Quarterly report pursuant to Section 13 or 15(d)

LOANS

v3.10.0.1
LOANS
9 Months Ended
Sep. 30, 2018
LOANS [Abstract]  
LOANS
NOTE 3 – LOANS

Portfolio loans were as follows (dollars in thousands):
  

 
September 30,
2018
   
December 31,
2017
 
Commercial and industrial
 
$
467,703
   
$
465,208
 
                 
Commercial real estate:
               
Residential developed
   
14,766
     
11,888
 
Unsecured to residential developers
   
---
     
2,332
 
Vacant and unimproved
   
38,334
     
39,752
 
Commercial development
   
722
     
1,103
 
Residential improved
   
92,690
     
90,467
 
Commercial improved
   
294,275
     
298,714
 
Manufacturing and industrial
   
112,153
     
97,679
 
Total commercial real estate
   
552,940
     
541,935
 
                 
Consumer
               
Residential mortgage
   
237,146
     
224,452
 
Unsecured
   
145
     
226
 
Home equity
   
79,860
     
82,234
 
Other secured
   
6,889
     
6,254
 
Total consumer
   
324,040
     
313,166
 
                 
Total loans
   
1,344,683
     
1,320,309
 
Allowance for loan losses
   
(16,803
)
   
(16,600
)
   
$
1,327,880
   
$
1,303,709
 
 
Activity in the allowance for loan losses by portfolio segment was as follows (dollars in thousands):

Three months ended September 30, 2018
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,149
   
$
6,876
   
$
3,651
   
$
19
   
$
16,695
 
Charge-offs
   
---
     
---
     
(30
)
   
---
     
(30
)
Recoveries
   
17
     
71
     
50
     
---
     
138
 
Provision for loan losses
   
(25
)
   
23
     
(10
)
   
12
     
---
 
Ending Balance
 
$
6,141
   
$
6,970
   
$
3,661
   
$
31
   
$
16,803
 
 
Three months ended September 30, 2017
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,336
   
$
6,583
   
$
3,621
   
$
30
   
$
16,570
 
Charge-offs
   
---
     
---
     
(55
)
   
---
     
(55
)
Recoveries
   
32
     
199
     
38
     
---
     
269
 
Provision for loan losses
   
(212
)
   
(94
)
   
(43
)
   
(1
)
   
(350
)
Ending Balance
 
$
6,156
   
$
6,688
   
$
3,561
   
$
29
   
$
16,434
 
 
Nine months ended September 30, 2018
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,478
   
$
6,590
   
$
3,494
   
$
38
   
$
16,600
 
Charge-offs
   
(66
)
   
---
     
(90
)
   
---
     
(156
)
Recoveries
   
106
     
530
     
123
     
---
     
759
 
Provision for loan losses
   
(377
)
   
(150
)
   
134
     
(7
)
   
(400
)
Ending Balance
 
$
6,141
   
$
6,970
   
$
3,661
   
$
31
   
$
16,803
 
 
Nine months ended September 30, 2017
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Beginning balance
 
$
6,345
   
$
6,703
   
$
3,871
   
$
43
   
$
16,962
 
Charge-offs
   
(108
)
   
---
     
(113
)
   
---
     
(221
)
Recoveries
   
96
     
818
     
129
     
---
     
1,043
 
Provision for loan losses
   
(177
)
   
(833
)
   
(326
)
   
(14
)
   
(1,350
)
Ending Balance
 
$
6,156
   
$
6,688
   
$
3,561
   
$
29
   
$
16,434
 
 
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):

September 30, 2018
 
Commercial
 and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
461
   
$
309
   
$
500
   
$
---
   
$
1,270
 
Collectively evaluated for impairment
   
5,680
     
6,661
     
3,161
     
31
     
15,533
 
Total ending allowance balance
 
$
6,141
   
$
6,970
   
$
3,661
   
$
31
   
$
16,803
 
Loans:
                                       
Individually reviewed for impairment
 
$
5,394
   
$
4,468
   
$
6,713
   
$
---
   
$
16,575
 
Collectively evaluated for impairment
   
462,309
     
548,472
     
317,327
     
---
     
1,328,108
 
Total ending loans balance
 
$
467,703
   
$
552,940
   
$
324,040
   
$
---
   
$
1,344,683
 
 
December 31, 2017
 
Commercial
and
Industrial
   
Commercial
Real Estate
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                             
Ending allowance attributable to loans:
                             
Individually reviewed for impairment
 
$
497
   
$
197
   
$
514
   
$
---
   
$
1,208
 
Collectively evaluated for impairment
   
5,981
     
6,393
     
2,980
     
38
     
15,392
 
Total ending allowance balance
 
$
6,478
   
$
6,590
   
$
3,494
   
$
38
   
$
16,600
 
Loans:
                                       
Individually reviewed for impairment
 
$
6,402
   
$
7,332
   
$
8,345
   
$
---
   
$
22,079
 
Collectively evaluated for impairment
   
458,806
     
534,603
     
304,821
     
---
     
1,298,230
 
Total ending loans balance
 
$
465,208
   
$
541,935
   
$
313,166
   
$
---
   
$
1,320,309
 
 
The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2018 (dollars in thousands):

  
September 30, 2018
   
Unpaid
Principal
Balance
         
Recorded
Investment
         
Allowance
Allocated
   
With no related allowance recorded:
                 
Commercial and industrial
 
$
1,162
   
$
1,162
   
$
---
 
                         
Commercial real estate:
                       
Residential developed
   
---
     
---
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
151
     
151
     
---
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
184
     
184
     
---
 
Commercial improved
   
1,698
     
1,698
     
---
 
Manufacturing and industrial
   
---
     
---
     
---
 
     
2,033
     
2,033
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
     
---
     
---
     
---
 
Total with no related allowance recorded
 
$
3,195
   
$
3,195
   
$
---
 
                         
With an allowance recorded:
                       
Commercial and industrial
 
$
4,232
   
$
4,232
   
$
461
 
                         
Commercial real estate:
                       
Residential developed
   
174
     
174
     
2
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
114
     
114
     
3
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
200
     
200
     
13
 
Commercial improved
   
1,558
     
1,558
     
281
 
Manufacturing and industrial
   
389
     
389
     
10
 
     
2,435
     
2,435
     
309
 
Consumer:
                       
Residential mortgage
   
5,485
     
5,485
     
409
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
1,228
     
1,228
     
91
 
Other secured
   
---
     
---
     
---
 
     
6,713
     
6,713
     
500
 
Total with an allowance recorded
 
$
13,380
   
$
13,380
   
$
1,270
 
Total
 
$
16,575
   
$
16,575
   
$
1,270
 
 
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2017 (dollars in thousands):
 
  
December 31, 2017
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
Allocated
 
With no related allowance recorded:
                 
Commercial and industrial
 
$
3,438
   
$
3,438
   
$
---
 
                         
Commercial real estate:
                       
Residential developed
   
---
     
---
     
---
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
---
 
Commercial development
   
190
     
190
     
---
 
Residential improved
   
15
     
15
     
---
 
Commercial improved
   
---
     
---
     
---
 
Manufacturing and industrial
   
---
     
---
     
---
 
     
205
     
205
     
---
 
Consumer:
                       
Residential mortgage
   
---
     
---
     
---
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
---
     
---
     
---
 
Other secured
   
---
     
---
     
---
 
     
---
     
---
     
---
 
Total with no related allowance recorded
 
$
3,643
   
$
3,643
   
$
---
 
                         
With an allowance recorded:
                       
Commercial and industrial
 
$
2,964
   
$
2,964
   
$
497
 
                         
Commercial real estate:
                       
Residential developed
   
179
     
179
     
4
 
Unsecured to residential developers
   
---
     
---
     
---
 
Vacant and unimproved
   
126
     
126
     
3
 
Commercial development
   
---
     
---
     
---
 
Residential improved
   
1,715
     
1,715
     
69
 
Commercial improved
   
4,928
     
4,928
     
119
 
Manufacturing and industrial
   
179
     
179
     
2
 
     
7,127
     
7,127
     
197
 
Consumer:
                       
Residential mortgage
   
6,638
     
6,638
     
409
 
Unsecured
   
---
     
---
     
---
 
Home equity
   
1,707
     
1,707
     
105
 
Other secured
   
---
     
---
     
---
 
     
8,345
     
8,345
     
514
 
Total with an allowance recorded
 
$
18,436
   
$
18,436
   
$
1,208
 
Total
 
$
22,079
   
$
22,079
   
$
1,208
 
 
The following table presents information regarding average balances of impaired loans and interest recognized on impaired loans for the three and nine month periods ended September 30, 2018 and 2017 (dollars in thousands):
 

 
Three
Months
Ended
September 30,
2018
   
Three
Months
Ended
September 30,
2017
   
Nine
Months
Ended
September 30,
2018
   
Nine
Months
Ended
September 30,
2017
 
Average of impaired loans during the period:
                       
Commercial and industrial
 
$
4,089
   
$
4,047
   
$
4,968
   
$
5,410
 
                                 
Commercial real estate:
                               
Residential developed
   
174
     
181
     
176
     
183
 
Unsecured to residential developers
   
---
     
---
     
---
     
---
 
Vacant and unimproved
   
259
     
372
     
227
     
338
 
Commercial development
   
---
     
189
     
42
     
189
 
Residential improved
   
389
     
2,255
     
1,007
     
3,002
 
Commercial improved
   
3,273
     
5,925
     
3,444
     
6,026
 
Manufacturing and industrial
   
392
     
185
     
348
     
246
 
                                 
Consumer
   
6,701
     
8,793
     
7,418
     
10,366
 
                                 
Interest income recognized during impairment:
                               
Commercial and industrial
   
445
     
179
     
701
     
697
 
Commercial real estate
   
34
     
108
     
170
     
360
 
Consumer
   
72
     
80
     
227
     
306
 
                                 
Cash-basis interest income recognized
                               
Commercial and industrial
   
457
     
177
     
716
     
708
 
Commercial real estate
   
39
     
114
     
168
     
363
 
Consumer
   
71
     
79
     
223
     
306
 
 
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 September 30, 2018 and December 31, 2017 (dollars in thousands):
 

September 30, 2018

  
Nonaccrual
 
 
Over 90
days
Accruing
 
             
Commercial and industrial
 
$
---
   
$
---
 
                 
Commercial real estate:
               
Residential developed
   
---
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
---
     
---
 
Commercial development
   
---
     
---
 
Residential improved
   
15
     
---
 
Commercial improved
   
106
     
---
 
Manufacturing and industrial
   
---
     
---
 
     
121
     
---
 
Consumer:
               
Residential mortgage
   
2
     
---
 
Unsecured
   
---
     
---
 
Home equity
   
---
     
---
 
Other secured
   
---
     
---
 
     
2
     
---
 
Total
 
$
123
   
$
---
 
 
December 31, 2017

Nonaccrual


Over 90
days
Accruing

             
Commercial and industrial
 
$
4
   
$
---
 
                 
Commercial real estate:
               
Residential developed
   
---
     
---
 
Unsecured to residential developers
   
---
     
---
 
Vacant and unimproved
   
---
     
---
 
Commercial development
   
190
     
---
 
Residential improved
   
89
     
---
 
Commercial improved
   
106
     
---
 
Manufacturing and industrial
   
---
     
---
 
     
385
     
---
 
Consumer:
               
Residential mortgage
   
2
     
---
 
Unsecured
   
4
     
---
 
Home equity
   
---
     
---
 
Other secured
   
---
     
---
 
     
6
     
---
 
Total
 
$
395
   
$
---
 
 
The following table presents the aging of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017 by class of loans (dollars in thousands):
 
 
September 30, 2018
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
---
   
$
---
   
$
---
   
$
467,703
   
$
467,703
 
                                         
Commercial real estate:
                                       
Residential developed
   
---
     
---
     
---
     
14,766
     
14,766
 
Unsecured to residential developers
   
---
     
---
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
---
     
38,334
     
38,334
 
Commercial development
   
---
     
---
     
---
     
722
     
722
 
Residential improved
   
---
     
15
     
15
     
92,675
     
92,690
 
Commercial improved
   
5
     
106
     
111
     
294,164
     
294,275
 
Manufacturing and industrial
   
---
     
---
     
---
     
112,153
     
112,153
 
 
   
5
     
121
     
126
     
552,814
     
552,940
 
Consumer:
                                       
Residential mortgage
   
272
     
---
     
272
     
236,874
     
237,146
 
Unsecured
   
---
     
---
     
---
     
145
     
145
 
Home equity
   
86
     
---
     
86
     
79,774
     
79,860
 
Other secured
   
8
     
---
     
8
     
6,881
     
6,889
 
     
366
     
---
     
366
     
323,674
     
324,040
 
Total
 
$
371
   
$
121
   
$
492
   
$
1,344,191
   
$
1,344,683
 
 
 
December 31, 2017
 
30-90
Days
   
Greater Than
90 Days
   
Total
Past Due
   
Loans Not
Past Due
   
Total
 
Commercial and industrial
 
$
290
   
$
---
   
$
290
   
$
464,918
   
$
465,208
 
                                         
Commercial real estate:
                                       
Residential developed
   
---
     
---
     
---
     
11,888
     
11,888
 
Unsecured to residential developers
   
---
     
---
     
---
     
2,332
     
2,332
 
Vacant and unimproved
   
---
     
---
     
---
     
39,752
     
39,752
 
Commercial development
   
---
     
190
     
190
     
913
     
1,103
 
Residential improved
   
---
     
89
     
89
     
90,378
     
90,467
 
Commercial improved
   
125
     
---
     
125
     
298,589
     
298,714
 
Manufacturing and industrial
   
---
     
---
     
---
     
97,679
     
97,679
 
     
125
     
279
     
404
     
541,531
     
541,935
 
Consumer:
                                       
Residential mortgage
   
215
     
---
     
215
     
224,237
     
224,452
 
Unsecured
   
10
     
---
     
10
     
216
     
226
 
Home equity
   
76
     
---
     
76
     
82,158
     
82,234
 
Other secured
   
---
     
---
     
---
     
6,254
     
6,254
 
     
301
     
---
     
301
     
312,865
     
313,166
 
Total
 
$
716
   
$
279
   
$
995
   
$
1,319,314
   
$
1,320,309
 
  
The Company had allocated $1,270,000 and $1,208,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings ("TDRs") as of September 30, 2018 and December 31, 2017, 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.

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.  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 September 30, 2018 and December 31, 2017 (dollars in thousands):
 
   
September 30, 2018
   
December 31, 2017
 
   
Number of
Loans
   
Outstanding
Recorded
Balance
   
Number of
Loans
   
Outstanding
Recorded
Balance
 
Commercial and industrial
   
18
   
$
5,394
     
19
   
$
6,402
 
Commercial real estate
   
28
     
4,468
     
33
     
7,332
 
Consumer
   
87
     
6,713
     
99
     
8,345
 
     
133
   
$
16,575
     
151
   
$
22,079
 
 
The following table presents information related to accruing troubled debt restructurings as of September 30, 2018 and December 31, 2017.  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 each period reported (dollars in thousands):
 
    
September 30,
2018
   
December 31,
2017
 
Accruing TDR - nonaccrual at restructuring
 
$
---
   
$
---
 
Accruing TDR - accruing at restructuring
   
12,544
     
16,809
 
Accruing TDR - upgraded to accruing after six consecutive payments
   
3,910
     
4,955
 
   
$
16,454
   
$
21,764
 

The following tables present information regarding troubled debt restructurings executed during the three month periods ended September 30, 2018 and 2017 (dollars in thousands):
 
    
Three Months Ended September 30,
2018
   
Three Months Ended September 30,
2017
 

 
# of
Loans
   
Pre-TDR
Balance
   
Writedown
Upon
TDR
   
# of
Loans
   
Pre-TDR
Balance
   
Writedown
Upon
TDR
 
Commercial and industrial
   
2
   
$
244
   
$
---
     
---
   
$
---
   
$
---
 
Commercial real estate
   
---
     
---
     
---
     
---
     
---
     
---
 
Consumer
   
3
     
147
     
---
     
2
     
222
     
---
 
     
5
    $
391
   
$
---
     
2
   
$
222
   
$
---
 

The following tables present information regarding troubled debt restructurings executed during the nine month periods ended September 30, 2018 and 2017 (dollars in thousands):
 
   
Nine Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2018
   
2017
 
     
# of
Loans
   
Pre-TDR
Balance
   
Writedown
Upon
TDR
   
# of
Loans
   
Pre-TDR
Balance
   
Writedown
Upon
TDR
 
Commercial and industrial
   
2
   
$
244
   
$
---
     
---
   
$
---
   
$
---
 
Commercial real estate
   
3
     
492
     
---
     
1
     
1,018
     
---
 
Consumer
   
7
     
239
     
---
     
4
     
396
     
---
 
     
12
    $
975
   
$
---
     
5
   
$
1,414
   
$
---
 

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.

Payment defaults on TDRs have been minimal and during the three and nine month periods ended September 30, 2018 and 2017, the balance of loans that became delinquent by more than 90 days past due or that were transferred to nonaccrual within 12 months of restructuring were not material.

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 quarterly which analyzes the collateral position and cash flow of the borrower and its guarantors.  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 September 30, 2018 and December 31, 2017, the risk grade category of commercial loans by class of loans were as follows (dollars in thousands):
 
September 30, 2018
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
   
Total
 
Commercial and industrial
 
$
---
   
$
9,932
   
$
153,131
   
$
290,356
   
$
10,279
   
$
4,005
   
$
---
   
$
---
   
$
467,703
 
                                                                         
Commercial real estate:
                                                                       
Residential developed
   
---
     
---
     
---
     
14,153
     
613
     
---
     
---
     
---
     
14,766
 
Unsecured to residential developers
   
---
     
---
     
---
     
---
     
---
     
---
     
---
     
---
     
---
 
Vacant and unimproved
   
---
     
---
     
9,046
     
26,339
     
2,949
     
---
     
---
     
---
     
38,334
 
Commercial development
   
---
     
---
     
87
     
635
     
---
     
---
     
---
     
---
     
722
 
Residential improved
   
---
     
---
     
12,878
     
79,137
     
418
     
241
     
16
     
---
     
92,690
 
Commercial improved
   
---
     
4,788
     
59,082
     
224,944
     
4,535
     
821
     
105
     
---
     
294,275
 
Manufacturing & industrial
   
---
     
3,213
     
24,045
     
79,384
     
5,511
     
---
     
---
     
---
     
112,153
 
   
$
---
   
$
17,933
   
$
258,269
   
$
714,948
   
$
24,305
   
$
5,067
   
$
121
   
$
---
   
$
1,020,643
 
 
December 31, 2017
   
1
     
2
     
3
     
4
     
5
     
6
     
7
     
8
   
Total
 
Commercial and industrial
 
$
---
   
$
15,002
   
$
137,774
   
$
291,373
   
$
15,170
   
$
5,885
   
$
4
   
$
---
   
$
465,208
 
                                                                         
Commercial real estate:
                                                                       
Residential developed
   
---
     
---
     
48
     
11,068
     
772
     
---
     
---
     
---
     
11,888
 
Unsecured to residential developers
   
---
     
---
     
---
     
2,332
     
---
     
---
     
---
     
---
     
2,332
 
Vacant and unimproved
   
---
     
---
     
19,244
     
17,332
     
3,176
     
---
     
---
     
---
     
39,752
 
Commercial development
   
---
     
---
     
104
     
809
     
---
     
---
     
190
     
---
     
1,103
 
Residential improved
   
---
     
---
     
7,275
     
80,818
     
1,533
     
752
     
89
     
---
     
90,467
 
Commercial improved
   
---
     
1,398
     
64,043
     
228,888
     
3,353
     
926
     
106
     
---
     
298,714
 
Manufacturing & industrial
   
---
     
927
     
44,714
     
49,238
     
2,311
     
489
     
---
     
---
     
97,679
 
   
$
---
   
$
17,327
   
$
273,202
   
$
681,858
   
$
26,315
   
$
8,052
   
$
389
   
$
---
   
$
1,007,143
 
 
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):
 
    
September 30,
2018
   
December 31,
2017
 
Not classified as impaired
 
$
236
   
$
2,010
 
Classified as impaired
   
4,952
     
6,431
 
Total commercial loans classified substandard or worse
 
$
5,188
   
$
8,441
 
 
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):

 
September 30, 2018
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
237,146
   
$
145
   
$
79,860
   
$
6,889
 
Nonperforming
   
---
     
---
     
---
     
---
 
Total
 
$
237,146
   
$
145
   
$
79,860
   
$
6,889
 
 
 
December 31, 2017
 
Residential
Mortgage
   
Consumer
Unsecured
   
Home
Equity
   
Consumer
Other
 
Performing
 
$
224,452
   
$
226
   
$
82,234
   
$
6,254
 
Nonperforming
   
---
     
---
     
---
     
---
 
Total
 
$
224,452
   
$
226
   
$
82,234
   
$
6,254