Loans and the Allowance for Loan Losses

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 6. Loans and the Allowance for Loan Losses

Loans are stated at their principal amounts inclusive of net deferred loan origination fees. Interest income is credited as earned except when a loan becomes past due 90 days or more and doubt exists as to the ultimate collection of interest or principal. In those cases the recognition of income is discontinued. Past due status is based on the contractual terms of the loan. Loans that are past due 90 days or more that are both well secured and in the process of collection will remain on an accruing basis. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income.

Payments received on non-accrual loans are generally applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected. Loan origination fees and certain direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to the loan’s yield using the level yield method.

Portfolio segments are defined as the level at which an entity develops and documents a systematic methodology to determine its allowance. Management has determined that the Corporation has two portfolio segments of loans and leases (commercial and consumer) in determining the allowance. Both quantitative and qualitative factors are used by management at the portfolio segment level in determining the adequacy of the allowance for the Corporation. Classes of loans and leases are a disaggregation of the Corporation’s portfolio segments. Classes are defined as a group of loans and leases, which share similar initial measurement attributes, risk characteristics, and methods for monitoring and assessing credit risk. Management has determined that the Corporation has five classes of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.

Impaired Loans

The Corporation accounts for impaired loans in accordance with FASB ASC 310-10-35. The value of impaired loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or at the fair value of the collateral if the loan is collateral dependent.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. The Corporation has defined its population of impaired loans to include all classes of non-accrual, troubled debt restructuring (“TDR”) loans and loans with a specific reserve. As part of the evaluation of impaired loans, the Corporation individually reviews for impairment all non-homogeneous loans internally classified as substandard or below. Generally, smaller impaired non-homogeneous loans and impaired homogeneous loans are collectively evaluated for impairment.

When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized by creating or adjusting an existing allocation of the allowance, or by recording a partial charge-off of the loan to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.

Loans Modified in a Troubled Debt Restructuring

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties; the Corporation makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for a period of nine months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Reserve for Credit Losses

The Corporation’s reserve for credit losses is comprised of two components, the allowance for loan losses and the reserve for unfunded commitments (the “Unfunded Commitments”).

Allowance for Loan Losses

The allowance reflects management’s best estimate of probable losses within the existing loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risk inherent in the loan portfolio. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Credit exposures deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged-off amounts are credited to the allowance for loan losses.

The Corporation’s allowance for loan losses includes (1) specific valuation allowances for impaired loans evaluated in accordance with FASB Codification Topic 310: Receivables; (2) formulaic allowances based on historical loss experience by loan category, adjusted, as necessary, to reflect the impact of current conditions; and (3) unallocated general valuation allowances determined in accordance with FASB Codification Topic 450: Contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.

The ultimate collectability of a substantial portion of the Corporation’s loan portfolio is susceptible to changes in the real estate market and economic conditions in the State of New Jersey and the impact of such conditions on the creditworthiness of the borrowers.

Purchase Credit Impaired Loans

The Corporation purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit impaired loans are accounted for individually. The Corporation estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan , expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, and credit risk. Net adjustments to the reserve for unfunded commitments are included in other expense.

Composition of Loan Portfolio

The following table sets forth the composition of the Corporation’s loan portfolio, including net deferred fees and costs, at September 30, 2014 and December 31, 2013:

	September 30,			December 31,
	2014			2013
	(in thousands)
Commercial	$	470,510		$	229,688
Commercial real estate		1,570,854			536,539
Construction		141,844			42,722
Residential real estate		241,387			150,571
Consumer		2,640			1,084
Subtotal		2,427,235			960,604
Net deferred loan (fees) costs		(470	)		339
Loans receivable	$	2,426,765		$	960,943

At September 30, 2014 and December 31, 2013, loan balances of approximately $987.5 million and $564.7 million, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.

Purchase Credit Impaired Loans

The Corporation holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at September 30, 2014 and December 31, 2013.

	September 30,		December 31,
	2014		2013
	(in thousands)
Commercial	$	7,255	$	—
Commercial real estate		1,835		—
Construction		—		—
Residential real estate		2,262		—
Consumer		—		—
Total carrying amount	$	11,352	$	—

For those purchased loans disclosed above, the Corporation did not increase the allowance for loan losses for the nine months ended September 30, 2014, nor did it increase the allowance for loan losses for purchased impaired loans during the nine months ended September 30, 2013.

The accretable yield, or income expected to be collected, on the purchased loans above is as follows at September 30, 2014 and December 31, 2013.

	September 30,
	2014
Balance at July 1	$	5,013
New loans purchased		—
Accretion of income		(76	)
Reclassifications from non-accretable difference		—
Disposals		—
Balance at September 30	$	4,937

The following table presents information about the recorded investment in loan receivables on non-accrual status by class at September 30, 2014 and December 31, 2013:

Loans Receivable on Non-Accrual Status
	September 30, 2014		December 31, 2013
	(in thousands)
Commercial	$	634	$	753
Commercial real estate		3,765		744
Residential real estate		1,684		1,640
Total loans receivable on non-accrual status	$	6,083	$	3,137

Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified impaired loans.

The Corporation continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the Corporation utilizes the services of a third party loan review firm to rate the credit quality of its loans receivable. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the loan quality or inadequately protect the Corporation’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected. The following table presents information, excluding net deferred costs, about the Corporation’s loan credit quality at September 30, 2014 and December 31, 2013:

Credit Quality Indicators

	September 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	449,688	$	15,447	$	5,073	$	302	$	470,510
Commercial real estate		1,533,499		17,521		19,834		—		1,570,854
Construction		140,365		—		1,479		—		141,844
Residential real estate		238,516		—		2,871		—		241,387
Consumer		2,534		—		106		—		2,640
Total loans	$	2,364,602	$	32,968	$	29,363	$	302	$	2,427,235

	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	226,013	$	1,719	$	1,284	$	672	$	229,688
Commercial real estate		509,679		14,544		12,316		—		536,539
Construction		41,492		—		1,230		—		42,722
Residential real estate		147,379		978		2,214		—		150,571
Consumer		964		—		120		—		1,084
Total loans	$	925,527	$	17,241	$	17,164	$	672	$	960,604

The following table provides an analysis of the impaired loans, by class, at September 30, 2014 and December 31, 2013:

	September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
No Related Allowance Recorded
Commercial	$	890	$	663	$	—
Commercial real estate		5,005		5,654		—
Residential real estate		1,957		2,288		—
Consumer		106		106		—
Total	$	7,958	$	8,711		—
With An Allowance Recorded
Commercial real estate	$	3,600	$	3,600	$	323
Total	$	3,600	$	3,600	$	323
Total
Commercial	$	890	$	663	$	—
Commercial real estate		8,605		9,254		—
Residential real estate		1,957		2,288		—
Consumer		106		106		—
Total	$	11,558	$	12,311	$	323

	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(in thousands)
No Related Allowance Recorded
Commercial	$	449	$	449	$	—
Commercial real estate		10,482		10,783		—
Residential real estate		1,858		2,000		—
Consumer		120		120		—
Total	$	12,909	$	13,352	$	—
With An Allowance Recorded
Commercial	$	672	$	672	$	300
Commercial real estate		4,344		4,344		115
Total	$	5,016	$	5,016	$	415
Total
Commercial	$	1,121	$	1,121	$	300
Commercial real estate		14,826		15,127		115
Residential real estate		1,858		2,000		—
Consumer		120		120		—
Total	$	17,925	$	18,368	$	415

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by class as of and for the three and nine months ended September 30, 2014 and 2013.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2014				2013				2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance recorded:
Commercial	$	897	$	—	$	—	$	—	$	778	$	30	$	—	$	—
Commercial real estate		5,046		31		1,275		19		5,313		74		1,275		57
Residential real estate		1,975		0		—		—		2,044		31		—		—
Consumer		106		2		—		—		106		5		—		—
Total	$	8,024		32	$	1,275	$	19	$	8,241	$	140	$	1,275	$	57
Impaired loans with an allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		3,600		37		175		—		3,600		122		2,302		68
Residential real estate		—		—		1,226		10		—		—		1,226		31
Consumer		—		—		—				—		—		—		—
Total	$	3,600	$	37	$	1,401	$	10	$	3,600	$	122	$	3,428	$	99
Total impaired loans:
Commercial	$	897	$	—	$	—	$	—	$	778	$	30	$	—	$	—
Commercial real estate		8,646		68		1,450		19		8,913		196		3,477		125
Residential real estate		1,975		0		1,226		10		2,044		31		1,226		31
Consumer		106		2		—		—		106		5		—		—
Total	$	11,624	$	69	$	2,676	$	29		11,841	$	262	$	4,703	$	156

Included in impaired loans at September 30, 2014 are loans that are deemed troubled debt restructurings. The recorded investment in loans include accrued interest receivable and other capitalized costs such as real estate taxes paid on behalf of the borrower and loan origination fees, net, when applicable. Cash basis interest and interest income recognized on accrual basis approximate each other.

The following table provides an analysis of the aging of the recorded investment of loans, excluding net deferred costs that are past due at September 30, 2014 and December 31, 2013 by class:

Aging Analysis

	September 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days Past Due and Accruing
	(in thousands)
Commercial	$	405	$	—	$	752	$	1,157	$	469,353	$	470,510	$	—
Commercial real estate		951		2,044		4,020		7,015		1,563,839		1,570,854		—
Construction		—		—		—		—		141,844		141,844		—
Residential real estate		347		1,763		3,403		5,513		235,874		241,387		—
Consumer		17		—		—		17		2,623		2,640
Total	$	1,720	$	3,807	$	8,175	$	13,702	$	2,413,533	$	2,427,235	$	—

	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days Past Due and Accruing
	(in thousands)
Commercial	$	18	$	—	$	753	$	771	$	228,917	$	229,688	$	—
Commercial Real Estate		221		—		744		965		535,574		536,539		—
Construction		—		—		—		—		42,722		42,722		—
Residential real estate		990		258		1,640		2,888		147,683		150,571		—
Consumer		5		—		—		5		1,079		1,084
Total	$	1,234	$	258	$	3,137	$	4,629	$	955,975	$	960,604	$	—

The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment (excluding net deferred costs), acquired, and the related portion of the allowance for loan loss that is allocated to each loan portfolio class:

	September 30, 2014
	Commercial		Commercial real estate		Construction		Residential real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	323	$	—	$	—	$	—	$	—	$	323
Collectively evaluated for impairment		2,478		6,699		524		1,052		5		1,037		11,795
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total	$	2,478	$	7,022	$	524	$	1,052	$	5	$	1,037	$	12,118
Loans Receivable
Individually evaluated for impairment	$	68	$	5,983	$	—	$	1,733	$	106	$	—	$	7,890
Collectively evaluated for impairment		463,187		1,563,036		141,844		237,391		2,534		—		2,407,992
Acquired with deteriorated credit quality		7,255		1,835		—		2,263		—		—		11,353
Total	$	470,510	$	1,570,854	$	141,844	$	241,387	$	2,640	$	—	$	2,427,235

The tables above include approximately $1,275,000,000 of acquired loans for the period ended September 30, 2014 reported as collectively evaluated for impairment.

	December 31, 2013
	Commercial		Commercial real estate		Construction		Residential real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses:
Individually evaluated for impairment	$	300	$	115	$	—	$	—	$	—	$	—	$	415
Collectively evaluated for impairment		1,398		5,631		362		990		146		1,391		9,918
Total	$	1,698	$	5,746	$	362	$	990	$	146	$	1,391	$	10,333
Loans Receivable
Individually evaluated for impairment	$	1,121	$	14,826	$	—	$	1,858	$	120	$	—	$	17,925
Collectively evaluated for impairment		228,567		521,713		42,722		148,713		964		—		942,679
Total	$	229,688	$	536,539	$	42,722	$	150,571	$	1,084	$	—	$	960,604

The tables above include approximately $34,000,000 of acquired loans for the period ended December 31, 2013 reported as collectively evaluated for impairment.

The Corporation’s allowance for loan losses is analyzed quarterly. Many factors are considered, including growth in the portfolio, delinquencies, nonaccrual loan levels, and other factors inherent in the extension of credit. There have been no material changes to the allowance for loan loss methodology as disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

A summary of the activity in the allowance for loan losses is as follows:

	Three Months Ended September 30, 2014
	Commercial		Commercial real estate		Construction		Residential real estate		Consumer			Unallocated			Total
	(in thousands)
Balance at July 1,	$	2,142	$	5,741	$	504	$	1,011	$	63		$	1,364		$	10,825
Charge offs		—		—		—		—		(18	)		—			(18	)
Recoveries		—		—		—		—		11			—			11
Provision		336		1,281		20		41		(51	)		(327	)		1,300
Balance at September 30,	$	2,478	$	7,022	$	524	$	1,052	$	5		$	1,037		$	12,118

	Nine Months Ended September 30, 2014
	Commercial			Commercial real estate		Construction		Residential real estate			Consumer			Unallocated			Total
	(in thousands)
Balance at January 1,	$	1,698		$	5,746	$	362	$	990		$	146		$	1,391		$	10,333
Charge offs		(333	)		—		—		(108	)		(7	)		—			(448	)
Recoveries		—			—		—		11			13			—			24
Provision		1,113			1,276		162		159			(147	)		(354	)		2,209
Balance at September 30,	$	2,478		$	7,022	$	524	$	1,052		$	5		$	1,037		$	12,118

	Three Months Ended September 30, 2013
	Commercial			Commercial real estate		Construction		Residential real estate			Consumer			Unallocated		Total
	(in thousands)
Balance at July 1,	$	2,422		$	5,333	$	318	$	1,341		$	29		$	759	$	10,202
Charge offs		(6	)		—		—		—			(4	)		—		(10	)
Recoveries		—			—		—		—			2			—		2
Provision		(702	)		455		51		(37	)		67			166		—
Balance at September 30,	$	1,714		$	5,788	$	369	$	1,304		$	94		$	925	$	10,194

	Nine Months Ended September 30, 2013
	Commercial			Commercial real estate			Construction		Residential real estate			Consumer			Unallocated		Total
	(in thousands)
Balance at January 1,	$	2,424		$	5,323		$	313	$	1,532		$	113		$	532	$	10,237
Charge offs		(6	)		(50	)		—		—			(20	)		—		(76	)
Recoveries		21			8			—		—			4			—		33
Provision		(725	)		507			56		(228	)		(3	)		393		—
Balance at September 30,	$	1,714		$	5,788		$	369	$	1,304		$	94		$	925	$	10,194

Troubled Debt Restructurings

At September 30, 2014, there were 0 commitments to lend additional funds to borrowers whose loans were on non-accrual status or were contractually past due in excess of 90 days and still accruing interest, or whose terms have been modified in troubled debt restructurings.

The policy of the Corporation generally is to grant commercial, mortgage and consumer loans to residents and businesses within its market area. The borrowers’ abilities to repay their obligations are dependent upon various factors, including the borrowers’ income and net worth, cash flows generated by the borrowers’ underlying collateral, value of the underlying collateral, and priority of the lender’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the control of the Corporation. The Corporation is therefore subject to risk of loss. The Corporation believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for virtually all loans. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Loans modified in a troubled debt restructuring totaled a recorded investment of $2.8 million at September 30, 2014, of which $1.0 million were on non-accrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, 2013, loans modified in a troubled debt restructuring totaled $6.6 million, of which $826,000 was on non-accrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The Corporation has allocated no specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of September 30, 2014 and December 31, 2013.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2014 (dollars in thousands):

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Troubled debt restructurings:
Commercial		1	$	672	$	315
Commercial real estate		1		136		93
Construction		—		—		—
Residential real estate		2		275		273
Total		4	$	1,083	$	681

The Corporation had a $333,000 charge-off in connection with a loan modification at the time of modification during the nine months ended September 30, 2014. There were 0 troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2014.

There were 0 troubled debt restructurings that occurred during the year ended December 31, 2013. The Corporation had 0 loans charged-off in connection with a loan modification at the time of the modification during the year ended December 31, 2013. There were 0 troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ended December 31, 2013.

In an effort to proactively manage delinquent loans, the Corporation has selectively extended to certain borrowers concessions such as rate reductions, extension of maturity dates, principal or interest forgiveness, adjusted repayment terms, forbearance agreements, or combinations of two or more of these concessions. As of September 30, 2014, loans on which concessions were made with respect to adjusted repayment terms amounted to $2.0 million, and deemed troubled debt restructurings. Loans on which combinations of two or more concessions were made amounted to $1.3 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.