Allowance for Loan Losses and Credit Quality | Allowance for Loan Losses and Credit Quality The Company’s primary lending emphasis is the origination of commercial business 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, 2018 : (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 Non-accrual Loans Commercial Construction $ — $ — $ — $ — $ 138,144 $ 138,144 $ — $ — Commercial Business 13 251 808 1,072 105,286 106,358 — 4,111 Commercial Real Estate 1,333 514 3,268 5,115 373,883 378,998 — 3,268 Mortgage Warehouse Lines — — — — 204,359 204,359 — — Residential Real Estate — 60 1,123 1,183 44,865 46,048 — 1,123 Consumer Loans to Individuals — — 205 205 25,357 25,562 — 411 Other — — — — 192 192 — — Total loans $ 1,346 $ 825 $ 5,404 $ 7,575 $ 892,086 899,661 $ — $ 8,913 Deferred loan costs, net 251 Total loans, including deferred loan costs, net $ 899,912 The following table provides an aging of the loan portfolio by loan class at December 31, 2017 : (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 Non-accrual Loans Commercial Construction $ — $ — $ — $ — $ 136,412 $ 136,412 $ — $ — Commercial Business 180 545 619 1,344 91,562 92,906 — 4,212 Commercial Real Estate 540 — 2,465 3,005 305,919 308,924 — 2,465 Mortgage Warehouse Lines — — — — 189,412 189,412 — — Residential Real Estate 911 256 69 1,236 39,258 40,494 — 69 Consumer Loans to Individuals 119 — 116 235 20,790 21,025 — 368 Other — — — — 183 183 — — Total loans $ 1,750 $ 801 $ 3,269 $ 5,820 $ 783,536 789,356 $ — $ 7,114 Deferred loan costs, net 550 Total loans, including deferred loan costs, net $ 789,906 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. At June 30, 2018 , there was one purchased credit impaired (“PCI”) loan for $514,000 that was not classified as a non-performing loan. At December 31, 2017 , there were no PCI loans that 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 their 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 Company and adequately margined. Loans that are based upon “blue chip” stocks listed on the major stock 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 and, for service companies, the sources of revenue are abundant. Future needs have been planned for. Character and management ability of individuals or company principals are excellent. Loans to individuals are supported by their high net worth 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 their high net worth but whose supporting assets are illiquid. 3w. Watch - Included in this category are loans evidencing problems identified by Company management that require closer supervision. Such problems have not developed to the point that requires a “special mention” rating. This category also covers situations where the Company does not have adequate current information upon which credit quality can be determined. The 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 Company's credit position at some future date. Special mention loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification. 5. Substandard - A “substandard” loan is inadequately protected by the current 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 Company will sustain some loss if the deficiencies are not corrected. 6. Doubtful - A loan classified as “doubtful” has all the weaknesses inherent in a loan classified as 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 as “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 loan even though partial recovery may occur in the future. The following table provides a breakdown of the loan portfolio by credit quality indicator at June 30, 2018 : (Dollars in thousands) Commercial Credit Exposure - By Internally Assigned Grade Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Grade: Pass $ 133,827 $ 93,532 $ 357,024 $ 204,359 $ 44,579 Special Mention 4,317 8,535 11,083 — 116 Substandard — 4,031 10,891 — 1,353 Doubtful — 260 — — — Total $ 138,144 $ 106,358 $ 378,998 $ 204,359 $ 46,048 Consumer Credit Exposure - By Payment Activity Loans To Individuals Other Performing $ 25,151 $ 192 Non-performing 411 — Total $ 25,562 $ 192 The following table provides a breakdown of the loan portfolio by credit quality indicator at December 31, 2017 : (Dollars in thousands) Commercial Credit Exposure - By Internally Assigned Grade Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Grade: Pass $ 136,180 $ 84,746 $ 289,203 $ 189,412 $ 39,539 Special Mention 232 3,454 13,267 — 666 Substandard — 1,252 6,454 — 289 Doubtful — 3,454 — — — Total $ 136,412 $ 92,906 $ 308,924 $ 189,412 $ 40,494 Consumer Credit Exposure - By Payment Activity Loans To Individuals Other Performing $ 20,657 $ 183 Non-performing 368 — Total $ 21,025 $ 183 Impaired Loans 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 agreement, including scheduled interest payments. When a loan is placed on non-accrual status, it is also considered to be impaired. Loans are placed on non-accrual 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, 2018 and December 31, 2017 : June 30, 2018 (Dollars in thousands) Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Loans to Individuals Other Unallocated Total Allowance for loan losses: Individually evaluated for impairment $ — $ 487 $ 229 $ — $ — $ — $ — $ — $ 716 Loans acquired with deteriorated credit quality — — — — — — — — — Collectively evaluated for impairment 1,661 1,178 3,085 920 462 169 — 307 7,782 Ending Balance $ 1,661 $ 1,665 $ 3,314 $ 920 $ 462 $ 169 $ — $ 307 $ 8,498 Loans receivable: Individually evaluated for impairment $ 104 $ 4,320 $ 7,234 $ — $ 1,123 $ 411 $ — $ — $ 13,192 Loans acquired with deteriorated credit quality — 303 1,452 — — — — — 1,755 Collectively evaluated for impairment 138,040 101,735 370,312 204,359 44,925 25,151 192 — 884,714 Ending Balance $ 138,144 $ 106,358 $ 378,998 $ 204,359 $ 46,048 $ 25,562 $ 192 $ — 899,661 Deferred loan costs, net 251 $ 899,912 December 31, 2017 (Dollars in thousands) Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Loans to Individuals Other Unallocated Total Allowance for loan losses: Individually evaluated for impairment $ — $ 592 $ 92 $ — $ — $ — $ — $ — $ 684 Loans acquired with deteriorated credit quality — — — — — — — — — Collectively evaluated for impairment 1,703 1,128 2,857 852 392 114 — 283 7,329 Ending Balance $ 1,703 $ 1,720 $ 2,949 $ 852 $ 392 $ 114 $ — $ 283 $ 8,013 Loans receivable: Individually evaluated for impairment $ 232 $ 4,459 $ 5,713 $ — $ 69 $ 368 $ — $ — $ 10,841 Loans acquired with deteriorated credit quality — 274 590 — — — — — 864 Collectively evaluated for impairment 136,180 88,173 302,621 189,412 40,425 20,657 183 — 777,651 Ending Balance $ 136,412 $ 92,906 $ 308,924 $ 189,412 $ 40,494 $ 21,025 $ 183 $ — 789,356 Deferred loan costs, net 550 $ 789,906 The activity in the allowance for loan loss by loan class for the three and six months ended June 30, 2018 and 2017 was as follows : (Dollars in thousands) Construction Commercial Commercial Mortgage Residential Loans to Individuals Other Unallocated Total Balance - March 31, 2018 $ 1,612 $ 1,675 $ 3,166 $ 732 $ 446 $ 129 $ — $ 537 $ 8,297 Provision charged/(credited) to operations 49 16 140 188 16 46 — (230 ) 225 Loans charged off — (32 ) — — — (7 ) — — (39 ) Recoveries of loans charged off — 6 8 — — 1 — — 15 Balance - June 30, 2018 $ 1,661 $ 1,665 $ 3,314 $ 920 $ 462 $ 169 $ — $ 307 $ 8,498 Balance - March 31, 2017 $ 1,370 $ 1,822 $ 2,634 $ 642 $ 365 $ 122 $ — $ 595 $ 7,550 Provision charged/(credited) to operations 85 (386 ) 352 260 20 (3 ) — (178 ) 150 Loans charged off — — — — — — — — — Recoveries of loans charged off — 1 5 — — 1 — — 7 Balance - June 30, 2017 $ 1,455 $ 1,437 $ 2,991 $ 902 $ 385 $ 120 $ — $ 417 $ 7,707 (Dollars in thousands) Construction Commercial Business Commercial Real Estate Mortgage Warehouse Lines Residential Real Estate Loans to Individuals Other Unallocated Total Balance - January 1, 2018 $ 1,703 $ 1,720 $ 2,949 $ 852 $ 392 $ 114 $ — $ 283 $ 8,013 Provision charged/(credited) to operations (42 ) (36 ) 304 68 70 61 1 24 450 Loans charged off — (32 ) — — — (7 ) (1 ) — (40 ) Recoveries of loans charged off — 13 61 — — 1 — — 75 Balance - June 30, 2018 $ 1,661 $ 1,665 $ 3,314 $ 920 $ 462 $ 169 $ — $ 307 $ 8,498 Balance - January 1, 2017 $ 1,204 $ 1,732 $ 2,574 $ 973 $ 367 $ 112 $ — $ 532 $ 7,494 Provision charged/(credited) to operations 251 (298 ) 408 (71 ) 119 6 — (115 ) 300 Loans charged off — — — — (101 ) — — — (101 ) Recoveries of loans charged off — 3 9 — — 2 — — 14 Balance - June 30, 2017 $ 1,455 $ 1,437 $ 2,991 $ 902 $ 385 $ 120 $ — $ 417 $ 7,707 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) Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Average Interest With no allowance: Commercial: Construction $ 104 $ 104 $ — $ 104 $ 2 $ 125 $ 4 Commercial Business 1,318 1,573 — 1,332 27 1,291 54 Commercial Real Estate 2,435 2,808 — 4,089 1 3,027 18 Mortgage Warehouse Lines — — — — — — — Subtotal 3,857 4,485 — 5,525 30 4,443 76 Residential Real Estate 1,123 1,188 — 811 — 539 — Consumer: Loans to Individuals 411 487 — 424 — 415 Other — — — — — Subtotal 411 487 — 424 — 415 — With no allowance: $ 5,391 $ 6,160 $ — $ 6,760 $ 30 $ 5,397 $ 76 With an allowance: Commercial: Construction $ — $ — $ — $ — $ — $ — Commercial Business 3,305 3,356 487 3,328 46 3,376 92 Commercial Real Estate 6,251 7,044 229 4,127 59 4,204 100 Mortgage Warehouse Lines — — — — — — Subtotal 9,556 10,400 716 7,455 105 7,580 192 Residential Real Estate — — — — — Consumer: Loans to Individuals — — — — — Other — — — — — Subtotal — — — — — — — With an allowance: $ 9,556 $ 10,400 $ 716 $ 7,455 $ 105 $ 7,580 $ 192 Total: Construction 104 104 — 104 2 125 4 Commercial Business 4,623 4,929 487 4,660 73 4,667 146 Commercial Real Estate 8,686 9,852 229 8,216 60 7,231 118 Mortgage Warehouse Lines — — — — — — — Residential Real Estate 1,123 1,188 — 811 — 539 — Consumer 411 487 — 424 — 415 — Total $ 14,947 $ 16,560 $ 716 $ 14,215 $ 135 $ 12,977 $ 268 Impaired Loans Receivables (By Class) December 31, 2017 (Dollars in thousands) Recorded Investment Unpaid Principal Balance Related Allowance With no allowance: Commercial: Construction $ 232 $ 232 $ — Commercial Business 1,271 1,419 — Commercial Real Estate 1,348 1,372 — Mortgage Warehouse Lines — — — Subtotal 2,851 3,023 — Residential Real Estate 69 123 — Consumer: Loans to Individuals 368 438 — Other — — — Subtotal 368 438 — With no allowance $ 3,288 $ 3,584 $ — With an allowance: Commercial: Construction $ — $ — $ — Commercial Business 3,462 3,464 592 Commercial Real Estate 4,955 5,748 92 Mortgage Warehouse Lines — — — Subtotal 8,417 9,212 684 Residential Real Estate — — — Consumer: Loans to Individuals — — — Other — — — Subtotal — — — With an allowance $ 8,417 $ 9,212 $ 684 Total: Construction 232 232 — Commercial Business 4,733 4,883 592 Commercial Real Estate 6,303 7,120 92 Mortgage Warehouse Lines — — — Residential Real Estate 69 123 — Consumer 368 438 — Total $ 11,705 $ 12,796 $ 684 Impaired Loans Receivables (By Class) Three Months Ended June 30, 2017 Six Months Ended June 30, 2017 (Dollars in thousands) Average Recorded Investment Interest Income Recognized Average Interest Income Recognized With no allowance: Commercial: Construction $ 188 $ 3 $ 186 $ 6 Commercial Business 688 82 741 86 Commercial Real Estate 2,723 92 2,772 105 Mortgage Warehouse Lines — — — — Subtotal 3,599 177 3,699 197 Residential Real Estate 181 — 210 — Consumer: Loans to Individuals 297 — 316 — Other — — — — Subtotal 297 — 316 — With no allowance: $ 4,077 $ 177 $ 4,225 $ 197 With an allowance: Commercial: Construction $ 137 $ — $ 171 $ — Commercial Business 3,680 60 2,595 127 Commercial Real Estate 2,989 43 2,600 85 Mortgage Warehouse Lines — — — — Subtotal 6,806 103 5,366 212 Residential Real Estate — — 100 — Consumer: Loans to Individuals — — — — Other — — — — Subtotal — — — — With an allowance: $ 6,806 $ 103 $ 5,466 $ 212 Total: Construction 325 3 357 6 Commercial Business 4,368 142 3,336 213 Commercial Real Estate 5,712 135 5,372 190 Mortgage Warehouse Lines — — — — Residential Real Estate 181 — 310 — Consumer 297 — 316 — Total $ 10,883 $ 280 $ 9,691 $ 409 Purchased Credit-Impaired Loans Purchased credit-impaired loans (“PCI”) are loans acquired at a discount that are due in part to credit quality. On April 11, 2018, as part of the NJCB acquisition, the Company acquired purchased credit-impaired loans with loan balances totaling $1.1 million and fair values totaling $881,000 . The following table presents additional information regarding purchased credit-impaired loans at June 30, 2018 and December 31, 2017 : (Dollars in thousands) June 30, 2018 December 31, 2017 Outstanding balance $ 2,094 $ 998 Carrying amount $ 1,755 $ 860 Changes in accretable discount for purchased credit-impaired loans for the three and six months ended June 30, 2018 and June 30, 2017 were as follows: Three months ended June 30, Six months ended June 30, (Dollars in thousands) 2018 2017 2018 2017 Balance at beginning of period $ 103 $ 23 $ 126 $ 30 Acquisition of impaired loans 168 — 168 — Transfer from non-accretable discount — 161 — 161 Accretion of discount (38 ) (13 ) (61 ) (20 ) Balance at end of period $ 233 $ 171 $ 233 $ 171 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, 2018 December 31, 2017 Number of loans Recorded Investment Number of loans Recorded Investment 1 $ 77 1 $ 77 At June 30, 2018 , there was one residential property with a fair value of $1.1 million held in other real estate owned. At December 31, 2017 , there were no residential properties held in other real estate owned. Troubled Debt Restructurings 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 to re-amortize or extend 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 as a TDR during the six months ended June 30, 2018 . There was one commercial real estate loan with a pre- and post-modification recorded investment of $2.3 million that was modified as a TDR during the six months ended June 30, 2017 . There were no troubled debt restructurings that subsequently defaulted within twelve months of restructuring during the six months ended June 30, 2018 . There was one troubled debt restructuring that defaulted within twelve months of restructuring in the amount of $458,000 during the six months ended June 30, 2017. |