Loans and the Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and the Allowance for Loan Losses

Loans and the Allowance for Loan Losses

Note 5 — Loans and the Allowance for Loan Losses

The following table sets forth the composition of the Corporation's loan portfolio including net deferred fees and costs, at December 31, 2011 and 2010, respectively:

	2011		2010
	(Dollars in Thousands)
Commercial and industrial	$	146,662	$	121,034
Commercial real estate		408,010		372,001
Construction		39,382		49,744
Residential mortgage		160,999		165,154
Installment		957		511
Total loans	$	756,010	$	708,444

Included in the loan balances above are net deferred loan costs of $17,000 and $258,000 at December 31, 2011 and 2010, respectively.

At December 31, 2011 and 2010, loans to officers and directors aggregated approximately $10,279,000 and $5,456,000, respectively. During the year ended December 31, 2011, the Corporation made new loans to officers and directors in the amount of $6,875,000; payments by such persons during 2011 aggregated $2,052,000.

Management is of the opinion that the above loans were made on the same terms and conditions as those prevailing for comparable transactions with non-related borrowers.

At December 31, 2011 and 2010 loan balances of approximately $469.5 million and $435.9 million were pledged to secure short term borrowings from the Federal Reserve Bank of New York and Federal Home Loan Bank Advances.

During the second quarter of 2010, the Corporation entered into a lease of its former operations facility under a direct financing lease. The lease has a 15 year term with no renewal options. According to the terms of the lease, the lessee has an obligation to purchase the property underlying the lease in either year seven (7), ten (10) or fifteen (15) at predetermined prices for those years as provided in the lease. The structure of the minimum lease payments and the purchase prices as provided in the lease provide an inducement to the lessee to purchase the property in year seven (7).

At December 31, 2011 and 2010, the net investment in direct financing lease consists of a minimum lease receivable of $4,870,000 and $5,026,000, respectively, and unearned interest income of $1,123,000 and $1,317,000, respectively, for a net investment in direct financing lease of $3,747,000 and $3,709,000, respectively. The net investment in direct financing lease is carried as a component of loans in the Corporation's consolidated statements of condition.

Minimum future lease receipts of the direct financing lease are as follows:

For years ending December 31,	(Dollars in Thousands)
2012	$	171
2013		216
2014		216
2015		228
2016		265
Thereafter		2,651
Total minimum future lease receipts	$	3,747

The following table presents information about loan receivables on non-accrual status at December 31, 2011 and 2010:

	2011		2010
	(Dollars in Thousands)
Commercial and industrial	$	125	$	456
Commercial real estate		225		3,563
Construction		3,044		5,865
Residential mortgage		3,477		1,290
Total loans receivable on non-accrual status	$	6,871	$	11,174

The Corporation continuously monitors the credit quality of its loans receivable. In addition to the 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. All loans past due 90 days or more and all impaired loans are included in the appropriate category below. The following table presents information about the loan credit quality at December 31, 2011 and 2010:

Credit Quality Indicators

	December 31, 2011
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	143,048	$	2,022	$	1,592	$	—	$	146,662
Commercial real estate		371,365		24,282		12,363		—		408,010
Construction		36,338		—		3,044		—		39,382
Residential mortgage		155,326		—		5,673		—		160,999
Installment		957		—		—		—		957
Total loans	$	707,034	$	26,304	$	22,672	$	—	$	756,010

Credit Quality Indicators

	December 31, 2010
	(Dollars in Thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	116,741	$	1,929	$	2,364	$	—	$	121,034
Commercial real estate		345,096		15,383		11,522		—		372,001
Construction		43,879		—		3,588		2,277		49,744
Residential mortgage		161,558		—		3,596		—		165,154
Installment		511		—		—		—		511
Total loans	$	667,785	$	17,312	$	21,070	$	2,277	$	708,444

The following table provides an analysis of the impaired loans at December 31, 2011 and 2010:

Impaired Loans

	December 31, 2011
	(Dollars in Thousands)
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	—	$	—	$	—	$	292	$	11
Commercial real estate		2,121		2,570		—		3,390		149
Construction		—		—		—		3,156		—
Total	$	2,121	$	2,570	$	—	$	6,838	$	160

With An Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	4,180	$	4,180	$	567	$	4,583	$	258
Construction		3,044		3,584		200		3,048		18
Residential mortgage		4,601		4,601		318		4,572		102
Total	$	11,825	$	12,365	$	1,085	$	12,203	$	378
Total
Commercial and industrial	$	—	$	—	$	—	$	292	$	11
Commercial real estate		6,301		6,750		567		7,973		407
Construction		3,044		3,584		200		6,204		18
Residential mortgage		4,601		4,601		318		4,572		102
Total (including related allowance)	$	13,946	$	14,935	$	1,085	$	19,041	$	538

Impaired Loans

	December 31, 2010
	(Dollars in Thousands)
No Related Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	1,364	$	1,908	$	—	$	1,933	$	87
Commercial real estate		3,984		4,625		—		4,274		78
Construction		5,865		8,642		—		6,855		112
Residential mortgage		1,462		1,765		—		1,711		27
Total	$	12,675	$	16,940	$	—	$	14,773	$	304

With An Allowance Recorded	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	4,180	$	4,180	$	618	$	4,181	$	204
Residential mortgage		1,354		1,354		21		1,356		76
Total	$	5,534	$	5,534	$	639	$	5,537	$	280
Total
Commercial and industrial	$	1,364	$	1,908	$	—	$	1,933	$	87
Commercial real estate		8,164		8,805		618		8,455		282
Construction		5,865		8,642		—		6,855		112
Residential mortgage		2,816		3,119		21		3,067		103
Total (including related allowance)	$	18,209	$	22,474	$	639	$	20,310	$	584

The Corporation defines an impaired loan as a loan for which it is probable, based on information available at the determination date, that the Corporation will not collect all amounts due under the contractual terms of the loan. At December 31, 2011, impaired loans were primarily collateral dependent, and totaled $13.9 million. Specific reserves of $1.1 million were assigned to impaired loans of $11.8 million. Other impaired loans in the amount of $2.1 million had no specific reserve. At December 31, 2009 average impaired loans were $6.9 million and related interest income recognized was $267,000.

Loans are considered to have been modified in a troubled debt restructuring 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 troubled debt restructuring remains on non-accrual status for a period of six 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. Included in impaired loans at December 31, 2011 are loans that are deemed troubled debt restructurings. Of these loans, $7.5 million, 81% of which are included in the tables above, are performing under the restructured terms and are accruing interest.

The following table provides an analysis of the aging of loans, including deferred fees and costs, that are past due at December 31, 2011 and 2010:

Aging Analysis

	December 31, 2011
	(Dollars in Thousands)
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
Commercial and Industrial	$	137	$	1,544	$	125	$	1,806	$	144,856	$	146,662	$	—
Commercial Real Estate		1,331		5,335		1,254		7,920		400,090		408,010		1,029
Construction		—		—		3,044		3,044		36,338		39,382		—
Residential Mortgage		2,174		99		3,477		5,750		155,249		160,999		—
Installment		16		—		—		16		941		957		—
Total	$	3,658	$	6,978	$	7,900	$	18,536	$	737,474	$	756,010	$	1,029

Aging Analysis

	December 31, 2010
	(Dollars in Thousands)
	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days And Accruing
Commercial and Industrial	$	1,509	$	476	$	456	$	2,441	$	118,593	$	121,034	$	—
Commercial Real Estate		4,290		2,229		3,563		10,082		361,919		372,001		—
Construction		170		449		5,865		6,484		43,260		49,744		—
Residential Mortgage		1,814		309		2,004		4,127		161,027		165,154		714
Installment		9		—		—		9		502		511		—
Total	$	7,792	$	3,463	$	11,888	$	23,143	$	685,301	$	708,444	$	714

The following table details the amount of loans receivable that are evaluated individually, and collectively, for impairment, and the related portion of the allowance for loan loss that is allocated to each loan portfolio segment:

Allowance for loan and lease losses

	December 31, 2011 (Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	567	$	200	$	318	$	—	$	—	$	1,085
Collectively evaluated for impairment		1,527		5,405		507		945		51		82		8,517
Total	$	1,527	$	5,972	$	707	$	1,263	$	51	$	82	$	9,602
Loans Receivable
Individually evaluated for impairment	$	953	$	12,769	$	3,044	$	5,050	$	—	$	—	$	21,816
Collectively evaluated for impairment		145,709		395,241		36,338		155,949		957		—		734,194
Total	$	146,662	$	408,010	$	39,382	$	160,999	$	957	$	—	$	756,010

Allowance for loan and lease losses

	December 31, 2010
	(Dollars in Thousands)
	C & I		Comm R/E		Construction		Res Mtge		Installment		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	—	$	618	$	—	$	21	$	—	$	—	$	639
Collectively evaluated for impairment		1,272		5,097		551		1,017		52		239		8,228
Total	$	1,272	$	5,715	$	551	$	1,038	$	52	$	239	$	8,867
Loans Receivable
Individually evaluated for impairment	$	2,748	$	11,960	$	5,865	$	1,354	$	—	$	—	$	21,927
Collectively evaluated for impairment		118,286		360,041		43,879		163,800		511		—		686,517
Total	$	121,034	$	372,001	$	49,744	$	165,154	$	511	$	—	$	708,444

The Corporation's allowance for loan losses is analyzed quarterly and 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 previous Annual Reports.

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

	Year Ended December 31, 2011
	(Dollars in thousands)
	C & I			Comm R/E			Construction			Res Mtg			Installment			Unallocated			Total
Balance at January 1,	$	1,272		$	5,715		$	551		$	1,038		$	52		$	239		$	8,867
Loans charged-off		(186	)		(1,168	)		(631	)		(23	)		(20	)		—			(2,028	)
Recoveries		240			15			—			53			7			—			315
Provision for loan losses		201			1,410			787			195			12			(157	)		2,448
Balance at December 31,	$	1,527		$	5,972		$	707		$	1,263		$	51		$	82		$	9,602

	For the Year Ended December 31,
	2011			2010			2009
	(Dollars in Thousands)
Balance at the beginning of year	$	8,867		$	8,711		$	6,254
Provision for loan losses		2,448			5,076			4,597
Loans charged-off		(2,028	)		(4,940	)		(2,152	)
Recoveries on loans previously charged-off		315			20			12
Balance at the end of year	$	9,602		$	8,867		$	8,711

The amount of interest income that would have been recorded on non-accrual loans in 2011, 2010 and 2009 had payments remained in accordance with the original contractual terms was $378,000, $598,000 and $431,000, respectively.

At December 31, 2011, there were no commitments to lend additional funds to borrowers whose loans were non-accrual or contractually past due in excess of 90 days and still accruing interest.

The policy of the Corporation is to generally grant commercial, mortgage and installment 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 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 a large majority of the Corporation's loans.

The following table presents information about the troubled debt restructurings (TDRs) by class transacted during the period indicated:

	Year Ended December 31, 2011
	Number of Loans		Pre-restructuring Outstanding Recorded Investment		Post-restructuring Outstanding Recorded Investment
	(Dollars in Thousands)
Troubled debt restructurings:
Commercial Real Estate		1	$	1,719	$	1,318
Residential Mortgage		5		1,624		1,575
Total		6	$	3,343	$	2,893

The Corporation charged off $450,000 in connection with loan modifications at the time of the modification during the twelve months ended December 31, 2011.

The Corporation had no loans modified as a TDR within the previous twelve months that subsequently defaulted during the twelve months ended December 31, 2011.

The Corporation adopted ASU No. 2011-02 on July 1, 2011 which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. In general, a modification or restructuring of a loan constitutes a TDR if the Corporation grants a concession to a borrower experiencing financial difficulty. Loans modified in TDRs are placed on non-accrual status until the Corporation determines that future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate performance according to the restructured terms for a period of at least six months. 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.

Loans modified in a troubled debt restructuring totaled $11.1 million at December 31, 2011 of which $3.7 million were 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.

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 December 31, 2011, loans on which concessions were made with respect to adjusted repayment terms amounted to $1.7 million. Loans on which combinations of two or more concessions were made amounted to $9.4 million. The concessions granted included principal concessions, rate reduction, adjusted repayment, extended maturity and payment deferral.