Quarterly report pursuant to Section 13 or 15(d)

LOANS

v2.4.0.8
LOANS
3 Months Ended
Mar. 31, 2014
LOANS [Abstract]  
LOANS
NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):
  
 
 
March 31,
   
December 31,
 
 
 
2014
   
2013
 
Commercial and industrial
 
$
271,924
   
$
274,099
 
 
               
Commercial real estate:
               
Residential developed
   
15,204
     
18,130
 
Unsecured to residential developers
   
7,112
     
7,315
 
Vacant and unimproved
   
44,538
     
42,988
 
Commercial development
   
2,236
     
2,434
 
Residential improved
   
73,341
     
76,294
 
Commercial improved
   
244,261
     
247,195
 
Manufacturing and industrial
   
76,505
     
77,984
 
Total commercial real estate
   
463,197
     
472,340
 
 
               
Consumer
               
Residential mortgage
   
189,926
     
188,648
 
Unsecured
   
1,285
     
1,337
 
Home equity
   
94,148
     
95,961
 
Other secured
   
9,631
     
9,992
 
Total consumer
   
294,990
     
295,938
 
 
               
Total loans
   
1,030,111
     
1,042,377
 
Allowance for loan losses
   
(20,383
)
   
(20,798
)
 
               
 
 
$
1,009,728
   
$
1,021,579
 

Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):
 
 
 
Commercial and
   
Commercial
   
   
   
 
Three months ended March 31, 2014
 
Industrial
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,174
   
$
10,868
   
$
3,703
   
$
53
   
$
20,798
 
Charge-offs
   
(39
)
   
---
     
(43
)
   
---
     
(82
)
Recoveries
   
39
     
590
     
38
     
---
     
667
 
Provision for loan losses
   
(87
)
   
(1,086
)
   
177
     
(4
)
   
(1,000
)
Ending Balance
 
$
6,087
   
$
10,372
   
$
3,875
   
$
49
   
$
20,383
 

 
 
Commercial and
   
Commercial
   
   
   
 
Three months ended March 31, 2013
 
Industrial
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,459
   
$
13,457
   
$
3,787
   
$
36
   
$
23,739
 
Charge-offs
   
(161
)
   
(237
)
   
(244
)
   
---
     
(642
)
Recoveries
   
355
     
684
     
101
     
---
     
1,140
 
Provision for loan losses
   
(673
)
   
(546
)
   
458
     
11
     
(750
)
Ending Balance
 
$
5,980
   
$
13,358
   
$
4,102
   
$
47
   
$
23,487
 
 
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):

 
 
Commercial and
   
Commercial
   
   
   
 
March 31, 2014
 
Industrial
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
 
   
   
   
   
 
Ending allowance attributable to loans:
 
   
   
   
   
 
Individually reviewed for impairment
 
$
2,134
   
$
987
   
$
873
   
$
---
   
$
3,994
 
Collectively evaluated for impairment
   
3,953
     
9,385
     
3,002
     
49
     
16,389
 
Total ending allowance balance
 
$
6,087
   
$
10,372
   
$
3,875
   
$
49
   
$
20,383
 
 
                                       
Loans:
                                       
Individually reviewed for impairment
 
$
15,173
   
$
41,645
   
$
14,372
   
$
---
   
$
71,190
 
Collectively evaluated for impairment
   
256,751
     
421,552
     
280,618
     
---
     
958,921
 
Total ending loans balance
 
$
271,924
   
$
463,197
   
$
294,990
   
$
---
   
$
1,030,111
 

 
 
Commercial and
   
Commercial
   
   
   
 
December 31, 2013:
 
Industrial
   
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
 
   
   
   
   
 
Ending allowance attributable to loans:
 
   
   
   
   
 
Individually reviewed for impairment
 
$
1,981
   
$
1,008
   
$
881
   
$
---
   
$
3,870
 
Collectively evaluated for impairment
   
4,193
     
9,860
     
2,822
     
53
     
16,928
 
Total ending allowance balance
 
$
6,174
   
$
10,868
   
$
3,703
   
$
53
   
$
20,798
 
 
                                       
Loans:
                                       
Individually reviewed for impairment
 
$
13,155
   
$
41,285
   
$
14,483
   
$
---
   
$
68,923
 
Collectively evaluated for impairment
   
260,944
     
431,055
     
281,455
     
---
     
973,454
 
Total ending loans balance
 
$
274,099
   
$
472,340
   
$
295,938
   
$
---
   
$
1,042,377
 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 (dollars in thousands):

 
 
Unpaid
   
   
 
 
 
Principal
   
Recorded
   
Allowance
 
March 31, 2014
 
Balance
   
Investment
   
Allocated
 
With no related allowance recorded:
 
   
   
 
Commercial and industrial
 
$
5,360
   
$
5,360
   
$
---
 
 
                       
Commercial real estate:
                       
Residential developed
   
3,826
     
2,893
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
---
 
Commercial development
   
286
     
286
     
---
 
Residential improved
   
475
     
475
     
---
 
Commercial improved
   
2,887
     
2,098
     
---
 
Manufacturing and industrial
   
253
     
253
     
---
 
 
   
7,727
     
6,005
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
 
   
---
     
---
     
---
 
 
 
$
13,087
   
$
11,365
   
$
---
 
 
                       
With an allowance recorded:
                       
Commercial and industrial
 
$
9,813
   
$
9,813
   
$
2,134
 
 
                       
Commercial real estate:
                       
Residential developed
   
1,339
     
1,339
     
37
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,672
     
1,672
     
50
 
Commercial development
   
205
     
205
     
6
 
Residential improved
   
9,881
     
9,881
     
320
 
Commercial improved
   
15,956
     
15,956
     
463
 
Manufacturing and industrial
   
6,587
     
6,587
     
111
 
 
   
35,640
     
35,640
     
987
 
Consumer:
                       
Residential mortgage
   
9,398
     
9,398
     
571
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
4,974
     
4,974
     
302
 
Other secured
   
---
     
---
     
---
 
 
   
14,372
     
14,372
     
873
 
 
 
$
59,825
   
$
59,825
   
$
3,994
 
 
                       
Total
 
$
72,912
   
$
71,190
   
$
3,994
 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (dollars in thousands):

 
 
Unpaid
   
   
 
 
 
Principal
   
Recorded
   
Allowance
 
December 31, 2013
 
Balance
   
Investment
   
Allocated
 
With no related allowance recorded:
 
   
   
 
Commercial and industrial
 
$
3,287
   
$
3,284
   
$
---
 
 
                       
Commercial real estate:
                       
Residential developed
   
5,273
     
4,340
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
3
     
3
     
---
 
Commercial development
   
362
     
362
     
---
 
Residential improved
   
1,493
     
1,493
     
---
 
Commercial improved
   
2,797
     
2,272
     
---
 
Manufacturing and industrial
   
252
     
252
     
---
 
 
   
10,180
     
8,722
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
 
   
---
     
---
     
---
 
 
 
$
13,467
   
$
12,006
   
$
---
 
 
                       
With an allowance recorded:
                       
Commercial and industrial
 
$
9,871
   
$
9,871
   
$
1,981
 
 
                       
Commercial real estate:
                       
Residential developed
   
618
     
618
     
33
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,900
     
1,900
     
47
 
Commercial development
   
207
     
207
     
5
 
Residential improved
   
9,534
     
9,534
     
342
 
Commercial improved
   
14,450
     
14,450
     
479
 
Manufacturing and industrial
   
5,854
     
5,854
     
102
 
 
   
32,563
     
32,563
     
1,008
 
Consumer:
                       
Residential mortgage
   
9,454
     
9,454
     
575
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
5,029
     
5,029
     
306
 
Other secured
   
---
     
---
     
---
 
 
   
14,483
     
14,483
     
881
 
 
 
$
56,917
   
$
56,917
   
$
3,870
 
 
                       
Total
 
$
70,384
   
$
68,923
   
$
3,870
 

The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three month periods ended March 31, 2014 and 2013 (dollars in thousands):
  
 
 
Three
   
Three
 
 
 
Months
   
Months
 
 
 
Ended
   
Ended
 
 
 
March 31,
   
March 31,
 
 
 
2014
   
2013
 
Average of impaired loans during the period:
 
   
 
Commercial and industrial
 
$
14,284
   
$
17,233
 
 
               
Commercial real estate:
               
Residential developed
   
4,532
     
7,128
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
1,820
     
3,647
 
Commercial development
   
527
     
16
 
Residential improved
   
10,419
     
12,526
 
Commercial improved
   
18,291
     
21,945
 
Manufacturing and industrial
   
6,719
     
7,018
 
 
               
Consumer
   
14,415
     
14,651
 
 
               
Interest income recognized during impairment:
               
Commercial and industrial
   
338
     
343
 
Commercial real estate
   
453
     
618
 
Consumer
   
132
     
123
 
 
               
Cash-basis interest income recognized
               
Commercial and industrial
   
338
     
337
 
Commercial real estate
   
452
     
589
 
Consumer
   
134
     
124
 

Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2014 and December 31, 2013:

 
 
   
Over 90
 
 
 
   
days
 
March 31, 2014
 
Nonaccrual
   
Accruing
 
 
 
   
 
Commercial and industrial
 
$
8,077
   
$
---
 
 
               
Commercial real estate:
               
Residential developed
   
2,205
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
---
     
---
 
Commercial development
   
29
     
---
 
Residential improved
   
1,065
     
---
 
Commercial improved
   
2,377
     
623
 
Manufacturing and industrial
   
---
     
---
 
 
   
5,676
     
623
 
Consumer:
               
Residential mortgage
   
621
     
141
 
Unsecured
   
81
     
---
 
Home equity
   
329
     
---
 
Other secured
   
---
     
---
 
 
   
1,031
     
141
 
Total
 
$
14,784
   
$
764
 

 
 
   
Over 90
 
 
 
   
days
 
December 31, 2013
 
Nonaccrual
   
Accruing
 
 
 
   
 
Commercial and industrial
 
$
5,625
   
$
---
 
 
               
Commercial real estate:
               
Residential developed
   
2,590
     
153
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
---
     
---
 
Commercial development
   
23
     
---
 
Residential improved
   
429
     
---
 
Commercial improved
   
2,511
     
---
 
Manufacturing and industrial
   
---
     
---
 
 
   
5,553
     
153
 
Consumer:
               
Residential mortgage
   
639
     
---
 
Unsecured
   
33
     
---
 
Home equity
   
332
     
---
 
Other secured
   
---
     
---
 
 
   
1,004
     
---
 
Total
 
$
12,182
   
$
153
 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2014 and December 31, 2013 by class of loans (dollars in thousands):

 
   
30-90
   
Greater Than
   
Total
   
Loans Not
   
 
March 31, 2014
 
 
Days
   
90 Days
   
Past Due
   
Past Due
   
Total
 
Commercial and industrial
 
$
21
   
$
---
   
$
21
   
$
271,903
   
$
271,924
 
 
                                       
Commercial real estate:
                                       
Residential developed
   
---
     
1,917
     
1,917
     
13,287
     
15,204
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,112
     
7,112
 
Vacant and unimproved
   
---
     
---
     
---
     
44,538
     
44,538
 
Commercial development
   
---
     
29
     
29
     
2,207
     
2,236
 
Residential improved
   
176
     
697
     
873
     
72,468
     
73,341
 
Commercial improved
   
262
     
2,673
     
2,935
     
241,326
     
244,261
 
Manufacturing and industrial
   
---
     
---
     
---
     
76,505
     
76,505
 
 
   
438
     
5,316
     
5,754
     
457,443
     
463,197
 
Consumer:
                                       
Residential mortgage
   
78
     
141
     
219
     
189,707
     
189,926
 
Unsecured
   
---
     
---
     
---
     
1,285
     
1,285
 
Home equity
   
539
     
---
     
539
     
93,609
     
94,148
 
Other secured
   
23
     
---
     
23
     
9,608
     
9,631
 
 
   
640
     
141
     
781
     
294,209
     
294,990
 
Total
 
$
1,099
   
$
5,457
   
$
6,556
   
$
1,023,555
   
$
1,030,111
 

 
   
30-90
   
Greater Than
   
Total
   
Loans Not
   
 
December 31, 2013
 
 
Days
   
90 Days
   
Past Due
   
Past Due
   
Total
 
Commercial and industrial
 
$
---
   
$
---
   
$
---
   
$
274,099
   
$
274,099
 
 
                                       
Commercial real estate:
                                       
Residential developed
   
143
     
2,296
     
2,439
     
15,691
     
18,130
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,315
     
7,315
 
Vacant and unimproved
   
---
     
---
     
---
     
42,988
     
42,988
 
Commercial development
   
---
     
23
     
23
     
2,411
     
2,434
 
Residential improved
   
98
     
50
     
148
     
76,146
     
76,294
 
Commercial improved
   
438
     
2,056
     
2,494
     
244,701
     
247,195
 
Manufacturing and industrial
   
---
     
---
     
---
     
77,984
     
77,984
 
 
   
679
     
4,425
     
5,104
     
467,236
     
472,340
 
Consumer:
                                       
Residential mortgage
   
78
     
---
     
78
     
188,570
     
188,648
 
Unsecured
   
9
     
---
     
9
     
1,328
     
1,337
 
Home equity
   
317
     
---
     
317
     
95,644
     
95,961
 
Other secured
   
12
     
---
     
12
     
9,980
     
9,992
 
 
   
416
     
---
     
416
     
295,522
     
295,938
 
Total
 
$
1,095
   
$
4,425
   
$
5,520
   
$
1,036,857
   
$
1,042,377
 

The Company had allocated $3,890,000 and $3,870,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of March 31, 2014 and December 31, 2013, 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 months ended March 31, 2014 and throughout 2013, no loans were removed from TDR status.  Given the nature of the TDRs outstanding at March 31, 2014, it is unlikely that any such loans will be removed from TDR status in 2014.

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 March 31, 2014 and December 31, 2013 (dollars in thousands):

 
 
March 31, 2014
   
December 31, 2013
 
 
 
Number of Loans
   
Outstanding Recorded Balance
   
Number of Loans
   
Outstanding Recorded Balance
 
Commercial and industrial
   
37
   
$
9,082
     
43
   
$
7,787
 
Commercial real estate
   
118
     
46,238
     
122
     
45,774
 
Consumer
   
106
     
14,426
     
106
     
14,531
 
 
   
261
   
$
69,746
     
271
   
$
68,092
 

The following tables present information regarding troubled debt restructurings executed during the three month periods ended March 31, 2014 and 2013 (dollars in thousands):

Three Months Ended March 31, 2014
 
Number of Loans
   
Pre-Modification Outstanding Recorded Balance
   
Principal Writedown upon Modification
 
Commercial and industrial
   
1
   
$
60
   
$
---
 
Commercial real estate
   
4
     
2,263
     
---
 
Consumer
   
1
     
4
     
---
 
 
   
6
   
$
2,327
   
$
---
 

Three Months Ended March 31, 2013
 
Number of Loans
   
Pre-Modification Outstanding Recorded Balance
   
Principal Writedown upon Modification
 
Commercial and industrial
   
1
   
$
25
   
$
---
 
Commercial real estate
   
5
     
1,441
     
---
 
Consumer
   
23
     
5,022
     
1,770
 
 
   
29
   
$
6,488
   
$
1,770
 

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 March 31, 2014 and 2013 that are not considered TDRs (dollars in thousands):

  
 
Three Months Ended
   
Three Months Ended
 
 
 
March 31, 2014
   
March 31, 2013
 
 
 
Number of Loans
 
Outstanding Recorded Balance
   
Number of Loans
 
Outstanding Recorded Balance
 
Commercial and industrial
   
65
   
$
15,984
     
86
   
$
29,927
 
Commercial real estate
   
40
     
7,585
     
94
     
35,589
 
Consumer
   
8
     
1,002
     
11
     
194
 
 
   
113
   
$
24,571
     
191
   
$
65,710
 

The table below presents, by class, information regarding troubled debt restructured loans which had payment defaults during the three month periods ended March 31, 2014 and 2013 (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
   
Three Months Ended
 
 
 
March 31, 2014
   
March 31, 2013
 
 
 
Number of Loans
 
Outstanding Recorded Balance
   
Number of Loans
 
Outstanding Recorded Balance
 
Commercial and industrial
   
---
   
$
---
     
---
   
$
---
 
Commercial real estate
   
1
     
131
     
---
     
---
 
Consumer
   
---
     
---
     
---
     
---
 

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, as well as the ability to repay the entire loan, are 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 March 31, 2014 and December 31, 2013, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):

March 31, 2014
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
 
Commercial and industrial
 
$
505
   
$
13,640
   
$
76,159
   
$
159,056
   
$
13,196
   
$
1,291
   
$
8,077
   
$
---
 
 
                                                               
Commercial real estate:
                                                               
Residential developed
   
---
     
---
     
583
     
5,396
     
6,025
     
995
     
2,205
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,107
     
5
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
12,171
     
25,174
     
6,799
     
394
     
---
     
---
 
Commercial development
   
---
     
---
     
---
     
1,485
     
517
     
205
     
29
     
---
 
Residential improved
   
---
     
108
     
15,005
     
43,039
     
8,912
     
5,212
     
1,065
     
---
 
Commercial improved
   
---
     
6,413
     
48,175
     
159,483
     
22,453
     
5,360
     
2,377
     
---
 
Manufacturing and industrial
   
---
     
787
     
23,386
     
42,512
     
9,178
     
642
     
---
     
---
 
 
 
$
505
   
$
20,948
   
$
175,479
   
$
443,252
   
$
67,085
   
$
14,099
   
$
13,753
   
$
---
 

December 31, 2013
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
 
Commercial and industrial
 
$
509
   
$
15,836
   
$
81,577
   
$
155,680
   
$
13,513
   
$
1,359
   
$
5,625
   
$
---
 
 
                                                               
Commercial real estate:
                                                               
Residential developed
   
---
     
---
     
2,039
     
5,653
     
5,232
     
2,616
     
2,590
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,309
     
6
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
11,191
     
24,638
     
6,761
     
398
     
---
     
---
 
Commercial development
   
---
     
---
     
---
     
1,673
     
532
     
207
     
23
     
---
 
Residential improved
   
---
     
109
     
15,121
     
45,018
     
9,391
     
6,226
     
429
     
---
 
Commercial improved
   
---
     
7,382
     
45,391
     
161,897
     
24,937
     
5,075
     
2,511
     
---
 
Manufacturing and industrial
   
---
     
311
     
24,546
     
42,133
     
10,402
     
593
     
---
     
---
 
 
 
$
509
   
$
23,638
   
$
179,865
   
$
444,001
   
$
70,774
   
$
16,474
   
$
11,178
   
$
---
 

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):

 
March 31,
 
December 31,
 
 
2014
 
2013
 
Not classified as impaired
 
$
5,501
   
$
7,400
 
Classified as impaired
   
22,351
     
20,252
 
Total commercial loans classified substandard or worse
 
$
27,852
   
$
27,652
 

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):

 
Residential
 
Consumer
 
Home
 
Consumer
 
March 31, 2014
Mortgage
 
Unsecured
 
Equity
 
Other
 
Performing
 
$
189,785
   
$
1,285
   
$
94,148
   
$
9,631
 
Nonperforming
   
141
     
---
     
---
     
---
 
Total
 
$
189,926
   
$
1,285
   
$
94,148
   
$
9,631
 

 
Residential
 
Consumer
 
Home
 
Consumer
 
December 31, 2013
Mortgage
 
Unsecured
 
Equity
 
Other
 
Performing
 
$
188,648
   
$
1,337
   
$
95,961
   
$
9,992
 
Nonperforming
   
---
     
---
     
---
     
---
 
Total
 
$
188,648
   
$
1,337
   
$
95,961
   
$
9,992