Allowance for Loan Losses and Credit Quality Disclosure

The Company’s primary lending emphasis is the origination of commercial and commercial real estate loans and mortgage warehouse lines of credit. Based on the composition of the loan portfolio, the inherent primary risks are deteriorating credit quality, a decline in the economy, and a decline in New Jersey real estate market values. Any one, or a combination, of these events may adversely affect the loan portfolio and may result in increased delinquencies, loan losses and increased future provision levels.

The following table provides an aging of the loan portfolio by loan class at June 30, 2016:



(Dollars in thousands)	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Nonaccrual Loans
Commercial
Construction	$	—	$	—	$	186	$	186	$	93,035	$	93,221	$	—	$	186
Commercial Business	148		68		104		320		104,783		105,103		—		213
Commercial Real Estate	1,829		—		2,707		4,536		218,588		223,124		—		3,199
Mortgage Warehouse Lines	—		—		—		—		264,344		264,344		—		—
Residential Real Estate	—		—		1,298		1,298		47,789		49,087		—		1,298
Consumer
Loans to Individuals	—		—		263		263		24,467		24,730		—		263
Other	—		—		—		—		197		197		—		—
Total loans	1,977		68		4,558		6,603		753,203		759,806		—		5,159
Deferred loan costs, net	—		—		—		—		1,766		1,766		—		—
Total loans, net	$	1,977	$	68	$	4,558	$	6,603	$	754,969	$	761,572	$	—	$	5,159

The following table provides an aging of the loan portfolio by loan class at December 31, 2015:



(Dollars in thousands)	30-59 Days		60-89 Days		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days Accruing		Nonaccrual Loans
Commercial
Construction	$	—	$	—	$	—	$	—	$	93,745	$	93,745	$	—	$	—
Commercial Business	530		5		186		721		98,556		99,277		—		304
Commercial Real Estate	789		—		3,996		4,785		202,465		207,250		—		4,321
Mortgage Warehouse Lines	—		—		—		—		216,572		216,572		—		—
Residential Real Estate	—		166		1,132		1,298		39,446		40,744		—		1,132
Consumer
Loans to Individuals	400		—		263		663		22,411		23,074		—		263
Other	—		—		—		—		233		233		—		—
Total loans	1,719		171		5,577		7,467		673,428		680,895		—		6,020
Deferred loan costs, net	—		—		—		—		1,226		1,226		—		—
Total loans, net	$	1,719	$	171	$	5,577	$	7,467	$	674,654	$	682,121	$	—	$	6,020

As provided by ASC 310-30, the excess of cash flows expected at acquisition over the initial investment in the loan is recognized as interest income over the life of the loan. Accordingly, loans acquired in the merger with Rumson-Fair Haven Bank and Trust Company ("Rumson")with evidence of deteriorated credit quality of $464,000 at June 30, 2016 and $489,000 at December 31, 2015 were not classified as non-performing loans.

The Company’s internal credit risk grades are based on the definitions currently utilized by the banking regulatory agencies. The grades assigned and definitions are as follows, and loans graded excellent, above average, good and watch list are treated as “pass” for grading purposes:

1. Excellent - Loans that are based upon cash collateral held at the Bank and adequately margined. Loans that are based upon "blue chip" stocks listed on the major exchanges and adequately margined.

2. Above Average - Loans to companies whose balance sheets show excellent liquidity and long-term debt is on well-spread schedules of repayment easily covered by cash flow. Such companies have been consistently profitable and have diversification in their product lines or sources of revenue. The continuation of profitable operations for the foreseeable future is likely. Management is comprised of a mix of ages, experience, and backgrounds and management succession is in place. Sources of raw materials are abundant, and for service companies, the source of revenue is abundant. Future needs have been planned for. Character and ability of individuals or company principals are excellent. Loans to individuals are supported by high net worths and liquid assets.

3. Good - Loans to companies whose balance sheets show good liquidity and cash flow adequate to meet maturities of long-term debt with a comfortable margin. Such companies have established profitable records over a number of years, and there has been growth in net worth. Operating ratios are in line with those of the industry, and expenses are in proper relationship to the volume of business done and the profits achieved. Management is well-balanced and competent in their responsibilities. Economic environment is favorable; however, competition is strong. The prospects for growth are good. Loans in this category do not meet the collateral requirements of loans in categories 1 and 2 above. Loans to individuals are supported by good net worths but whose supporting assets are illiquid.

3w. Watch - Included in this category are loans evidencing problems identified by Bank management that require closer supervision. Such problem has not developed to the point which requires a Special Mention rating. This category also covers situations where the Bank does not have adequate current information upon which credit quality can be determined. The Bank's account officer has the obligation to correct these deficiencies within 30 days from the time of notification.

4. Special Mention - A "special mention" loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Bank's credit position at some future date. Special mention loans are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

5. Substandard - A "substandard" loan is inadequately protected by the current sound net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

6. Doubtful - A loan classified "doubtful" has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

7. Loss - A loan classified "loss" is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan even though partial recovery may be affected in the future.

The following table provides a breakdown of the loan portfolio by credit quality indicator at June 30, 2016:



(Dollars in thousands)
Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Grade:
Pass	$	92,904	$	96,318	$	206,197	$	264,344	$	48,225
Special Mention	131		8,357		12,249		—		260
Substandard	186		428		4,678		—		602
Doubtful	—		—		—		—		—
Total	$	93,221	$	105,103	$	223,124	$	264,344	$	49,087



Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other

Performing	$	24,467	$	197
Nonperforming	263		—
Total	$	24,730	$	197

The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2015:



(Dollars in thousands)
Commercial Credit Exposure - By Internally Assigned Grade	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate
Grade:
Pass	$	93,558	$	90,856	$	191,754	$	216,572	$	39,878
Special Mention	187		7,768		9,311		—		260
Substandard	—		653		6,185		—		606
Doubtful	—		—		—		—		—
Total	$	93,745	$	99,277	$	207,250	$	216,572	$	40,744



Consumer Credit Exposure - By Payment Activity	Loans To Individuals		Other
Performing	$	22,811	$	233
Nonperforming	263		—
Total	$	23,074	$	233

Impaired Loans Disclosures

Loans are considered to be impaired when, based on current information and events, it is determined that the Company will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When a loan is placed on nonaccrual status, it is also considered to be impaired. Loans are placed on nonaccrual status when: (1) the full collection of interest or principal becomes uncertain or (2) they are contractually past due 90 days or more as to interest or principal payments unless the loans are both well secured and in the process of collection.

The following tables summarize the distribution of the allowance for loan losses and loans receivable by loan class and impairment method at June 30, 2016 and December 31, 2015:

Period-End Allowance for Loan Losses by Impairment Method as of June 30, 2016



(Dollars in thousands)
	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other		Unallocated		Deferred Loan Fees		Total
Allowance for loan losses:

Individually evaluated for impairment	$	—	$	—	$	130	$	—	$	—	$	—	$	—	$	—	$	—	$	130
Loans acquired with deteriorated credit quality	—		—		—		—		—		—		—		—		—		—
Collectively evaluated for impairment	975		1,230		3,020		1,190		294		119		—		524		—		7,352
Ending Balance	$	975	$	1,230	$	3,150	$	1,190	$	294	$	119	$	—	$	524	$	—	$	7,482

Loans receivables:
Individually evaluated for impairment	$	317	$	231	$	4,072	$	—	$	1,298	$	263	$	—	$	—	$	—	$	6,181
Loans acquired with deteriorated credit quality	—		225		959		—		—		—		—		—		—		1,184
Collectively evaluated for impairment	92,904		104,647		218,093		264,344		47,789		24,467		197		—		1,766		754,207
Ending Balance	$	93,221	$	105,103	$	223,124	$	264,344	$	49,087	$	24,730	$	197	$	—	$	1,766	$	761,572

Period-End Allowance for Loan Losses by Impairment Method as of December 31, 2015



(Dollars in thousands)
	Construction		Commercial Business		Commercial Real Estate		Mortgage Warehouse Lines		Residential Real Estate		Loans to Individuals		Other		Unallocated		Deferred Loan Fees		Total
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	68	$	125	$	—	$	69	$	—	$	—	$	—	$	—	$	262
Loans acquired with deteriorated credit quality	—		—		64		—		—		—		—		—		—		64
Collectively evaluated for impairment	1,025		1,937		2,860		866		219		109		—		218		—		7,234
Ending Balance	$	1,025	$	2,005	$	3,049	$	866	$	288	$	109	$	—	$	218	$	—	$	7,560

Loans receivables:
Individually evaluated for impairment	$	494	$	458	$	4,833	$	—	$	1,132	$	263	$	—	$	—	$	—	$	7,180
Loans acquired with deteriorated credit quality	—		241		1,359		—		—		—		—		—		—		1,600
Collectively evaluated for impairment	93,251		98,578		201,058		216,572		39,612		22,811		233		—		1,226		673,341
Ending Balance	$	93,745	$	99,277	$	207,250	$	216,572	$	40,744	$	23,074	$	233	$	—	$	1,226	$	682,121

The activity in the allowance for loan loss by loan class for the three and six months ended June 30, 2016 and 2015 was as follows:



(Dollars in thousands)	Construction			Commercial Business			Commercial Real Estate			Mortgage Warehouse Lines		Residential Real Estate			Loans to Individuals		Other		Unallocated		Total
Balance - December 31, 2015	$	1,025		$	2,005		$	3,049		$	866	$	288		$	109	$	—	$	218	$	7,560
Provision charged (credited) to operations	(44		)	(392		)	46			1		(79		)	4		—		264		(200		)
Loans charged off	—			—			(60		)	—		—			—		—		—		(60		)
Recoveries of loans charged off	—			1			—			—		—			1		—		—		2
Balance - March 31, 2016	$	981		$	1,614		$	3,035		$	867	$	209		$	114	$	—	$	482	$	7,302

Provision charged (credited) to operations	(6		)	(284		)	(263		)	323		85			3		—		42		(100		)
Loans charged off	—			(101		)	—			—		—			—		—		—		(101		)
Recoveries of loans charged off	—			1			378			—		—			2		—		—		381
Balance - June 30, 2016	$	975		$	1,230		$	3,150		$	1,190	$	294		$	119	$	—	$	524	$	7,482



(Dollars in thousands)	Construction			Commercial Business			Commercial Real Estate			Mortgage Warehouse Lines		Residential Real Estate			Loans to Individuals			Other			Unallocated			Total
Balance - December 31, 2014	$	1,215		$	1,761		$	2,393		$	896	$	197		$	129		$	2		$	332		$	6,925
Provision charged (credited) to operations	(98		)	62			(4		)	152		13			(13		)	—			388			500
Loans charged off	—			(62		)	—			—		—			—			—			—			(62		)
Recoveries of loans charged off	—			—			—			—		—			1			—			—			1
Balance - March 31, 2015	$	1,117		$	1,761		$	2,389		$	1,048	$	210		$	117		$	2		$	720		$	7,364

Provision charged (credited) to operations	(27		)	(81		)	49			71		(8		)	3			(1		)	(6		)	—
Loans charged off	—			(26		)	—			—		—			—			—			—			(26		)
Recoveries of loans charged off	—			5			7			—		—			1			—			—			13
Balance - June 30, 2015	$	1,090		$	1,659		$	2,445		$	1,119	$	202		$	121		$	1		$	714		$	7,351

When a loan is identified as impaired, the measurement of impairment is based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In such cases, the current fair value of the collateral less selling costs is used. If the value of the impaired loan is less than the recorded investment in the loan, the impairment is recognized through an allowance estimate or a charge to the allowance.

Impaired Loans Receivables (By Class) – June 30, 2016



(Dollars in thousands)							Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Construction	$	317	$	317	$	—	$	317	$	2	$	255	$	4
Commercial Business	446		606		—		448		10		434		21
Commercial Real Estate	1,247		1,247		—		1,251		20		1,545		30
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Subtotal	2,010		2,170		—		2,016		32		2,234		55
Residential Real Estate	1,298		1,313		—		1,298		—		1,198		(2		)
Consumer
Loans to Individuals	263		263		—		263		—		263		—
Other	—		—		—		—		—		—		—
Subtotal	263		263		—		263		—		263		—
With no allowance:	$	3,571	$	3,746	$	—	$	3,577	$	32	$	3,695	$	53

With an allowance:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Business	10		21		—		143		—		177		—
Commercial Real Estate	3,784		3,968		130		3,888		22		3,836		38
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Subtotal	3,794		3,989		130		4,031		22		4,013		38
Residential Real Estate	—		—		—		—		—		100		—
Consumer
Loans to Individuals	—		—		—		—		—		—		—
Other	—		—		—		—		—		—		—
Subtotal	—		—		—		—		—		—		—
With an allowance:	$	3,794	$	3,989	$	130	$	4,031	$	22	$	4,113	$	38
Total:
Construction	317		317		—		317		2		255		4
Commercial Business	456		627		—		591		10		611		21
Commercial Real Estate	5,031		5,215		130		5,139		42		5,381		68
Mortgage Warehouse Lines	—		—		—		—		—		—		—
Residential Real Estate	1,298		1,313		—		1,298		—		1,298		(2		)
Consumer	263		263		—		263		—		263		—
Total	$	7,365	$	7,735	$	130	$	7,608	$	54	$	7,808	$	91

Impaired Loans Receivables (By Class) –December 31, 2015



(Dollars in thousands							For the year ended December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no allowance:
Construction	$	494	$	494	$	—	$	477	$	27
Commercial Business	488		847		—		492		23
Commercial Real Estate	2,417		2,683		—		2,998		94
Mortgage Warehouse Lines	—		—		—		—		—
Subtotal	3,399		4,024		—		3,967		144
Residential Real Estate	831		831		—		981		—
Consumer
Loans to Individuals	263		280		—		88		—
Other	—		—		—		—		—
Subtotal	263		280		—		88		—
With no allowance	$	4,493	$	5,135	$	—	$	5,036	$	144
With an allowance:
Construction	$	—	$	—	$	—	$	—	$	—
Commercial Business	211		237		68		307		5
Commercial Real Estate	3,775		3,788		189		4,200		154
Mortgage Warehouse Lines	—		—		—		—		—
Subtotal	3,986		4,025		257		4,507		159
Residential Real Estate	301		316		69		100		—
Consumer
Loans to Individuals	—		—		—		175		—
Other	—		—		—		—		—
Subtotal	—		—		—		175		—
With an allowance	$	4,287	$	4,341	$	326	$	4,782	$	159

Total:
Construction	494		494		—		477		27
Commercial Business	699		1,084		68		799		28
Commercial Real Estate	6,192		6,471		189		7,198		248
Mortgage Warehouse Lines	—		—		—		—		—
Residential Real Estate	1,132		1,147		69		1,081		—
Consumer	263		280		—		263		—
Total	$	8,780	$	9,476	$	326	$	9,818	$	303



Impaired Loans Receivables (By Class)-June 30, 2015
	Three Months Ended June 30, 2015				Six Months Ended June 30, 2015
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no allowance:
Construction	$	471	$	6	$	461	$	13
Commercial Business	487		3		510		7
Commercial Real Estate	2,666		28		2,702		61
Mortgage Warehouse Lines	—		—		—		—
Subtotal	3,624		37		3,673		81
Residential Real Estate	1,361		—		1,361		—

Consumer
Loans to Individuals	—		—		—		—
Other	—		—		—		—
Subtotal	—		—		—		—
With no allowance:	$	4,985	$	37	$	5,034	$	81
With an allowance:
Construction	$	—	$	—	$	—	$	—
Commercial Business	354		1		363		1
Commercial Real Estate	4,784		87		4,754		158
Mortgage Warehouse Lines	—		—		—		—
Subtotal	5,138		88		5,117		159
Residential Real Estate	—		—		—		—
Consumer
Loans to Individuals	263		—		263		—
Other	—		—		—		—
Subtotal	263		—		263		—
With an allowance:	$	5,401	$	88	$	5,380	$	159
Total:
Construction	471		6		461		13
Commercial Business	841		4		873		8
Commercial Real Estate	7,450		115		7,456		219
Mortgage Warehouse Lines	—		—		—		—
Residential Real Estate	1,361		—		1,361		—
Consumer	263		—		263		—
Total	$	10,386	$	125	$	10,414	$	240

Purchased Credit-Impaired Loans

Purchased Credit-Impaired loans (“PCI”) are loans acquired at a discount that are due in part to credit quality. The following table presents additional information regarding acquired credit-impaired loans at June 30, 2016 and December 31, 2015:



(Dollars in thousands)
	June 30, 2016		December 31, 2015
Outstanding balance	$	1,523	$	1,964
Carrying amount	$	1,184	$	1,600

Changes in accretable discount for purchased credit-impaired loans for the three and six months ended June 30, 2016 and June 30, 2015 were as follows:



	Three months ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
(Dollars in thousands)
Balance at beginning of period	$	52		$	115		$	73		$	135
Acquisition of impaired loans	—			—			—			—
Accretion of discount	(8		)	(14		)	(29		)	(34		)
Balance at end of period	$	44		$	101		$	44		$	101

Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure

The following table summarizes the recorded investment in consumer mortgage loans secured by residential real estate in the process of foreclosure:



(Dollars in thousands)
June 30,
2016			2015
Number of loans	Recorded Investment		Number of loans	Recorded Investment
4	$	840	5	$	1,809

In the normal course of business, the Bank may consider modifying loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment or as a re-amortization or extension of a loan term to better match the loan’s repayment stream with the borrower’s cash flow. A modified loan would be considered a troubled debt restructuring (“TDR”) if the Bank grants a concession to a borrower and has determined that the borrower is troubled (i.e., experiencing financial difficulties).

If the Bank restructures a loan to a troubled borrower, the loan terms (i.e., interest rate, payment, amortization period and maturity date) may be modified in various ways to enable the borrower to cover the modified debt service payments based on current financial statements and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms may only be offered for that time period. Where possible, the Bank would attempt to obtain additional collateral and/or secondary repayment sources at the time of the restructuring in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default. In evaluating whether a restructuring constitutes a troubled debt restructuring, applicable guidance requires that a creditor must separately conclude that the restructuring constitutes a concession and the borrower is experiencing financial difficulties.

There were no loans modified that were TDRs during the three and six months ended June 30, 2016. For the year ended December 31, 2015, there was 1 loan with a recorded investment of $288,000 that was modified as a TDR. There were no troubled debt restructurings that subsequently defaulted within twelve months of restructuring during the three and six months ended June 30, 2016 and the year ended December 31, 2015.