 versus net loan charge-offs of $1.6 million in the fourth quarter of 2013 and net loan recoveries of $53 thousand in the first quarter of 2013. As a percentage of average total loans outstanding, these net amounts represented, on an annualized basis, (0.08%) for the first quarter of 2014, 0.61% for the fourth quarter of 2013 and (0.03%) for the first quarter of 2013. Included in fourth quarter 2013 net charge-offs were $1.5 million in charge-offs related to the sale of non-accrual and classified loans during the quarter.

At March 31, 2014, the Company’s allowance for loan losses amounted to $18 million or 1.57% of period-end loans outstanding. The allowance as a percentage of loans outstanding was 1.62% at December 31, 2013 and 2.16% at March 31, 2013.

37

The Company recorded a $250 thousand consolidated provision for loan losses for the three months ended March 31, 2014, as compared to no provision for the comparable 2013 period, largely due to growth in the loan portfolio experienced during the past twelve months. The adequacy of the provision and the resulting allowance for loan losses, which was $18 million at March 31, 2014, is determined by management’s ongoing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of criticized and classified loans, collateral values and changes in the size and mix of the loan portfolio.

Management has determined that the current level of the allowance for loan losses is adequate in relation to the probable inherent losses present in the portfolio. The Company continues to have an allowance for loan losses that compares favorably to both our local and national peer groups as defined in the Uniform Bank Performance Report (“UBPR”). As per the most recent UBPR reports at December 31, 2013, the national peer group’s allowance for loan losses to total loans was 1.59% as compared to the Company’s ratios of 1.57% and 1.62% at March 31, 2014 and December 31, 2013, respectively. In comparison to the Company’s local peer group, the Company’s allowance for loan losses to total loans exceeded those peers, on average, by 54 basis points at December 31, 2013. Earnings results announced by commercial banks for the first quarter of 2014 indicate that many institutions continue to release reserves, to the extent that provisions are now typically less than quarterly net charge-offs. The Company believes its allowance for loan losses is adequate and will remain comparable to its peers.

Loan portfolio growth was strong during the first quarter of 2014, primarily in commercial real estate and multifamily loans. At March 31, 2014, the Company’s allowance for loan losses included an unallocated portion totaling $1.6 million. Loan growth, including multifamily loans, is expected to continue throughout 2014. An unallocated portion of the reserve is considered a prudent option until these loans to new borrowers establish satisfactory payment patterns.

Management considers many factors in this analysis, among them credit risk grades, delinquency trends, concentrations within segments of the loan portfolio, recent charge-off experience, local and national economic conditions, current real estate market conditions in geographic areas where the Company’s loans are located, changes in the trend of non-performing loans, changes in interest rates and loan portfolio growth. Changes in one or a combination of these factors may adversely affect the Company’s loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. Due to these uncertainties, management expects to record loan charge-offs in future periods. (See also Critical Accounting Policies, Judgments and Estimates contained herein.)

38

ANALYSIS OF NON-PERFORMING ASSETS

AND THE ALLOWANCE FOR LOAN LOSSES

March 31, 2014 versus December 31, 2013 and March 31, 2013

(dollars in thousands)

NON-PERFORMING ASSETS BY TYPE:
	At
	3/31/2014		12/31/2013		3/31/2013
Non-accrual loans	$	14,059	$	15,183	$	14,420
Non-accrual loans held for sale		-		-		-
Loans 90 days or more past due and still accruing		-		-		-
OREO		-		-		372
Total non-performing assets	$	14,059	$	15,183	$	14,792
Gross loans outstanding	$	1,129,818	$	1,068,848	$	824,399
Total loans held for sale	$	190	$	175	$	2,494

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES:
	Quarter Ended
	3/31/2014			12/31/2013			3/31/2013
Beginning balance	$	17,263		$	17,619		$	17,781
Provision		250			1,250			-
Charge-offs		(117	)		(2,136	)		(359	)
Recoveries		341			530			412
Ending balance	$	17,737		$	17,263		$	17,834

KEY RATIOS:
	At
	3/31/2014			12/31/2013			3/31/2013
Allowance as a % of total loans (1)		1.57	%		1.62	%		2.16	%
Non-accrual loans as a % of total loans (1)		1.24	%		1.42	%		1.75	%
Non-performing assets as a % of total loans, loans held for sale and OREO		1.24	%		1.42	%		1.79	%
Allowance for loan losses as a % of non-accrual loans (1)		126	%		114	%		124	%
Allowance for loan losses as a % of non-accrual loans and loans 90 days or more past due and still accruing (1)		126	%		114	%		124	%

(1) Excludes loans held for sale.

ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. The Company’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, mature, or repriced in any given period of time. The Company’s earnings or the net value of its portfolio will change under different interest rate scenarios. The principal objective of the Company’s asset/liability management program is to maximize net interest income within an acceptable range of overall risk, including both the effect of changes in interest rates and liquidity risk. The Company’s exposure to interest-rate risk has not changed materially since December 31, 2013.

39

ITEM 4. – CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There have been no changes in the Company’s internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, internal controls subsequent to the date the Company carried out its evaluation.

There were no changes to the Company’s internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred in the first quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. - LEGAL PROCEEDINGS

See the information set forth in Note 10—Legal Proceedings in the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item I, which information is incorporated by reference in response to this item.

ITEM 1A. – RISK FACTORS

There are no material changes from the risks disclosed in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2013, except as discussed below.

The Company’s loan portfolio has a high concentration of commercial real estate loans (exclusive of multifamily loans) and its business may be adversely affected by credit risk associated with commercial real estate and a decline in property values.

At March 31, 2014, $490 million, or 43% of the Company’s total gross loan portfolio, was comprised of commercial real estate (exclusive of multifamily loans). This type of lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Although real estate prices have shown signs of improvement, a decline in real estate values may reduce the value of the real estate collateral securing these types of loans and increase the risk that the Company would incur losses if borrowers default on their loans.

Of these commercial real estate loans, $295 million represents loans secured by owner-occupied properties for which the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or an affiliate of the party, who owns the property. Thus, such loans may entail less risk as the primary source of repayment is not derived from third party, nonaffiliated, rental income associated with the property or the proceeds of the sale, refinancing or permanent financing of the property.

ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.

40

ITEM 5. – OTHER INFORMATION

Not applicable.

ITEM 6. – EXHIBITS

31.1	Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SUFFOLK BANCORP
Date: May 1, 2014		/s/ Howard C. Bluver
		Howard C. Bluver
		President & Chief Executive Officer
		(principal executive officer)
Date: May 1, 2014		/s/ Brian K. Finneran
		Brian K. Finneran
		Executive Vice President & Chief Financial Officer
		(principal financial and accounting officer)

42

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

43

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO RULE 13A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Howard C. Bluver, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Suffolk Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 1, 2014

/s/ Howard C. Bluver

Howard C. Bluver

President & Chief Executive Officer

(principal executive officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO RULE 13A-14(A) OR 15D-14(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian K. Finneran, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Suffolk Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 1, 2014

/s/ Brian K. Finneran

Brian K. Finneran

Executive Vice President & Chief Financial Officer

(principal financial and accounting officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Howard C. Bluver, President & Chief Executive Officer of Suffolk Bancorp (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 1, 2014

/s/ Howard C. Bluver

Howard C. Bluver

President & Chief Executive Officer

(principal executive officer)

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Brian K. Finneran,  Chief Financial Officer of Suffolk Bancorp (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 1, 2014

/s/ Brian K. Finneran

Brian K. Finneran

Executive Vice President & Chief Financial Officer

(principal financial and accounting officer)

XML

LOANS, Loans and Allowance for Loan Losses by Risk Rating (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014		Mar. 31, 2013	Dec. 31, 2013
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	$ 14,059			$ 15,183
Percentage of Total (in hundredths)	100.00%			100.00%
Total Loans	1,129,818			1,068,848
Percentage of Total Loans (in hundredths)	1.20%			1.40%
Additional interest income for the non-accrual loans outstanding at the end of the reported periods	494		406
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	14,059			15,183
Non-accrual loans collateral value	19,250			23,636
Commercial and Industrial [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	4,843	[1]		5,014	[1]
Percentage of Total (in hundredths)	34.40%			33.00%
Total Loans	165,019			171,199
Percentage of Total Loans (in hundredths)	0.40%			0.40%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	4,843	[1]		5,014	[1]
Non-accrual loans collateral value	3,750	[1]		3,750	[1]
Commercial Real Estate [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	6,936			7,492
Percentage of Total (in hundredths)	49.30%			49.30%
Total Loans	489,958			469,357
Percentage of Total Loans (in hundredths)	0.60%			0.70%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	6,936			7,492
Non-accrual loans collateral value	9,960			13,050
Multifamily [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	0			0
Percentage of Total (in hundredths)	0.00%			0.00%
Total Loans	221,841			184,624
Percentage of Total Loans (in hundredths)	0.00%			0.00%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	0			0
Real Estate Construction [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	0			0
Percentage of Total (in hundredths)	0.00%			0.00%
Total Loans	14,940			6,565
Percentage of Total Loans (in hundredths)	0.00%			0.00%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	0			0
Residential Mortgages [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	1,840			1,897
Percentage of Total (in hundredths)	13.10%			12.50%
Total Loans	173,347			169,552
Percentage of Total Loans (in hundredths)	0.20%			0.20%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	1,840			1,897
Non-accrual loans collateral value	4,565			3,764
Home Equity [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	431			647
Percentage of Total (in hundredths)	3.10%			4.30%
Total Loans	55,250			57,112
Percentage of Total Loans (in hundredths)	0.00%			0.10%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	431			647
Non-accrual loans collateral value	975			3,072
Consumer [Member]
Summarizes non-accrual loans by loan class [Abstract]
Non-accrual Loans principal balance	9			133
Percentage of Total (in hundredths)	0.10%			0.90%
Total Loans	9,463			10,439
Percentage of Total Loans (in hundredths)	0.00%			0.00%
Collateral value securing non-accrual loans [Abstract]
Non-accrual Loans principal balance	9			133
Non-accrual loans collateral value	$ 0			$ 0

[1] Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

XML

FAIR VALUE, Recurring Basis (Details) (Fair Value, Measurements, Recurring [Member], USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets [Abstract]
Total	$ 366,517	$ 403,118
Liabilities [Abstract]
Derivatives	932	932
Total	932	932
U.S. Government Agency Securities [Member]
Assets [Abstract]
Total	66,761	100,095
Corporate Bonds [Member]
Assets [Abstract]
Total	15,684	15,651
Collateralized Mortgage Obligations [Member]
Assets [Abstract]
Total	27,299	30,104
Mortgage-backed Securities [Member]
Assets [Abstract]
Total	98,481	97,767
Obligations of States and Political Subdivisions [Member]
Assets [Abstract]
Total	155,923	157,163
Loans Held For Sale [Member]
Assets [Abstract]
Total	190	175
Mortgage Servicing Rights [Member]
Assets [Abstract]
Total	2,179	2,163
Significant Other Observable Inputs (Level 2) [Member]
Assets [Abstract]
Total	364,338	400,955
Liabilities [Abstract]
Derivatives	0	0
Total	0	0
Significant Other Observable Inputs (Level 2) [Member] | U.S. Government Agency Securities [Member]
Assets [Abstract]
Total	66,761	100,095
Significant Other Observable Inputs (Level 2) [Member] | Corporate Bonds [Member]
Assets [Abstract]
Total	15,684	15,651
Significant Other Observable Inputs (Level 2) [Member] | Collateralized Mortgage Obligations [Member]
Assets [Abstract]
Total	27,299	30,104
Significant Other Observable Inputs (Level 2) [Member] | Mortgage-backed Securities [Member]
Assets [Abstract]
Total	98,481	97,767
Significant Other Observable Inputs (Level 2) [Member] | Obligations of States and Political Subdivisions [Member]
Assets [Abstract]
Total	155,923	157,163
Significant Other Observable Inputs (Level 2) [Member] | Loans Held For Sale [Member]
Assets [Abstract]
Total	190	175
Significant Other Observable Inputs (Level 2) [Member] | Mortgage Servicing Rights [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member]
Assets [Abstract]
Total	2,179	2,163
Liabilities [Abstract]
Derivatives	932	932
Total	932	932
Significant Unobservable Inputs (Level 3) [Member] | U.S. Government Agency Securities [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Corporate Bonds [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Collateralized Mortgage Obligations [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Mortgage-backed Securities [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Obligations of States and Political Subdivisions [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Loans Held For Sale [Member]
Assets [Abstract]
Total	0	0
Significant Unobservable Inputs (Level 3) [Member] | Mortgage Servicing Rights [Member]
Assets [Abstract]
Total	$ 2,179	$ 2,163

XML

REGULATORY MATTERS (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Total Capital (to risk-weighted assets) [Abstract]
Actual capital ratios, Amount	$ 188,551	$ 181,952
Minimum for capital adequacy, Amount	102,394	97,542
Minimum to be "Well Capitalized" under prompt corrective action provisions, Amount	127,992	121,927
Total Capital (to risk-weighted assets) Ratios [Abstract]
Actual capital ratios, Ratio (in hundredths)	14.73%	14.92%
Minimum for capital adequacy, Ratio (in hundredths)	8.00%	8.00%
Minimum to be "Well Capitalized" under prompt corrective action provisions, Ratio (in hundredths)	10.00%	10.00%
Tier 1 Capital (to risk-weighted assets) [Abstract]
Actual capital ratios, Amount	172,527	166,683
Minimum for capital adequacy, Amount	51,197	48,771
Minimum to be "Well Capitalized" under prompt corrective action provisions, Amount	76,795	73,156
Tier 1 Capital (to risk-weighted assets) Ratio [Abstract]
Actual capital ratios, ratio (in hundredths)	13.48%	13.67%
Minimum for capital adequacy, Ratio (in hundredths)	4.00%	4.00%
Minimum to be "Well Capitalized" under prompt corrective action provisions, Ratio (in hundredths)	6.00%	6.00%
Tier 1 Capital (to average assets) [Abstract]
Actual capital ratios, Amount	172,527	166,683
Minimum for capital adequacy, Amount	67,629	68,454
Minimum to be "Well Capitalized" under prompt corrective action provisions, Amount	$ 84,536	$ 85,567
Tier 1 Capital (to average assets) Ratios [Abstract]
Actual capital ratios, ratio (in hundredths)	10.20%	9.74%
Minimum for capital adequacy, Ratio (in hundredths)	4.00%	4.00%
Minimum to be "Well Capitalized" under prompt corrective action provisions, Ratio (in hundredths)	5.00%	5.00%
Tier 1 Leverage Capital ratio (in hundredths)	10.20%	9.74%
Tier 1 Risk-based Capital Ratio (in hundredths)	13.48%	13.67%
Total Risk-based Capital Ratio (in hundredths)	14.73%	14.92%
Parent Company [Member]
Total Capital (to risk-weighted assets) Ratios [Abstract]
Actual capital ratios, Ratio (in hundredths)	14.82%	15.02%
Tier 1 Capital (to risk-weighted assets) Ratio [Abstract]
Actual capital ratios, ratio (in hundredths)	13.57%	13.77%
Tier 1 Capital (to average assets) Ratios [Abstract]
Actual capital ratios, ratio (in hundredths)	10.27%	9.81%
Tier 1 Leverage Capital ratio (in hundredths)	10.27%	9.81%
Tier 1 Risk-based Capital Ratio (in hundredths)	13.57%	13.77%
Total Risk-based Capital Ratio (in hundredths)	14.82%	15.02%

XML

LOANS, Analysis of Changes in the Allowances for Loan Losses (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Allowance for loan losses [Abstract]
Balance, Beginning of Period	$ 17,263,000	$ 17,781,000
Charge-offs	(117,000)	(359,000)
Recoveries	341,000	412,000
Provision for loan losses	250,000	0
Balance, End of Period	17,737,000	17,834,000
Number of months of performance trouble debt restructuring returns to accrual status	6 months
Threshold for non-accrual loans to be evaluated individually for impairment	250,000
Allowance for loan and lease losses, period increase (decrease)	474,000
Commercial and Industrial [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	2,615,000	6,181,000
Charge-offs	(115,000)	(348,000)
Recoveries	293,000	299,000
Provision for loan losses	(312,000)	(787,000)
Balance, End of Period	2,481,000	5,345,000
Allowance for loan and lease losses, period increase (decrease)	(134,000)
Period increase (decrease) in specific reserves	(9,000)
Increase (decrease) in historical loss factors (in hundredths)	(0.02%)
Commercial and Industrial [Member] | Unimpaired Pass Rated Loans [Member]
Allowance for loan losses [Abstract]
Period increase (decrease) in balance of unimpaired pass rated loans	(6,000,000)
Commercial Real Estate [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	6,626,000	5,999,000
Charge-offs	0	0
Recoveries	12,000	72,000
Provision for loan losses	657,000	(353,000)
Balance, End of Period	7,295,000	5,718,000
Allowance for loan and lease losses, period increase (decrease)	669,000
Commercial Real Estate [Member] | Unimpaired Pass Rated Loans [Member]
Allowance for loan losses [Abstract]
Period increase (decrease) in balance of unimpaired pass rated loans	23,000,000
Increase (decrease) in historical loss factors (in hundredths)	0.08%
Multifamily [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	2,159,000	150,000
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	481,000	702,000
Balance, End of Period	2,640,000	852,000
Allowance for loan and lease losses, period increase (decrease)	481,000
Multifamily [Member] | Unimpaired Pass Rated Loans [Member]
Allowance for loan losses [Abstract]
Period increase (decrease) in balance of unimpaired pass rated loans	37,000,000
Increase (decrease) in historical loss factors (in hundredths)	0.01%
Real Estate Construction [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	88,000	141,000
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	129,000	704,000
Balance, End of Period	217,000	845,000
Residential Mortgages [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	2,463,000	1,576,000
Charge-offs	0	0
Recoveries	4,000	1,000
Provision for loan losses	160,000	864,000
Balance, End of Period	2,627,000	2,441,000
Home Equity [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	745,000	907,000
Charge-offs	0	0
Recoveries	27,000	1,000
Provision for loan losses	(54,000)	16,000
Balance, End of Period	718,000	924,000
Consumer [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	241,000	189,000
Charge-offs	(2,000)	(11,000)
Recoveries	5,000	39,000
Provision for loan losses	(58,000)	28,000
Balance, End of Period	186,000	245,000
Unallocated [Member]
Allowance for loan losses [Abstract]
Balance, Beginning of Period	2,326,000	2,638,000
Charge-offs	0	0
Recoveries	0	0
Provision for loan losses	(753,000)	(1,174,000)
Balance, End of Period	$ 1,573,000	$ 1,464,000

XML

FAIR VALUE (Tables)

3 Months Ended

Mar. 31, 2014

FAIR VALUE [Abstract]

Carrying amounts and estimated fair values of financial instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in thousands).

	Level in		March 31, 2014				December 31, 2013
	Fair Value		Carrying		Estimated		Carrying		Estimated
	Heirarchy		Amount		Fair Value		Amount		Fair Value
Cash and due from banks	Level 1		$	86,165	$	86,165	$	131,352	$	131,352
Cash equivalents	Level 2			1,038		1,038		1,000		1,000
Interest-bearing time deposits in other banks	Level 2			10,000		10,000		10,000		10,000
Federal Reserve Bank, Federal Home Loan
Bank and other stock	N/	A		2,863		N/A		2,863		N/A
Investment securities held to maturity	Level 2			45,479		46,008		11,666		12,234
Investment securities available for sale	Level 2			364,148		364,148		400,780		400,780
Loans held for sale	Level 2			190		190		175		175
Loans, net of allowance	Level 2, 3 (1)			1,112,081		1,112,942		1,051,585		1,056,279
Bank owned life insurance	Level 3			44,109		44,109		38,755		38,755
Accrued interest and loan fees receivable	Level 2			6,322		6,322		5,441		5,441
Non-maturity deposits	Level 2			1,295,095		1,295,095		1,284,982		1,284,982
Time deposits	Level 2			228,339		229,064		225,079		225,946
Accrued interest payable	Level 2			160		160		160		160

(1) Impaired loans are generally classified within Level 3 of the fair value hierarchy.

Valuation of financial instruments measured at fair value on recurring basis

The following presents fair value measurements on a recurring basis at March 31, 2014 and December 31, 2013 (in thousands):

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	March 31, 2014		(Level 2)		(Level 3)
U.S. Government agency securities	$	66,761	$	66,761	$	-
Corporate bonds		15,684		15,684		-
Collateralized mortgage obligations		27,299		27,299		-
Mortgage-backed securities		98,481		98,481		-
Obligations of states and political subdivisions		155,923		155,923		-
Loans held for sale		190		190		-
Mortgage servicing rights		2,179		-		2,179
Total	$	366,517	$	364,338	$	2,179
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	December 31, 2013		(Level 2)		(Level 3)
U.S. Government agency securities	$	100,095	$	100,095	$	-
Corporate bonds		15,651		15,651		-
Collateralized mortgage obligations		30,104		30,104		-
Mortgage-backed securities		97,767		97,767		-
Obligations of states and political subdivisions		157,163		157,163		-
Loans held for sale		175		175		-
Mortgage servicing rights		2,163		-		2,163
Total	$	403,118	$	400,955	$	2,163
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

Changes in Level 3 assets and liabilities measured at fair value on a recurring basis

Reconciliations for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follow (in thousands).

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31,
	2014				2013
	Assets		Liabilities		Assets
	Mortgage Servicing Rights		Derivatives		Mortgage Servicing Rights
Balance, January 1	$	2,163	$	932	$	1,856
Net increase		16		-		183
Balance, March 31	$	2,179	$	932	$	2,039

Assets measured at fair value on a non-recurring basis

Assets measured at fair value on a non-recurring basis are as follows (in thousands):

Assets:	March 31, 2014		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	15,510	$	15,510
Total	$	15,510	$	15,510

Assets:	December 31, 2013		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	16,942	$	16,942
Total	$	16,942	$	16,942

XML

FAIR VALUE, Reconciliations for Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Liabilities Derivatives [Member]
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) [Rollforward]
Beginning balance	$ 932
Net increases	0
Ending balance	932
Assets Mortgage Servicing Rights [Member]
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) [Rollforward]
Beginning balance	2,163	1,856
Net increases	16	183
Ending balance	$ 2,179	$ 2,039

XML

LOANS (Details Textual) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Allowance for Loan Losses (Additional Textual) [Abstract]
Number of consecutive years	5 years
Threshold loan amount for annual rating review	$ 1,000,000
Allocation of specific reserve regarding troubled debt restructuring	611,000	586,000
Troubled debt restructuring funds committed	$ 250,000	$ 250,000
Minimum repayment period	2 years

XML

LOANS, Loans Modified or Renewed (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 Loan	Mar. 31, 2013 Loan
Financing Receivable, Modifications [Line Items]
Number of loans	3	11
Outstanding recorded balance	$ 1,422	$ 19,703
Commercial Real Estate [Member]
Financing Receivable, Modifications [Line Items]
Number of loans	3	11
Outstanding recorded balance	$ 1,422	$ 19,703

XML

FAIR VALUE, Balance Sheets Grouping (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013		Mar. 31, 2014
Carrying amounts and estimated fair values of financial instruments [Abstract]
Interest-bearing time deposits in other banks	$ 10,000		$ 10,000
Bank Owned Life Insurance	38,755		44,109
Percentage of derivative in net sale proceeds (in hundredths)	12.00%
Carrying Amount [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Federal Reserve Bank, Federal Home Loan Bank and other stock	2,863		2,863
Carrying Amount [Member] | Level 1 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Cash and due from banks	131,352		86,165
Carrying Amount [Member] | Level 2 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Cash equivalents	1,000		1,038
Interest-bearing time deposits in other banks	10,000		10,000
Investment securities held to maturity	11,666		45,479
Investment securities available for sale	400,780		364,148
Loans held for sale	175		190
Accrued interest and loan fees receivable	5,441		6,322
Non maturity deposits	1,284,982		1,295,095
Time deposits	225,079		228,339
Accrued interest payable	160		160
Carrying Amount [Member] | Level 3 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Bank Owned Life Insurance	38,755		44,109
Carrying Amount [Member] | Level 2/3 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Loans, net of allowance	1,051,585	[1]	1,112,081	[1]
Estimated Fair Value [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Federal Reserve Bank, Federal Home Loan Bank and other stock
Estimated Fair Value [Member] | Level 1 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Cash and due from banks	131,352		86,165
Estimated Fair Value [Member] | Level 2 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Cash equivalents	1,000		1,038
Interest-bearing time deposits in other banks	10,000		10,000
Investment securities held to maturity	12,234		46,008
Investment securities available for sale	400,780		364,148
Loans held for sale	175		190
Accrued interest and loan fees receivable	5,441		6,322
Non maturity deposits	1,284,982		1,295,095
Time deposits	225,946		229,064
Accrued interest payable	160		160
Estimated Fair Value [Member] | Level 3 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Bank Owned Life Insurance	38,755		44,109
Estimated Fair Value [Member] | Level 2/3 [Member]
Carrying amounts and estimated fair values of financial instruments [Abstract]
Loans, net of allowance	$ 1,056,279	[1]	$ 1,112,942	[1]

[1] Impaired loans are generally classified within Level 3 of the fair value hierarchy.

XML

ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)

3 Months Ended

Mar. 31, 2014

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") [Abstract]

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI")

2. ACCUMULATED OTHER COMPREHENSIVE INCOME (“AOCI”)

The changes in the Company’s AOCI by component, net of tax, for the three months ended March 31, 2014 and 2013 follow (in thousands). The increase in net unrealized gains on available for sale securities for the three months ended March 31, 2014 resulted almost solely from the positive impact of a reduction in interest rates in 2014.

	Three Months Ended March 31, 2014									Three Months Ended March 31, 2013
	Unrealized Gains and Losses on Available for Sale Securities			Pension and Post- Retirement Plan Items			Total			Unrealized Gains and Losses on Available for Sale Securities			Pension and Post- Retirement Plan Items			Total
Beginning balance	$	(4,095	)	$	(3,194	)	$	(7,289	)	$	10,553		$	(7,667	)	$	2,886
Other comprehensive income (loss) before reclassifications		3,088			-			3,088			(991	)		-			(991	)
Amounts reclassified from AOCI		-			-			-			(229	)		-			(229	)
Net other comprehensive income (loss)		3,088			-			3,088			(1,220	)		-			(1,220	)
Ending balance	$	(1,007	)	$	(3,194	)	$	(4,201	)	$	9,333		$	(7,667	)	$	1,666

The table below presents reclassifications out of AOCI for the three months ended March 31, 2014 and 2013 (in thousands).

The table below presents reclassifications out of AOCI for the three months ended March 31, 2014 and 2013 (in thousands).

	Amount Reclassified from AOCI
	Three Months Ended March 31,							Affected Line Item in the Statement
Details about AOCI Components	2014			2013				Where Net Income is Presented
Unrealized gains and losses on available for sale securities		$	-		$	359		Net gain on sale of securities available for sale
			-			(130	)	Income tax expense
Total reclassifications, net of tax		$	-		$	229

XML

EMPLOYEE BENEFITS (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012
Net periodic defined benefit pension expense [Abstract]
Interest cost	$ 540,000		$ 498,000
Expected return on plan assets	(637,000)		(575,000)
Net amortization	6,000		61,000
Net periodic pension credit	(91,000)		(16,000)
Minimum required contribution for the pension plan				1,000,000
Additional minimum required contribution for the pension plan	0
Non-recurring gain		$ 1,700,000

XML

Investment Securities, Amortized Cost, Maturities and Approximate Fair Value (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Amortized Cost [Abstract]
Due in one year or less	$ 11,353
Due from one to five years	130,651
Due from five to ten years	216,194
Due after ten years	5,000
Total securities available for sale	363,198
Fair Value [Abstract]
Due in one year or less	11,499
Due from one to five years	136,363
Due from five to ten years	211,507
Due after ten years	4,779
Total securities available for sale	364,148	400,780
Amortized Cost [Abstract]
Due in one year or less	627
Due from one to five years	6,584
Due from five to ten years	15,154
Due after ten years	23,114
Total securities held to maturity	45,479
Total investment securities	408,677
Fair Value [Abstract]
Due in one year or less	632
Due from one to five years	7,175
Due from five to ten years	15,010
Due after ten years	23,191
Total securities held to maturity	46,008
Total investment securities	$ 410,156

XML

Investment Securities, Amortized Cost, Estimated Values and Gross Unrealized Gains and Losses (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
INVESTMENT SECURITIES [Abstract]
Investment securities transferred from available for sale to held to maturity	$ 31,286,000	$ 0
Available for sale [Abstract]
Amortized Cost	363,198,000		407,211,000
Gross Unrealized Gains	9,590,000		9,339,000
Gross Unrealized Losses	(8,640,000)		(15,770,000)
Estimated Fair Value	364,148,000		400,780,000
Held to maturity [Abstract]
Amortized Cost	45,479,000		11,666,000
Gross Unrealized Gains	694,000		655,000
Gross Unrealized Losses	(165,000)		(87,000)
Estimated Fair Value	46,008,000		12,234,000
Total investment securities [Abstract]
Total Amortized Cost	408,677,000		418,877,000
Total Gross Unrealized Gains	10,284,000		9,994,000
Total Gross Unrealized Losses	(8,805,000)		(15,857,000)
Total Fair Value	410,156,000		413,014,000
Investment securities pledged	255,000,000		292,000,000
U.S. Government Agency Securities [Member]
Held to maturity [Abstract]
Amortized Cost	31,318,000		0
Gross Unrealized Gains	0		0
Gross Unrealized Losses	(165,000)		0
Estimated Fair Value	31,153,000		0
Obligations of States and Political Subdivisions [Member]
Held to maturity [Abstract]
Amortized Cost	14,161,000		11,666,000
Gross Unrealized Gains	694,000		655,000
Gross Unrealized Losses	0		(87,000)
Estimated Fair Value	14,855,000		12,234,000
U.S. Government Agency Securities [Member]
Available for sale [Abstract]
Amortized Cost	70,466,000		109,315,000
Gross Unrealized Gains	0		0
Gross Unrealized Losses	(3,705,000)		(9,220,000)
Estimated Fair Value	66,761,000		100,095,000
Obligations of States and Political Subdivisions [Member]
Available for sale [Abstract]
Amortized Cost	147,472,000		148,664,000
Gross Unrealized Gains	8,451,000		8,499,000
Gross Unrealized Losses	0		0
Estimated Fair Value	155,923,000		157,163,000
Collateralized Mortgage Obligations [Member]
Available for sale [Abstract]
Amortized Cost	27,108,000		30,335,000
Gross Unrealized Gains	880,000		557,000
Gross Unrealized Losses	(689,000)		(788,000)
Estimated Fair Value	27,299,000		30,104,000
Mortgage-Backed Securities [Member]
Available for sale [Abstract]
Amortized Cost	102,591,000		103,332,000
Gross Unrealized Gains	18,000		19,000
Gross Unrealized Losses	(4,128,000)		(5,584,000)
Estimated Fair Value	98,481,000		97,767,000
Corporate Bonds [Member]
Available for sale [Abstract]
Amortized Cost	15,561,000		15,565,000
Gross Unrealized Gains	241,000		264,000
Gross Unrealized Losses	(118,000)		(178,000)
Estimated Fair Value	$ 15,684,000		$ 15,651,000

XML

STOCK-BASED COMPENSATION (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options exercise period	3 years		3 years	3 years
Vesting rate	1.33333		1.33333	1.3333
Number of Shares [Roll Forward]
Outstanding at beginning (in shares)	291,000
Granted (in shares)	0
Exercised (in shares)	0
Forfeited or expired (in shares)	(9,166)
Outstanding at ending (in shares)	281,834
Weighted Average Exercise Price [Roll Forward]
Outstanding at beginning (in dollars per share)	$ 16.18
Granted (in dollars per share)	$ 0
Exercised (in dollars per share)	$ 0
Forfeited or expired (in dollars per share)	$ 20.27
Outstanding at ending (in dollars per share)	$ 16.04
Summary of options outstanding and exercisable [Abstract]
Weighted-Average Remaining Contractual Life	8 years
Total Shares Outstanding (in shares)	281,834
Total Weighted-Average Remaining Contractual Life	6 years 6 months
Total Weighted-Average Exercise Price (in dollars per share)	$ 16.04
Total Shares Exercisable (in shares)	88,671
Total Weighted-Average Exercise Price (in dollars per share)	$ 18.83
Compensation expense	$ 165	$ 82
Remaining unrecognized compensation cost	$ 728
Remaining unrecognized compensation cost remaining vesting period	2 years 3 months 18 days
$10.00 - $14.00 [Member]
Summary of options outstanding and exercisable [Abstract]
From (in dollars per share)	$ 10.00
To (in dollars per share)	$ 14.00
Shares Outstanding (in shares)	140,000
Weighted-Average Remaining Contractual Life	7 years 10 months 24 days
Weighted-Average Exercise Price (in dollars per share)	$ 12.01
Shares Exercisable (in shares)	50,003
Weighted-Average Remaining Contractual Life	8 years
Weighted-Average Exercise Price (in dollars per share)	$ 12.81
$14.01 - $20.00 [Member]
Summary of options outstanding and exercisable [Abstract]
From (in dollars per share)	$ 14.01
To (in dollars per share)	$ 20.00
Shares Outstanding (in shares)	114,834
Weighted-Average Remaining Contractual Life	9 years 2 months 12 days
Weighted-Average Exercise Price (in dollars per share)	$ 17.24
Shares Exercisable (in shares)	11,668
Weighted-Average Remaining Contractual Life	8 years 9 months 18 days
Weighted-Average Exercise Price (in dollars per share)	$ 14.47
$20.01 - $30.00 [Member]
Summary of options outstanding and exercisable [Abstract]
From (in dollars per share)	$ 20.01
To (in dollars per share)	$ 30.00
Shares Outstanding (in shares)	5,000
Weighted-Average Remaining Contractual Life	4 years 9 months 18 days
Weighted-Average Exercise Price (in dollars per share)	$ 28.30
Shares Exercisable (in shares)	5,000
Weighted-Average Remaining Contractual Life	4 years 9 months 18 days
Weighted-Average Exercise Price (in dollars per share)	$ 28.30
$30.01 - $40.00 [Member]
Summary of options outstanding and exercisable [Abstract]
From (in dollars per share)	$ 30.01
To (in dollars per share)	$ 40.00
Shares Outstanding (in shares)	22,000
Weighted-Average Remaining Contractual Life	2 years 3 months 18 days
Weighted-Average Exercise Price (in dollars per share)	$ 32.69
Shares Exercisable (in shares)	22,000
Weighted-Average Remaining Contractual Life	2 years 3 months 18 days
Weighted-Average Exercise Price (in dollars per share)	$ 32.69
Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options outstanding related to SAR's (in shares)	6,000
Intrinsic value of SAR's (in dollars per share)	$ 0
Non Qualified Stock Option [Member] | Chief Executive Officer [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options exercise period				3 years
Vesting rate				1.33333
Number of Shares [Roll Forward]
Granted (in shares)				30,000
Weighted Average Exercise Price [Roll Forward]
Granted (in dollars per share)				$ 10.79
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options exercise period	10 years
2009 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Company's common stock reserved for issuance (in shares)	500,000
Common stock available for possible issuance (in shares)	268,499
1999 Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Company's common stock reserved for issuance (in shares)	0

XML

Investment Securities, Securities Sales And Continuous Unrealized Loss Position Of Securities Held (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Proceeds from sales of securities available for sale and the associated realized securities gains and losses [Abstract]
Proceeds	$ 0	$ 10,475
Gross realized gains	0	359
Gross realized losses	0	0
Net realized gains	0	359
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value	176,404		187,007
Less than 12 months Unrealized Losses	6,883		13,001
12 months or longer Estimated Fair Value	33,702		31,855
12 months or longer Unrealized Losses	1,922		2,856
Total Estimated Fair Value	210,106		218,862
Total Unrealized Losses	8,805		15,857
U.S. Government Agency Securities [Member]
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value	88,511		86,590
Less than 12 months Unrealized Losses	3,273		7,726
12 months or longer Estimated Fair Value	9,403		13,505
12 months or longer Unrealized Losses	597		1,494
Total Estimated Fair Value	97,914		100,095
Total Unrealized Losses	3,870		9,220
Obligations of States and Political Subdivisions [Member]
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value			3,932
Less than 12 months Unrealized Losses			87
12 months or longer Estimated Fair Value			0
12 months or longer Unrealized Losses			0
Total Estimated Fair Value			3,932
Total Unrealized Losses			87
Collateralized Mortgage Obligations [Member]
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value	0		2,935
Less than 12 months Unrealized Losses	0		160
12 months or longer Estimated Fair Value	8,634		5,713
12 months or longer Unrealized Losses	689		628
Total Estimated Fair Value	8,634		8,648
Total Unrealized Losses	689		788
Mortgage-Backed Securities [Member]
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value	85,484		84,869
Less than 12 months Unrealized Losses	3,566		4,850
12 months or longer Estimated Fair Value	12,739		12,637
12 months or longer Unrealized Losses	562		734
Total Estimated Fair Value	98,223		97,506
Total Unrealized Losses	4,128		5,584
Corporate Bonds [Member]
Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position [Abstract]
Less than 12 months Estimated Fair Value	2,409		8,681
Less than 12 months Unrealized Losses	44		178
12 months or longer Estimated Fair Value	2,926		0
12 months or longer Unrealized Losses	74		0
Total Estimated Fair Value	5,335		8,681
Total Unrealized Losses	$ 118		$ 178

XML

INVESTMENT SECURITIES, Other Disclosures (Details) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Investment securities other disclosures [Abstract]
Sale of Visa Class B equity securities (in shares)		100,000
Proceeds from sale of Visa Shares		$ 7,800,000
Contingent liability from counterparty estimated future exposure from Visa litigation	932,000
Carrying Costs For Visa Litigation Expensed In The Period	59,000
US Government agency securities held as available-for-sale pledged as collateral	$ 3,000,000
Shares of Visa Class B securities held (in shares)	38,638

XML

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2014

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract]

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim condensed consolidated financial statements include the accounts of Suffolk Bancorp (the “Company”) and its wholly owned subsidiary, the Suffolk County National Bank of Riverhead and its subsidiaries (the “Bank”). The Bank formed Suffolk Greenway, Inc. (the “REIT”), a real estate investment trust, and owns 100% of an insurance agency and two corporations used to acquire foreclosed real estate. The insurance agency and the two corporations used to acquire foreclosed real estate are immaterial to the Company’s operations. Suffolk Bancorp and subsidiaries are collectively referred to hereafter as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of the Company’s management, the preceding unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of its condensed consolidated statements of condition as of March 31, 2014 and December 31, 2013, its condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013, its condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2014 and 2013, its condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2014 and 2013 and its condensed consolidated statements of cash flows for the three months ended March 31, 2014 and 2013.

The preceding unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results of operations to be expected for the remainder of the year. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 2013 Annual Report on Form 10-K.

Loans and Loan Interest Income Recognition - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs. Unearned discounts on installment loans are credited to income using methods that result in a level yield. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.

Interest income is accrued on the unpaid loan principal balance. Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. Loans of all classes will generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status. Loans start accruing interest again when they become current as to principal and interest for at least six months, and when, after a well-documented analysis by management, it has been determined that the loans can be collected in full.  For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (“TDRs”) and are classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and recoveries, and decreased by loan charge-offs. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance for loan losses. This happens when the loan is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by a continuous analysis of the loan portfolio. Such analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other relevant factors. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. In assessing the adequacy of the allowance for loan losses, management reviews the loan portfolio by separate classes that have similar risk and collateral characteristics. These classes are commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loans, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every impaired loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-impaired loans and is based on historical loss experience for each loan class from a rolling twelve quarter period and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the estimated collectability of the loan class not captured by historical loss data.  These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. TDRs are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Loans Held For Sale – Loans held for sale are carried at the lower of aggregate cost or fair value, based on observable inputs in the secondary market. Changes in fair value of loans held for sale are recognized in earnings.

Bank Owned Life Insurance - Bank owned life insurance is recorded at the lower of the cash surrender value or the amount that can be realized under the insurance policy and is included as an asset in the consolidated statements of condition. Changes in the cash surrender value and insurance benefit payments are recorded in non-interest income in the consolidated statements of operations.

Derivatives- Derivatives are contracts between counterparties that specify conditions under which settlements are to be made. The only derivatives held by the Company are swap contracts with the purchaser of its Visa Class B shares. The Company records its derivatives on the balance sheet at fair value. The Company’s derivatives do not qualify for hedge accounting. As a result, changes in fair value are recognized in earnings in the period in which they occur. (See also Note 3. Investment Securities contained herein.)

Recent Accounting Guidance – In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Topic 310), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Management intends to adopt ASU 2014-04 on January 1, 2015 and does not believe that the adoption will have a material effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to clarify the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company’s adoption of ASU 2013-11 on January 1, 2014 did not have a material effect on the Company’s consolidated financial statements.

Reclassifications — Certain reclassifications have been made to prior period information in order to conform to the current period’s presentation. Such reclassifications had no impact on the Company’s consolidated results of operations or financial condition.

XML

LOANS (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Categorizes total loans [Abstract]
Gross Loans	$ 1,129,818	$ 1,068,848
Allowance for loan losses	(17,737)	(17,263)	(17,834)	(17,781)
Net loans	1,112,081	1,051,585
Commercial and Industrial [Member]
Categorizes total loans [Abstract]
Gross Loans	165,019	171,199
Commercial Real Estate [Member]
Categorizes total loans [Abstract]
Gross Loans	489,958	469,357
Allowance for loan losses	(7,295)	(6,626)	(5,718)	(5,999)
Multifamily [Member]
Categorizes total loans [Abstract]
Gross Loans	221,841	184,624
Allowance for loan losses	(2,640)	(2,159)	(852)	(150)
Real Estate Construction [Member]
Categorizes total loans [Abstract]
Gross Loans	14,940	6,565
Allowance for loan losses	(217)	(88)	(845)	(141)
Residential Mortgages [Member]
Categorizes total loans [Abstract]
Gross Loans	173,347	169,552
Allowance for loan losses	(2,627)	(2,463)	(2,441)	(1,576)
Home Equity [Member]
Categorizes total loans [Abstract]
Gross Loans	55,250	57,112
Consumer [Member]
Categorizes total loans [Abstract]
Gross Loans	9,463	10,439
Allowance for loan losses	$ (186)	$ (241)

XML

LOANS, Loans Current and Past Due by Aging Categories (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Summary of current and past due loans [Abstract]
30-59 days past due	$ 3,636	$ 3,049
60-89 days past due	116	439
90 days and over past due	14,059	15,183
Total past due	17,811	18,671
Current	1,112,007	1,050,177
Total loans	1,129,818	1,068,848
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due (in hundredths)	0.30%	0.30%
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due (in hundredths)	0.00%	0.00%
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due (in hundredths)	1.30%	1.40%
Financing Receivable, Recorded Investment, Past Due (in hundredths)	1.60%	1.70%
Financing Receivable, Recorded Investment, Current (in hundredths)	98.40%	98.30%
% of Total Loan (in hundredths)	100.00%	100.00%
Commercial and Industrial [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	159	13
60-89 days past due	83	0
90 days and over past due	4,843	5,014
Total past due	5,085	5,027
Current	159,934	166,172
Total loans	165,019	171,199
Commercial Real Estate [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	979	631
60-89 days past due	0	0
90 days and over past due	6,936	7,492
Total past due	7,915	8,123
Current	482,043	461,234
Total loans	489,958	469,357
Multifamily [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	0	0
60-89 days past due	0	0
90 days and over past due	0	0
Total past due	0	0
Current	221,841	184,624
Total loans	221,841	184,624
Real Estate Construction [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	0	0
60-89 days past due	0	0
90 days and over past due	0	0
Total past due	0	0
Current	14,940	6,565
Total loans	14,940	6,565
Residential Mortgages [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	1,636	1,535
60-89 days past due	0	339
90 days and over past due	1,840	1,897
Total past due	3,476	3,771
Current	169,871	165,781
Total loans	173,347	169,552
Home Equity [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	807	795
60-89 days past due	24	100
90 days and over past due	431	647
Total past due	1,262	1,542
Current	53,988	55,570
Total loans	55,250	57,112
Consumer [Member]
Summary of current and past due loans [Abstract]
30-59 days past due	55	75
60-89 days past due	9	0
90 days and over past due	9	133
Total past due	73	208
Current	9,390	10,231
Total loans	$ 9,463	$ 10,439

XML

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Cash and cash equivalents
Cash and non-interest bearing deposits due from banks	$ 52,422	$ 69,065
Interest-bearing deposits due from banks	33,743	62,287
Federal funds sold	1,038	1,000
Total cash and cash equivalents	87,203	132,352
Interest-bearing time deposits in other banks	10,000	10,000
Federal Reserve Bank, Federal Home Loan Bank and other stock	2,863	2,863
Investment securities:
Available for sale, at fair value	364,148	400,780
Held to maturity (fair value of $46,008 and $12,234, respectively)	45,479	11,666
Total investment securities	409,627	412,446
Loans	1,129,818	1,068,848
Allowance for loan losses	17,737	17,263
Net loans	1,112,081	1,051,585
Loans held for sale	190	175
Premises and equipment, net	24,523	25,261
Bank owned life insurance	44,109	38,755
Deferred taxes	12,269	13,953
Accrued interest and loan fees receivable	6,322	5,441
Goodwill and other intangibles	2,994	2,978
Other assets	3,635	4,007
TOTAL ASSETS	1,715,816	1,699,816
LIABILITIES & STOCKHOLDERS' EQUITY
Demand deposits	633,496	628,616
Saving, N.O.W. & money market deposits	661,599	656,366
Time certificates of $100,000 or more	164,373	158,337
Other time deposits	63,966	66,742
Total deposits	1,523,434	1,510,061
Unfunded pension liability	167	258
Capital leases	4,588	4,612
Other liabilities	13,456	17,687
TOTAL LIABILITIES	1,541,645	1,532,618
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 15,000,000 shares authorized; 13,738,752 shares issued; 11,573,014 shares outstanding)	34,348	34,348
Surplus	43,445	43,280
Retained earnings	105,993	102,273
Treasury stock at par (2,165,738 shares)	(5,414)	(5,414)
Accumulated other comprehensive loss, net of tax	(4,201)	(7,289)
TOTAL STOCKHOLDERS' EQUITY	174,171	167,198
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 1,715,816	$ 1,699,816

XML

INCOME TAXES (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
INCOME TAXES [Abstract]
Income tax receivable				$ 5,000,000
Unrecognized tax benefits including interest	34,000	34,000	34,000
Operating Loss Carryforwards [Line Items]
Valuation reserve	464,000
Income Tax Reconciliation, Change in Enacted Tax Rate	462,000
Income Tax Reconciliation, Nondeductible Expense, Share-based Compensation Cost	454,000
Federal [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	3,300,000
New York State [Member]
Operating Loss Carryforwards [Line Items]
Net operating loss carryforwards	20,000,000
Corporate tax rate, effective (in hundredths)	7.10%
Corporate tax rate, future - 2016 (in hundredths)	6.50%
Asset qualifying threshold for tax modification	8,000,000,000
Maximum mortgage threshold for loans	$ 5,000,000

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (USD $) In Thousands	Common stock [Member]	Surplus [Member]	Retained earnings [Member]	Treasury stock [Member]	Accumulated other comprehensive income (loss), net of tax [Member]	Total
Balance at Dec. 31, 2012	$ 34,330	$ 42,628	$ 89,555	$ (5,414)	$ 2,886
Net income			2,709			2,709
Stock-based compensation		82				82
Other comprehensive income (loss)					(1,220)	1,489
Balance at Mar. 31, 2013	34,330	42,710	92,264	(5,414)	1,666	165,556
Balance at Dec. 31, 2013	34,348	43,280	102,273	(5,414)	(7,289)	167,198
Net income			3,720			3,720
Stock-based compensation		165				165
Other comprehensive income (loss)					3,088	6,808
Balance at Mar. 31, 2014	$ 34,348	$ 43,445	$ 105,993	$ (5,414)	$ (4,201)	$ 174,171

XML

LOANS, Summary of Impaired Loans (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	$ 21,724		$ 22,171
Impaired loans with an allowance recorded, Unpaid Principal Balance	3,487		4,518
Impaired loans, Unpaid Principal Balance, Total	25,211		26,689
Impaired loans with no allowance recorded, Recorded Investment	21,162		21,608
Impaired loans with an allowance recorded, Recorded Investment	3,349		4,382
Impaired Loans, Recorded Investment, Total	24,511		25,990
Impaired Loans, No Allowance Allocated	0		0
Impaired Loans, Allowance Allocated	899		945
Average recorded investment in impaired loans	25,102	29,511
Interest income recognized on impaired loans	261	176
Commercial and Industrial [Member]
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	7,314		6,711
Impaired loans with an allowance recorded, Unpaid Principal Balance	154		1,043
Impaired loans with no allowance recorded, Recorded Investment	7,314		6,711
Impaired loans with an allowance recorded, Recorded Investment	154		1,043
Impaired Loans, No Allowance Allocated	0		0
Impaired Loans, Allowance Allocated	32		41
Average recorded investment in impaired loans	7,567	10,947
Interest income recognized on impaired loans	107	57
Commercial Real Estate [Member]
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	11,638		12,239
Impaired loans with no allowance recorded, Recorded Investment	11,220		11,821
Impaired Loans, No Allowance Allocated	0		0
Average recorded investment in impaired loans	11,558	11,090
Interest income recognized on impaired loans	99	69
Real Estate Construction [Member]
Summary of impaired loans [Abstract]
Average recorded investment in impaired loans	0	1,401
Interest income recognized on impaired loans	0	0
Residential Mortgages [Member]
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	2,258		2,305
Impaired loans with an allowance recorded, Unpaid Principal Balance	2,857		2,873
Impaired loans with no allowance recorded, Recorded Investment	2,130		2,176
Impaired loans with an allowance recorded, Recorded Investment	2,857		2,873
Impaired Loans, No Allowance Allocated	0		0
Impaired Loans, Allowance Allocated	711		709
Average recorded investment in impaired loans	5,036	5,004
Interest income recognized on impaired loans	36	42
Home Equity [Member]
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	489		891
Impaired loans with an allowance recorded, Unpaid Principal Balance	328		328
Impaired loans with no allowance recorded, Recorded Investment	489		891
Impaired loans with an allowance recorded, Recorded Investment	192		191
Impaired Loans, No Allowance Allocated	0		0
Impaired Loans, Allowance Allocated	94		93
Average recorded investment in impaired loans	771	751
Interest income recognized on impaired loans	17	3
Consumer [Member]
Summary of impaired loans [Abstract]
Impaired loans with no allowance recorded, Unpaid Principal Balance	25		25
Impaired loans with an allowance recorded, Unpaid Principal Balance	148		274
Impaired loans with no allowance recorded, Recorded Investment	9		9
Impaired loans with an allowance recorded, Recorded Investment	146		275
Impaired Loans, No Allowance Allocated	0		0
Impaired Loans, Allowance Allocated	62		102
Average recorded investment in impaired loans	170	318
Interest income recognized on impaired loans	$ 2	$ 5

XML

EMPLOYEE BENEFITS (Tables)

3 Months Ended

Mar. 31, 2014

EMPLOYEE BENEFITS [Abstract]

Net periodic defined benefit pension expense

The following table summarizes the net periodic pension credit (in thousands):

	Three Months Ended March 31,
	2014			2013
Interest cost	$	540		$	498
Expected return on plan assets		(637	)		(575	)
Net amortization		6			61
Net periodic pension credit	$	(91	)	$	(16	)

XML

LOANS, Loans Modified as Troubled Debt Restructurings (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 Loan	Mar. 31, 2013 Loan	Dec. 31, 2013 Loan
Troubled debt restructuring at end of period [Abstract]
Number of loans	69		70
Outstanding recorded investment	$ 16,076		$ 16,085
Troubled debt restructured during year [Abstract]
Number of Loans	3	6
Outstanding Recorded Balance, pre-modification	377	1,242
Outstanding Recorded Balance, Post modification	377	1,242
Defaulted Troubled Debt Restructurings [Member]
Troubled debt restructured during year [Abstract]
Number of Loans	2	0
Outstanding Recorded Balance, pre-modification	1,596	0
Commercial and Industrial [Member]
Troubled debt restructuring at end of period [Abstract]
Number of loans	42		43
Outstanding recorded investment	6,133		6,022
Troubled debt restructured during year [Abstract]
Number of Loans	3	2
Outstanding Recorded Balance, pre-modification	377	320
Outstanding Recorded Balance, Post modification	377	320
Commercial Real Estate [Member]
Troubled debt restructuring at end of period [Abstract]
Number of loans	8		7
Outstanding recorded investment	5,937		6,022
Commercial Real Estate [Member] | Defaulted Troubled Debt Restructurings [Member]
Troubled debt restructured during year [Abstract]
Number of Loans	2	0
Outstanding Recorded Balance, pre-modification	1,596	0
Residential Mortgages [Member]
Troubled debt restructuring at end of period [Abstract]
Number of loans	16		17
Outstanding recorded investment	3,858		3,891
Troubled debt restructured during year [Abstract]
Number of Loans	0	3
Outstanding Recorded Balance, pre-modification	0	905
Outstanding Recorded Balance, Post modification	0	905
Consumer [Member]
Troubled debt restructuring at end of period [Abstract]
Number of loans	3		3
Outstanding recorded investment	148		150
Troubled debt restructured during year [Abstract]
Number of Loans	0	1
Outstanding Recorded Balance, pre-modification	0	17
Outstanding Recorded Balance, Post modification	$ 0	$ 17

XML

REGULATORY MATTERS (Tables)

3 Months Ended

Mar. 31, 2014

REGULATORY MATTERS [Abstract]

The Bank's actual capital amounts and ratios

The Bank’s capital amounts (in thousands) and ratios are as follows:

						Minimum					Minimum to be Well
						for capital					Capitalized under prompt
	Actual capital ratios					adequacy					corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2014
Total capital to risk-weighted assets	$	188,551		14.73	%	$	102,394		8.00	%	$	127,992		10.00	%
Tier 1 capital to risk-weighted assets		172,527		13.48	%		51,197		4.00	%		76,795		6.00	%
Tier 1 capital to adjusted average assets (leverage)		172,527		10.20	%		67,629		4.00	%		84,536		5.00	%
December 31, 2013
Total capital to risk-weighted assets	$	181,952		14.92	%	$	97,542		8.00	%	$	121,927		10.00	%
Tier 1 capital to risk-weighted assets		166,683		13.67	%		48,771		4.00	%		73,156		6.00	%
Tier 1 capital to adjusted average assets (leverage)		166,683		9.74	%		68,454		4.00	%		85,567		5.00	%

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) [Abstract]
NET INCOME	$ 3,720	$ 2,709
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
Provision for loan losses	250	0
Depreciation and Amortization	604	684
Stock-based compensation	165	82
Net amortization of premiums	293	317
Originations of mortgage loans for sale	(4,061)	(20,461)
Proceeds from sale of mortgage loans originated for sale	4,139	23,073
Gain on sale of mortgage loans originated for sale	(93)	(526)
Gain on sale of portfolio loans	0	(442)
Increase in other intangibles	(16)	(183)
Deferred tax (benefit) expense	(78)	425
Decrease in income tax receivable	0	57
Increase in accrued interest and loan fees receivable	(881)	(863)
Decrease in other assets	372	2,028
Adjustment to unfunded pension liability	(91)	(16)
Decrease in other liabilities	(4,230)	(2,724)
Income from bank owned life insurance	(354)	0
Gain on sale of branch building	(642)	0
Gain on sale of securities available for sale	0	(359)
Net cash (used in) provided by operating activities	(903)	3,801
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments on investment securities	3,854	19,831
Proceeds from sale of investment securities - available for sale	0	10,475
Maturities of investment securities - available for sale	6,040	6,025
Purchases of investment securities - available for sale	0	(49,129)
Maturities of investment securities - held to maturity	315	163
Purchases of investment securities - held to maturity	(2,834)	0
Proceeds from sale of portfolio loans	0	1,349
Loan originations - net	(60,746)	(48,146)
Proceeds from sale of branch building	900	0
Proceeds from sale of other real estate owned ("OREO")	0	1,200
Increase in bank owned life insurance	(5,000)	0
Purchases of premises and equipment - net	(124)	(327)
Net cash used in investing activities	(57,595)	(58,559)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts	13,373	(27,356)
Decrease in capital lease payable	(24)	(13)
Net cash provided by (used in) financing activities	13,349	(27,369)
NET DECREASE IN CASH AND CASH EQUIVALENTS	(45,149)	(82,127)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	132,352	385,806
CASH AND CASH EQUIVALENTS, END OF PERIOD	87,203	303,679
SUPPLEMENTAL DATA:
Interest paid	637	770
Income taxes paid	329	0
Investment securities transferred from available for sale to held to maturity	$ 31,286	$ 0

XML

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Investment securities:
Held to maturity, fair value	$ 46,008	$ 12,234
STOCKHOLDERS' EQUITY
Common Stock, par value (in dollars per share)	$ 2.50	$ 2.50
Common Stock, shares authorized (in shares)	15,000,000	15,000,000
Common Stock, shares issued (in shares)	13,738,752	13,738,752
Common Stock, shares outstanding (in shares)	11,573,014	11,573,014
Treasury Stock, shares (in shares)	2,165,738	2,165,738

XML

LEGAL PROCEEDINGS

3 Months Ended

Mar. 31, 2014

LEGAL PROCEEDINGS [Abstract]

LEGAL PROCEEDINGS

10. LEGAL PROCEEDINGS

Certain lawsuits and claims arising in the ordinary course of business. have been filed or are pending against us or our affiliates. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and expected settlements when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.

To the extent we believe any potential loss relating to such lawsuits and claims may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established accrual. We also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where reasonably practicable, we will provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.

Based upon information available to us and our review of lawsuits and claims filed or pending against us to date, we have not recognized a material accrual liability for these matters, nor do we currently expect it is reasonably possible that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 15, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	SUFFOLK BANCORP
Entity Central Index Key	0000754673
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		11,573,014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2014

XML

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2014

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES [Abstract]

Loans and Loan Interest Income Recognition

Loans and Loan Interest Income Recognition - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs. Unearned discounts on installment loans are credited to income using methods that result in a level yield. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.

Interest income is accrued on the unpaid loan principal balance. Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. Loans of all classes will generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status. Loans start accruing interest again when they become current as to principal and interest for at least six months, and when, after a well-documented analysis by management, it has been determined that the loans can be collected in full.  For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings (“TDRs”) and are classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt.

Allowance for Loan Losses

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred losses, increased by the provision for loan losses and recoveries, and decreased by loan charge-offs. For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance for loan losses. This happens when the loan is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon. The allowance for loan losses is determined by a continuous analysis of the loan portfolio. Such analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other relevant factors. All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. In assessing the adequacy of the allowance for loan losses, management reviews the loan portfolio by separate classes that have similar risk and collateral characteristics. These classes are commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loans, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows, including balloon payments, if any, using the loan’s effective interest rate. While every impaired loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated sources of repayment, and charge-offs. The general component covers non-impaired loans and is based on historical loss experience for each loan class from a rolling twelve quarter period and modifying those percentages, if necessary, after adjusting for current qualitative and environmental factors that reflect changes in the estimated collectability of the loan class not captured by historical loss data.  These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. TDRs are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Loans Held-For-Sale

Loans Held For Sale – Loans held for sale are carried at the lower of aggregate cost or fair value, based on observable inputs in the secondary market. Changes in fair value of loans held for sale are recognized in earnings.

Bank Owned Life Insurance

Bank Owned Life Insurance - Bank owned life insurance is recorded at the lower of the cash surrender value or the amount that can be realized under the insurance policy and is included as an asset in the consolidated statements of condition. Changes in the cash surrender value and insurance benefit payments are recorded in non-interest income in the consolidated statements of operations.

Derivatives

Derivatives- Derivatives are contracts between counterparties that specify conditions under which settlements are to be made. The only derivatives held by the Company are swap contracts with the purchaser of its Visa Class B shares. The Company records its derivatives on the balance sheet at fair value. The Company’s derivatives do not qualify for hedge accounting. As a result, changes in fair value are recognized in earnings in the period in which they occur. (See also Note 3. Investment Securities contained herein.)

Recent Accounting Guidance

Recent Accounting Guidance – In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Topic 310), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure,” to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Management intends to adopt ASU 2014-04 on January 1, 2015 and does not believe that the adoption will have a material effect on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” to clarify the balance sheet presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company’s adoption of ASU 2013-11 on January 1, 2014 did not have a material effect on the Company’s consolidated financial statements.

Reclassifications

Reclassifications — Certain reclassifications have been made to prior period information in order to conform to the current period’s presentation. Such reclassifications had no impact on the Company’s consolidated results of operations or financial condition.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
INTEREST INCOME
Loans and loan fees	$ 12,877	$ 11,082
U.S. Government agency obligations	628	333
Obligations of states and political subdivisions	1,505	1,500
Collateralized mortgage obligations	250	835
Mortgage-backed securities	501	365
Corporate bonds	90	117
Federal funds sold and interest-bearing deposits due from banks	46	173
Dividends	38	39
Total interest income	15,935	14,444
INTEREST EXPENSE
Saving, N.O.W. and money market deposits	292	286
Time certificates of $100,000 or more	234	300
Other time deposits	111	182
Total interest expense	637	768
Net interest income	15,298	13,676
Provision for loan losses	250	0
Net interest income after provision for loan losses	15,048	13,676
NON-INTEREST INCOME
Service charges on deposit accounts	1,003	924
Other service charges, commissions and fees	679	710
Fiduciary fees	279	273
Net gain on sale of securities available for sale	0	359
Net gain on sale of portfolio loans	0	442
Net gain on sale of mortgage loans originated for sale	93	526
Net gain on sale of branch building	642	0
Income from bank owned life insurance	354	0
Other operating income	42	83
Total non-interest income	3,092	3,317
OPERATING EXPENSES
Employee compensation and benefits	8,861	8,582
Occupancy expense	1,435	1,544
Equipment expense	449	572
Consulting and professional services	551	573
FDIC assessment	267	517
Data processing	573	467
Accounting and audit fees	108	21
Branch consolidation costs	(170)	0
Reserve and carrying costs related to Visa shares sold	59	0
Other operating expenses	1,176	1,525
Total operating expenses	13,309	13,801
Income before income tax expense	4,831	3,192
Income tax expense	1,111	483
NET INCOME	$ 3,720	$ 2,709
EARNINGS PER COMMON SHARE - BASIC (in dollars per shares)	$ 0.32	$ 0.23
EARNINGS PER COMMON SHARE - DILUTED (in dollars per shares)	$ 0.32	$ 0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC (in shares)	11,573,014	11,566,347
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED (in shares)	11,631,462	11,566,347

XML

EMPLOYEE BENEFITS

3 Months Ended

Mar. 31, 2014

EMPLOYEE BENEFITS [Abstract]

EMPLOYEE BENEFITS

5. EMPLOYEE BENEFITS

Retirement Plan- The Company’s retirement plan is noncontributory and covers substantially all eligible employees. The plan conforms to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and the Pension Protection Act of 2006, which requires certain funding rules for defined benefit plans. The Company’s policy is to accrue for all pension costs and to fund the maximum amount allowable for tax purposes. Actuarial gains and losses that arise from changes in assumptions concerning future events are amortized over a period that reflects the long-term nature of pension expense used in estimating pension costs.

The Company accounts for its retirement plan in accordance with ASC 715, “Compensation – Retirement Benefits” and ASC 960, “Plan Accounting – Defined Benefit Pension Plans,” which require an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan on its balance sheet; recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligation as of the date of fiscal year-end statement of financial position (with limited exceptions); and disclose in the notes to financial statements additional information about certain effects of net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset and obligation. Plan assets and benefit obligations shall be measured as of the date of its statement of financial position and in determining the amount of net periodic benefit cost. An employer is required to use the same date for the measurement of plan assets as for the statement of condition.

On December 31, 2012, certain provisions of the Company’s retirement plan were changed which affected all participants in this plan and froze the participation of new entrants into the pension plan for all remaining employees in 2012. These changes froze the plan such that no additional pension benefits would accumulate.

The following table summarizes the net periodic pension credit (in thousands):

	Three Months Ended March 31,
	2014			2013
Interest cost	$	540		$	498
Expected return on plan assets		(637	)		(575	)
Net amortization		6			61
Net periodic pension credit	$	(91	)	$	(16	)

In December 2012, the Company made an annual minimum contribution of $1 million for the plan year ended September 30, 2013. There was no additional minimum required contribution for the plan year ended September 30, 2013. The Company does not expect to contribute to its pension plan in 2014.

Post-Retirement Benefits other than Pension - The Company formerly provided life insurance benefits to employees meeting eligibility requirements. Employees hired after December 31, 1997 were not eligible for retiree life insurance. No other welfare benefits were provided. In the second quarter of 2013, the Company terminated all post-retirement life insurance benefits and recorded a non-recurring gain of $1.7 million as a credit to employee compensation and benefits expense in the Company’s consolidated statement of operations.

XML

LOANS

3 Months Ended

Mar. 31, 2014

LOANS [Abstract]

LOANS

4. LOANS

At March 31, 2014 and December 31, 2013, net loans disaggregated by class consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Commercial and industrial	$	165,019		$	171,199
Commercial real estate		489,958			469,357
Multifamily		221,841			184,624
Real estate construction		14,940			6,565
Residential mortgages		173,347			169,552
Home equity		55,250			57,112
Consumer		9,463			10,439
Gross loans		1,129,818			1,068,848
Allowance for loan losses		(17,737	)		(17,263	)
Net loans at end of period	$	1,112,081		$	1,051,585

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands).

	Commercial and industrial			Commercial real estate			Multifamily		Real estate construction		Residential mortgages		Home equity			Consumer			Unallocated			Total
Three months ended March 31, 2014
Balance at beginning of period	$	2,615		$	6,626		$	2,159	$	88	$	2,463	$	745		$	241		$	2,326		$	17,263
Charge-offs		(115	)		-			-		-		-		-			(2	)		-			(117	)
Recoveries		293			12			-		-		4		27			5			-			341
(Credit) provision for loan losses		(312	)		657			481		129		160		(54	)		(58	)		(753	)		250
Balance at end of period	$	2,481		$	7,295		$	2,640	$	217	$	2,627	$	718		$	186		$	1,573		$	17,737
Three months ended March 31, 2013
Balance at beginning of period	$	6,181		$	5,999		$	150	$	141	$	1,576	$	907		$	189		$	2,638		$	17,781
Charge-offs		(348	)		-			-		-		-		-			(11	)		-			(359	)
Recoveries		299			72			-		-		1		1			39			-			412
(Credit) provision for loan losses		(787	)		(353	)		702		704		864		16			28			(1,174	)		-
Balance at end of period	$	5,345		$	5,718		$	852	$	845	$	2,441	$	924		$	245		$	1,464		$	17,834

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan, in full or in part, is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan 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 judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company 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 TDRs and classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a TDR to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. If a loan is impaired, a specific reserve may be recorded so that the loan is reported, net, at the present value of estimated future cash flows including balloon payments, if any, using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. TDRs are separately identified for impairment disclosures and 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 collateral-dependent, the loan is reported at the fair value of the collateral net of estimated costs to sell.  For TDRs that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses.

The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors.  The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over a rolling twelve quarter period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class.  These qualitative factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified: commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The Company recorded a $250 thousand provision for loan losses for the three months ended March 31, 2014 due to growth in the loan portfolio. The Company did not record a provision for loan losses in the first quarter of 2013.

For the three months ended March 31, 2014, the ending balance of the Company’s allowance for loan losses increased by $474 thousand when compared to December 31, 2013. During the first quarter of 2014, the Company increased its allowance for loan losses allocated to multifamily loans and commercial real estate loans (“CRE”) by $481 thousand and $669 thousand, respectively, while reducing the amount allocated to commercial and industrial loans (“C&I”) by $134 thousand.

The increases in the allowance for loan losses allocated to multifamily and CRE loans were primarily due to higher balances of unimpaired pass rated multifamily and CRE loans of $37 million and $23 million, respectively, versus December 31, 2013, coupled with increases of 0.01% and 0.08%, respectively, in the ASC 450-20 historical loss factors rates for such unimpaired pass rated loans.

The decrease in the allowance for loan losses allocated to C&I loans during the first quarter of 2014 reflected a $6 million decrease in the balance of unimpaired pass rated C&I loans, as well as a reduction of 0.02% in the ASC 450-20 historical loss factors rate on unimpaired pass rated C&I loans and a decrease of $9 thousand in specific reserves for C&I loans.

The ASC 450-20 loss factors rates incorporate a rolling twelve quarter look back period used in calculating historical losses for each loan segment. In an effort to more accurately represent the Company’s incurred and expected losses by individual loan segment, a twelve quarter period is used to improve the granularity of individual loan segment charge-off history and reduce the volatility associated with improperly weighting short-term trends in the calculation.

At March 31, 2014 and December 31, 2013, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at March 31, 2014 and December 31, 2013 disaggregated by class and impairment methodology (in thousands).

March 31, 2014	Commercial and industrial		Commercial  real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	32	$	-	$	-	$	-	$	711	$	94	$	62	$	-	$	899
Ending balance: collectively evaluated for impairment		2,449		7,295		2,640		217		1,916		624		124		1,573		16,838
Ending balance	$	2,481	$	7,295	$	2,640	$	217	$	2,627	$	718	$	186	$	1,573	$	17,737
Loan balances:
Ending balance: individually evaluated for impairment	$	7,468	$	11,220	$	-	$	-	$	4,987	$	681	$	155	$	-	$	24,511
Ending balance: collectively evaluated for impairment		157,551		478,738		221,841		14,940		168,360		54,569		9,308		-		1,105,307
Ending balance	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	-	$	1,129,818

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	41	$	-	$	-	$	-	$	709	$	93	$	102	$	-	$	945
Ending balance: collectively evaluated for impairment		2,574		6,626		2,159		88		1,754		652		139		2,326		16,318
Ending balance	$	2,615	$	6,626	$	2,159	$	88	$	2,463	$	745	$	241	$	2,326	$	17,263
Loan balances:
Ending balance: individually evaluated for impairment	$	7,754	$	11,821	$	-	$	-	$	5,049	$	1,082	$	284	$	-	$	25,990
Ending balance: collectively evaluated for impairment		163,445		457,536		184,624		6,565		164,503		56,030		10,155		-		1,042,858
Ending balance	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	-	$	1,068,848

The following table presents the Company’s impaired loans disaggregated by class at March 31, 2014 and December 31, 2013 (in thousands).

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	7,314	$	7,314	$	-	$	6,711	$	6,711	$	-
Commercial real estate		11,638		11,220		-		12,239		11,821		-
Residential mortgages		2,258		2,130		-		2,305		2,176		-
Home equity		489		489		-		891		891		-
Consumer		25		9		-		25		9		-
Subtotal		21,724		21,162		-		22,171		21,608		-
With an allowance recorded:
Commercial and industrial		154		154		32		1,043		1,043		41
Residential mortgages		2,857		2,857		711		2,873		2,873		709
Home equity		328		192		94		328		191		93
Consumer		148		146		62		274		275		102
Subtotal		3,487		3,349		899		4,518		4,382		945
Total	$	25,211	$	24,511	$	899	$	26,689	$	25,990	$	945

The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the three months ended March 31, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for the periods presented.

	Three Months Ended March 31,
	2014				2013
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans
Commercial and industrial	$	7,567	$	107	$	10,947	$	57
Commercial real estate		11,558		99		11,090		69
Real estate construction		-		-		1,401		-
Residential mortgages		5,036		36		5,004		42
Home equity		771		17		751		3
Consumer		170		2		318		5
Total	$	25,102	$	261	$	29,511	$	176

TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $611 thousand and $586 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of March 31, 2014 and December 31, 2013, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of default by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.

A total of $250 thousand was committed to be advanced in connection with TDRs at March 31, 2014 and December 31, 2013, representing the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing interest. It is the Company’s policy to evaluate advances on such loans on a case by case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments, but may do so in certain circumstances.

Outstanding TDRs, disaggregated by class, at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

	March 31, 2014				December 31, 2013
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		42	$	6,133		43	$	6,022
Commercial real estate		8		5,937		7		6,022
Residential mortgages		16		3,858		17		3,891
Consumer		3		148		3		150
Total		69	$	16,076		70	$	16,085

The following presents, disaggregated by class, information regarding TDRs executed during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014						2013
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
New TDRs	Loans		Balance		Balance		Loans		Balance		Balance
Commercial and industrial		3	$	377	$	377		2	$	320	$	320
Residential mortgages		-		-		-		3		905		905
Consumer		-		-		-		1		17		17
Total		3	$	377	$	377		6	$	1,242	$	1,242

Presented below and disaggregated by class is information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance
Commercial real estate		2	$	1,596		-	$	-
Total		2	$	1,596		-	$	-

Not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate.

The following presents information regarding modifications and renewals executed during the three months ended March 31, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial real estate		3	$	1,422		11	$	19,703
Total		3	$	1,422		11	$	19,703

The following table presents a summary of non-performing assets for each period (in thousands):

	March 31, 2014		December 31, 2013
Non-accrual loans	$	14,059	$	15,183
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	14,059	$	15,183
TDRs accruing interest	$	10,631	$	10,647
TDRs non-accruing	$	5,445	$	5,438

At March 31, 2014 and December 31, 2013, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	March 31, 2014										December 31, 2013
	Non- accrual loans		% of Total			Total Loans		% of Total Loans			Non- accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	4,843		34.4	%	$	165,019		0.4	%	$	5,014		33.0	%	$	171,199		0.4	%
Commercial real estate		6,936		49.3			489,958		0.6			7,492		49.3			469,357		0.7
Multifamily		-		-			221,841		-			-		-			184,624		-
Real estate construction		-		-			14,940		-			-		-			6,565		-
Residential mortgages		1,840		13.1			173,347		0.2			1,897		12.5			169,552		0.2
Home equity		431		3.1			55,250		-			647		4.3			57,112		0.1
Consumer		9		0.1			9,463		-			133		0.9			10,439		-
Total	$	14,059		100.0	%	$	1,129,818		1.2	%	$	15,183		100.0	%	$	1,068,848		1.4	%

Additional interest income of approximately $494 thousand and $406 thousand would have been recorded during the three months ended March 31, 2014 and 2013, respectively, if non-accrual loans had performed in accordance with their original terms.

The following table presents the collateral value securing non-accrual loans for each period (in thousands):

	March 31, 2014				December 31, 2013
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	4,843	$	3,750	$	5,014	$	3,750
Commercial real estate		6,936		9,960		7,492		13,050
Residential mortgages		1,840		4,565		1,897		3,764
Home equity		431		975		647		3,072
Consumer		9		-		133		-
Total	$	14,059	$	19,250	$	15,183	$	23,636

(1) Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

At March 31, 2014 and December 31, 2013, past due loans disaggregated by class were as follows (in thousands).

	Past Due
March 31, 2014	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	159		$	83	$	4,843		$	5,085		$	159,934		$	165,019
Commercial real estate		979			-		6,936			7,915			482,043			489,958
Multifamily		-			-		-			-			221,841			221,841
Real estate construction		-			-		-			-			14,940			14,940
Residential mortgages		1,636			-		1,840			3,476			169,871			173,347
Home equity		807			24		431			1,262			53,988			55,250
Consumer		55			9		9			73			9,390			9,463
Total	$	3,636		$	116	$	14,059		$	17,811		$	1,112,007		$	1,129,818
% of Total Loans		0.3	%		-		1.3	%		1.6	%		98.4	%		100.0	%

	Past Due
December 31, 2013	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	13		$	-	$	5,014		$	5,027		$	166,172		$	171,199
Commercial real estate		631			-		7,492			8,123			461,234			469,357
Multifamily		-			-		-			-			184,624			184,624
Real estate construction		-			-		-			-			6,565			6,565
Residential mortgages		1,535			339		1,897			3,771			165,781			169,552
Home equity		795			100		647			1,542			55,570			57,112
Consumer		75			-		133			208			10,231			10,439
Total	$	3,049		$	439	$	15,183		$	18,671		$	1,050,177		$	1,068,848
% of Total Loans		0.3	%		-		1.4	%		1.7	%		98.3	%		100.0	%

The Bank utilizes an eight-grade risk-rating system for commercial and industrial loans, commercial real estate and construction loans. Loans in risk grades 1- 4 are considered pass loans. The Bank’s risk grades are as follows:

Risk Grade 1, Excellent - Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2, Good -  Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3, Satisfactory - Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

· At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.

· At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

· The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

· During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4, Satisfactory/Monitored - Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5, Special Mention - Loans which possess potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential not defined impairments to the primary source of repayment.

Risk Grade 6, Substandard - One or more of the following characteristics may be exhibited in loans classified Substandard:

· Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

· Loans are inadequately protected by the current net worth and paying capacity of the obligor.

· The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

· Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

· Unusual courses of action are needed to maintain a high probability of repayment.

· The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

· The lender is forced into a subordinated or unsecured position due to flaws in documentation.

· Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

· The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

· There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7, Doubtful - One or more of the following characteristics may be present in loans classified Doubtful:

· Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

· The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

· The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8, Loss - Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at March 31, 2014 and December 31, 2013 (in thousands).

March 31, 2014	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	152,091	$	468,449	$	221,841	$	14,940	$	168,755	$	54,819	$	9,306	$	1,090,201		96.5	%
Special mention		3,563		2,786		-		-		-		-		-		6,349		0.6
Substandard		9,365		18,723		-		-		4,592		431		157		33,268		2.9
Total	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	1,129,818		100.0	%

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	158,536	$	445,302	$	184,624	$	6,565	$	164,559	$	56,379	$	10,156	$	1,026,121		96.0	%
Special mention		2,934		2,817		-		-		-		-		-		5,751		0.5
Substandard		9,729		21,238		-		-		4,993		733		283		36,976		3.5
Total	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	1,068,848		100.0	%

The Bank annually reviews the ratings on all commercial and industrial, commercial real estate and real estate construction loans greater than $1 million. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these loan classes. Management uses the results of these reviews as part of its ongoing review process.

XML

STOCK-BASED COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2014

STOCK-BASED COMPENSATION [Abstract]

Summary of stock option activity

A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding, January 1, 2014		291,000		$	16.18
Granted		-			-
Exercised		-			-
Forfeited or expired		(9,166	)	$	20.27
Outstanding, March 31, 2014		281,834		$	16.04

Summary of options outstanding and exercisable

The following summarizes shares subject to purchase from stock options outstanding and exercisable as of March 31, 2014:

		Outstanding					Exercisable
				Weighted-Average					Weighted-Average
Range of				Remaining	Weighted-Average				Remaining	Weighted-Average
Exercise Prices		Shares		Contractual Life	Exercise Price		Shares		Contractual Life	Exercise Price
$	10.00 - $14.00		140,000	7.9 years	$	12.01		50,003	8.0 years	$	12.81
$	14.01 - $20.00		114,834	9.2 years	$	17.24		11,668	8.8 years	$	14.47
$	20.01 - $30.00		5,000	4.8 years	$	28.30		5,000	4.8 years	$	28.30
$	30.01 - $40.00		22,000	2.3 years	$	32.69		22,000	2.3 years	$	32.69
			281,834	8.0 years	$	16.04		88,671	6.5 years	$	18.83

XML

ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) (Tables)

3 Months Ended

Mar. 31, 2014

ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") [Abstract]

Changes in AOCI by component, net of tax

The changes in the Company’s AOCI by component, net of tax, for the three months ended March 31, 2014 and 2013 follow (in thousands). The increase in net unrealized gains on available for sale securities for the three months ended March 31, 2014 resulted almost solely from the positive impact of a reduction in interest rates in 2014.

	Three Months Ended March 31, 2014									Three Months Ended March 31, 2013
	Unrealized Gains and Losses on Available for Sale Securities			Pension and Post- Retirement Plan Items			Total			Unrealized Gains and Losses on Available for Sale Securities			Pension and Post- Retirement Plan Items			Total
Beginning balance	$	(4,095	)	$	(3,194	)	$	(7,289	)	$	10,553		$	(7,667	)	$	2,886
Other comprehensive income (loss) before reclassifications		3,088			-			3,088			(991	)		-			(991	)
Amounts reclassified from AOCI		-			-			-			(229	)		-			(229	)
Net other comprehensive income (loss)		3,088			-			3,088			(1,220	)		-			(1,220	)
Ending balance	$	(1,007	)	$	(3,194	)	$	(4,201	)	$	9,333		$	(7,667	)	$	1,666

Reclassifications out of AOCI

The table below presents reclassifications out of AOCI for the three months ended March 31, 2014 and 2013 (in thousands).

	Amount Reclassified from AOCI
	Three Months Ended March 31,							Affected Line Item in the Statement
Details about AOCI Components	2014			2013				Where Net Income is Presented
Unrealized gains and losses on available for sale securities		$	-		$	359		Net gain on sale of securities available for sale
			-			(130	)	Income tax expense
Total reclassifications, net of tax		$	-		$	229

XML

REGULATORY MATTERS

3 Months Ended

Mar. 31, 2014

REGULATORY MATTERS [Abstract]

REGULATORY MATTERS

8. REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital requirements that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and tier 1 capital, as defined in the federal banking regulations, to risk-weighted assets and of tier 1 capital to adjusted average assets (leverage). Management believes, as of March 31, 2014, that the Company and the Bank met all such capital adequacy requirements to which it is subject.

The Bank’s capital amounts (in thousands) and ratios are as follows:

						Minimum					Minimum to be Well
						for capital					Capitalized under prompt
	Actual capital ratios					adequacy					corrective action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2014
Total capital to risk-weighted assets	$	188,551		14.73	%	$	102,394		8.00	%	$	127,992		10.00	%
Tier 1 capital to risk-weighted assets		172,527		13.48	%		51,197		4.00	%		76,795		6.00	%
Tier 1 capital to adjusted average assets (leverage)		172,527		10.20	%		67,629		4.00	%		84,536		5.00	%
December 31, 2013
Total capital to risk-weighted assets	$	181,952		14.92	%	$	97,542		8.00	%	$	121,927		10.00	%
Tier 1 capital to risk-weighted assets		166,683		13.67	%		48,771		4.00	%		73,156		6.00	%
Tier 1 capital to adjusted average assets (leverage)		166,683		9.74	%		68,454		4.00	%		85,567		5.00	%

The Company’s tier 1 leverage, tier 1 risk-based and total risk-based capital ratios were 10.27%, 13.57% and 14.82%, respectively, at March 31, 2014 versus 9.81%, 13.77% and 15.02%, respectively, at December 31, 2013.

The ability of the Bank to pay dividends to the Company is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock. In addition, a national bank may not pay dividends in an amount greater than its undivided profits or declare any dividends if such declaration would leave the bank inadequately capitalized. Also, the ability of the Bank to declare dividends will depend on the prior approval of the Federal Reserve Bank (“FRB”).

In July 2013, the OCC approved new rules on regulatory capital applicable to national banks, implementing Basel III. Most banking organizations are required to apply the new capital rules on January 1, 2015. The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. They also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a buffer of common equity tier 1 capital above minimum capital requirements. The rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk-weighted assets, including through new measures of creditworthiness to replace references to credit ratings, consistent with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Based on our capital levels and balance sheet composition at March 31, 2014, we believe implementation of the new rules will not have a material impact on our capital needs.

XML

STOCK-BASED COMPENSATION

3 Months Ended

Mar. 31, 2014

STOCK-BASED COMPENSATION [Abstract]

STOCK-BASED COMPENSATION

6. STOCK-BASED COMPENSATION

Under the terms of the Company’s stock option plans adopted in 1999 and 2009, options have been granted to key employees and directors to purchase shares of the Company’s stock. Under the 2009 Stock Incentive Plan (“the Plan”), a total of 500,000 shares of the Company’s common stock were reserved for issuance, of which 268,499 shares remain for possible issuance at March 31, 2014. There are no remaining shares reserved for issuance under the 1999 Stock Option Plan. Options are awarded by the Compensation Committee of the Board of Directors. Both plans provide that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less.

No options were granted during the first three months of 2014. Options granted in 2013 and 2012 are exercisable over a three-year period commencing one year from the date of grant at a rate of one third per year. Options granted in 2011 are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year. No options were exercised during the first three months of 2014 and 2013.

Both plans provide for but do not require the grant of stock appreciation rights (“SARs”) that the holder may exercise instead of the underlying option. At March 31, 2014, there were 6,000 SARs outstanding related to options granted before 2011. The SARs had no intrinsic value at March 31, 2014. When the SAR is exercised, the underlying option is canceled. The optionee receives shares of common stock or cash with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise of SARs is treated as the exercise of the underlying option.

In 2011 the Company granted an award of 30,000 non-qualified stock options at an exercise price of $10.79 per share to its President and Chief Executive Officer as a material inducement to employment with the Company. The non-qualified options were not issued as part of any of the Company’s registered stock-based compensation plans. The options are exercisable over a three-year period commencing three years from the date of grant at a rate of one third per year.

A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding, January 1, 2014		291,000		$	16.18
Granted		-			-
Exercised		-			-
Forfeited or expired		(9,166	)	$	20.27
Outstanding, March 31, 2014		281,834		$	16.04

The following summarizes shares subject to purchase from stock options outstanding and exercisable as of March 31, 2014:

		Outstanding					Exercisable
				Weighted-Average					Weighted-Average
Range of				Remaining	Weighted-Average				Remaining	Weighted-Average
Exercise Prices		Shares		Contractual Life	Exercise Price		Shares		Contractual Life	Exercise Price
$	10.00 - $14.00		140,000	7.9 years	$	12.01		50,003	8.0 years	$	12.81
$	14.01 - $20.00		114,834	9.2 years	$	17.24		11,668	8.8 years	$	14.47
$	20.01 - $30.00		5,000	4.8 years	$	28.30		5,000	4.8 years	$	28.30
$	30.01 - $40.00		22,000	2.3 years	$	32.69		22,000	2.3 years	$	32.69
			281,834	8.0 years	$	16.04		88,671	6.5 years	$	18.83

The Company accounts for stock-based compensation on a modified prospective basis with the fair value of grants of employee stock options recognized in the financial statements. Compensation expense related to stock-based compensation amounted to $165 thousand and $82 thousand for the three months ended March 31, 2014 and 2013, respectively. The remaining unrecognized compensation cost of approximately $728 thousand at March 31, 2014 will be expensed over the remaining weighted average vesting period of approximately 2.3 years.

XML

INCOME TAXES

3 Months Ended

Mar. 31, 2014

INCOME TAXES [Abstract]

INCOME TAXES

7. INCOME TAXES 

The deferred tax assets and liabilities are netted and presented in a single amount which is included in deferred taxes in the accompanying consolidated statements of condition. The realization of deferred tax assets (“DTAs”) (net of a recorded valuation allowance) is largely dependent upon future taxable income, future reversals of existing taxable temporary differences and the ability to carry back losses to available tax years. In assessing the need for a valuation allowance, the Company considers positive and negative evidence, including taxable income in carryback years, scheduled reversals of deferred tax liabilities, expected future taxable income and tax planning strategies. The Company applied a carryback of the net operating losses for 2012, which resulted in $5 million included in income tax receivable in the 2012 consolidated statement of condition, and which was received in November 2013. At March 31, 2014 the Company had net operating loss carryforwards of approximately $3.3 million and $20.0 million for Federal and New York State (“NYS”) income tax purposes, respectively, which may be applied against future taxable income. The Company has a full valuation allowance of $464 thousand, tax effected, on the NYS net operating loss due to the Company’s significant tax-exempt investment income in NYS. The valuation allowance may be reversed to income in future periods to the extent that the related DTAs are realized or when the Company returns to consistent, taxable earnings in NYS. Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining DTAs. Both the Federal and NYS unused net operating loss carryforwards are expected to expire in varying amounts through the year 2032. It is anticipated that the Federal carryforward will be utilized prior to its expiration based on the Company’s future years’ projected earnings.

On March 31, 2014, Governor Andrew Cuomo signed legislation to implement the New York State fiscal plan for 2014 – 2015.   This legislation encompasses significant changes to New York’s bank tax regime, most notably by merging the bank tax into the general corporate tax law.  In addition, the new budget law simplifies the code by setting forth a single apportionment factor.  The corporate tax rate will be lowered from 7.1% to 6.5% in 2016.  Furthermore, for community banks (all banks and thrifts with $8 billion or less in assets) there is a subtraction modification for a portion of interest earned on all residential and small business loans with a principal amount of up to $5 million made to New York borrowers. All banks in this category that have a REIT on April 1, 2014, and in the applicable tax year would instead get a deduction based on their REIT's dividends paid deduction. The Company had a qualifying REIT on April 1, 2014 and is less than $8 billion in assets. If a change in a tax law or rate occurs, any existing deferred tax liability or asset must be adjusted. The effect is reflected in operations in the period of the enactment of the change in the tax law or rate.  As such, the Company made an adjustment as of March 31, 2014 to increase its DTAs resulting in a net income tax credit of $462 thousand in the first quarter of 2014.

Offsetting the net income tax credit, was a $454 thousand income tax expense related to an adjustment of the Company’s stock based compensation included in the DTAs primarily for stock options that had expired or been forfeited by former employees. The adjustment relates primarily to prior periods, but management has determined that it is not material, and as such, has included it in the current quarter’s results.

The Company had unrecognized tax benefits including interest of approximately $34 thousand for all periods presented.

The Company recognizes interest and penalties accrued relating to unrecognized tax benefits in income tax expense. There is no accrued interest relating to uncertain tax positions as of March 31, 2014. The Company files income tax returns in the U.S. federal jurisdiction and in New York State. Federal returns are subject to audits by tax authorities and the Company is currently under an audit for the tax years 2010 through 2012. The Company does not expect a significant change in income taxes as a result of this audit.  In 2012, New York State audited the Company and Suffolk Greenway, Inc., a subsidiary of the Bank, for the years 2008, 2009 and 2010 and there was no change as a result of these audits. It is not anticipated that the unrecognized tax benefits will significantly change over the next 12 months.

XML

FAIR VALUE

3 Months Ended

Mar. 31, 2014

FAIR VALUE [Abstract]

FAIR VALUE

9. FAIR VALUE

Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability in an exchange. The definition of fair value includes the exchange price which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal market for the asset or liability. Market participant assumptions include assumptions about risk, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique, as well as the effect of credit risk on the fair value of liabilities. The Company uses three levels of the fair value inputs to measure assets, as described below.

Basis of Fair Value Measurement:

Level 1 – Valuations based on quoted prices in active markets for identical investments.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 inputs include: (i) quoted prices for similar investments in active markets, (ii) quoted prices for identical investments traded in non-active markets (i.e., dealer or broker markets) and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data for substantially the full term of the investment.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities. Such instruments are generally classified within Level 1 and Level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include U.S. Government agency securities, state and municipal obligations, MBS, CMOs and corporate bonds. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The types of instruments valued based on significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability are generally classified within Level 3 of the fair value hierarchy.

ASC 820, “Fair Value Measurements and Disclosures,” presents requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term fair value. ASC 820 provides additional guidance in determining fair values when the volume and level of activity for the asset or liability have significantly decreased, particularly when there is no active market or where the price inputs being used represent distressed sales. It also provides guidelines for making fair value measurements more consistent with principles, reaffirming the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets become inactive.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments (in thousands).

	Level in		March 31, 2014				December 31, 2013
	Fair Value		Carrying		Estimated		Carrying		Estimated
	Heirarchy		Amount		Fair Value		Amount		Fair Value
Cash and due from banks	Level 1		$	86,165	$	86,165	$	131,352	$	131,352
Cash equivalents	Level 2			1,038		1,038		1,000		1,000
Interest-bearing time deposits in other banks	Level 2			10,000		10,000		10,000		10,000
Federal Reserve Bank, Federal Home Loan
Bank and other stock	N/	A		2,863		N/A		2,863		N/A
Investment securities held to maturity	Level 2			45,479		46,008		11,666		12,234
Investment securities available for sale	Level 2			364,148		364,148		400,780		400,780
Loans held for sale	Level 2			190		190		175		175
Loans, net of allowance	Level 2, 3 (1)			1,112,081		1,112,942		1,051,585		1,056,279
Bank owned life insurance	Level 3			44,109		44,109		38,755		38,755
Accrued interest and loan fees receivable	Level 2			6,322		6,322		5,441		5,441
Non-maturity deposits	Level 2			1,295,095		1,295,095		1,284,982		1,284,982
Time deposits	Level 2			228,339		229,064		225,079		225,946
Accrued interest payable	Level 2			160		160		160		160

(1) Impaired loans are generally classified within Level 3 of the fair value hierarchy.

Fair value estimates are made at a specific point in time and may be based on judgments regarding losses expected in the future, risk, and other factors that are subjective in nature. The methods and assumptions used to produce the fair value estimates follow.

The Company records investments available for sale and mortgage servicing rights at fair value. For cash and due from banks, cash equivalents, interest-bearing time deposits in other banks, bank owned life insurance, accrued interest and loan fees receivable, non-maturity deposits and accrued interest payable, the carrying amount is a reasonable estimate of fair value. Time deposits are valued using a replacement cost of funds approach.

Fair values are estimated for portfolios of loans with similar characteristics. The fair value of performing loans was calculated by discounting projected cash flows through their estimated maturity using market discount rates that reflect the general credit and interest rate characteristics of the loan category. The maturity horizon is based on the Bank’s history of repayments for each type of loan and an estimate of the effect of current economic conditions. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using availablemarket information and specific borrower information.

OREO properties are initially recorded at fair value, less estimated costs to sell when acquired, establishing a new cost basis. Adjustments to OREO are measured at fair value, less estimated costs to sell. Fair values are generally based on third party appraisals or realtor evaluations of the property. These appraisals and evaluations may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less estimated costs to sell, an impairment loss is recognized through a valuation allowance, and the property is reported as non-recurring Level 3.

Loans identified as impaired are measured using one of three methods: the loan’s observable market price, the fair value of collateral less estimated costs to sell or the present value of expected future cash flows. Those measured using the loan’s observable market price or the fair value of collateral are recorded at fair value. For each period presented, no impaired loans were measured using the loan’s observable market price. If an impaired loan has had a charge-off or if the fair value of the collateral is less than the recorded investment in the loan, the Company establishes a specific reserve and reports the loan as non-recurring Level 3. The fair value of collateral of impaired loans is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

The fair value of loans held for sale is based on observable inputs in the secondary market.

The fair value of commitments to extend credit was estimated by either discounting cash flows or using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counter-parties. The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements. The fees charged for the commitments were not material in amount.

During the second and third quarters of 2013, the Company entered into derivative swap contracts with the purchaser of its Visa Class B shares. The fair value of these derivatives is measured using an internal model that includes the use of probability weighted scenarios for estimates of Visa’s aggregate exposure to the litigation matters, with consideration of amounts funded by Visa into its escrow account for this litigation. As a result, the Company estimates a fair value for these derivatives at 12% of the net sale proceeds from the Company’s sale of the related Visa Class B shares. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the possible outcomes and the probability weighting assigned to each scenario, these derivatives have been classified as Level 3 within the valuation hierarchy. (See also Note 3. Investment Securities contained herein.)

The following presents fair value measurements on a recurring basis at March 31, 2014 and December 31, 2013 (in thousands):

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	March 31, 2014		(Level 2)		(Level 3)
U.S. Government agency securities	$	66,761	$	66,761	$	-
Corporate bonds		15,684		15,684		-
Collateralized mortgage obligations		27,299		27,299		-
Mortgage-backed securities		98,481		98,481		-
Obligations of states and political subdivisions		155,923		155,923		-
Loans held for sale		190		190		-
Mortgage servicing rights		2,179		-		2,179
Total	$	366,517	$	364,338	$	2,179
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

			Fair Value Measurements Using
			Significant Other		Significant
			Observable Inputs		Unobservable Inputs
Assets:	December 31, 2013		(Level 2)		(Level 3)
U.S. Government agency securities	$	100,095	$	100,095	$	-
Corporate bonds		15,651		15,651		-
Collateralized mortgage obligations		30,104		30,104		-
Mortgage-backed securities		97,767		97,767		-
Obligations of states and political subdivisions		157,163		157,163		-
Loans held for sale		175		175		-
Mortgage servicing rights		2,163		-		2,163
Total	$	403,118	$	400,955	$	2,163
Liabilities:
Derivatives		932	$	-	$	932
Total	$	932	$	-	$	932

Reconciliations for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follow (in thousands).

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31,
	2014				2013
	Assets		Liabilities		Assets
	Mortgage Servicing Rights		Derivatives		Mortgage Servicing Rights
Balance, January 1	$	2,163	$	932	$	1,856
Net increase		16		-		183
Balance, March 31	$	2,179	$	932	$	2,039

Assets measured at fair value on a non-recurring basis are as follows (in thousands):

Assets:	March 31, 2014		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	15,510	$	15,510
Total	$	15,510	$	15,510

Assets:	December 31, 2013		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Impaired loans	$	16,942	$	16,942
Total	$	16,942	$	16,942

XML

LOANS, Loans and Allowance for Loan Losses Impairment Evaluations (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	$ 899	$ 945
Ending balance: collectively evaluated for impairment	16,838	16,318
Balance, End of Period	17,737	17,263	17,834	17,781
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	24,511	25,990
Ending balance: collectively evaluated for impairment	1,105,307	1,042,858
Ending balance (loan portfolio)	1,129,818	1,068,848
Commercial and Industrial [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	32	41
Ending balance: collectively evaluated for impairment	2,449	2,574
Balance, End of Period	2,481	2,615	5,345	6,181
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	7,468	7,754
Ending balance: collectively evaluated for impairment	157,551	163,445
Ending balance (loan portfolio)	165,019	171,199
Commercial Real Estate [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	7,295	6,626
Balance, End of Period	7,295	6,626	5,718	5,999
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	11,220	11,821
Ending balance: collectively evaluated for impairment	478,738	457,536
Ending balance (loan portfolio)	489,958	469,357
Multifamily [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	2,640	2,159
Balance, End of Period	2,640	2,159	852	150
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	221,841	184,624
Ending balance (loan portfolio)	221,841	184,624
Real Estate Construction [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	217	88
Balance, End of Period	217	88	845	141
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	14,940	6,565
Ending balance (loan portfolio)	14,940	6,565
Residential Mortgages [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	711	709
Ending balance: collectively evaluated for impairment	1,916	1,754
Balance, End of Period	2,627	2,463	2,441	1,576
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	4,987	5,049
Ending balance: collectively evaluated for impairment	168,360	164,503
Ending balance (loan portfolio)	173,347	169,552
Home Equity [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	94	93
Ending balance: collectively evaluated for impairment	624	652
Balance, End of Period	718	745	924	907
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	681	1,082
Ending balance: collectively evaluated for impairment	54,569	56,030
Ending balance (loan portfolio)	55,250	57,112
Consumer [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	62	102
Ending balance: collectively evaluated for impairment	124	139
Balance, End of Period	186	241
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	155	284
Ending balance: collectively evaluated for impairment	9,308	10,155
Ending balance (loan portfolio)	9,463	10,439
Unallocated [Member]
Allowance for loan losses: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	1,573	2,326
Balance, End of Period	1,573	2,326	1,464	2,638
Loan balances: [Abstract]
Ending balance: individually evaluated for impairment	0	0
Ending balance: collectively evaluated for impairment	0	0
Ending balance (loan portfolio)	$ 0	$ 0

XML

LOANS (Tables)

3 Months Ended

Mar. 31, 2014

LOANS [Abstract]

Categorizes total loans

At March 31, 2014 and December 31, 2013, net loans disaggregated by class consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Commercial and industrial	$	165,019		$	171,199
Commercial real estate		489,958			469,357
Multifamily		221,841			184,624
Real estate construction		14,940			6,565
Residential mortgages		173,347			169,552
Home equity		55,250			57,112
Consumer		9,463			10,439
Gross loans		1,129,818			1,068,848
Allowance for loan losses		(17,737	)		(17,263	)
Net loans at end of period	$	1,112,081		$	1,051,585

Summary of the activity in the allowance for loan losses by loan class

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands).

	Commercial and industrial			Commercial real estate			Multifamily		Real estate construction		Residential mortgages		Home equity			Consumer			Unallocated			Total
Three months ended March 31, 2014
Balance at beginning of period	$	2,615		$	6,626		$	2,159	$	88	$	2,463	$	745		$	241		$	2,326		$	17,263
Charge-offs		(115	)		-			-		-		-		-			(2	)		-			(117	)
Recoveries		293			12			-		-		4		27			5			-			341
(Credit) provision for loan losses		(312	)		657			481		129		160		(54	)		(58	)		(753	)		250
Balance at end of period	$	2,481		$	7,295		$	2,640	$	217	$	2,627	$	718		$	186		$	1,573		$	17,737
Three months ended March 31, 2013
Balance at beginning of period	$	6,181		$	5,999		$	150	$	141	$	1,576	$	907		$	189		$	2,638		$	17,781
Charge-offs		(348	)		-			-		-		-		-			(11	)		-			(359	)
Recoveries		299			72			-		-		1		1			39			-			412
(Credit) provision for loan losses		(787	)		(353	)		702		704		864		16			28			(1,174	)		-
Balance at end of period	$	5,345		$	5,718		$	852	$	845	$	2,441	$	924		$	245		$	1,464		$	17,834

Additional information of allowance for loan losses

At March 31, 2014 and December 31, 2013, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at March 31, 2014 and December 31, 2013 disaggregated by class and impairment methodology (in thousands).

March 31, 2014	Commercial and industrial		Commercial  real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	32	$	-	$	-	$	-	$	711	$	94	$	62	$	-	$	899
Ending balance: collectively evaluated for impairment		2,449		7,295		2,640		217		1,916		624		124		1,573		16,838
Ending balance	$	2,481	$	7,295	$	2,640	$	217	$	2,627	$	718	$	186	$	1,573	$	17,737
Loan balances:
Ending balance: individually evaluated for impairment	$	7,468	$	11,220	$	-	$	-	$	4,987	$	681	$	155	$	-	$	24,511
Ending balance: collectively evaluated for impairment		157,551		478,738		221,841		14,940		168,360		54,569		9,308		-		1,105,307
Ending balance	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	-	$	1,129,818

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	41	$	-	$	-	$	-	$	709	$	93	$	102	$	-	$	945
Ending balance: collectively evaluated for impairment		2,574		6,626		2,159		88		1,754		652		139		2,326		16,318
Ending balance	$	2,615	$	6,626	$	2,159	$	88	$	2,463	$	745	$	241	$	2,326	$	17,263
Loan balances:
Ending balance: individually evaluated for impairment	$	7,754	$	11,821	$	-	$	-	$	5,049	$	1,082	$	284	$	-	$	25,990
Ending balance: collectively evaluated for impairment		163,445		457,536		184,624		6,565		164,503		56,030		10,155		-		1,042,858
Ending balance	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	-	$	1,068,848

Summary of impaired loans

The following table presents the Company’s impaired loans disaggregated by class at March 31, 2014 and December 31, 2013 (in thousands).

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	7,314	$	7,314	$	-	$	6,711	$	6,711	$	-
Commercial real estate		11,638		11,220		-		12,239		11,821		-
Residential mortgages		2,258		2,130		-		2,305		2,176		-
Home equity		489		489		-		891		891		-
Consumer		25		9		-		25		9		-
Subtotal		21,724		21,162		-		22,171		21,608		-
With an allowance recorded:
Commercial and industrial		154		154		32		1,043		1,043		41
Residential mortgages		2,857		2,857		711		2,873		2,873		709
Home equity		328		192		94		328		191		93
Consumer		148		146		62		274		275		102
Subtotal		3,487		3,349		899		4,518		4,382		945
Total	$	25,211	$	24,511	$	899	$	26,689	$	25,990	$	945

The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the three months ended March 31, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for the periods presented.

	Three Months Ended March 31,
	2014				2013
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans
Commercial and industrial	$	7,567	$	107	$	10,947	$	57
Commercial real estate		11,558		99		11,090		69
Real estate construction		-		-		1,401		-
Residential mortgages		5,036		36		5,004		42
Home equity		771		17		751		3
Consumer		170		2		318		5
Total	$	25,102	$	261	$	29,511	$	176

Troubled debt restructurings

Outstanding TDRs, disaggregated by class, at March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

	March 31, 2014				December 31, 2013
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		42	$	6,133		43	$	6,022
Commercial real estate		8		5,937		7		6,022
Residential mortgages		16		3,858		17		3,891
Consumer		3		148		3		150
Total		69	$	16,076		70	$	16,085

The following presents, disaggregated by class, information regarding TDRs executed during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014						2013
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
New TDRs	Loans		Balance		Balance		Loans		Balance		Balance
Commercial and industrial		3	$	377	$	377		2	$	320	$	320
Residential mortgages		-		-		-		3		905		905
Consumer		-		-		-		1		17		17
Total		3	$	377	$	377		6	$	1,242	$	1,242

Presented below and disaggregated by class is information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance
Commercial real estate		2	$	1,596		-	$	-
Total		2	$	1,596		-	$	-

Summary of loans modified and renewed and not considered TDRs

The following presents information regarding modifications and renewals executed during the three months ended March 31, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial real estate		3	$	1,422		11	$	19,703
Total		3	$	1,422		11	$	19,703

Summary of non-performing assets

The following table presents a summary of non-performing assets for each period (in thousands):

	March 31, 2014		December 31, 2013
Non-accrual loans	$	14,059	$	15,183
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	14,059	$	15,183
TDRs accruing interest	$	10,631	$	10,647
TDRs non-accruing	$	5,445	$	5,438

Summarizes non-accrual loans by loan class

At March 31, 2014 and December 31, 2013, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	March 31, 2014										December 31, 2013
	Non- accrual loans		% of Total			Total Loans		% of Total Loans			Non- accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	4,843		34.4	%	$	165,019		0.4	%	$	5,014		33.0	%	$	171,199		0.4	%
Commercial real estate		6,936		49.3			489,958		0.6			7,492		49.3			469,357		0.7
Multifamily		-		-			221,841		-			-		-			184,624		-
Real estate construction		-		-			14,940		-			-		-			6,565		-
Residential mortgages		1,840		13.1			173,347		0.2			1,897		12.5			169,552		0.2
Home equity		431		3.1			55,250		-			647		4.3			57,112		0.1
Consumer		9		0.1			9,463		-			133		0.9			10,439		-
Total	$	14,059		100.0	%	$	1,129,818		1.2	%	$	15,183		100.0	%	$	1,068,848		1.4	%

Collateral value securing non-accrual loans

The following table presents the collateral value securing non-accrual loans for each period (in thousands):

	March 31, 2014				December 31, 2013
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	4,843	$	3,750	$	5,014	$	3,750
Commercial real estate		6,936		9,960		7,492		13,050
Residential mortgages		1,840		4,565		1,897		3,764
Home equity		431		975		647		3,072
Consumer		9		-		133		-
Total	$	14,059	$	19,250	$	15,183	$	23,636

(1) Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

Summary of current and past due loans

At March 31, 2014 and December 31, 2013, past due loans disaggregated by class were as follows (in thousands).

	Past Due
March 31, 2014	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	159		$	83	$	4,843		$	5,085		$	159,934		$	165,019
Commercial real estate		979			-		6,936			7,915			482,043			489,958
Multifamily		-			-		-			-			221,841			221,841
Real estate construction		-			-		-			-			14,940			14,940
Residential mortgages		1,636			-		1,840			3,476			169,871			173,347
Home equity		807			24		431			1,262			53,988			55,250
Consumer		55			9		9			73			9,390			9,463
Total	$	3,636		$	116	$	14,059		$	17,811		$	1,112,007		$	1,129,818
% of Total Loans		0.3	%		-		1.3	%		1.6	%		98.4	%		100.0	%

	Past Due
December 31, 2013	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	13		$	-	$	5,014		$	5,027		$	166,172		$	171,199
Commercial real estate		631			-		7,492			8,123			461,234			469,357
Multifamily		-			-		-			-			184,624			184,624
Real estate construction		-			-		-			-			6,565			6,565
Residential mortgages		1,535			339		1,897			3,771			165,781			169,552
Home equity		795			100		647			1,542			55,570			57,112
Consumer		75			-		133			208			10,231			10,439
Total	$	3,049		$	439	$	15,183		$	18,671		$	1,050,177		$	1,068,848
% of Total Loans		0.3	%		-		1.4	%		1.7	%		98.3	%		100.0	%

Credit risk profile by internally assigned grade

The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at March 31, 2014 and December 31, 2013 (in thousands).

March 31, 2014	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	152,091	$	468,449	$	221,841	$	14,940	$	168,755	$	54,819	$	9,306	$	1,090,201		96.5	%
Special mention		3,563		2,786		-		-		-		-		-		6,349		0.6
Substandard		9,365		18,723		-		-		4,592		431		157		33,268		2.9
Total	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	1,129,818		100.0	%

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	158,536	$	445,302	$	184,624	$	6,565	$	164,559	$	56,379	$	10,156	$	1,026,121		96.0	%
Special mention		2,934		2,817		-		-		-		-		-		5,751		0.5
Substandard		9,729		21,238		-		-		4,993		733		283		36,976		3.5
Total	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	1,068,848		100.0	%

XML

FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014 Corporation
Summary of Significant Accounting Policies [Abstract]
Ownership percentage (in hundredths)	100.00%
Number of corporation used to acquire foreclosed real estate	2
Maximum period for accrued interest for all class of loans	90 days
Threshold for non-accrual loans to be evaluated individually for impairment	$ 250

XML

FAIR VALUE, Non-recurring Basis (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets measured at fair value on a non-recurring basis [Abstract]
Impaired loans	$ 15,510	$ 16,942
Total	15,510	16,942
Significant Unobservable Inputs (Level 3) [Member]
Assets measured at fair value on a non-recurring basis [Abstract]
Impaired loans	15,510	16,942
Total	$ 15,510	$ 16,942

XML

LOANS, Loans by Internal Assigned Grade for Credit Risk (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Credit risk profile by internally assigned grade [Abstract]
Total	$ 1,129,818	$ 1,068,848
Total (in hundredths)	100.00%	100.00%
Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	1,090,201	1,026,121
Total (in hundredths)	96.50%	96.00%
Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	6,349	5,751
Total (in hundredths)	0.60%	0.50%
Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	33,268	36,976
Total (in hundredths)	2.90%	3.50%
Commercial and Industrial [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	165,019	171,199
Commercial and Industrial [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	152,091	158,536
Commercial and Industrial [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	3,563	2,934
Commercial and Industrial [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	9,365	9,729
Commercial Real Estate [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	489,958	469,357
Commercial Real Estate [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	468,449	445,302
Commercial Real Estate [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	2,786	2,817
Commercial Real Estate [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	18,723	21,238
Multifamily [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	221,841	184,624
Multifamily [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	221,841	184,624
Multifamily [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Multifamily [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Real Estate Construction [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	14,940	6,565
Real Estate Construction [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	14,940	6,565
Real Estate Construction [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Real Estate Construction [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Residential Mortgages [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	173,347	169,552
Residential Mortgages [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	168,755	164,559
Residential Mortgages [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Residential Mortgages [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	4,592	4,993
Home Equity [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	55,250	57,112
Home Equity [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	54,819	56,379
Home Equity [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Home Equity [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	431	733
Consumer [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	9,463	10,439
Consumer [Member] | Pass [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	9,306	10,156
Consumer [Member] | Special Mention [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	0	0
Consumer [Member] | Substandard [Member]
Credit risk profile by internally assigned grade [Abstract]
Total	$ 157	$ 283

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) [Abstract]
Net income	$ 3,720	$ 2,709
Other comprehensive income (loss), net of tax and reclassification adjustments:
Net change in unrealized gain (loss) on securities available for sale arising during the period	3,088	(1,220)
Total other comprehensive income (loss), net of tax	3,088	(1,220)
Total comprehensive income	$ 6,808	$ 1,489

XML

INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2014

INVESTMENT SECURITIES [Abstract]

INVESTMENT SECURITIES

3. INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent. Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any. The Company has the positive intent and ability to hold such securities to maturity. Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax in AOCI as a separate component of stockholders’ equity until realized. Changes in unrealized gains and losses are reported, net of tax, in the consolidated statements of comprehensive income (loss). Interest earned on securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold.

During the first quarter of 2014, investment securities totaling $31 million were transferred from available for sale to held to maturity. At the time of transfer, the securities were at unrealized losses. In accordance with ASC 320-10-35-10, the securities were transferred at fair value, which became the amortized cost. The discount is then accreted to interest income over the remaining life of the security. The unrealized holding losses at the date of transfer remained in AOCI and are amortized simultaneously against interest income. Those entries offset or mitigate each other. For regulatory capital purposes, the unamortized AOCI related to these securities is treated in the same manner as an available for sale debt security.

The amortized cost, estimated fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at March 31, 2014 and December 31, 2013 were as follows (in thousands):

	March 31, 2014									December 31, 2013
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency securities	$	70,466	$	-	$	(3,705	)	$	66,761	$	109,315	$	-	$	(9,220	)	$	100,095
Obligations of states and political subdivisions		147,472		8,451		-			155,923		148,664		8,499		-			157,163
Collateralized mortgage obligations		27,108		880		(689	)		27,299		30,335		557		(788	)		30,104
Mortgage-backed securities		102,591		18		(4,128	)		98,481		103,332		19		(5,584	)		97,767
Corporate bonds		15,561		241		(118	)		15,684		15,565		264		(178	)		15,651
Total available for sale securities		363,198		9,590		(8,640	)		364,148		407,211		9,339		(15,770	)		400,780
Held to maturity:
U.S. Government agency securities		31,318		-		(165	)		31,153		-		-		-			-
Obligations of states and political subdivisions		14,161		694		-			14,855		11,666		655		(87	)		12,234
Total held to maturity securities		45,479		694		(165	)		46,008		11,666		655		(87	)		12,234
Total investment securities	$	408,677	$	10,284	$	(8,805	)	$	410,156	$	418,877	$	9,994	$	(15,857	)	$	413,014

At March 31, 2014 and December 31, 2013, investment securities carried at $255 million and $292 million, respectively, were pledged for trust deposits, public funds on deposit and as collateral for the derivative swap contracts.

The amortized cost, contractual maturities and estimated fair value of the Company’s investment securities at March 31, 2014 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	March 31, 2014
	Amortized		Estimated
	Cost		Fair Value
Securities available for sale:
Due in one year or less	$	11,353	$	11,499
Due from one to five years		130,651		136,363
Due from five to ten years		216,194		211,507
Due after ten years		5,000		4,779
Total securities available for sale		363,198		364,148
Securities held to maturity:
Due in one year or less		627		632
Due from one to five years		6,584		7,175
Due from five to ten years		15,154		15,010
Due after ten years		23,114		23,191
Total securities held to maturity		45,479		46,008
Total investment securities	$	408,677	$	410,156

The proceeds from sales of securities available for sale and the associated net realized gains are shown below for the periods indicated (in thousands):

	Three Months Ended March 31,
	2014		2013
Proceeds	$	-	$	10,475
Gross realized gains	$	-	$	359
Gross realized losses		-		-
Net realized gains	$	-	$	359

Information pertaining to securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
March 31, 2014	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	88,511	$	3,273	$	9,403	$	597	$	97,914	$	3,870
Collateralized mortgage obligations		-		-		8,634		689		8,634		689
Mortgage-backed securities		85,484		3,566		12,739		562		98,223		4,128
Corporate bonds		2,409		44		2,926		74		5,335		118
Total	$	176,404	$	6,883	$	33,702	$	1,922	$	210,106	$	8,805

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2013	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	86,590	$	7,726	$	13,505	$	1,494	$	100,095	$	9,220
Obligations of states and political subdivisions		3,932		87		-		-		3,932		87
Collateralized mortgage obligations		2,935		160		5,713		628		8,648		788
Mortgage-backed securities		84,869		4,850		12,637		734		97,506		5,584
Corporate bonds		8,681		178		-		-		8,681		178
Total	$	187,007	$	13,001	$	31,855	$	2,856	$	218,862	$	15,857

The Company’s management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available for sale or held to maturity are evaluated for OTTI under FASB ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.” In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company 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 OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost and its estimated fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in AOCI, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The corporate bonds at unrealized losses for twelve months or longer in the table above carry investment grade ratings by all major credit rating agencies including both Moody’s and Standard  & Poor’s. The unrealized losses on these bonds were a result of the current interest rate environment and the corresponding shape of the yield curve.  The losses were not related to a deterioration of the quality of the issuer or any company-specific adverse events. All other securities at unrealized losses for twelve months or longer are issued or guaranteed by U.S. Government agencies or sponsored enterprises and the related unrealized losses resulted solely from the current interest rate environment and the corresponding shape of the yield curve.

Upon review of the considerations mentioned here, no OTTI was deemed to be warranted at March 31, 2014.

The Bank was a member of the Visa USA payment network and was issued Class B shares upon Visa’s initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its balance sheet at zero value.

During the second and third quarters of 2013, the Bank sold 100,000 Visa Class B shares to another Visa USA member financial institution at a gross pre-tax gain of approximately $7.8 million which was recorded in non-interest income in the Company’s statement of operations. In conjunction with the sale, the Company entered into derivative swap contracts with the purchaser of these Visa Class B shares which provide for settlements between the purchaser and the Company based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares.

Also during the second and third quarters of 2013, the Company recorded a total of $932 thousand in operating expenses and in other liabilities on the balance sheet, representing the estimate of the Company’s exposure to the settlement of the Visa litigation or the derivative liability. A relatively high degree of subjectivity was used in estimating the fair value of this derivative liability, but management believes that the estimate of its fair value was reasonable based on the available information. The present value of estimated future fees to be paid to the derivative counterparty, or carrying costs, calculated by reference to the market price of the Visa Class A shares at a fixed rate of interest are expensed as incurred. For the three months ended March 31, 2014, $59 thousand in such carrying costs was expensed.

Management believes that the estimate of the Company’s exposure to the Visa indemnification and fees associated with the derivatives are adequate based on current information. However, future developments in the litigation could require potentially significant changes to the estimate.

The Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $3 million at March 31, 2014, as collateral for the derivative swap contracts.

At March 31, 2014, the Company still owned 38,638 Visa Class B shares subsequent to the sales described here. Based on the existing transfer restriction and the uncertainty of the litigation, these Visa Class B shares continue to be carried on the Company’s balance sheet at zero value. Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

XML

ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Accumulated Other Comprehensive Income [Roll Forward]
Beginning balance	$ (7,289)	$ 2,886
Other comprehensive income (loss) before reclassifications	3,088	(991)
Amounts reclassified from AOCI	0	(229)
Net other comprehensive income (loss)	3,088	(1,220)
Ending balance	(4,201)	1,666
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]
Net realized gains	0	359
Income tax expense	1,111	483
Net income	3,720	2,709
Reclassification Out Of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]
Net realized gains	0	359
Income tax expense	0	(130)
Net income	0	229
Unrealized Gains and Losses on Available for Sale Securities [Member]
Accumulated Other Comprehensive Income [Roll Forward]
Beginning balance	(4,095)	10,553
Other comprehensive income (loss) before reclassifications	3,088	(991)
Amounts reclassified from AOCI	0	(229)
Net other comprehensive income (loss)	3,088	(1,220)
Ending balance	(1,007)	9,333
Pension and Post Retirement Plan Items [Member]
Accumulated Other Comprehensive Income [Roll Forward]
Beginning balance	(3,194)	(7,667)
Other comprehensive income (loss) before reclassifications	0	0
Amounts reclassified from AOCI	0	0
Net other comprehensive income (loss)	0	0
Ending balance	$ (3,194)	$ (7,667)

XML

LOANS, Summary of Non-Performing Assets (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Summary of non-performing assets [Abstract]
Non-accrual loans	$ 14,059	$ 15,183
Non-accrual loans held-for-sale	0	0
Loans 90 days past due and still accruing	0	0
OREO	0	0
Total non-performing assets	14,059	15,183
TDRs accruing interest	10,631	10,647
TDRs - nonaccruing	$ 5,445	$ 5,438

XML

INVESTMENT SECURITIES (Tables)

3 Months Ended

Mar. 31, 2014

INVESTMENT SECURITIES [Abstract]

Amortized cost, estimated fair values, and gross unrealized gains and losses of securities available for sale and held to maturity

The amortized cost, estimated fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at March 31, 2014 and December 31, 2013 were as follows (in thousands):

	March 31, 2014									December 31, 2013
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available for sale:
U.S. Government agency securities	$	70,466	$	-	$	(3,705	)	$	66,761	$	109,315	$	-	$	(9,220	)	$	100,095
Obligations of states and political subdivisions		147,472		8,451		-			155,923		148,664		8,499		-			157,163
Collateralized mortgage obligations		27,108		880		(689	)		27,299		30,335		557		(788	)		30,104
Mortgage-backed securities		102,591		18		(4,128	)		98,481		103,332		19		(5,584	)		97,767
Corporate bonds		15,561		241		(118	)		15,684		15,565		264		(178	)		15,651
Total available for sale securities		363,198		9,590		(8,640	)		364,148		407,211		9,339		(15,770	)		400,780
Held to maturity:
U.S. Government agency securities		31,318		-		(165	)		31,153		-		-		-			-
Obligations of states and political subdivisions		14,161		694		-			14,855		11,666		655		(87	)		12,234
Total held to maturity securities		45,479		694		(165	)		46,008		11,666		655		(87	)		12,234
Total investment securities	$	408,677	$	10,284	$	(8,805	)	$	410,156	$	418,877	$	9,994	$	(15,857	)	$	413,014

Investment securities amortized cost, maturities, and approximate fair value

The amortized cost, contractual maturities and estimated fair value of the Company’s investment securities at March 31, 2014 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	March 31, 2014
	Amortized		Estimated
	Cost		Fair Value
Securities available for sale:
Due in one year or less	$	11,353	$	11,499
Due from one to five years		130,651		136,363
Due from five to ten years		216,194		211,507
Due after ten years		5,000		4,779
Total securities available for sale		363,198		364,148
Securities held to maturity:
Due in one year or less		627		632
Due from one to five years		6,584		7,175
Due from five to ten years		15,154		15,010
Due after ten years		23,114		23,191
Total securities held to maturity		45,479		46,008
Total investment securities	$	408,677	$	410,156

Proceeds from sales of securities available for sale and the associated realized securities gains and losses

The proceeds from sales of securities available for sale and the associated net realized gains are shown below for the periods indicated (in thousands):

	Three Months Ended March 31,
	2014		2013
Proceeds	$	-	$	10,475
Gross realized gains	$	-	$	359
Gross realized losses		-		-
Net realized gains	$	-	$	359

Length of time individual securities for held-to-maturity and available-for-sale held in a continuous unrealized loss position

Information pertaining to securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
March 31, 2014	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	88,511	$	3,273	$	9,403	$	597	$	97,914	$	3,870
Collateralized mortgage obligations		-		-		8,634		689		8,634		689
Mortgage-backed securities		85,484		3,566		12,739		562		98,223		4,128
Corporate bonds		2,409		44		2,926		74		5,335		118
Total	$	176,404	$	6,883	$	33,702	$	1,922	$	210,106	$	8,805

	Less than 12 months				12 months or longer				Total
	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
December 31, 2013	Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. Government agency securities	$	86,590	$	7,726	$	13,505	$	1,494	$	100,095	$	9,220
Obligations of states and political subdivisions		3,932		87		-		-		3,932		87
Collateralized mortgage obligations		2,935		160		5,713		628		8,648		788
Mortgage-backed securities		84,869		4,850		12,637		734		97,506		5,584
Corporate bonds		8,681		178		-		-		8,681		178
Total	$	187,007	$	13,001	$	31,855	$	2,856	$	218,862	$	15,857