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LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES
12 Months Ended
Dec. 31, 2013
Receivables [Abstract]  
LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES
LOANS AND ALLOWANCE FOR PROBABLE LOAN LOSSES

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):

 
 
December 31, 2013
 
December 31, 2012
Real Estate Loans:
 
 
 
 
Construction
 
$
125,219

 
$
113,744

1-4 Family residential
 
390,499

 
368,845

Other
 
262,536

 
236,760

Commercial loans
 
157,655

 
160,058

Municipal loans
 
245,550

 
220,947

Loans to individuals
 
169,814

 
162,623

Total loans
 
1,351,273

 
1,262,977

Less: Allowance for loan losses
 
18,877

 
20,585

Net loans
 
$
1,332,396

 
$
1,242,392



Loans to Affiliated Parties

In the normal course of business, we make loans to certain of our own executive officers and directors and their related interests.  As of December 31, 2013 and 2012, these loans totaled $5.5 million and $4.3 million, respectively.  These loans represented 2.1% and 1.7% of shareholders' equity as of December 31, 2013 and 2012, respectively.  Such loans are made in the normal course of business at normal credit terms, including interest rate and collateral requirements and do not represent more than normal credit risks contained in the rest of the loan portfolio for loans of similar types.

Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is validated by multiple processes.  First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for identifying problem loans and estimating necessary reserves based on customer financial stress and underlying collateral.  These recommendations are reviewed by senior loan administration, the Special Assets department, and the Loan Review department.  Third, the Loan Review department does independent reviews of the portfolio on an annual basis.  The Loan Review department follows a board-approved annual loan review scope.  The loan review scope encompasses a number of metrics that takes into consideration the size of the loan, the type of credit extended, the seasoning of the loan along with the performance of the loan.  The loan review scope, as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater.  The loan review officer also tracks specific reserves for loans by type compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.

At each review, a subjective analysis methodology is used to grade the respective loan.  Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible.  If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances.  The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $50,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

For loans to individuals, the methodology associated with determining the appropriate allowance for losses on loans primarily consists of an evaluation of individual payment histories, remaining term to maturity and underlying collateral support.

SFG loans, included in loans to individuals, experiencing past due status or extension of maturity characteristics are reserved for at significantly higher levels based on the circumstances associated with each specific loan.  In general the reserves for SFG are calculated based on the past due status of the loan.  For reserve purposes, the portfolio has been segregated by past due status and by the remaining term variance from the original contract.  During repayment, loans that pay late will take longer to pay out than the original contract.  Additionally, some loans may be granted extensions for extenuating payment circumstances and evaluated for troubled debt classification.  The remaining term extensions increase the risk of collateral deterioration and, accordingly, reserves are increased to recognize this risk.

Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or full charge-off.  Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan.  Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic and industry loan concentration.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  We use the following definitions for risk ratings:

Satisfactory (Rating 1 – 4) – This rating is assigned to all satisfactory loans.  This category, by definition, should consist of acceptable credit.  Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Satisfactory, if deficiencies are in process of correction.  These loans will not be included in the Watch List.

Satisfactory (Rating 5) – Special Treatment Required – (Pass Watch) – These loans require some degree of special treatment, but not due to credit quality.  This category does not include loans specially mentioned or adversely classified by the loan review officer or regulatory authorities; however, particular attention must be accorded such credits due to characteristics such as:

A lack of, or abnormally extended payment program;
A heavy degree of concentration of collateral without sufficient margin;
A vulnerability to competition through lesser or extensive financial leverage; and
A dependence on a single, or few customers, or sources of supply and materials without suitable substitutes or alternatives.

Special Mention (Rating 6) – A Special Mention asset has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.  Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss (Rating 9) – Loans classified as Loss are currently in the process of being charged off and are fully reserved. They are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.  

Loans that are accruing and not considered troubled debt restructurings ("TDR") are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses.

The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors.  These factors are likely to cause estimated losses to differ from historical loss experience and include:

Changes in lending policies or procedures, including underwriting, collection, charge-off, and recovery procedures;
Changes in local, regional and national economic and business conditions including entry into new markets;
Changes in the volume or type of credit extended;
Changes in the experience, ability, and depth of lending management;
Changes in the volume and severity of past due, nonaccrual, restructured, or classified loans;
Changes in charge-off trends;
Changes in loan review or Board oversight;
Changes in the level of concentrations of credit; and
Changes in external factors, such as competition and legal and regulatory requirements.

The following table details activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):

 
 
Year Ended December 31, 2013
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Balance at beginning of period
 
$
2,355

 
$
3,545

 
$
2,290

 
$
3,158

 
$
633

 
$
7,373

 
$
1,231

 
$
20,585

Provision (reversal) for loan losses
 
(290
)
 
(40
)
 
10

 
(909
)
 
35

 
10,073

 

 
8,879

Distribution of unallocated allowance
 

 

 

 

 

 
1,231

 
(1,231
)
 

Loans charged off
 

 
(319
)
 
(67
)
 
(512
)
 

 
(12,676
)
 

 
(13,574
)
Recoveries of loans charged off
 
77

 
91

 
339

 
233

 

 
2,247

 

 
2,987

Balance at end of period
 
$
2,142

 
$
3,277

 
$
2,572

 
$
1,970

 
$
668

 
$
8,248

 
$

 
$
18,877

 
 
 
Year Ended December 31, 2012
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family Residential
 
Other
 
Commercial Loans
 
Municipal Loans
 
Loans to Individuals
 
Unallocated
 
Total
Balance at beginning of period
 
$
2,620

 
$
1,957

 
$
3,051

 
$
2,877

 
$
619

 
$
6,244

 
$
1,172

 
$
18,540

Provision (reversal) for loan losses
 
(345
)
 
1,655

 
(608
)
 
371

 
14

 
9,590

 
59

 
10,736

Loans charged off
 
(41
)
 
(239
)
 
(159
)
 
(402
)
 

 
(10,188
)
 

 
(11,029
)
Recoveries of loans charged off
 
121

 
172

 
6

 
312

 

 
1,727

 

 
2,338

Balance at end of period
 
$
2,355

 
$
3,545

 
$
2,290

 
$
3,158

 
$
633

 
$
7,373

 
$
1,231

 
$
20,585

 
 
 
Year Ended December 31, 2011
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family Residential
 
Other
 
Commercial Loans
 
Municipal Loans
 
Loans to Individuals
 
Unallocated
 
Total
Balance at beginning of period
 
$
2,585

 
$
1,988

 
$
3,354

 
$
3,746

 
$
607

 
$
7,978

 
$
453

 
$
20,711

Provision (reversal) for loan losses
 
20

 
546

 
(307
)
 
(64
)
 
12

 
6,570

 
719

 
7,496

Loans charged off
 
(46
)
 
(675
)
 
(271
)
 
(1,254
)
 

 
(10,231
)
 

 
(12,477
)
Recoveries of loans charged off
 
61

 
98

 
275

 
449

 

 
1,927

 

 
2,810

Balance at end of period
 
$
2,620

 
$
1,957

 
$
3,051

 
$
2,877

 
$
619

 
$
6,244

 
$
1,172

 
$
18,540


The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method as described in the allowance for loan losses methodology discussion (in thousands):
 
 
As of December 31, 2013
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Ending balance – individually evaluated for impairment
 
$
103

 
$
161

 
$
73

 
$
240

 
$
15

 
$
173

 
$

 
$
765

Ending balance – collectively evaluated for impairment
 
2,039

 
3,116

 
2,499

 
1,730

 
653

 
8,075

 

 
18,112

Balance at end of period
 
$
2,142

 
$
3,277

 
$
2,572

 
$
1,970

 
$
668

 
$
8,248

 
$

 
$
18,877

 
 
 
As of December 31, 2012
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Other
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Unallocated
 
Total
Ending balance – individually evaluated for impairment
 
$
592

 
$
500

 
$
387

 
$
1,015

 
$
89

 
$
308

 
$

 
$
2,891

Ending balance – collectively evaluated for impairment
 
1,763

 
3,045

 
1,903

 
2,143

 
544

 
7,065

 
1,231

 
17,694

Balance at end of period
 
$
2,355

 
$
3,545

 
$
2,290

 
$
3,158

 
$
633

 
$
7,373

 
$
1,231

 
$
20,585


 

The following tables present the recorded investment in loans by portfolio segment based on impairment method as described in the allowance for loan losses methodology discussion (in thousands):

 
 
December 31, 2013
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
 
Construction

 
1-4 Family Residential
 
 
Other

 
Commercial Loans
 
Municipal Loans
 
 Individuals
 
 
Total

Loans individually evaluated for impairment
 
$
1,472

 
$
2,624

 
$
1,778

 
$
1,369

 
$
759

 
$
559

 
$
8,561

Loans collectively evaluated for impairment
 
123,747

 
387,875

 
260,758

 
156,286

 
244,791

 
169,255

 
1,342,712

Total ending loans balance
 
$
125,219

 
$
390,499

 
$
262,536

 
$
157,655

 
$
245,550

 
$
169,814

 
$
1,351,273



 
 
December 31, 2012
 
 
Real Estate
 
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family Residential
 
Other
 
Commercial Loans
 
Municipal Loans
 
Loans to Individuals
 
Total
Loans individually evaluated for impairment
 
$
7,653

 
$
8,563

 
$
10,366

 
$
6,284

 
$
559

 
$
1,165

 
$
34,590

Loans collectively evaluated for impairment
 
106,091

 
360,282

 
226,394

 
153,774

 
220,388

 
161,458

 
1,228,387

Total ending loans balance
 
$
113,744

 
$
368,845

 
$
236,760

 
$
160,058

 
$
220,947

 
$
162,623

 
$
1,262,977




 The following table details activity of the reserve for unfunded loan commitments for the periods presented (in thousands):

 
 
Years Ended December 31,
 
 
2013
 
2012
 
2011
Reserve For Unfunded Loan Commitments:
 
 
 
 
 
 
Balance at beginning of period
 
$
5

 
$
26

 
$
30

Provision (reversal) for losses on unfunded loan commitments
 
308

 
(21
)
 
(4
)
Balance at end of period
 
$
313

 
$
5

 
$
26



The following table sets forth loans by credit quality indicator for the periods presented (in thousands):

 
 
December 31, 2013
 
 
Pass
 
Pass Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
$
121,280

 
$

 
$
1,419

 
$
2,454

 
$
66

 
$

 
$
125,219

1-4 Family residential
 
380,741

 
1,626

 
3,025

 
4,901

 
206

 

 
390,499

Other
 
249,381

 
2,553

 
4,698

 
5,887

 
17

 

 
262,536

Commercial loans
 
150,683

 
836

 
9

 
5,826

 
301

 

 
157,655

Municipal loans
 
244,505

 

 

 
1,045

 

 

 
245,550

Loans to individuals
 
168,764

 
27

 
2

 
719

 
302

 

 
169,814

Total
 
$
1,315,354

 
$
5,042

 
$
9,153

 
$
20,832

 
$
892

 
$

 
$
1,351,273


 
 
December 31, 2012
 
 
Pass
 
Pass Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
$
106,091

 
$

 
$
3,637

 
$
3,941

 
$
75

 
$

 
$
113,744

1-4 Family residential
 
360,282

 
1,805

 
170

 
5,711

 
877

 

 
368,845

Other
 
226,394

 
2,721

 
4,073

 
3,319

 
253

 

 
236,760

Commercial loans
 
153,774

 
731

 

 
4,690

 
863

 

 
160,058

Municipal loans
 
220,388

 
204

 

 
355

 

 

 
220,947

Loans to individuals
 
161,458

 
27

 
4

 
723

 
393

 
18

 
162,623

Total
 
$
1,228,387

 
$
5,488

 
$
7,884

 
$
18,739

 
$
2,461

 
$
18

 
$
1,262,977



The following table sets forth nonperforming assets for the periods presented (in thousands):

 
 
At
December 31, 2013
 
At
December 31,
2012
Nonaccrual loans
 
$
8,088

 
$
10,314

Accruing loans past due more than 90 days
 
3

 
15

Restructured loans
 
3,888

 
2,998

Other real estate owned
 
726

 
686

Repossessed assets
 
901

 
704

Total Nonperforming Assets
 
$
13,606

 
$
14,717


 
Nonaccrual and Past Due Loans

Nonaccrual loans are those loans which are 90 days or more delinquent and collection in full of both the principal and interest is not expected.  Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection of principal or interest.  When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes.  Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of the loan is reasonably certain.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Other factors, such as the value of collateral securing the loan and the financial condition of the borrower must be considered in judgments as to potential loan loss.

Loans are considered impaired if, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.  The measurement of impaired loans is generally based on the present value of the expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral.  In measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions such as discount rates, and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would be utilized by unrelated third parties performing a valuation. Loans that are evaluated and determined not to meet the definition of an impaired loan are reserved for at the general reserve rate for its appropriate class.

Nonaccrual loans and accruing loans past due more than 90 days include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table sets forth the recorded investment in nonaccrual and accruing loans past due more than 90 days by class of loans for the periods presented (in thousands):

 
 
December 31, 2013
 
December 31, 2012
 
 
Nonaccrual
 
Accruing Loans
Past Due More
Than 90 Days
 
Nonaccrual
 
Accruing Loans Past Due More
Than 90 Days
Real Estate Loans:
 
 
 
 
 
 
 
 
Construction
 
$
1,472

 
$

 
$
2,416

 
$

1-4 Family residential
 
1,435

 

 
2,001

 

Other
 
599

 

 
1,357

 

Commercial loans
 
1,062

 

 
1,812

 

Loans to individuals
 
3,520

 
3

 
2,728

 
15

Total
 
$
8,088

 
$
3

 
$
10,314

 
$
15



The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):

 
 
December 31, 2013
 
 
30-59 Days
Past Due
 
60-89 Days
 Past Due
 
Greater than
90 Days
Past Due
 
Total Past
Due
 
Loans Not Past Due
 
Total
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
$
311

 
$

 
$
1,472

 
$
1,783

 
$
123,436

 
$
125,219

1-4 Family residential
 
4,340

 
781

 
1,435

 
6,556

 
383,943

 
390,499

Other
 
2,652

 

 
599

 
3,251

 
259,285

 
262,536

Commercial loans
 
411

 
22

 
1,062

 
1,495

 
156,160

 
157,655

Municipal loans
 

 

 

 

 
245,550

 
245,550

Loans to individuals
 
7,241

 
2,590

 
3,523

 
13,354

 
156,460

 
169,814

Total
 
$
14,955

 
$
3,393

 
$
8,091

 
$
26,439

 
$
1,324,834

 
$
1,351,273

 
 
 
December 31, 2012
 
 
30-59 Days
Past Due
 
60-89 Days
 Past Due
 
Greater than
 90 Days
Past Due
 
Total Past
 Due
 
Loans Not Past Due
 
Total
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Construction
 
$
1,589

 
$

 
$
2,416

 
$
4,005

 
$
109,739

 
$
113,744

1-4 Family residential
 
4,450

 
977

 
2,001

 
7,428

 
361,417

 
368,845

Other
 
1,639

 
273

 
1,357

 
3,269

 
233,491

 
236,760

Commercial loans
 
769

 
175

 
1,812

 
2,756

 
157,302

 
160,058

Municipal loans
 
709

 

 

 
709

 
220,238

 
220,947

Loans to individuals
 
5,908

 
1,191

 
2,743

 
9,842

 
152,781

 
162,623

Total
 
$
15,064

 
$
2,616

 
$
10,329

 
$
28,009

 
$
1,234,968

 
$
1,262,977


 


The following table sets forth interest income recognized on nonaccrual and restructured loans by class of loans for the periods presented. Average recorded investment is reported on a year-to-date basis (in thousands):

    
 
December 31, 2013
 
Average
Recorded Investment
 
Interest Income Recognized
 
Accruing Interest at Original Contracted Rate
Real Estate Loans:
 
 
 
 
 
Construction
$
1,707

 
$
9

 
$
166

1-4 Family residential
2,915

 
57

 
137

Other
1,972

 
71

 
109

Commercial loans
1,935

 
15

 
93

Municipal loans
292

 
26

 
42

Loans to individuals
3,149

 
464

 
783

Total
$
11,970

 
$
642

 
$
1,330


 
December 31, 2012
 
Average
Recorded
Investment
 
Interest Income Recognized
 
Accruing Interest at Original Contracted Rate
Real Estate Loans:
 
 
 
 
 
Construction
$
3,222

 
$
2

 
$
241

1-4 Family residential
2,873

 
38

 
128

Other
1,734

 
69

 
178

Commercial loans
2,234

 
32

 
128

Loans to individuals
3,170

 
431

 
673

Total
$
13,233

 
$
572

 
$
1,348


 
December 31, 2011
 
Average
Recorded
Investment
 
Interest Income Recognized
 
Accruing Interest at Original Contracted Rate
Real Estate Loans:
 
 
 
 
 
Construction
$
4,054

 
$
18

 
$
292

1-4 Family residential
2,362

 
112

 
153

Other
1,744

 
50

 
130

Commercial loans
1,748

 
2

 
65

Loans to individuals
4,508

 
761

 
1,191

Total
$
14,416

 
$
943

 
$
1,831



The following table sets forth impaired loans by class of loans for the periods presented (in thousands): 
 
 
December 31, 2013
 
 
Unpaid
 Contractual
Principal
 Balance
 
Recorded
 Investment
 With No
 Allowance
 
Recorded
 Investment
 With
Allowance
 
Total
 Recorded
Investment
 
Related Allowance for Loan Losses
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
Construction
 
$
2,629

 
$

 
$
1,472

 
$
1,472

 
$
103

1-4 Family residential
 
2,748

 

 
2,624

 
2,624

 
161

Other
 
1,800

 

 
1,778

 
1,778

 
73

Commercial loans
 
1,606

 

 
1,369

 
1,369

 
240

Municipal loans
 
759

 

 
759

 
759

 
15

Loans to individuals
 
4,280

 

 
3,943

 
3,943

 
1,950

Total
 
$
13,822

 
$

 
$
11,945

 
$
11,945

 
$
2,542

 
 
 
December 31, 2012
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
 Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
 Investment
 
Related Allowance for Loan Losses
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
Construction
 
$
3,716

 
$

 
$
2,465

 
$
2,465

 
$
200

1-4 Family residential
 
2,907

 

 
2,799

 
2,799

 
222

Other
 
3,133

 

 
2,613

 
2,613

 
243

Commercial loans
 
2,215

 

 
2,043

 
2,043

 
630

Municipal loans
 

 

 

 

 

Loans to individuals
 
3,626

 
1

 
3,359

 
3,360

 
1,428

Total
 
$
15,597

 
$
1

 
$
13,279

 
$
13,280

 
$
2,723



At any time a potential loss is recognized in the collection of principal, proper reserves should be allocated.  Loans are charged off when deemed uncollectible.  Loans are written down as soon as collection by liquidation is evident to the liquidation value of the collateral net of liquidation costs, if any, and placed in nonaccrual status.


Troubled Debt Restructurings

The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.  Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The following tables set forth the recorded investment in loans modified for the periods presented (dollars in thousands):

 
 
Year Ended December 31, 2013
 
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination (1)
 
Total Modifications
 
Number of Contracts
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
1-4 Family residential
 
$
279

 
$

 
$
117

 
$
396

 
5

Other
 
153

 

 
14

 
167

 
2

Commercial loans
 
256

 

 
84

 
340

 
5

Municipal Loans
 
759

 

 

 
759

 
1

Loans to individuals
 

 
308

 
97

 
405

 
47

Total
 
$
1,447

 
$
308

 
$
312

 
$
2,067

 
60


 
 
Year Ended December 31, 2012
 
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination (1)
 
Total Modifications
 
Number of Contracts
Real Estate Loans:
 
 
 
 
 
 
 
 
 
 
1-4 Family residential
 
$
644

 
$
32

 
$
428

 
$
1,104

 
13

Other
 
510

 
204

 
349

 
1,063

 
9

Commercial loans
 
372

 

 
516

 
888

 
12

Municipal Loans
 

 

 

 

 

Loans to individuals
 
27

 
7

 
98

 
132

 
26

Total
 
$
1,553

 
$
243

 
$
1,391

 
$
3,187

 
60


(1)
These modifications include an extension of the amortization period and interest rate reduction.

The majority of loans restructured as TDRs during the year ended December 31, 2013 were modified to extend the maturity. Interest continues to be charged on principal balances outstanding during the term extended. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the years ended December 31, 2013 and December 31, 2012 were insignificant. Generally, the loans identified as TDRs were previously reported as impaired loans prior to restructuring and therefore the modification did not impact our determination of the allowance for loan losses.
On an ongoing basis, the performance of the restructured loans is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. For the years ended December 31, 2013 and 2012, there were no significant defaults. These defaults did not significantly impact the determination of the allowance for loan loss.
At December 31, 2013 and December 31, 2012, there were no commitments to lend additional funds to borrowers whose terms have been modified in TDRs.