Quarterly report pursuant to Section 13 or 15(d)

LOANS

v2.4.0.8
LOANS
6 Months Ended
Jun. 30, 2013
LOANS [Abstract]  
LOANS
NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):

 
 
June 30,
2013
   
December 31,
2012
 
 
 
   
 
Commercial and industrial
 
$
242,759
   
$
259,700
 
 
               
Commercial real estate:
               
Residential developed
   
22,788
     
26,090
 
Unsecured to residential developers
   
7,048
     
5,547
 
Vacant and unimproved
   
49,992
     
56,525
 
Commercial development
   
1,469
     
1,799
 
Residential improved
   
70,223
     
75,813
 
Commercial improved
   
250,544
     
255,738
 
Manufacturing and industrial
   
77,591
     
81,447
 
Total commercial real estate
   
479,655
     
502,959
 
 
               
Consumer
               
Residential mortgage
   
181,292
     
182,625
 
Unsecured
   
1,601
     
1,683
 
Home equity
   
96,463
     
92,764
 
Other secured
   
11,117
     
12,617
 
Total consumer
   
290,473
     
289,689
 
 
               
Total loans
   
1,012,887
     
1,052,348
 
Allowance for loan losses
   
(22,248
)
   
(23,739
)
 
               
 
 
$
990,639
   
$
1,028,609
 

Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):

Three months ended June 30, 2013:
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
5,980
   
$
13,358
   
$
4,102
   
$
47
   
$
23,487
 
Charge-offs
   
(87
)
   
(222
)
   
(389
)
   
---
     
(698
)
Recoveries
   
71
     
310
     
78
     
---
     
459
 
Provision for loan losses
   
(362
)
   
(1,122
)
   
464
     
20
     
(1,000
)
Ending Balance
 
$
5,602
   
$
12,324
   
$
4,255
   
$
67
   
$
22,248
 
 
Three months ended June 30, 2012:
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
7,507
   
$
17,565
   
$
4,366
   
$
13
   
$
29,451
 
Charge-offs
   
(21
)
   
(799
)
   
(79
)
   
---
     
(899
)
Recoveries
   
110
     
201
     
67
     
---
     
378
 
Provision for loan losses
   
(958
)
   
(1,728
)
   
900
     
36
     
(1,750
)
Ending Balance
 
$
6,638
   
$
15,239
   
$
5,254
   
$
49
   
$
27,180
 
 
Six months ended June 30, 2013:
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,459
   
$
13,457
   
$
3,787
   
$
36
   
$
23,739
 
Charge-offs
   
(249
)
   
(459
)
   
(633
)
   
---
     
(1,341
)
Recoveries
   
427
     
994
     
179
     
---
     
1,600
 
Provision for loan losses
   
(1,035
)
   
(1,668
)
   
922
     
31
     
(1,750
)
Ending Balance
 
$
5,602
   
$
12,324
   
$
4,255
   
$
67
   
$
22,248
 
 
Six months ended June 30, 2012:
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,313
   
$
20,475
   
$
4,821
   
$
32
   
$
31,641
 
Charge-offs
   
(989
)
   
(2,506
)
   
(901
)
   
---
     
(4,396
)
Recoveries
   
280
     
4,885
     
120
     
---
     
5,285
 
Provision for loan losses
   
1,034
     
(7,615
)
   
1,214
     
17
     
(5,350
)
Ending Balance
 
$
6,638
   
$
15,239
   
$
5,254
   
$
49
   
$
27,180
 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method (dollars in thousands):

June 30, 2013:
 
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
 
   
   
   
   
 
Ending allowance attributable to loans:
 
   
   
   
   
 
Individually reviewed for impairment
 
$
1,963
   
$
1,890
   
$
1,065
   
$
---
   
$
4,918
 
Collectively evaluated for impairment
   
3,639
     
10,434
     
3,190
     
67
     
17,330
 
Total ending allowance balance
 
$
5,602
   
$
12,324
   
$
4,255
   
$
67
   
$
22,248
 
 
                                       
Loans:
                                       
Individually reviewed for impairment
 
$
13,086
   
$
48,395
   
$
15,145
   
$
---
   
$
76,626
 
Collectively evaluated for impairment
   
229,673
     
431,260
     
275,328
     
---
     
936,261
 
Total ending loans balance
 
$
242,759
   
$
479,655
   
$
290,473
   
$
---
   
$
1,012,887
 

December 31, 2012:
 
 
Commercial and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
 
   
   
   
   
 
Ending allowance attributable to loans:
 
   
   
   
   
 
Individually reviewed for impairment
 
$
2,920
   
$
2,418
   
$
716
   
$
---
   
$
6,054
 
Collectively evaluated for impairment
   
3,539
     
11,039
     
3,071
     
36
     
17,685
 
Total ending allowance balance
 
$
6,459
   
$
13,457
   
$
3,787
   
$
36
   
$
23,739
 
 
                                       
Loans:
                                       
Individually reviewed for impairment
 
$
14,390
   
$
54,831
   
$
14,086
   
$
---
   
$
83,307
 
Collectively evaluated for impairment
   
245,310
     
448,128
     
275,603
     
---
     
969,041
 
Total ending loans balance
 
$
259,700
   
$
502,959
   
$
289,689
   
$
---
   
$
1,052,348
 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013 (dollars in thousands):

 
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
 
   
   
 
Commercial and industrial
 
$
4,397
   
$
4,394
   
$
---
 
 
                       
Commercial real estate:
                       
Residential developed
   
5,551
     
4,618
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
880
     
880
     
---
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
1,073
     
1,073
     
---
 
Commercial improved
   
3,180
     
3,165
     
---
 
Manufacturing and industrial
   
810
     
810
     
---
 
 
   
11,494
     
10,546
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
 
   
---
     
---
     
---
 
 
 
$
15,891
   
$
14,940
   
$
---
 
 
                       
With an allowance recorded:
                       
Commercial and industrial
 
$
8,738
   
$
8,693
   
$
1,963
 
 
                       
Commercial real estate:
                       
Residential developed
   
1,783
     
1,783
     
174
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,995
     
1,995
     
101
 
Commercial development
   
14
     
14
     
1
 
Residential improved
   
10,247
     
10,247
     
411
 
Commercial improved
   
19,327
     
19,327
     
1,092
 
Manufacturing and industrial
   
4,482
     
4,482
     
111
 
 
   
37,848
     
37,848
     
1,890
 
Consumer:
                       
Residential mortgage
   
9,433
     
9,433
     
663
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
5,712
     
5,712
     
402
 
Other secured
   
---
     
---
     
---
 
 
   
15,145
     
15,145
     
1,065
 
 
 
$
61,731
   
$
61,686
   
$
4,918
 
 
                       
Total
 
$
77,622
   
$
76,626
   
$
4,918
 
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012 (dollars in thousands):
 
 
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
 
   
   
 
Commercial and industrial
 
$
2,515
   
$
2,512
   
$
---
 
 
                       
Commercial real estate:
                       
Residential developed
   
7,136
     
6,283
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
2,321
     
2,136
     
---
 
Commercial development
   
213
     
213
     
---
 
Residential improved
   
3,293
     
3,019
     
---
 
Commercial improved
   
7,268
     
6,127
     
---
 
Manufacturing and industrial
   
3,686
     
3,686
     
---
 
 
   
23,917
     
21,464
         
Consumer:
                       
Residential mortgage
   
4,614
     
3,062
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
 
   
4,614
     
3,062
     
---
 
 
 
$
31,046
   
$
27,038
   
$
---
 
 
                       
With an allowance recorded:
                       
Commercial and industrial
 
$
11,878
   
$
11,878
   
$
2,920
 
 
                       
Commercial real estate:
                       
Residential developed
   
1,524
     
1,524
     
337
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,688
     
1,688
     
34
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
10,063
     
10,063
     
842
 
Commercial improved
   
15,386
     
15,386
     
1,071
 
Manufacturing and industrial
   
4,706
     
4,706
     
134
 
 
   
33,367
     
33,367
     
2,418
 
Consumer:
                       
Residential mortgage
   
10,220
     
10,220
     
664
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
804
     
804
     
52
 
Other secured
   
---
     
---
     
---
 
 
   
11,024
     
11,024
     
716
 
 
 
$
56,269
   
$
56,269
   
$
6,054
 
 
                       
Total
 
$
87,315
   
$
83,307
   
$
6,054
 

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three and six month periods ended June 30, 2013 and 2012 (dollars in thousands):

 
 
Three Months
Ended
June 30,
2013
   
Three Months
Ended
June 30,
2012
   
Six
Months
Ended
June 30,
2013
   
Six
Months
Ended
June 30,
2012
 
Average of impaired loans during the period:
 
   
   
   
 
Commercial and industrial
 
$
14,823
   
$
14,788
   
$
16,027
   
$
16,874
 
 
                               
Commercial real estate:
                               
Residential developed
   
6,553
     
8,351
     
6,841
     
8,445
 
Unsecured to residential developers
   
---
     
---
     
---
     
---
 
Vacant and unimproved
   
3,031
     
3,862
     
3,339
     
3,672
 
Commercial development
   
14
     
217
     
15
     
218
 
Residential improved
   
11,678
     
13,440
     
12,102
     
13,993
 
Commercial improved
   
21,032
     
17,280
     
21,488
     
16,690
 
Manufacturing and industrial
   
6,136
     
9,299
     
6,577
     
9,384
 
 
                               
Consumer
   
15,183
     
16,136
     
14,917
     
16,030
 
 
                               
 
                               
Interest income recognized during impairment:
                               
Commercial and industrial
   
784
     
465
     
1,127
     
827
 
Commercial real estate
   
816
     
626
     
1,434
     
1,211
 
Consumer
   
137
     
144
     
260
     
278
 
 
                               
Cash-basis interest income recognized
                               
Commercial and industrial
   
599
     
487
     
935
     
815
 
Commercial real estate
   
879
     
627
     
1,469
     
1,215
 
Consumer
   
133
     
139
     
257
     
276
 
 
Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013:

 
 
Nonaccrual
   
Over 90
days
Accruing
 
Commercial and industrial
 
$
4,081
   
$
---
 
 
               
Commercial real estate:
               
Residential developed
   
2,238
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
486
     
---
 
Commercial development
   
2
     
---
 
Residential improved
   
651
     
---
 
Commercial improved
   
2,166
     
158
 
Manufacturing and industrial
   
---
     
---
 
 
   
5,543
     
158
 
Consumer:
               
Residential mortgage
   
619
     
---
 
Unsecured
   
34
     
---
 
Home equity
   
339
     
---
 
Other secured
   
---
     
---
 
 
   
992
     
---
 
Total
 
$
10,616
   
$
158
 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2012:
 
 
 
Nonaccrual
   
Over 90
days
Accruing
 
Commercial and industrial
 
$
7,657
   
$
---
 
 
               
Commercial real estate:
               
Residential developed
   
3,024
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
706
     
---
 
Commercial development
   
2
     
196
 
Residential improved
   
1,159
     
---
 
Commercial improved
   
1,521
     
422
 
Manufacturing and industrial
   
225
     
---
 
 
   
6,637
     
618
 
Consumer:
               
Residential mortgage
   
447
     
---
 
Unsecured
   
19
     
---
 
Home equity
   
625
     
---
 
Other secured
   
---
     
---
 
 
   
1,091
     
---
 
Total
 
$
15,385
   
$
618
 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 by class of loans (dollars in thousands):

 
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
 
 
   
   
   
   
 
Commercial and industrial
 
$
197
   
$
168
   
$
365
   
$
242,394
   
$
242,759
 
 
                                       
Commercial real estate:
                                       
Residential developed
   
---
     
1,917
     
1,917
     
20,871
     
22,788
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,048
     
7,048
 
Vacant and unimproved
   
454
     
---
     
454
     
49,538
     
49,992
 
Commercial development
   
---
     
2
     
2
     
1,467
     
1,469
 
Residential improved
   
185
     
160
     
345
     
69,878
     
70,223
 
Commercial improved
   
310
     
1,861
     
2,171
     
248,373
     
250,544
 
Manufacturing and industrial
   
---
     
---
     
---
     
77,591
     
77,591
 
 
   
949
     
3,940
     
4,889
     
474,766
     
479,655
 
Consumer:
                                       
Residential mortgage
   
101
     
616
     
717
     
180,575
     
181,292
 
Unsecured
   
---
     
---
     
---
     
1,601
     
1,601
 
Home equity
   
334
     
324
     
658
     
95,805
     
96,463
 
Other secured
   
52
     
---
     
52
     
11,065
     
11,117
 
 
   
487
     
940
     
1,427
     
289,046
     
290,473
 
Total
 
$
1,633
   
$
5,048
   
$
6,681
   
$
1,006,206
   
$
1,012,887
 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 by class of loans (dollars in thousands):

 
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
 
 
   
   
   
   
 
Commercial and industrial
 
$
395
   
$
219
   
$
614
   
$
259,086
   
$
259,700
 
 
                                       
Commercial real estate:
                                       
Residential developed
   
---
     
35
     
35
     
26,055
     
26,090
 
Unsecured to residential developers
   
---
     
---
     
---
     
5,547
     
5,547
 
Vacant and unimproved
   
17
     
652
     
669
     
55,856
     
56,525
 
Commercial development
   
---
     
199
     
199
     
1,600
     
1,799
 
Residential improved
   
520
     
192
     
712
     
75,101
     
75,813
 
Commercial improved
   
2,502
     
1,436
     
3,938
     
251,800
     
255,738
 
Manufacturing and industrial
   
200
     
25
     
225
     
81,222
     
81,447
 
 
   
3,239
     
2,539
     
5,778
     
497,181
     
502,959
 
Consumer:
                                       
Residential mortgage
   
647
     
110
     
757
     
181,868
     
182,625
 
Unsecured
   
---
     
---
     
---
     
1,683
     
1,683
 
Home equity
   
415
     
264
     
679
     
92,085
     
92,764
 
Other secured
   
59
     
---
     
59
     
12,558
     
12,617
 
 
   
1,121
     
374
     
1,495
     
288,194
     
289,689
 
Total
 
$
4,755
   
$
3,132
   
$
7,887
   
$
1,044,461
   
$
1,052,348
 

The Company had allocated $4,809,000 and $6,005,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of June 30, 2013 and December 31, 2012, respectively.  These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow.  These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.  The Company has been active at utilizing these programs and working with its customers to reduce the risk of foreclosure.  For commercial loans, these modifications typically include an interest only period and, in some cases, a lowering of the interest rate on the loan.  In some cases, the modification will include separating the note into two notes with the first note structured to be supported by current cash flows and collateral, and the second note made for the remaining unsecured debt.  The second note is charged off immediately and collected only after the first note is paid in full.  This modification type is commonly referred to as an A-B note structure.  For consumer mortgage loans, the restructuring typically includes a lowering of the interest rate to provide payment and cash flow relief.  For each restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the structure can be successful and that cash flows will be sufficient to support the restructured debt.  An analysis is also performed to determine whether the restructured loan should be on accrual status.  Generally, if the loan is on accrual at the time of restructure, it will remain on accrual after the restructuring.  In some cases, a nonaccrual loan may be placed on accrual at restructuring if the loan’s actual payment history demonstrates it would have cash flowed under the restructured terms.  After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

Typically, once a loan is identified as a TDR, it will retain that designation until it is paid off, since the restructured loans generally are not at market rates at the time of restructuring.  An exception to this would be a loan that is modified under an A-B note structure.  If the remaining “A” note is at a market rate at the time of restructuring (taking into account the borrower’s credit risk and prevailing market conditions), the loan can be removed from TDR designation in a subsequent calendar year after six months of performance in accordance with the new terms.  The market rate relative to the borrower’s credit risk is determined through analysis of market pricing information gathered from peers and use of a loan pricing model.  The general objective of the model is to achieve a consistent return on equity from one credit to the next, taking into consideration their differences in credit risk.  In the model, credits with higher risk receive a higher potential loss allocation, and therefore require a higher interest rate to achieve the target return on equity.  In general, when a loan is removed from TDR status it would no longer be considered impaired.  As a result, allowance allocations for loans removed from TDR status would be based on the historical based allocation for the applicable loan grade and loan class.  During the three and six months ended June 30, 2013 and throughout 2012, no loans were removed from TDR status.  Given the nature of the TDRs outstanding at June 30, 2013, it is unlikely that any such loans will be removed from TDR status in 2013.

As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan.  For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral.  For impaired commercial loans where repayment is expected from cash flows from business operations, the allowance is computed based on a discounted cash flow computation.  Certain groups of TDRs, such as residential mortgages, have common characteristics and for them the allowance is computed based on a discounted cash flow computation on the change in weighted rate for the pool.  The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

The following table presents information regarding troubled debt restructurings as of June 30, 2013 and December 31, 2012 (dollars in thousands):

 
 
June 30, 2013
   
December 31, 2012
 
 
 
Number of
Loans
   
Outstanding
Recorded
Balance
   
Number of
Loans
   
Outstanding
Recorded
Balance
 
Commercial and industrial
   
59
   
$
12,965
     
58
   
$
14,485
 
Commercial real estate
   
123
     
43,514
     
142
     
49,936
 
Consumer
   
107
     
15,188
     
86
     
13,634
 
 
   
289
   
$
71,667
     
286
   
$
78,055
 
 
The following table presents information regarding troubled debt restructurings executed during the three month periods ended June 30, 2013 and 2012 (dollars in thousands):

 
Three Months Ended
June 30, 2013
 
Three Months Ended
June 30, 2012
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
 
Principal
Writedown
upon
Modification
 
Number of
Loans
 
Outstanding
Recorded
Balance
 
Principal
Writedown
upon
Modification
 
 
 
 
 
 
 
 
Commercial and industrial
   
2
   
$
237
   
$
---
     
3
   
$
93
   
$
9
 
Commercial real estate
   
4
     
1,276
     
---
     
9
     
1,301
     
---
 
Consumer
   
7
     
448
     
---
     
2
     
275
     
---
 
 
   
13
   
$
1,961
   
$
---
     
14
   
$
1,669
   
$
9
 

The following table presents information regarding troubled debt restructurings executed during the six month periods ended June 30, 2013 and 2012 (dollars in thousands):

 
Six Months Ended
June 30, 2013
 
Six Months Ended
June 30, 2012
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
 
Principal
Writedown
upon
Modification
 
Number of
Loans
 
Outstanding
Recorded
Balance
 
Principal
Writedown
upon
Modification
 
 
 
 
 
 
 
 
Commercial and industrial
   
3
   
$
262
   
$
---
     
13
   
$
1,335
   
$
9
 
Commercial real estate
   
9
     
2,717
     
---
     
39
     
7,698
     
86
 
Consumer
   
30
     
5,469
     
1,770
     
9
     
1,462
     
260
 
 
   
42
   
$
8,448
   
$
1,770
     
61
   
$
10,495
   
$
355
 

According to the accounting standards, not all loan modifications are TDRs.  TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress.  The Company reviews all modifications and renewals for determination of TDR status.  In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.  These modifications are not considered TDRs.  In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress.  This could be the case if the Company is matching a competitor’s interest rate.  These modifications would also not be considered TDRs.  Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.  The following table presents information regarding modifications and renewals executed during the three month periods ended June 30, 2013 and 2012 that are not considered TDRs (dollars in thousands):

  
 
Three Months Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
 
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
   
Number of
Loans
 
Outstanding
Recorded
Balance
 
 
 
 
   
 
 
Commercial and industrial
   
124
   
$
18,526
     
156
   
$
27,628
 
Commercial real estate
   
103
     
40,047
     
85
     
28,906
 
Consumer
   
17
     
738
     
22
     
815
 
 
   
244
   
$
59,311
     
263
   
$
57,349
 

The following table presents information regarding modifications and renewals executed during the six month periods ended June 30, 2013 and 2012 that are not considered TDRs (dollars in thousands):

  
 
Six Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2012
 
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
   
Number of
Loans
 
Outstanding
Recorded
Balance
 
 
 
 
   
 
 
Commercial and industrial
   
210
   
$
48,453
     
250
   
$
60,918
 
Commercial real estate
   
197
     
75,636
     
164
     
65,706
 
Consumer
   
28
     
932
     
46
     
1,687
 
 
   
435
   
$
125,021
     
460
   
$
128,311
 

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended June 30, 2013 and 2012 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

 
 
Three Months Ended
June 30, 2013
   
Three Months Ended
June 30, 2012
 
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
   
Number of
Loans
 
Outstanding
Recorded
Balance
 
 
 
 
   
 
 
Commercial and industrial
   
---
   
$
---
     
1
   
$
20
 
Commercial real estate
   
---
     
---
     
---
     
---
 
Consumer
   
---
     
---
     
---
     
---
 

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the six month periods ended June 30, 2013 and 2012 (dollars in thousands). Included are loans that became delinquent more than 90 days past due or transferred to nonaccrual within 12 months of restructuring.

 
 
Six Months Ended
June 30, 2013
   
Six Months Ended
June 30, 2012
 
 
 
Number of
Loans
 
Outstanding
Recorded
Balance
   
Number of
Loans
 
Outstanding
Recorded
Balance
 
 
 
 
   
 
 
Commercial and industrial
   
---
   
$
---
     
3
   
$
112
 
Commercial real estate
   
---
     
---
     
1
     
76
 
Consumer
   
---
     
---
     
1
     
70
 

Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  The Company analyzes commercial loans individually and classifies these relationships by credit risk grading.  The Company uses an eight point grading system, with grades 5 through 8 being considered classified, or watch, credits.  All commercial loans are assigned a grade at origination, at each renewal or any amendment.  When a credit is first downgraded to a watch credit (either through renewal, amendment, loan officer identification or the loan review process), an Administrative Loan Review (“ALR”) is generated by credit and the loan officer.  All watch credits have an ALR completed monthly which analyzes the collateral position and cash flow of the borrower and its guarantors.  The loan officer is required to complete both a short term and long term plan to rehabilitate or exit the credit and to give monthly comments on the progress to these plans.  Management meets quarterly with loan officers to discuss each of these credits in detail and to help formulate solutions where progress has stalled.  When necessary, the loan officer proposes changes to the assigned loan grade as part of the ALR.  Additionally, Loan Review reviews all loan grades upon origination, renewal or amendment and again as loans are selected though the loan review process.  The credit will stay on the ALR until either its grade has improved to a 4 or the credit relationship is at a zero balance.  The Company uses the following definitions for the risk grades:

1. Excellent - Loans supported by extremely strong financial condition or secured by the Bank’s own deposits. Minimal risk to the Bank and the probability of serious rapid financial deterioration is extremely small.

2. Above Average - Loans supported by sound financial statements that indicate the ability to repay or borrowings secured (and margined properly) with marketable securities. Nominal risk to the Bank and probability of serious financial deterioration is highly unlikely. The overall quality of these credits is very high.

3. Good Quality - Loans supported by satisfactory asset quality and liquidity, good debt capacity coverage, and good management in all critical positions. Loans are secured by acceptable collateral with adequate margins. There is a slight risk of deterioration if adverse market conditions prevail.

4. Acceptable Risk - Loans carrying an acceptable risk to the Bank, which may be slightly below average quality. The borrower has limited financial strength with considerable leverage. There is some probability of deterioration if adverse market conditions prevail. These credits should be monitored closely by the Relationship Manager.

5. Marginally Acceptable - Loans are of marginal quality with above normal risk to the Bank. The borrower shows acceptable asset quality but very little liquidity with high leverage. There is inconsistent earning performance without the ability to sustain adverse market conditions. The primary source of repayment is questionable, but the secondary source of repayment still remains an option. Very close attention by the Relationship Manager and management is needed.

6. Substandard - Loans are inadequately protected by the net worth and paying capacity of the borrower or the collateral pledged. The primary and secondary sources of repayment are questionable. Heavy debt condition may be evident and volume and earnings deterioration may be underway. It is possible that the Bank will sustain some loss if the deficiencies are not immediately addressed and corrected.

7. Doubtful - Loans supported by weak or no financial statements that indicate the ability to repay the entire loan is questionable. Loans in this category are normally characterized less than adequate collateral, insolvent, or extremely weak financial condition. A loan classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses makes collection or liquidation in full highly questionable. The possibility of loss is extremely high, however, activity may be underway to minimize the loss or maximize the recovery.

8. Loss - Loans are considered uncollectible and of little or no value as a bank asset.
 
As of June 30, 2013, the risk grade category of commercial loans by class of loans was as follows (dollars in thousands):

 
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
 
 
                                                               
Commercial and industrial
 
$
1,311
   
$
10,458
   
$
68,445
   
$
141,786
   
$
14,299
   
$
2,378
   
$
4,081
   
$
---
 
 
                                                               
Commercial real estate:
                                                               
Residential developed
   
---
     
---
     
721
     
6,636
     
7,347
     
5,846
     
2,238
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
     
6,974
     
74
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
11,846
     
26,713
     
10,413
     
536
     
486
     
---
 
Commercial development
   
---
     
---
     
---
     
1,282
     
170
     
14
     
2
     
---
 
Residential improved
   
---
     
112
     
10,402
     
38,403
     
13,392
     
7,263
     
651
     
---
 
Commercial improved
   
---
     
1,164
     
51,982
     
152,281
     
32,758
     
10,193
     
2,166
     
---
 
Manufacturing and industrial
   
---
     
252
     
21,190
     
46,150
     
7,888
     
2,110
     
---
     
---
 
 
                                                               
 
 
$
1,311
   
$
11,986
   
$
164,586
   
$
420,225
   
$
86,341
   
$
28,340
   
$
9,624
   
$
---
 

As of December 31, 2012, the risk grade category of commercial loans by class of loans was as follows (dollars in thousands):

 
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
 
 
                                                               
Commercial and industrial
 
$
1,349
   
$
20,630
   
$
72,723
   
$
141,425
   
$
12,027
   
$
3,884
   
$
7,662
   
$
---
 
 
                                                               
Commercial real estate:
                                                               
Residential developed
   
---
     
---
     
715
     
6,240
     
9,772
     
6,339
     
3,024
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
     
5,535
     
12
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
12,532
     
29,654
     
12,412
     
1,221
     
706
     
---
 
Commercial development
   
---
     
---
     
---
     
482
     
1,102
     
213
     
2
     
---
 
Residential improved
   
---
     
115
     
9,973
     
41,578
     
14,471
     
8,517
     
1,159
     
---
 
Commercial improved
   
---
     
2,009
     
40,253
     
159,353
     
37,449
     
15,153
     
1,521
     
---
 
Manufacturing and industrial
   
---
     
2,087
     
17,795
     
48,061
     
9,592
     
3,687
     
225
     
---
 
 
                                                               
 
 
$
1,349
   
$
24,841
   
$
153,991
   
$
432,328
   
$
96,837
   
$
39,014
   
$
14,299
   
$
---
 

Commercial loans rated a 6 or worse per the Company’s internal risk rating system are considered substandard, doubtful or loss. Commercial loans classified as substandard or worse were as follows at period-end (dollars in thousands):

 
 
June 30,
2013
   
December 31,
2012
 
 
 
   
 
Not classified as impaired
 
$
8,189
   
$
13,015
 
Classified as impaired
   
29,775
     
40,298
 
 
               
Total commercial loans classified substandard or worse
 
$
37,964
   
$
53,313
 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in consumer loans based on payment activity (dollars in thousands):

June 30, 2013
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
180,676
   
$
1,601
   
$
96,139
   
$
11,117
 
Nonperforming
   
616
     
---
     
324
     
---
 
Total
 
$
181,292
   
$
1,601
   
$
96,463
   
$
11,117
 


December 31, 2012
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
182,515
   
$
1,683
   
$
92,500
   
$
12,617
 
Nonperforming
   
110
     
---
     
264
     
---
 
Total
 
$
182,625
   
$
1,683
   
$
92,764
   
$
12,617