Note 3:

Loans Receivable and Allowance for Loan Losses

Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity, are generally reported at their outstanding unpaid principal balances adjusted for unearned income, the allowance for loan losses, and any unamortized deferred fees or costs.

Interest income is accrued based on the unpaid principal balance. Loan application fees are non interest income while other certain direct origination costs are deferred, and amortized as a level yield adjustment over the respective term of the loan and reported in interest income.

The accrual of interest on loans is discontinued at the time the loan is ninety days past due for payment unless the loan is well-secured and in process of collection. Consumer installment loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued, but not collected, on loans that are placed on nonaccrual status, or are charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis method until qualifying for return to accrual status. Upon receipt of cash, the cash received is first applied to satisfy principal and then applied to interest, unless the loan is in a cure period and Management believes there will be a loss. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

On September 30, 2016, the Company purchased $23.0 million face amount ($23.7 million fair value) of non-credit impaired student loans receivable, together with accrued interest of $107,822, from another Bank. The purchase price aggregated $23.8 million. By the terms of the agreement, the seller Bank will continue to service these loans in return for a fee. In accordance with the Company’s accounting policies, the premium paid will be amortized to interest income, in order to achieve a consistent effective yield.

A summary of the Company’s loan portfolio at September 30, 2016 and December 31, 2015 is as follows:

(in thousands)	September 30,			December 31,
	2016			2015
Commercial and Industrial	$	69,723			59,752
Commercial Real Estate		258,920			245,828
Construction		48,048			15,551
Construction to permanent- CRE		5,587			4,880
Residential		103,969			110,837
Consumer/Other		73,903			47,521
Total Loans		560,150			484,369
Allowance for loan losses		(7,328	)		(5,242	)
Loans receivable, net	$	552,822			479,127

Amounts presented at December 31, 2015 include $28.2 million of loans secured by 1-4 Family Non-owner Occupied real estate in the Residential category, reclassified from Commercial Real Estate for consistency with the September 30, 2016 presentation. Net unamortized purchase loan premiums aggregated $1.4 million and $0.9 million as of September 30, 2016 and December 31, 2015, respectively. Net deferred loan costs aggregated $0.2 million as of September 30, 2016 and $0.3 million as of December 31, 2015.

The Company's lending activities are conducted principally in Fairfield and New Haven Counties in Connecticut and Westchester County in New York, and the five Boroughs of New York City. The Company originates commercial real estate loans, commercial business loans, and a variety of consumer loans. In addition, the Company previously had originated loans on residential real estate. All residential and commercial mortgage loans are collateralized primarily by first or second mortgages on real estate. The ability and willingness of borrowers to satisfy their loan obligations is dependent to some degree on the status of the regional economy as well as upon the regional real estate market. Accordingly, the ultimate collectability of a substantial portion of the loan portfolio and the recovery of a substantial portion of any resulting real estate acquired is susceptible to changes in market conditions.

The Company has established credit policies applicable to each type of lending activity in which it engages, by which it evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 75% of the market value of the collateral for commercial real estate at the date of the credit extension depending on the Company's evaluation of the borrowers' creditworthiness and type of collateral and up to 80% for multi–family real estate. In the case of construction loans, the maximum loan-to-value is 75% of the “as completed” appraised value. The appraised value of collateral is monitored on an ongoing basis and additional collateral is requested when warranted. Real estate is the primary form of collateral. Other important forms of collateral are accounts receivable, inventory, other business assets, marketable securities and time deposits.

Risk characteristics of the Company’s portfolio classes include the following:

Commercial and Industrial Loans

– The Company’s commercial and industrial loan portfolio consists primarily of commercial business loans and lines of credit to businesses and professionals. These loans are usually made to finance accounts receivable, the purchase of inventory or new or used equipment and for other short or long-term working capital purposes. These loans are generally secured by business assets, but are also occasionally offered on an unsecured basis. In granting this type of loan, the Company primarily looks to the borrower’s cash flow as the source of repayment with collateral and personal guarantees, where obtained, as a secondary source of repayment. Payments on such loans are often dependent upon the successful operation of the underlying business involved. Repayment of such loans may therefore be negatively impacted by adverse changes in economic conditions, management’s inability to effectively manage the business, claims of others against the borrower’s assets which may take priority over the Company’s claims against assets, death or disability of the borrower, or loss of markets for the borrower’s products or services.

Commercial Real Estate Loans –

In underwriting commercial real estate loans, the Company evaluates both the prospective borrower’s ability to make timely payments on the loan and the value of the property securing the loans. Repayment of such loans may be negatively impacted should the borrower default or should there be a substantial decline in the value of the property securing the loan or decline in general economic conditions. Where the owner occupies the property, the Company also evaluates the business ability to repay the loan on a timely basis. In addition, the Company may require personal guarantees, lease assignments and/or the guarantee of the operating company when the property is owner occupied.

Construction Loans

– Construction loans are short-term loans (generally up to eighteen months) secured by land for both residential and commercial development. The loans are generally made for acquisition and improvements. Funds are disbursed as phases of construction are completed. Included in this category are loans to construct single family homes where no contract of sale exists. These loans are based upon the experience and the financial strength of the builder, the type and location of the property and other factors. Construction loans are generally personally guaranteed by the principal(s). Repayment of such loans may be negatively impacted by the builders’ inability to complete construction, a downturn in the new construction market, a significant increase in interest rates, or decline in general economic conditions.

Construction to Perm

anent

-CRE

–

One time close of a construction facility converting to an amortizing mortgage loan typically upon an event which would include a certificate of occupancy as well as stabilization, defined as cash flow sufficient to support a pre-defined minimum debt coverage ratio, as well as other conditions and covenants particular to the loan type. The construction facility would typically carry a floating rate, then upon conversion to amortization would reset at a predetermined spread over FHLB with a minimum interest rate.

Residential Real Estate Loans

– Home equity loans secured by real estate properties are offered by the Company. The Company no longer offers residential mortgages, having exited this business in 2013. Repayment of residential real estate loans may be negatively impacted should the borrower have financial difficulties, should there be a significant decline in the value of the property securing the loan, or should there be decline in general economic conditions.

Consumer/ Other Loans

– The Company also offers installment loans, credit cards, and consumer overdraft and reserve lines of credit to individuals. Repayments of such loans are often dependent on the personal income of the borrower, which may be negatively impacted by adverse changes in economic conditions. The Company does not place a high emphasis on originating these types of loans.

The Company does not have any lending programs commonly referred to as subprime lending. Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.

The following table sets forth activity in our allowance for loan losses, by loan type, for the three and nine months ended September 30, 2016. The following table also details the amount of loans receivable that are evaluated individually and collectively for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, as of September 30, 2016.

	ALLOWANCE FOR LOANS LOSSES
(in thousands)
Three months ended September 30, 2016:	Commercial and Industrial			Commercial Real Estate			Construction			Construction to Permanent			Residential			Consumer/ Other			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	3,400			2,295			169			145			647			531			22			7,209
Charge-offs		(50	)		-			-			-			(186	)		(2	)		-			(238	)
Recoveries		-			-			-			-			2			-			-			2
Provision		352			(491	)		(108	)		(18	)		949			(329	)		-			355
Ending Balance	$	3,702			1,804			61			127			1,412			200			22			7,328

Nine months ended September 30, 2016:
Allowance for loan losses:
Beginning Balance	$	1,027			1,970			486			123			740			677			219			5,242
Charge-offs		(50	)		-			-			-			(190	)		(4	)		-			(244	)
Recoveries		12			-			-			-			3			1			-			16
Provision		2,713			(166	)		(425	)		4			859			(474	)		(197	)		2,314
Ending Balance	$	3,702			1,804			61			127			1,412			200			22			7,328

As of September 30, 2016:
Ending balance: individually evaluated for impairment		3,158			-			-			-			-			3			-			3,161
Ending balance: collectively evaluated for impairment		544			1,804			61			127			1,412			197			22			4,167
Total allowance for loan losses	$	3,702			1,804			61			127			1,412			200			22			7,328

Total loans ending balance	$	69,722			258,920			48,048			5,587			103,970			73,903			-			560,150

Ending balance: individually evaluated for impairment	$	3,158			6,713			-			-			4,676			3			-			14,550

Ending balance: individually evaluated for impairment	$	66,564			252,207			48,048			5,587			99,294			73,900			-			545,600

The following table sets forth activity in our allowance for loan losses, by loan type, for the three and nine months ended September 30, 2015. The following table also details the amount of loans receivable that are evaluated individually and collectively for impairment, and the related portion of the allowance for loan losses that is allocated to each loan portfolio segment, as of December 31, 2015.

	ALLOWANCE FOR LOANS LOSSES
(in thousands)
Three months ended September 30, 2015:	Commercial and Industrial			Commercial Real Estate		Construction		Construction to Permanent			Residential			Consumer/ Other			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	982			2,145		275		150			832			726			98		5,208
Charge-offs		-			-		-		-			(7	)		(4	)		-		(11	)
Recoveries		7			35		-		-			-			1			-		43
Provision		(219	)		204		119		38			(198	)		(25	)		81		-
Ending Balance	$	770			2,384		394		188			627			698			179		5,240

Nine Months Ended September 30, 2015:
Allowance for loan losses:
Beginning Balance	$	1,918			1,419		63		215			831			478			-		4,924
Charge-offs		-			-		-		-			(10	)		(11	)		-		(21	)
Recoveries		37			35		-		5			-			10			-		87
Provision		(1,185	)		930		331		(32	)		(194	)		221			179		250
Ending Balance	$	770			2,384		394		188			627			698			179		5,240

As of December 31, 2015:
Ending balance: individually evaluated for impairment	$	-			-		-		-			-			3			-		3
Ending balance: collectively evaluated for impairment		1,027			1,970		486		123			740			674			219		5,239
Total allowance for loan losses	$	1,027			1,970		486		123			740			677			219		5,242

Total loans ending balance	$	59,752			245,828		15,551		4,880			110,837			47,521			-		484,369

Ending balance: individually evaluated for impairment		-			7,745		-		-			4,556			550			-		12,851

Ending balance: collectively evaluated for impairment	$	59,752			238,083		15,551		4,880			106,281			46,971			-		471,518

The Company monitors the credit quality of its loans receivable in an ongoing manner. Credit quality is monitored by reviewing certain credit quality indicators, including loan to value ratios, debt service coverage ratios and credit scores.

The Company has a risk rating system as part of the risk assessment of its loan portfolio. The Company’s lending officers are required to assign a risk rating to each loan in their portfolio at origination, which is ratified or modified by the Loan Committee to which the loan is submitted for approval. When the lender learns of important financial developments, the risk rating is reviewed accordingly, and adjusted if necessary. Similarly, the Loan Committee can adjust a risk rating. The Company employs a loan officer whose responsibility is to independently review the ratings annually for all commercial credits over $250,000.

The Company uses an independent third party loan reviewer who performs quarterly reviews of a sample of loans, validating the Company’s risk ratings assigned to such loans. Any upgrades or downgrades to classified loans must be approved by the Management Loan Committee.

When assigning a risk rating to a loan, management utilizes the Company’s internal eleven-point risk rating system. An asset is considered “special mention” when it has a potential weakness based on objective evidence, but does not currently expose the Company to sufficient risk to warrant classification in one of the following categories:

●

An asset is considered “substandard” if it is not adequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets have well-defined weaknesses based on objective evidence, and are characterized by the “distinct possibility” that the Company will sustain “some loss” if the deficiencies are not corrected.

●

Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.”

Charge–off generally commences after the loan is classified “doubtful” to reduce the loan to its recoverable balance. If the account is classified as “loss”, the full balance is charged off regardless of the potential recovery from the sale of the collateral. That amount is recognized as a recovery after the collateral is sold.

In accordance with FFIEC (“Federal Financial Institutions Examination Council”) published policies establishing uniform criteria for the classification of retail credit based on delinquency status, “Open-end” credits are charged off when 180 days delinquent and “Closed-end” credits are charged off when 120 days delinquent.

ncluded in loans receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The unpaid principal balances of loans on nonaccrual status and considered impaired were $4.7 million at September 30, 2016 and $1.6 million at December 31, 2015.

The $4.7 million of non-accrual loans at September 30, 2016 is comprised of 5 relationships, for which a specific reserve of $3.2 million has been established. The non-accrual increase of $3.1 million from December 31, 2015 is related to a single commercial loan and is not indicative of a credit quality trend within the portfolio. Despite the Company’s decision to fully reserve for this loan as of June 30, 2016, the Company has commenced recovery actions for alleged fraud across all available avenues, including insurance coverage and claims against third parties. Potentially responsive insurance coverage, under which the Company has sought recovery, includes a Financial Institution Bond with a limit of liability of $5.0 million above a $50,000 deductible. The Company will vigorously pursue its avenues of recovery, including insurance coverage and third party claims.

If non-accrual loans had been performing in accordance with their contractual terms, the Company would have recorded $70,000 and $266,000 of additional income during the three and nine months ended September 30, 2016, respectively, and $3,000 and $8,000 during the three and nine months ended September 30, 2015, respectively.

The following table sets forth the detail, and delinquency status, of non-accrual loans at September 30, 2016:

(in thousands)
2016:	31 - 60 Days Past Due		61 - 90 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Non-Accrual Loans
Commercial & Industrial	$	-		-		3,158		3,158		-		3,158
Residential		-		-		1,590		1,590		-		1,590
Consumer		-		-		3		3		-		3
Total	$	-		-		4,751		4,751		-		4,751

The following table sets forth the detail, and delinquency status, of non-accrual loans at December 31, 2015:

(in thousands)
2015:	31 - 60 Days Past Due		61 - 90 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Non-Accrual Loans
Residential	$	-		-		1,590		1,590		-		1,590
Consumer		-		-		3		3		-		3
Total	$	-		-		1,593		1,593		-		1,593

Generally, loans are placed on non-accruing status when they become 90 days or more delinquent, and remain on non-accrual status until they are brought current, have at least six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent and still be on a non-accruing status.

At September 30

2016

loans

were on

non-accrual

status

totaling

$4.7

million.

For these 5

loans

a specific

serve of $3.2

has been

established.

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at September 30, 2016:

(in thousands)	Performing (Accruing) Loans
2016:	31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Performing Loans		Total Non-Accrual Loans		Total Loans
Commercial & Industrial:
Pass	$	-		571		-		571		65,990		66,561		-		66,561
Substandard		-		-		-		-		4		4		3,158		3,162
Total Commercial & Industrial		-		571		-		571		65,994		66,565		3,158		69,723

Commercial Real Estate:
Pass		2,522		4,000		-		6,522		246,349		252,871		-		252,871
Special Mention		-		-		-		-		5,176		5,176		-		5,176
Substandard		-		-		-		-		873		873		-		873
Total Commercial Real Estate		2,522		4,000		-		6,522		252,398		258,920		-		258,920

Construction - Pass		-		-		-		-		48,048		48,048		-		48,048

Construction to Permanent - Pass		-		-		-		-		5,587		5,587		-		5,587

Residential Real Estate:
Pass		390		-		1,458		1,848		100,531		102,379		-		102,379
Substandard		-		-		-		-		-		-		1,590		1,590
Total Residential Real Estate		390		-		1,458		1,848		100,531		102,379		1,590		103,969

Consumer/Other:
Pass		112		3		11		126		73,774		73,900		-		73,900
Substandard		-		-		-		-		-		-		3		3
Total Consumer/Other		112		3		11		126		73,774		73,900		3		73,903

Grand Total:
Pass		3,024		4,574		1,469		9,067		540,279		549,346		-		549,346
Special Mention		-		-		-		-		5,176		5,176		-		5,176
Substandard		-		-		-		-		877		877		4,751		5,628
Grand Total	$	3,024		4,574		1,469		9,067		546,332		555,399		4,751		560,150

The following table sets forth the detail and delinquency status of loans receivable, by performing and non-performing loans at December 31, 2015:

(in thousands)	Performing (Accruing) Loans
2015:	31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Performing Loans		Total Non-Accrual Loans		Total Loans
Commercial & Industrial:
Pass	$	43		605		520		1,168		55,600		56,768		-		56,768
Substandard		2,977		-		-		2,977		7		2,984		-		2,984
Total Commercial & Industrial		3,020		605		520		4,145		55,607		59,752		-		59,752

Commercial Real Estate:
Pass		-		-		-		-		237,996		237,996		-		237,996
Special Mention		-		-		-		-		5,322		5,322		-		5,322
Substandard		840		-		-		840		1,670		2,510		-		2,510
Total Commercial Real Estate		840		-		-		840		244,988		245,828		-		245,828

Construction - Pass		-		-		-		-		15,551		15,551		-		15,551

Construction to Permanent - Pass		-		-		-		-		4,880		4,880		-		4,880

Residential Real Estate:
Pass		154		87		1,517		1,758		107,489		109,247		-		109,247
Substandard		-		-		-		-		-		-		1,590		1,590
Total Residential Real Estate		154		87		1,517		1,758		107,489		109,247		1,590		110,837

Consumer/Other:
Pass		309		2		9		320		47,198		47,518		-		47,518
Substandard		-		-		-		-		-		-		3		3
Total Consumer/Other		309		2		9		320		47,198		47,518		3		47,521

Grand Total:
Pass		506		694		2,046		3,246		468,714		471,960		-		471,960
Special Mention		-		-		-		-		5,322		5,322		-		5,322
Substandard		3,817		-		-		3,817		1,677		5,494		1,593		7,087
Grand Total	$	4,323		694		2,046		7,063		475,713		482,776		1,593		484,369

Impaired Loans

Impaired loans consist of non-accrual loans, Troubled Debt Restructurings (“TDRs”), and loans previously classified as TDRs that have been upgraded. As of September 30, 2016, the Company’s impairment analysis resulted in identification of $14.6 million of impaired loans, for which specific reserves of $3.2 million were required at September 30, 2016, compared to $12.9 million of impaired loans at December 31, 2015, for which specific reserves of $3,000 were required. Loans that did not require specific reserves have sufficient collateral values, less costs to sell, supporting the carrying balances of the loans. In some cases, there may be no specific reserves because the Company already charged off the specific impairment. Once a borrower is in default, the Company is under no obligation to advance additional funds on unused commitments.

Troubled Debt Restructurings

On a case-by-case basis, the Company may agree to modify the contractual terms of a borrower’s loan to assist customers who may be experiencing financial difficulty. If the borrower is experiencing financial difficulties and a concession has been made, the loan is classified as a troubled debt restructured loan.

For the three and nine months ended September 30, 2016 and 2015, there were no loans modified as a “troubled debt restructuring”. At September 30, 2016 and December 31, 2015, there were no commitments to advance additional funds under troubled debt restructured loans.

Substantially all of our troubled debt restructured loan modifications involve lowering the monthly payments on such loans through either a reduction in interest rate below market rate, an extension of the term of the loan, or a combination of these two methods. These modifications rarely result in the forgiveness of principal or accrued interest. In addition, we frequently obtain additional collateral or guarantor support when modifying commercial loans. If the borrower had demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status, when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. All troubled debt restructurings are classified as impaired loans, which are individually evaluated for impairment.

The following table summarizes impaired loans by loan portfolio class as of September 30, 2016:

(in thousands)
2016:	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial & Industrial	$	-		-		-
Commercial Real Estate		6,713		6,833		-
Construction		-		-		-
Construction to Permanent		-		-		-
Residential		4,676		5,527		-
Consumer/Other		-		-		-
		11,389		12,360		-
With an allowance recorded:
Commercial & Industrial		3,158		3,208		3,158
Commercial Real Estate		-		-		-
Construction		-		-		-
Construction to Permanent		-		-		-
Residential		-		-		-
Consumer/Other		3		3		3
		3,161		3,211		3,161
Grand Total:
Commercial & Industrial		3,158		3,208		3,158
Commercial Real Estate		6,713		6,833		-
Construction		-		-		-
Construction to Permanent		-		-		-
Residential		4,676		5,527		-
Consumer/Other		3		3		3
Grand Total	$	14,550		15,571		3,161

The following table summarizes impaired loans by loan portfolio class as of December 31, 2015:

(in thousands)
2015:	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial & Industrial	$	-		96		-
Commercial Real Estate		7,745		8,259		-
Construction		-		287		-
Construction to Permanent		-		-		-
Residential		4,556		5,559		-
Consumer/Other		547		633		-
		12,848		14,834		-
With an allowance recorded:
Commercial & Industrial		-		-		-
Commercial Real Estate		-		-		-
Construction		-		-		-
Construction to Permanent		-		-		-
Residential		-		-		-
Consumer/Other		3		3		3
		3		3		3
Grand Total:
Commercial & Industrial		-		96		-
Commercial Real Estate		7,745		8,259		-
Construction		-		287		-
Construction to Permanent		-		-		-
Residential		4,556		5,559		-
Consumer/Other		550		636		3
Grand Total	$	12,851		14,837		3

The following tables summarize additional information regarding impaired loans for the three and nine months ended September 30, 2016 and 2015.

	Three Months Ended September 30,
	2016				2015
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial & Industrial	$	148		-		-		-
Commercial Real Estate		6,428		77		7,916		94
Residential		4,787		36		3,373		31
Consumer/ Other		272		-		549		4
		11,635		113		11,838		129

With an allowance recorded:
Commercial & Industrial		3,068		-		-		-
Consumer/ Other		2		-		1		-
		3,070		-		1		-

Grand Total:
Commercial & Industrial		3,216		-		-		-
Commercial Real Estate		6,428		77		7,916		94
Residential		4,787		36		3,373		31
Consumer/ Other		274		-		550		4
Grand Total	$	14,705		113		11,839		129

	Nine Months Ended September 30,
	2016				2015
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial & Industrial	$	74		-		-		-
Commercial Real Estate		7,281		236		8,079		281
Residential		4,666		98		3,430		95
Consumer/ Other		409		9		551		13
Total:		12,430		343		12,060		389

With an allowance recorded:
Commercial & Industrial		2,278		-		-		-
Consumer/ Other		2		-		1		-
Total:		2,280		-		1		-

Grand Total:
Commercial & Industrial		2,352		-		-		-
Commercial Real Estate		7,281		236		8,079		281
Residential		4,666		98		3,430		95
Consumer/ Other		411		9		552		13
Grand Total	$	14,710		343		12,061		389