Loans | 3 Months Ended |
Mar. 31, 2014 |
Loans [Abstract] | ' |
Loans | ' |
Note 5. Loans |
The following table presents the company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans held for investment as of the dates stated: |
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| 31-Mar-14 | | 31-Dec-13 | | | | | |
| | Amount | | Percent of Total | | | Amount | | Percent of Total | | | | | |
Commercial and industrial | $ | 245,936 | | 44.10% | | $ | 246,324 | | 45.75% | | | | | |
Commercial real estate | | 191,790 | | 34.39% | | | 172,711 | | 32.08% | | | | | |
Residential real estate | | 23,029 | | 4.13% | | | 22,004 | | 4.09% | | | | | |
Consumer | | 3,414 | | 0.61% | | | 3,191 | | 0.59% | | | | | |
Guaranteed student loans | | 93,142 | | 16.70% | | | 94,028 | | 17.46% | | | | | |
Overdrafts | | 367 | | 0.07% | | | 184 | | 0.03% | | | | | |
Loans held for investment | $ | 557,678 | | 100.00% | | $ | 538,442 | | 100.00% | | | | | |
Allowance for loan and lease losses | | -5,414 | | | | | -5,305 | | | | | | | |
Loans held for investment, net of allowance | | 552,264 | | | | | 533,137 | | | | | | | |
Loans held for sale | | 6,336 | | | | | 3,363 | | | | | | | |
Total loans | $ | 558,600 | | | | $ | 536,500 | | | | | | | |
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Loans held for investment, excluding guaranteed student loans, include unearned fees net of capitalized origination costs, of $249 thousand and $244 thousand, as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014, $204.7 million of loans held for investment were pledged to the FHLB and the Federal Reserve Bank as collateral for borrowing capacity. |
During the third quarter of 2013, the Bank began purchasing guaranteed student loans, which were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, these loans are substantially guaranteed by a guarantee agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers under defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders. |
As of March 31, 2014, the company had $93.1 million of guaranteed student loans recorded as loans held for investment on its consolidated balance sheet. This balance includes premium and acquisition costs of $2.5 million and $1.4 million, respectively, which are amortized into interest income on the effective interest method. The guaranteed student loans carry an approximate 98% federal government guaranty as to the payment of principal and accrued interest. |
Loans Held for Sale |
The Bank is a party to a sub-participation agreement with a commercial bank (the “participating bank”), whereby the participating bank and the Bank purchase participation interests from unaffiliated mortgage originators that seek funding to facilitate the origination of single-family residential mortgage loans for sale in the secondary market. The originators underwrite and close mortgage loans consistent with established standards of approved investors and, once the loans close, the originators and the participating bank deliver the loans to the investors. Typically, the Bank, together with the participating bank, purchase up to an aggregate of a 99% participation interest with the originators retaining the remaining 1%. These loans are held for short periods, usually less than 30 days and more typically 10-20 days. Accordingly, these loans are classified as held for sale and are carried at the lower of cost or fair value, determined on an aggregate basis. |
Loans Held for Investment |
The following table presents the company’s loans held for investment by regulatory risk ratings classification and by loan type as of the dates stated. As defined by the Federal Reserve and adopted by the company, “special mention” loans are defined as having potential weaknesses that deserve management’s close attention; “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; and “doubtful” loans have all the weaknesses inherent in substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not categorized as special mention, substandard or doubtful are classified as “pass.” The company’s risk ratings, which are assigned to loans, are embedded within these categories. |
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| 31-Mar-14 |
| Pass | | Special Mention | | Substandard | | Doubtful | | Total Loans |
Commercial and industrial | $ | 240,296 | | $ | 1,032 | | $ | 4,608 | | $ | - | | $ | 245,936 |
Commercial real estate | | 186,312 | | | 2,080 | | | 3,398 | | | - | | | 191,790 |
Residential real estate | | 20,237 | | | 1,989 | | | 803 | | | - | | | 23,029 |
Consumer | | 3,106 | | | - | | | 308 | | | - | | | 3,414 |
Guaranteed student loans | | 93,142 | | | - | | | - | | | - | | | 93,142 |
Overdrafts | | 367 | | | - | | | - | | | - | | | 367 |
Total loans | $ | 543,460 | | $ | 5,101 | | $ | 9,117 | | $ | - | | $ | 557,678 |
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| 31-Dec-13 |
| Pass | | Special Mention | | Substandard | | Doubtful | | Total Loans |
Commercial and industrial | $ | 238,655 | | $ | 1,990 | | $ | 5,679 | | $ | - | | $ | 246,324 |
Commercial real estate | | 166,398 | | | 2,366 | | | 3,947 | | | - | | | 172,711 |
Residential real estate | | 21,014 | | | 132 | | | 858 | | | - | | | 22,004 |
Consumer | | 2,849 | | | - | | | 342 | | | - | | | 3,191 |
Guaranteed student loans | | 94,028 | | | - | | | - | | | - | | | 94,028 |
Overdrafts | | 184 | | | - | | | - | | | - | | | 184 |
Total loans | $ | 523,128 | | $ | 4,488 | | $ | 10,826 | | $ | - | | $ | 538,442 |
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Allowance for Loan and Lease Losses |
The allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.” A loan is impaired when, based on current information and events, it is probable that all amounts due (principal and interest) according to the contractual terms of the loan agreement will not be collected. |
The allowance for loan and lease losses is determined based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that are originated by the company. In evaluating the loan portfolio, qualitative factors, such as general economic conditions, nationally and in the company’s target markets, are considered, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in the consolidated statements of operations. Loans or portions of loans deemed to be uncollectible are charged against the allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. |
The company’s allowance for loan and lease losses related to guaranteed student loans is based on historical default rates for similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guaranty. |
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The following table presents the allowance for loan and lease loss activity, by loan category, for the dates stated: |
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| For the Three Months Ended March 31, | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | |
Balance at beginning of period | $ | 5,305 | | $ | 4,875 | | | | | | | | | |
Charge-offs: | | | | | | | | | | | | | | |
Commercial and industrial | | - | | | 1 | | | | | | | | | |
Commercial real estate | | - | | | 159 | | | | | | | | | |
Residential real estate | | 35 | | | - | | | | | | | | | |
Consumer | | - | | | - | | | | | | | | | |
Guaranteed student loans | | - | | | - | | | | | | | | | |
Overdrafts | | 1 | | | 1 | | | | | | | | | |
Total charge-offs | | 36 | | | 161 | | | | | | | | | |
Recoveries: | | | | | | | | | | | | | | |
Commercial and industrial | | 1 | | | - | | | | | | | | | |
Commercial real estate | | - | | | - | | | | | | | | | |
Residential real estate | | - | | | - | | | | | | | | | |
Consumer | | - | | | - | | | | | | | | | |
Guaranteed student loans | | - | | | - | | | | | | | | | |
Overdrafts | | - | | | 1 | | | | | | | | | |
Total recoveries | | 1 | | | 1 | | | | | | | | | |
Net charge-offs | | 35 | | | 160 | | | | | | | | | |
Provision for loan and lease losses | | 227 | | | 411 | | | | | | | | | |
Amount for unfunded commitments | | -19 | | | -27 | | | | | | | | | |
Other (1) | | -64 | | | - | | | | | | | | | |
Balance at end of period | $ | 5,414 | | $ | 5,099 | | | | | | | | | |
_______________________ | | | | | | | | | | | | | | |
(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income. | | | | | | | | | |
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The following tables present the allowance for loan and lease losses, with the amount independently and collectively evaluated for impairment, and loan balances, by loan type, as of the dates stated: |
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| 31-Mar-14 | | | | | | |
| | | | Individually Evaluated | | Collectively Evaluated | | | | | | |
| Total Amount | | for Impairment | | for Impairment | | | | | | |
Allowance for loan losses applicable to: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,861 | | $ | 303 | | $ | 1,558 | | | | | | |
Commercial real estate | | 2,737 | | | 219 | | | 2,518 | | | | | | |
Residential real estate | | 407 | | | 218 | | | 189 | | | | | | |
Consumer | | 30 | | | - | | | 30 | | | | | | |
Guaranteed student loans | | 379 | | | - | | | 379 | | | | | | |
Total allowance for loan and lease losses | $ | 5,414 | | $ | 740 | | $ | 4,674 | | | | | | |
Loan balances applicable to: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 245,936 | | $ | 4,566 | | $ | 241,370 | | | | | | |
Commercial real estate | | 191,790 | | | 4,247 | | | 187,543 | | | | | | |
Residential real estate | | 23,029 | | | 1,656 | | | 21,373 | | | | | | |
Consumer | | 3,781 | | | 8 | | | 3,773 | | | | | | |
Guaranteed student loans | | 93,142 | | | - | | | 93,142 | | | | | | |
Total loans | $ | 557,678 | | $ | 10,477 | | $ | 547,201 | | | | | | |
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| 31-Dec-13 | | | | | | |
| | | | Individually Evaluated | | Collectively Evaluated | | | | | | |
| Total Amount | | for Impairment | | for Impairment | | | | | | |
Allowance for loan losses applicable to: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 2,148 | | $ | 292 | | $ | 1,856 | | | | | | |
Commercial real estate | | 2,756 | | | 298 | | | 2,458 | | | | | | |
Residential real estate | | 194 | | | 10 | | | 184 | | | | | | |
Consumer | | 12 | | | - | | | 12 | | | | | | |
Guaranteed student loans | | 195 | | | - | | | 195 | | | | | | |
Total allowance for loan and lease losses | $ | 5,305 | | $ | 600 | | $ | 4,705 | | | | | | |
Loan balances applicable to: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 246,324 | | $ | 5,526 | | $ | 240,798 | | | | | | |
Commercial real estate | | 172,711 | | | 4,875 | | | 167,836 | | | | | | |
Residential real estate | | 22,004 | | | 632 | | | 21,372 | | | | | | |
Consumer | | 3,375 | | | 8 | | | 3,367 | | | | | | |
Guaranteed student loans | | 94,028 | | | - | | | 94,028 | | | | | | |
Total loans | $ | 538,442 | | $ | 11,041 | | $ | 527,401 | | | | | | |
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The following tables present the loans that were individually evaluated for impairment, by loan type, as of the dates stated. The tables present those loans with and without an allowance and various additional data, as of the dates stated: |
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| 31-Mar-14 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 2,824 | | $ | 3,894 | | $ | - | | $ | 2,983 | | $ | 26 |
Commercial real estate | | 1,550 | | | 2,507 | | | - | | | 1,569 | | | - |
Residential real estate | | 302 | | | 332 | | | - | | | 311 | | | 2 |
Consumer | | 8 | | | 8 | | | - | | | 8 | | | - |
With an allowance recorded: | | | | | | | | | | | | | | |
Commercial and industrial | | 1,742 | | | 1,820 | | | 303 | | | 1,758 | | | 14 |
Commercial real estate | | 2,697 | | | 2,941 | | | 219 | | | 2,696 | | | 38 |
Residential real estate | | 1,354 | | | 1,365 | | | 218 | | | 1,347 | | | - |
Consumer | | - | | | - | | | - | | | - | | | - |
Total loans individually evaluated for impairment | $ | 10,477 | | $ | 12,867 | | $ | 740 | | $ | 10,672 | | $ | 80 |
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| 31-Dec-13 |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
With no related allowance recorded: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 3,413 | | $ | 4,484 | | $ | - | | $ | 3,342 | | $ | 159 |
Commercial real estate | | 2,075 | | | 3,002 | | | - | | | 2,719 | | | - |
Residential real estate | | 444 | | | 474 | | | - | | | 447 | | | 8 |
Consumer | | 8 | | | 8 | | | - | | | 10 | | | 1 |
With an allowance recorded: | | | | | | | | | | | | | | |
Commercial and industrial | | 2,113 | | | 2,194 | | | 292 | | | 2,220 | | | 50 |
Commercial real estate | | 2,800 | | | 3,085 | | | 298 | | | 2,934 | | | 197 |
Residential real estate | | 188 | | | 198 | | | 10 | | | 190 | | | 2 |
Consumer | | - | | | - | | | - | | | - | | | - |
Total loans individually evaluated for impairment | $ | 11,041 | | $ | 13,445 | | $ | 600 | | $ | 11,862 | | $ | 417 |
Acquired loans pursuant to a business combination are initially recorded at estimated fair value as of the date of acquisition; therefore, any related allowance for loan and lease losses is not carried over or established at acquisition. The difference between contractually required amounts receivable and the acquisition date fair value of loans that are not deemed credit-impaired at acquisition is accreted (recognized) into income over the life of the loan either on a straight-line basis or based on the underlying principal payments on the loan. Any change in credit quality subsequent to acquisition for these loans is reflected in the allowance for loan and lease losses. |
Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that all contractually required principal and interest payments will not be collected are accounted for under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). A portion of the loans acquired in the VBB Acquisition were deemed by management to be credit-impaired loans qualifying for accounting under ASC 310-30. |
In July 2011, the loans acquired in the Paragon Transaction and the VBB Acquisition were adjusted to estimated fair value by recording a discount of $1.8 million and $14.0 million, respectively. Of the $14.0 million discount recorded on the VBB Acquisition, $12.7 million related to $40.2 million of purchased credit-impaired loans. The remaining fair value adjustment on the purchased credit-impaired loans, as of March 31, 2014, was $2.9 million. The carrying value of purchased impaired loans, as of March 31, 2014, was approximately $9.3 million, which is net of any impairment charges recorded subsequent to acquisition. |
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For purchased credit-impaired loans, the excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and accreted into interest income over the remaining life of the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference. |
In applying ASC 310-30 to acquired loans, the company must periodically estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including default rates, the amount and timing of prepayments and the liquidation value and timing of underlying collateral, in addition to other factors. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield, which is a reclassification from the nonaccretable difference. The increased accretable yield is recognized in income over the remaining period of expected cash flows from the loan. |
If upon remeasurement in a future period, a loan for which an impairment charge has been taken is expected to have cash flows that exceed those previously determined, some portion of the impairment could be reversed. During the first quarter of 2014, the company recorded a benefit of $47 thousand due to the improvement of expected cash flows from a loan for which an impairment change was recorded in a prior period. Impairments and reversals of impairments are recorded in the provision for loan and lease losses in the consolidated statements of operations, and a component of the allowance for loan and lease losses in the consolidated balance sheet. |
The following table presents the accretion activity related to acquired loans as of the dates stated: |
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| 31-Mar-14 | | 31-Dec-13 | | | | | | | | | |
Balance at beginning of period | $ | 4,441 | | $ | 8,133 | | | | | | | | | |
Accretion (1) | | -139 | | | -2,644 | | | | | | | | | |
Disposals (2) | | - | | | -1,048 | | | | | | | | | |
Other (3) | | 64 | | | - | | | | | | | | | |
Balance at end of period | $ | 4,366 | | $ | 4,441 | | | | | | | | | |
_______________________ | | | | | | | | | | | | | | |
(1) Accretion amounts are reported in interest income. | | | | | | | | | |
(2) Disposals represent the reduction of purchase accounting adjustments due to the resolution of acquired loans at amounts less than the contractually-owed receivable. Of the 2013 amount, $85 thousand relates to loans reclassified as other real estate owned. | | | | | | | | | |
(3) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income. | | | | | | | | | |
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The following tables present the age analysis of loans past due as of the dates stated: |
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| 31-Mar-14 | | | | | | |
| 30-89 days | | 90+ days | | Total | | | | | | |
| Past Due | | Past Due | | Past Due | | | | | | |
Commercial and industrial | $ | 387 | | $ | 869 | | $ | 1,256 | | | | | | |
Commercial real estate | | 786 | | | 16 | | | 802 | | | | | | |
Residential real estate | | 432 | | | 1,248 | | | 1,680 | | | | | | |
Consumer | | 8 | | | - | | | 8 | | | | | | |
Guaranteed student loans | | 6,806 | | | 33,024 | | | 39,830 | | | | | | |
Total | $ | 8,419 | | $ | 35,157 | | $ | 43,576 | | | | | | |
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| 31-Dec-13 | | | | | | |
| 30-89 days | | 90+ days | | Total | | | | | | |
| Past Due | | Past Due | | Past Due | | | | | | |
Commercial and industrial | $ | 1,034 | | $ | 781 | | $ | 1,815 | | | | | | |
Commercial real estate | | - | | | 17 | | | 17 | | | | | | |
Residential real estate | | 228 | | | 385 | | | 613 | | | | | | |
Consumer | | 4 | | | - | | | 4 | | | | | | |
Guaranteed student loans | | 43,875 | | | - | | | 43,875 | | | | | | |
Total | $ | 45,141 | | $ | 1,183 | | $ | 46,324 | | | | | | |
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The following table presents nonaccrual loans and other real estate owned (“OREO”) as of the dates stated. A loan is considered nonaccrual if it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of March 31, 2014, there were no loans past due 90 days or greater for which interest was accruing. |
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| 31-Mar-14 | | 31-Dec-13 | | | | | | | | | |
Commercial and industrial | $ | 2,320 | | $ | 2,386 | | | | | | | | | |
Commercial real estate | | 398 | | | 883 | | | | | | | | | |
Residential real estate | | 1,577 | | | 553 | | | | | | | | | |
Consumer | | - | | | - | | | | | | | | | |
Total nonaccrual loans | $ | 4,295 | | $ | 3,822 | | | | | | | | | |
Other real estate owned | | 161 | | | 199 | | | | | | | | | |
Total nonperforming assets | $ | 4,456 | | $ | 4,021 | | | | | | | | | |
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In accordance with Accounting Standards Update (“ASU”) No. 2011-02, “Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” the company assesses all restructurings for potential identification as troubled debt restructurings (“TDR”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Modifications of terms for loans that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal payments, regardless of the period of the modification. |
For loans classified as TDRs, the company further evaluates the loans as performing or nonperforming. If at the time of restructure the loan is on accrual status, it will be classified as performing and will continue to be classified as performing as long as the borrower continues making payments in accordance with the restructured terms. A modified loan will be classified as nonaccrual if the loan becomes 90 days delinquent. TDRs originally considered nonaccrual will be classified as nonperforming, but may be classified as performing TDRs if subsequent to restructure the loan experiences payment performance according to the restructured terms for a consecutive six-month period. |
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The following table presents performing and nonperforming loans identified as TDRs, by loan type, as of the dates stated: |
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| 31-Mar-14 | | 31-Dec-13 | | | | | | | | | |
Performing: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 490 | | $ | 1,030 | | | | | | | | | |
Commercial real estate | | 907 | | | 908 | | | | | | | | | |
Residential real estate | | - | | | - | | | | | | | | | |
Consumer | | - | | | - | | | | | | | | | |
Total performing TDRs | $ | 1,397 | | $ | 1,938 | | | | | | | | | |
Nonperforming: | | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,909 | | $ | 1,940 | | | | | | | | | |
Commercial real estate | | 16 | | | 17 | | | | | | | | | |
Residential real estate | | 132 | | | 120 | | | | | | | | | |
Consumer | | - | | | - | | | | | | | | | |
Total nonperforming TDRs | $ | 2,057 | | $ | 2,077 | | | | | | | | | |
Total TDRs | $ | 3,454 | | $ | 4,015 | | | | | | | | | |
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The following tables present loans classified as TDRs, including the type of modification, number of loans and loan type, as of the dates stated: |
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| 31-Mar-14 | | | | |
| Number of Loans Modified | | Rate Modification (1) | | Term Extension and/or Other Concessions | | Total | | | | |
Commercial and industrial | 7 | | $ | 1,137 | | $ | 1,262 | | $ | 2,399 | | | | |
Commercial real estate | 3 | | | 907 | | | 16 | | | 923 | | | | |
Residential real estate | 1 | | | - | | | 132 | | | 132 | | | | |
Consumer | - | | | - | | | - | | | - | | | | |
Total TDRs | 11 | | $ | 2,044 | | $ | 1,410 | | $ | 3,454 | | | | |
___________________ | | | | | | | | | | | | | | |
(1) Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date. | | | | |
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| 31-Dec-13 | | | | |
| Number of Loans Modified | | Rate Modification (1) | | Term Extension and/or Other Concessions | | Total | | | | |
Commercial and industrial | 8 | | $ | 1,159 | | $ | 1,812 | | $ | 2,971 | | | | |
Commercial real estate | 3 | | | 908 | | | 17 | | | 925 | | | | |
Residential real estate | 1 | | | - | | | 119 | | | 119 | | | | |
Consumer | - | | | - | | | - | | | - | | | | |
Total TDRs | 12 | | $ | 2,067 | | $ | 1,948 | | $ | 4,015 | | | | |
___________________ | | | | | | | | | | | | | | |
(1) Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date. | | | | |
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