Loans and the Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2015

Receivables [Abstract]

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

Note 6. Loans and the Allowance for Loan and Lease Losses

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan and lease losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Loan segments 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 Company has five segments of loans and leases: commercial (including lease financing), commercial real estate, commercial construction, residential real estate (including home equity) and consumer.  

Interest income on commercial, commercial real estate, commercial construction and residential loans are discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to nonaccrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The policy of the Company is to generally grant commercial, residential and consumer loans to New Jersey 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 Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease losses are provided for all known and inherent risks. Collateral and/or personal guarantees are required for a large majority of the Company’s loans.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses is a valuation allowance for probable incurred credit losses. Losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. As part of the evaluation of impaired loans, the Company 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.

The Bank has defined its population of impaired loans to include all loans on nonaccrual status; all troubled debt restructuring loans; and all loans (above an established dollar threshold of $250,000) internally classified as “Special Mention” or below that require a specific reserve.

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

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience, the primary factor, is determined by loan class and is based on the actual loss history experienced by the Bank over an actual three year rolling calculation. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. This actual loss experience is supplemented with the exogenous factor adjustments based on the risks present for each loan category. These exogenous factors (nine total) include consideration of the following: concentrations of credit; delinquency & nonaccrual trends; economic & business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans.

Purchased Credit-Impaired Loans

The Company purchases groups of loans in conjunction with mergers, 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 and lease losses.  After acquisition, losses are recognized by an increase in the allowance for loan and lease losses.

Such purchased credit impaired loans are accounted for individually.  The Company estimates the amount and timing of expected cash flows for each loan 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.

Composition of Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio, including net deferred loan fees, at March 31, 2015 and December 31, 2014:

	March 31, 2015			December 31, 2014
	(in thousands)
Commercial	$	562,931		$	499,816
Commercial real estate		1,668,310			1,634,510
Commercial construction		181,056			167,359
Residential real estate		226,645			234,967
Consumer		3,581			2,879
Gross loans		2,642,523			2,539,531
Net deferred loan fees		(1,784	)		(890	)
Total loans receivable	$	2,640,739		$	2,538,641

At March 31, 2015 and December 31, 2014, loan balances of approximately $1.1 billion and $1.0 billion, respectively, were pledged to secure borrowings from the Federal Home Loan Bank of New York.

Purchased Credit-Impaired Loans

The Company 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 March 31, 2015 and December 31, 2014.

	March 31, 2015		December 31, 2014
	(in thousands)
Commercial	$	7,146	$	7,199
Commercial real estate		1,807		1,816
Residential real estate		819		806
Total carrying amount	$	9,772	$	9,821

For those purchased loans disclosed above, the Company did not increase the allowance for loan and lease losses for the three months ended March 31, 2015, nor did it increase the allowance for loan and lease losses for purchased impaired loans during the three months ended March 31, 2015.

The accretable yield, or income expected to be collected, on the purchased loans for the three months ended March 31, 2015 is as follows (in thousands):

	March 31,
	2015
Balance at January 1, 2015	$	4,805
New loans purchased		—
Accretion of income		(54	)
Reclassifications from non-accretable difference		—
Disposals		—
Balance at March 31, 2015	$	4,751

The following table presents information about the recorded investment in loan receivables on nonaccrual status by class at March 31, 2015 and December 31, 2014:

Loans Receivable on Nonaccrual Status

	March 31, 2015		December 31, 2014
	(in thousands)
Commercial	$	3,347	$	616
Commercial real estate		8,009		8,197
Residential real estate		3,229		2,796
Total loans receivable on nonaccrual status	$	14,585	$	11,609

Nonaccrual 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 Company continuously monitors the credit quality of its loans receivable. In addition to its internal staff, the Company 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 Company’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 loan fees, about the Company’s loan credit quality at March 31, 2015 and December 31, 2014: 

	March 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	528,431	$	23,975	$	10,249	$	276	$	562,931
Commercial real estate		1,621,181		24,509		22,620		—		1,668,310
Commercial construction		179,577		1,479		—		—		181,056
Residential real estate		223,148		—		3,497		—		226,645
Consumer		3,484		—		97		—		3,581
Total loans	$	2,555,821	$	49,963	$	36,463	$	276	$	2,642,523

	December 31, 2014
	Pass		Special Mention		Substandard		Doubtful		Total
	(in thousands)
Commercial	$	481,638	$	3,686	$	14,203	$	289	$	499,816
Commercial real estate		1,596,606		14,140		23,764		—		1,634,510
Commercial construction		165,880		1,479		—		—		167,359
Residential real estate		230,772		—		4,195		—		234,967
Consumer		2,778		—		101		—		2,879
Total loans	$	2,477,674	$	19,305	$	42,263	$	289	$	2,539,531

The following table provides an analysis of the impaired loans, by loan segment, at March 31, 2015 and December 31, 2014:

	March 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded	(in thousands)
Commercial	$	314	$	334	$	—
Commercial real estate		5,774		6,468		—
Residential real estate		3,505		3,869		—
Consumer		105		97		—
Total	$	9,698	$	10,768	$	—
With an allowance recorded
Commercial	$	382	$	390	$	188
Commercial real estate		6,341		6,341		518
Total	$	6,723	$	6,731	$	706
Total
Commercial	$	696	$	724	$	188
Commercial real estate		12,115		12,809		518
Residential real estate		3,505		3,869		—
Consumer		105		97		—
Total	$	16,421	$	17,499	$	706

	December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
No related allowance recorded	(in thousands)
Commercial	$	481	$	527	$	—
Commercial real estate		5,890		6,587		—
Residential real estate		3,072		3,407		—
Consumer		109		101		—
Total	$	9,552	$	10,622	$	—
With an allowance recorded
Commercial	$	387	$	390	$	111
Commercial real estate		3,520		3,520		151
Total	$	3,907	$	3,910	$	262
Total
Commercial	$	868	$	917	$	111
Commercial real estate		9,410		10,107		151
Residential real estate		3,072		3,407		—
Consumer		109		101		—
Total	$	13,459	$	14,532	$	262

The following table provides an analysis related to the average recorded investment and interest income recognized on impaired loans by segment as of and for the three months ended March 31, 2015 and 2014 (in thousands):

	Three Months Ended March 31,
	2015				2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans with no related allowance recorded
Commercial	$	290	$	—	$	—	$	—
Commercial real estate		6,052		19		1,275		57
Residential real estate		3,613		2		—		—
Consumer		106		1		—		—
Total	$	10,061	$	22	$	1,275	$	57
Impaired loans with an allowance recorded
Commercial	$	387	$	—	$	—	$	—
Commercial real estate		6,335		—		2,302		68
Residential real estate		—		—		1,226		31
Total	$	6,722	$		$	3,528	$	99
Total impaired loans
Commercial	$	677	$	—	$	—	$	—
Commercial real estate		12,387		19		3,477		125
Residential real estate		3,613		2		1,226		31
Consumer		106		1		—		—
Total	$	16,783	$	22	$	4,703	$	156

Included in impaired loans at March 31, 2015, December 31, 2014 and March 31, 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 loan fees that are past due at March 31, 2015 and December 31, 2014 by segment:

Aging Analysis

	March 31, 2015
	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 or Greater Past Due and Accruing
	(in thousands)
Commercial	$	5,562	$	554	$	3,899	$	10,015	$	552,916	$	562,931	$	638
Commercial real estate		2,567		5,092		4,180		11,839		1,656,471		1,668,310		—
Commercial construction		375		—		—		375		180,681		181,056		—
Residential real estate		1,925		—		2,937		4,862		221,783		226,645		—
Consumer		2		1		—		3		3,578		3,581
Total	$	10,431	$	5,647	$	11,016	$	27,094	$	2,615,429	$	2,642,523	$	638

Aging Analysis

	December 31, 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 or Greater Past Due and Accruing
	(in thousands)
Commercial	$	6,060	$	—	$	662	$	6,722	$	493,094	$	499,816	$	45
Commercial real estate		4,937		638		5,961		11,535		1,622,975		1,634,510		609
Commercial construction		—		—		—		—		167,359		167,359		—
Residential real estate		1,821		210		3,200		5,231		229,736		234,967		557
Consumer		30		1		—		31		2,848		2,879		—
Total	$	12,848	$	849	$	9,823	$	23,519	$	2,516,012	$	2,539,531	$	1,211

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

	March 31, 2015
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	188	$	518	$	—	$	—	$	—	$	—	$	706
Collectively evaluated for impairment		3,739		8,328		1,518		981		4		657		15,227
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total	$	3,927	$	8,846	$	1,518	$	981	$	4	$	657	$	15,933
Loans receivable
Individually evaluated for impairment	$	696	$	12,115	$	—	$	3,905	$	105	$	—	$	16,421
Collectively evaluated for impairment		555,089		1,654,388		181,056		222,321		3,476		—		2,616,330
Acquired with deteriorated credit quality		7,146		1,807		—		819		—		—		9,772
Total	$	562,931	$	1,668,310	$	181,056	$	226,645	$	3,581	$	—	$	2,642,523

The tables above include approximately $1.1 billion of acquired loans for the period ended March 31, 2015 reported as collectively evaluated for impairment.

The following table details the amount of loans that are evaluated individually, and collectively, for impairment (excluding net deferred loan fees), acquired, and the related portion of the allowance for loan and lease losses that are allocated to each loan portfolio segment:

	December 31, 2014
	Commercial		Commercial real estate		Commercial construction		Residential real estate		Consumer		Unallocated		Total
	(in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	111	$	151	$	—	$	—	$	—	$	—	$	262
Collectively evaluated for impairment		2,972		7,648		1,239		1,113		7		919		13,898
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total	$	3,083	$	7,799	$	1,239	$	1,113	$	7	$	919	$	14,160
Loans receivable
Individually evaluated for impairment	$	452	$	6,284	$	—	$	2,180	$	101	$	—	$	9,017
Collectively evaluated for impairment		492,165		1,626,410		167,359		231,981		2,778		—		2,520,693
Acquired with deteriorated credit quality		7,199		1,816		—		806		—		—		9,821
Total	$	499,816	$	1,634,510	$	167,359	$	234,967	$	2,879	$	—	$	2,539,531

The tables above include approximately $1.2 billion of acquired loans for the period ended December 31, 2014 reported as collectively evaluated for impairment.

The Company’s allowance for loan and lease 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 and lease losses methodology as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

	Three Months Ended March 31, 2015
	Commercial			Commercial real estate			Commercial construction		Residential real estate			Consumer			Unallocated			Total
	(in thousands)
Balance at January 1, 2015	$	3,083		$	7,799		$	1,239	$	1,113		$	7		$	919		$	14,160
Charge-offs		(45	)		(4	)		—		—			(11	)		—			(60	)
Recoveries		6			—			—		1			1			—			8
Provision		883			1,051			279		(133	)		7			(262	)		1,825
Balance at March 31, 2015	$	3,927		$	8,846		$	1,518	$	981		$	4		$	657		$	15,933

	Three Months Ended March 31, 2014
	Commercial			Commercial real estate			Commercial construction		Residential real estate		Consumer			Unallocated		Total
	(in thousands)
Balance at January 1, 2014	$	1,698		$	5,746		$	362	$	990	$	146		$	1,391	$	10,333
Charge-offs		(333	)		—			—		—		(3	)		—		(336	)
Recoveries		—			—			—		10		1			—		11
Provision		860			(362	)		72		4		(65	)		116		625
Balance at March 31, 2014	$	2,225		$	5,384		$	434	$	1,004	$	79		$	1,507	$	10,663

Trouble Debt Restructurings

At March 31, 2015, there were 0 commitments to lend additional funds to borrowers whose loans were on nonaccrual 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 Company 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 Company. The Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan and lease 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 March 31, 2015, of which $1.1 million were on nonaccrual status. The remaining loans modified were current and have complied with the terms of their restructure agreement. At December 31, 2014, loans modified in a troubled debt restructuring totaled $2.8 million, of which $1.0 million were on nonaccrual status. The remaining loans modified were current at the time of the restructuring and have complied with the terms of their restructure agreement. The Company has allocated 0 specific allocations with respect to loans whose loan terms had been modified in troubled debt restructurings as of March 31, 2015 and December 31, 2014. The TDRs presented as of March 31, 2015 and December 31, 2014 did not increase the allowance for loan and lease losses.

There were 0 troubled debt restructurings occurring during the three months ended March 31, 2015.

There were 0 charge-offs in connection with a loan modification at the time of modification during the three months ended March 31, 2015. There were 0 troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2015.

The following table presents loans by segment modified as troubled debt restructurings that occurred during the year ended March 31, 2014 (dollars in thousands):

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Loans		Investment		Investment
Troubled debt restructurings:
Commercial		1	$	672	$	337

The Company had a $333,000 charge-off in connection with a loan modification at the time of modification during the three months ended March 31, 2014. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2014.