Annual report pursuant to Section 13 and 15(d)

LOANS

v2.4.1.9
LOANS
12 Months Ended
Dec. 31, 2014
LOANS [Abstract]  
LOANS
NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):
 
   
December 31,
2014
   
December 31,
2013
 
Commercial and industrial
 
$
327,674
   
$
274,099
 
                 
Commercial real estate:
               
Residential developed
   
12,771
     
18,130
 
Unsecured to residential developers
   
7,496
     
7,315
 
Vacant and unimproved
   
50,372
     
42,988
 
Commercial development
   
4,082
     
2,434
 
Residential improved
   
69,612
     
76,294
 
Commercial improved
   
269,757
     
247,195
 
Manufacturing and industrial
   
76,441
     
77,984
 
Total commercial real estate
   
490,531
     
472,340
 
                 
Consumer
               
Residential mortgage
   
190,249
     
188,648
 
Unsecured
   
948
     
1,337
 
Home equity
   
98,887
     
95,961
 
Other secured
   
10,194
     
9,992
 
Total consumer
   
300,278
     
295,938
 
                 
Total loans
   
1,118,483
     
1,042,377
 
Allowance for loan losses
   
(18,962
)
   
(20,798
)
   
$
1,099,521
   
$
1,021,579
 
 
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):
 
2014
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,174
   
$
10,868
   
$
3,703
   
$
53
   
$
20,798
 
Charge-offs
   
(43
)
   
(134
)
   
(499
)
   
---
     
(676
)
Recoveries
   
522
     
1,481
     
187
     
---
     
2,190
 
Provision for loan losses
   
(480
)
   
(3,525
)
   
655
     
---
     
(3,350
)
Ending Balance
 
$
6,173
   
$
8,690
   
$
4,046
   
$
53
   
$
18,962
 
 
2013
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,459
   
$
13,457
   
$
3,787
   
$
36
   
$
23,739
 
Charge-offs
   
(317
)
   
(1,065
)
   
(822
)
   
---
     
(2,204
)
Recoveries
   
1,134
     
2,141
     
238
     
---
     
3,513
 
Provision for loan losses
   
(1,102
)
   
(3,665
)
   
500
     
17
     
(4,250
)
Ending Balance
 
$
6,174
   
$
10,868
   
$
3,703
   
$
53
   
$
20,798
 
 
2012
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,313
   
$
20,475
   
$
4,821
   
$
32
   
$
31,641
 
Charge-offs
   
(1,245
)
   
(3,206
)
   
(3,045
)
   
---
     
(7,496
)
Recoveries
   
547
     
5,840
     
307
     
---
     
6,694
 
Provision for loan losses
   
844
     
(9,652
)
   
1,704
     
4
     
(7,100
)
Ending Balance
 
$
6,459
   
$
13,457
   
$
3,787
   
$
36
   
$
23,739
 
 
The following tables present 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):
 
December 31, 2014
 
Commercial
and
Industrial
   
Commercial Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                   
Ending allowance attributable to loans:
                   
Individually reviewed for impairment
 
$
2,429
   
$
743
   
$
893
   
$
---
   
$
4,065
 
Collectively evaluated for impairment
   
3,744
     
7,947
     
3,153
     
53
     
14,897
 
Total ending allowance balance
 
$
6,173
   
$
8,690
   
$
4,046
   
$
53
   
$
18,962
 
                                         
Loans:
                                       
Individually reviewed for impairment
 
$
9,084
   
$
29,818
   
$
14,495
   
$
---
   
$
53,397
 
Collectively evaluated for impairment
   
318,590
     
460,713
     
285,783
     
---
     
1,065,086
 
Total ending loans balance
 
$
327,674
   
$
490,531
   
$
300,278
   
$
---
   
$
1,118,483
 
 
December 31, 2013
 
Commercial
and
 Industrial
   
Commercial 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 December 31, 2014 (dollars in thousands):
 
December 31, 2014
 
Unpaid Principal Balance
   
Recorded Investment
   
Allowance Allocated
 
With no related allowance recorded:
           
Commercial and industrial
 
$
3,019
   
$
3,019
   
$
---
 
                         
Commercial real estate:
                       
Residential developed
   
531
     
531
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
---
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
547
     
547
     
---
 
Commercial improved
   
331
     
331
     
---
 
Manufacturing and industrial
   
206
     
206
     
---
 
     
1,615
     
1,615
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
     
---
     
---
     
---
 
   
$
4,634
   
$
4,634
   
$
---
 
                         
With an allowance recorded:
                       
Commercial and industrial
 
$
6,065
   
$
6,065
   
$
2,429
 
                         
Commercial real estate:
                       
Residential developed
   
550
     
550
     
35
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,499
     
1,499
     
43
 
Commercial development
   
199
     
199
     
5
 
Residential improved
   
7,323
     
7,323
     
240
 
Commercial improved
   
16,113
     
16,113
     
389
 
Manufacturing and industrial
   
2,519
     
2,519
     
31
 
     
28,203
     
28,203
     
743
 
Consumer:
                       
Residential mortgage
   
9,492
     
9,484
     
584
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
5,182
     
5,011
     
309
 
Other secured
   
---
     
---
     
---
 
     
14,674
     
14,495
     
893
 
   
$
48,942
   
$
48,763
   
$
4,065
 
                         
Total
 
$
53,576
   
$
53,397
   
$
4,065
 
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (dollars in thousands):
 
December 31, 2013
 
Unpaid Principal Balance
   
Recorded Investment
   
Allowance 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 years ended December 31, 2014, 2013 and 2012 (dollars in thousands):
 
   
2014
   
2013
   
2012
 
Average of impaired loans during the period:
           
Commercial and industrial
 
$
11,818
   
$
14,333
   
$
14,928
 
                         
Commercial real estate:
                       
Residential developed
   
3,628
     
6,357
     
8,162
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
1,646
     
2,804
     
3,851
 
Commercial development
   
451
     
398
     
216
 
Residential improved
   
9,309
     
11,549
     
13,192
 
Commercial improved
   
17,853
     
20,191
     
17,975
 
Manufacturing and industrial
   
5,630
     
6,305
     
9,125
 
                         
Consumer
   
14,476
     
14,532
     
15,857
 
                         
                         
Interest income recognized during impairment:
                       
Commercial and industrial
   
1,108
     
1,278
     
1,291
 
Commercial real estate
   
1,527
     
1,974
     
2,736
 
Consumer
   
541
     
537
     
538
 
                         
Cash-basis interest income recognized
                       
Commercial and industrial
   
1,107
     
1,273
     
1,295
 
Commercial real estate
   
1,547
     
1,971
     
2,740
 
Consumer
   
541
     
532
     
550
 
 
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 December 31, 2014 and 2013:
 
December 31, 2014
 
Nonaccrual
   
Over 90
days
Accruing
 
         
Commercial and industrial
 
$
5,605
   
$
---
 
                 
Commercial real estate:
               
Residential developed
   
245
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
---
     
---
 
Commercial development
   
29
     
---
 
Residential improved
   
766
     
---
 
Commercial improved
   
866
     
117
 
Manufacturing and industrial
   
---
     
---
 
     
1,906
     
117
 
Consumer:
               
Residential mortgage
   
305
     
---
 
Unsecured
   
40
     
---
 
Home equity
   
436
     
17
 
Other secured
   
---
     
---
 
     
781
     
17
 
Total
 
$
8,292
   
$
134
 
 
December 31, 2013
 
Nonaccrual
   
Over 90
days
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 December 31, 2014 by class of loans (dollars in thousands):
 
December 31, 2014
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
54
   
$
---
   
$
54
   
$
327,620
   
$
327,674
 
                                         
Commercial real estate:
                                       
Residential developed
   
---
     
---
     
---
     
12,771
     
12,771
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,496
     
7,496
 
Vacant and unimproved
   
100
     
---
     
100
     
50,272
     
50,372
 
Commercial development
   
---
     
29
     
29
     
4,053
     
4,082
 
Residential improved
   
100
     
440
     
540
     
69,072
     
69,612
 
Commercial improved
   
---
     
958
     
958
     
268,799
     
269,757
 
Manufacturing and industrial
   
---
     
---
     
---
     
76,441
     
76,441
 
     
200
     
1,427
     
1,627
     
488,904
     
490,531
 
Consumer:
                                       
Residential mortgage
   
338
     
303
     
641
     
189,608
     
190,249
 
Unsecured
   
---
     
18
     
18
     
930
     
948
 
Home equity
   
79
     
422
     
501
     
98,386
     
98,887
 
Other secured
   
---
     
---
     
---
     
10,194
     
10,194
 
     
417
     
743
     
1,160
     
299,118
     
300,278
 
Total
 
$
671
   
$
2,170
   
$
2,841
   
$
1,115,642
   
$
1,118,483
 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2013 by class of loans (dollars in thousands):
 
December 31, 2013
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
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 $4,065,000 and $3,870,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings (“TDRs”) as of December 31, 2014 and December 31, 2013, respectively.  These loans may have 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.

Based upon recently issued regulatory guidance, the Company has determined that in situations where there is a subsequent modification or renewal and the loan is brought to market terms, including a contractual interest rate not less than a market interest rate for new debt with similar credit risk characteristics, the TDR and impaired loan designations may be removed.  This guidance was first applied to loans outstanding at September 30, 2014 resulting in a reduction of $5.9 million in loans designated as TDR and impaired.  In addition, the TDR designation may also be removed from loans 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 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.

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, less estimated costs to sell.  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 December 31, 2014 and 2013 (dollars in thousands):
 
   
2014
   
2013
 
   
Number of Loans
   
Outstanding Recorded Balance
   
Number of Loans
   
Outstanding Recorded Balance
 
Commercial and industrial
   
36
   
$
9,085
     
43
   
$
7,787
 
Commercial real estate
   
84
     
29,817
     
122
     
45,774
 
Consumer
   
106
     
14,495
     
106
     
14,531
 
     
226
   
$
53,397
     
271
   
$
68,092
 
 
The following table presents information related to accruing troubled debt restructurings as of December 31, 2014, 2013, 2012 and 2011. The table presents the amount of accruing troubled debt restructurings that were on nonaccrual status prior to the restructuring, accruing at the time of restructuring and those that were upgraded to accruing status after receiving six consecutive monthly payments in accordance with the restructured terms as of December 31, 2014, 2013, 2012 and 2011 (dollars in thousands):
 
   
2014
   
2013
   
2012
   
2011
 
Accruing TDR - nonaccrual at restructuring
 
$
---
   
$
---
   
$
1,135
   
$
605
 
Accruing TDR - accruing at restructuring
   
46,197
     
57,790
     
61,545
     
51,532
 
Accruing TDR - upgraded to accruing after six consecutive payments
   
---
     
---
     
2,344
     
3,542
 
   
$
46,197
   
$
57,790
   
$
65,024
   
$
55,679
 

The following tables present information regarding troubled debt restructurings executed during the year ended December 31, 2014, 2013 and 2012 (dollars in thousands):
 
2014
 
Number of Loans
   
Pre-Modification
Outstanding
Recorded Balance
   
Principal
Writedown upon
Modification
 
Commercial and industrial
   
1
   
$
61
   
$
---
 
Commercial real estate
   
11
     
4,345
     
---
 
Consumer
   
39
     
1,422
     
---
 
     
51
   
$
5,828
   
$
---
 
 
2013
 
Number of Loans
   
Pre-Modification
Outstanding
Recorded Balance
   
Principal
Writedown upon
Modification
 
Commercial and industrial
   
5
   
$
1,085
   
$
---
 
Commercial real estate
   
13
     
4,298
     
---
 
Consumer
   
36
     
5,833
     
---
 
     
54
   
$
11,216
   
$
---
 
 
2012
 
Number of Loans
   
Pre-Modification
Outstanding
Recorded Balance
   
Principal
Writedown upon
Modification
 
Commercial and industrial
   
16
   
$
1,462
   
$
9
 
Commercial real estate
   
52
     
15,413
     
332
 
Consumer
   
10
     
1,518
     
261
 
     
78
   
$
18,393
   
$
602
 

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.  As with other loans not considered TDR or impaired, allowance allocations are based on the historical based allocation for the applicable loan grade and loan class.
 
The table below presents, by class, information regarding troubled debt restructurings which had payment defaults during the twelve months ended December 31, 2014, 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.
 
   
2014
   
2013
   
2012
 
   
Number of Loans
 
Outstanding Recorded Balance
   
Number of Loans
 
Outstanding Recorded Balance
   
Number of Loans
 
Outstanding Recorded Balance
 
Commercial and industrial
   
---
   
$
---
     
---
   
$
---
     
3
   
$
112
 
Commercial real estate
   
1
     
131
     
1
     
1,350
     
2
     
225
 
Consumer
   
---
     
---
     
---
     
---
     
2
     
184
 

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 the credit department 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 December 31, 2014, the risk grade category of commercial loans by class of loans was as follows (dollars in thousands):
 
2014
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
 
Commercial and industrial
 
$
343
   
$
11,177
   
$
118,382
   
$
182,651
   
$
8,448
   
$
1,068
   
$
5,605
   
$
---
 
                                                                 
Commercial real estate:
                                                               
Residential developed
   
---
     
---
     
2,491
     
4,702
     
4,491
     
842
     
245
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
     
7,496
     
---
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
12,105
     
30,997
     
7,241
     
29
     
---
     
---
 
Commercial development
   
---
     
---
     
---
     
3,643
     
211
     
199
     
29
     
---
 
Residential improved
   
---
     
103
     
16,291
     
43,928
     
6,428
     
2,096
     
766
     
---
 
Commercial improved
   
---
     
4,392
     
61,543
     
178,169
     
20,558
     
4,229
     
866
     
---
 
Manufacturing and industrial
   
---
     
1,508
     
27,396
     
42,494
     
4,713
     
330
     
---
     
---
 
   
$
343
   
$
17,180
   
$
238,208
   
$
494,080
   
$
52,090
   
$
8,793
   
$
7,511
   
$
---
 

As of December 31, 2013, the risk grade category of commercial loans by class of loans was as follows (dollars in thousands):
 
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 year-end (dollars in thousands):
 
   
2014
   
2013
 
Not classified as impaired
 
$
4,220
   
$
7,400
 
Classified as impaired
   
12,084
     
20,252
 
Total commercial loans classified substandard or worse
 
$
16,304
   
$
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 tables present the recorded investment in consumer loans based on payment activity as of December 31, 2014 and 2013 (dollars in thousands):
 
December 31, 2014
 
Residential Mortgage
   
Consumer Unsecured
   
Home
 Equity
   
Consumer Other
 
Performing
 
$
189,946
   
$
930
   
$
98,465
   
$
10,194
 
Nonperforming
   
303
     
18
     
422
     
---
 
Total
 
$
190,249
   
$
948
   
$
98,887
   
$
10,194
 
 
December 31, 2013
 
Residential Mortgage
   
Consumer Unsecured
   
Home
Equity
   
Consumer Other
 
Performing
 
$
188,648
   
$
1,337
   
$
95,961
   
$
9,992
 
Nonperforming
   
---
     
---
     
---
     
---
 
Total
 
$
188,648
   
$
1,337
   
$
95,961
   
$
9,992