Note 10 - Loans Receivable

Loans receivable, included unfunded commitments consist of the following:

	September 30			December 31
	2014			2013
	(dollars in thousands)
Residential mortgage, total	$	295,656		$	258,919
Individually evaluated for impairment		28,959			35,064
Collectively evaluated for impairment		266,697			223,855

Construction, land acquisition and development, total		79,105			75,539
Individually evaluated for impairment		916			2,808
Collectively evaluated for impairment		78,189			72,731

Land, total		31,965			34,429
Individually evaluated for impairment		2,061			1,263
Collectively evaluated for impairment		29,904			33,166

Lines of credit, total		17,968			21,598
Individually evaluated for impairment		454			304
Collectively evaluated for impairment		17,514			21,294

Commercial real estate, total		205,275			220,160
Individually evaluated for impairment		6,174			4,672
Collectively evaluated for impairment		199,101			215,488

Commercial non-real estate, total		9,358			8,583
Individually evaluated for impairment		303			-
Collectively evaluated for impairment		9,055			8,583

Home equity, total		28,966			30,339
Individually evaluated for impairment		1,638			1,777
Collectively evaluated for impairment		27,328			28,562

Consumer, total		1,061			1,185
Individually evaluated for impairment		13			-
Collectively evaluated for impairment		1,048			1,185
Total Loans		669,354			650,752
Less
Unfunded commitments included above		(36,854	)		(34,069	)
	$	632,500		$	616,683
Individually evaluated for impairment		40,518			45,888
Collectively evaluated for impairment		591,982			570,795
		632,500			616,683
Allowance for loan losses		(9,282	)		(11,739	)
Deferred loan origination fees and costs, net		(3,158	)		(2,131	)
Net Loans	$	620,060		$	602,813

The inherent credit risks within the portfolio vary depending upon the loan class as follows:

Residential mortgage loans are secured by one to four family dwelling units. The loans have limited risk as they are secured by first mortgages on the unit, which are generally the primary residence of the borrower, at a loan to value ratio of 80% or less.

Construction, land acquisition and development loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project prior to or at completion, due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of the loan as well as related foreclosure and holding costs. In addition, the Bank may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. Sources of repayment of these loans typically are permanent financing expected to be obtained upon completion or sales of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

Land loans are underwritten based upon the independent appraisal valuations as well as the estimated value associated with the land upon completion of development. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and governmental regulation of real property.

Line of credit loans are subject to the underwriting standards and processes similar to commercial non-real estate loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real-estate and/or other assets. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Line of credit loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates line of credit loans based on collateral and risk-rating criteria.

Commercial real estate loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real-estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan or the principal business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate loans based on collateral and risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. The nature of commercial real estate loans makes them more difficult to monitor and evaluate.

Commercial non-real estate loans are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower's ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

Home equity loans are subject to the underwriting standards and processes similar to residential mortgages and are secured by one to four family dwelling units. Home equity loans have greater risk than residential mortgages as a result of the Bank being in a second lien position in the event collateral is liquidated.

Consumer loans consist of loans to individuals through the Bank's retail network and are typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.

The loan portfolio segments and loan classes disclosed above are the same because this is the level of detail management uses when the original loan is recorded and is the level of detail used by management to assess and monitor the risk and performance of the portfolio. Management has determined that this level of detail is adequate to understand and manage the inherent risks within each portfolio segment and loan class.

Allowance for Loan Losses - An allowance for loan losses is provided through charges to income in an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Determining the amount of the allowance for loan losses requires the use of estimates and assumptions, which is permitted under GAAP. Actual results could differ significantly from those estimates. Management believes the allowance for losses on loans is adequate. While management uses available information to estimate losses on loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in the state of Maryland. In addition, various regulatory agencies periodically review the Bank's allowance for losses on loans as an integral part of their examination process. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. When a real estate secured loan becomes impaired, a decision is made as to whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

For such loans that are classified as impaired, an allowance is established when the current market value of the underlying collateral less its estimated disposal costs is lower than the carrying value of that loan. For loans that are not solely collateral dependent, an allowance is established when the present value of the expected future cash flows of the impaired loan is lower than the carrying value of that loan. The general component relates to loans that are classified as doubtful, substandard or special mention that are not considered impaired, as well as non-classified loans. The general reserve is based on historical loss experience adjusted for qualitative factors. These qualitative factors include:

Levels and trends in delinquencies and nonaccruals;

Inherent risk in the loan portfolio;

Trends in volume and terms of the loan;

Effects of any change in lending policies and procedures;

Experience, ability and depth of management;

National and local economic trends and conditions;

Effect of any changes in concentration of credit; and

Industry conditions.

A loan is considered impaired if it meets either of the following two criteria:

Loans that are 90 days or more in arrears (nonaccrual loans); or

Loans where, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement.

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

A loan is considered a troubled debt restructuring when for economic or legal reasons relating to the borrowers financial difficulties Bancorp grants a concession to the borrower that it would not otherwise consider. Loan modifications made with terms consistent with current market conditions that the borrower could obtain in the open market are not considered troubled debt restructurings.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

With respect to all loan segments, management does not charge off a loan, or a portion of a loan, until one of the following conditions have been met:

The loan has been foreclosed on. Once the loan has been transferred from the Loans Receivable to Foreclosed Real Estate, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.

An agreement to accept less than the recorded balance of the loan has been made with the borrower. Once an agreement has been finalized, and any proceeds from the borrower are received, a charge off is recorded for the difference between the recorded amount of the loan and the net value of the underlying collateral.

The loan is considered to be impaired collateral dependent and its collateral valuation is less than the recorded balance. The loan is written down for accounting purposes by the amount of the difference between the recorded balance and collateral value.

Prior to the above conditions, a loan is assessed for impairment when: (i) a loan becomes 90 days or more in arrears or (ii) based on current information and events, it is probable that the borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent. For a cash flow dependent loan, if based on management’s calculation of discounted cash flows, a reserve is needed, a specific reserve is recorded. That reserve is included in the Allowance for Loan Losses in the Consolidated Statement of Financial Condition.

Over the last several years, Bancorp has experienced an increase in the number of extension requests for commercial real estate and construction loans, some of which have related repayment guarantees. An extension may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing, and is based on a re-underwriting of the loan and management's assessment of the borrower's ability to perform according to the agreed-upon terms. Typically, at the time of an extension, borrowers are performing in accordance with contractual loan terms. Extension terms generally do not exceed 12 to 18 months and typically require that the borrower provide additional economic support in the form of partial repayment, additional collateral or guarantees. In cases where the fair value of the collateral or the financial resources of the borrower are deemed insufficient to repay the loan, reliance may be placed on the support of a guarantee, if applicable. However, such guarantees are not relied on when evaluating a loan for impairment and never considered the sole source of repayment.

Bancorp evaluates the financial condition of guarantors based on the most current financial information available. Most often, such information takes the form of (i) personal financial statements of net worth, cash flow statements and tax returns (for individual guarantors) and (ii) financial and operating statements, tax returns and financial projections (for legal entity guarantors). Bancorp’s evaluation is primarily focused on various key financial metrics, including net worth, leverage ratios, and liquidity. It is Bancorp's policy to update such information annually, or more frequently as warranted, over the life of the loan.

While Bancorp does not specifically track the frequency with which it has pursued guarantor performance under a guarantee, its underwriting process, both at origination and upon extension, as applicable, includes an assessment of the guarantor's reputation, creditworthiness and willingness to perform. Historically, when Bancorp has found it necessary to seek performance under a guarantee, it has been able to effectively mitigate its losses. As stated above, Bancorp’s ability to seek performance under a guarantee is directly related to the guarantor's reputation, creditworthiness and willingness to perform. When a loan becomes impaired, repayment is sought from both the underlying collateral and the guarantor (as applicable). In the event that the guarantor is unwilling or unable to perform, a legal remedy is pursued.

Construction loans are funded, at the request of the borrower, typically not more than once per month, based on the extent of work completed, and are monitored, throughout the life of the project, by independent professional construction inspectors and Bancorp's commercial real estate lending department. Interest is advanced to the borrower, upon request, based upon the progress of the project toward completion. The amount of interest advanced is added to the total outstanding principal under the loan commitment. Should the project not progress as scheduled, the adequacy of the interest reserve necessary to carry the project through to completion is subject to close monitoring by management. Should the interest reserve be deemed to be inadequate, the borrower is required to fund the deficiency. Similarly, once a loan is fully funded, the borrower is required to fund all interest payments.

Construction loans are reviewed for extensions upon expiration of the loan term. Provided the loan is performing in accordance with contractual terms, extensions may be granted to allow for the completion of the project, marketing or sales of completed units, or to provide for permanent financing. Extension terms generally do not exceed 12 to 18 months.

In general, Bancorp's construction loans are used to finance improvements to commercial, industrial or residential property. Repayment is typically derived from the sale of the property as a whole, the sale of smaller individual units, or by a take-out from a permanent mortgage. The term of the construction period generally does not exceed two years. Loan commitments are based on established construction budgets which represent an estimate of total costs to complete the proposed project including both hard (direct) costs (building materials, labor, etc.) and soft (indirect) costs (legal and architectural fees, etc.). In addition, project costs may include an appropriate level of interest reserve to carry the project through to completion. If established, such interest reserves are determined based on (i) a percentage of the committed loan amount, (ii) the loan term, and (iii) the applicable interest rate. Regardless of whether a loan contains an interest reserve, the total project cost statement serves as the basis for underwriting and determining which items will be funded by the loan and which items will be funded through borrower equity. Bancorp has not advanced additional interest reserves to keep a loan from becoming nonperforming.

Bancorp recognized $29,000 and $8,000 of interest income from its loan portfolio from interest reserves during the nine months ended September 30, 2014 and 2013, respectively. None of the loans where interest reserves were recorded as capitalized interest were non-performing.

The following is a summary of the allowance for loan losses for the nine and three month periods ended September 30, 2014 (dollars in thousands):

	Total			Residential Mortgage			Construction Acquisition Development			Land			Lines of Credit			Commercial Real Estate			Commercial Non-Real Estate			Home Equity			Consumer
Nine months ended September 30, 2014

Beginning Balance	$	11,739		$	6,291		$	414		$	1,346		$	36		$	2,512		$	135		$	1,003		$	2
Provision		431			(1,213	)		8			(842	)		1,282			58			1,300			(157	)		(5	)
Charge-offs		(3,680	)		(704	)		(62	)		-			(1,313	)		(92	)		(1,311	)		(198	)		-
Recoveries		792			257			-			349			-			25			156			-			5
Ending Balance	$	9,282		$	4,631		$	360		$	853		$	5		$	2,503		$	280		$	648		$	2

Ending balance related to:

Loans individually evaluated for impairment	$	2,464		$	2,160		$	-		$	56		$	-		$	229		$	17		$	-		$	2
Loans collectively evaluated for impairment	$	6,818		$	2,471		$	360		$	797		$	5		$	2,274		$	263		$	648		$	-

Three months ended September 30, 2014

Beginning Balance	$	10,828		$	5,167		$	480		$	987		$	621		$	2,514		$	324		$	731		$	4
Provision		250			(459	)		(120	)		(134	)		697			81			275			(83	)		(7	)
Charge-offs		(1,858	)		(111	)		-			-			(1,313	)		(92	)		(342	)		-			-
Recoveries		62			34			-			-			-			-			23			-			5
Ending Balance	$	9,282		$	4,631		$	360		$	853		$	5		$	2,503		$	280		$	648		$	2

The following is a summary of the allowance for loan losses for the nine and three month periods ended September 30, 2013 (dollars in thousands):

	Total			Residential Mortgage			Construction Acquisition Development			Land			Lines of Credit			Commercial Real Estate			Commercial Non-Real Estate			Home Equity			Consumer
Nine months ended September 30, 2013

Beginning Balance	$	17,478		$	8,418		$	2,120		$	2,245		$	87		$	3,295		$	46		$	1,254		$	13
Provision		12,820			243			687			3,045			387			8,254			186			(16	)		34
Charge-offs		(19,115	)		(2,821	)		(2,338	)		(4,506	)		(485	)		(8,246	)		(109	)		(564	)		(46	)
Recoveries		1,087			51			10			947			20			54			5			-			-
Ending Balance	$	12,270		$	5,891		$	479		$	1,731		$	9		$	3,357		$	128		$	674		$	1

Ending balance related to:

Loans individually evaluated for impairment	$	2,767		$	2,450		$	-		$	71		$	-		$	246		$	-		$	-		$	-
Loans collectively evaluated for impairment	$	9,503		$	3,441		$	479		$	1,660		$	9		$	3,111		$	128		$	674		$	1

Three months ended September 30, 2013

Beginning Balance	$	12,765		$	6,032		$	1,203		$	1,582		$	51		$	2,970		$	117		$	810		$	-
Provision		12,200			884			450			2,104			436			8,130			8			187			1
Charge-offs		(13,680	)		(1,034	)		(1,174	)		(2,902	)		(485	)		(7,762	)		-			(323	)		-
Recoveries		985			9			-			947			7			19			3			-			-
Ending Balance	$	12,270		$	5,891		$	479		$	1,731		$	9		$	3,357		$	128		$	674		$	1

The accrual of interest on loans is discontinued at the time the loan is 90 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Bancorp’s policy for recording payments received on non-accrual financing receivables is to record the payment towards principal and interest on a cash basis until such time as the loan is returned to accrual status.

The following tables summarize impaired loans at September 30, 2014 and December 31, 2013 (dollars in thousands):

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
September 30, 2014
Residential mortgage	$	14,162	$	2,160	$	14,797	$	28,959	$	29,781
Construction, acquisition and development		-		-		916		916		915
Land		357		56		1,704		2,061		2,103
Lines of credit		-		-		454		454		545
Commercial real estate		2,543		229		3,631		6,174		6,398
Commercial non-real estate		282		17		21		303		812
Home equity		-		-		1,638		1,638		2,298
Consumer		13		2		-		13		13
Total impaired loans	$	17,357	$	2,464	$	23,161	$	40,518	$	42,866

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance		Total Impaired Loans
	Recorded Investment		Related Allowance		Recorded Investment		Recorded Investment		Unpaid Principal Balance
December 31, 2013
Residential mortgage	$	16,910	$	2,749	$	18,154	$	35,064	$	39,149
Construction, acquisition and development		-		-		2,808		2,808		3,453
Land		363		67		900		1,263		1,380
Lines of credit		-		-		304		304		395
Commercial real estate		2,092		241		2,580		4,672		4,685
Commercial non-real estate		-		-		-		-		-
Home equity		491		246		1,286		1,777		2,239
Consumer		-		-		-		-		-
Total impaired loans	$	19,856	$	3,303	$	26,032	$	45,888	$	51,301

The following tables summarize average impaired loans for the nine month and three month periods ended September 30, 2014 and 2013 (dollars in thousands):

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance				Total Impaired Loans
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Nine months ended September 30, 2014
Residential mortgage	$	14,361	$	455	$	17,567	$	517	$	31,928	$	972
Construction, acquisition and development		-		-		2,044		45		2,044		45
Land		360		10		1,802		65		2,162		75
Lines of credit		799		15		612		34		1,411		49
Commercial real estate		2,043		92		4,701		171		6,744		263
Commercial non-real estate		252		4		542		23		794		27
Home equity		-		-		1,678		44		1,678		44
Consumer		13		-		-		-		13		-
Total impaired loans	$	17,828	$	576	$	28,945	$	899	$	46,774	$	1,475

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance				Total Impaired Loans
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Three months ended September 30, 2014
Residential mortgage	$	14,188	$	147	$	14,846	$	139	$	29,034	$	286
Construction, acquisition and development		-		-		1,191		11		1,191		11
Land		358		3		1,725		24		2,083		27
Lines of credit		-		-		454		7		454		7
Commercial real estate		2,549		34		3,709		44		6,258		78
Commercial non-real estate		285		1		7		10		292		11
Home equity		-		-		1,639		15		1,639		15
Consumer		13		-		-		-		13		-
Total impaired loans	$	17,393	$	185	$	23,571	$	250	$	40,964	$	435

The following tables summarize average impaired loans for the nine and three month periods ended September 30, 2013 (dollars in thousands):

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance				Total Impaired Loans
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Nine months ended September 30, 2013
Residential mortgage	$	16,681	$	551	$	31,600	$	884	$	48,281	$	1,435
Construction, acquisition and development		1,267		44		5,649		137		6,916		181
Land		2,462		55		1,645		94		4,107		149
Lines of credit		-		-		431		22		431		22
Commercial real estate		6,898		245		11,145		261		18,043		506
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		2,504		42		2,504		42
Consumer		-		-		-		-		-		-
Total impaired loans	$	27,308	$	895	$	52,974	$	1,440	$	80,282	$	2,335

	Impaired Loans with Specific Allowance				Impaired Loans with No Specific Allowance				Total Impaired Loans
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Three months ended September 30, 2013
Residential mortgage	$	16,608	$	168	$	30,968	$	571	$	47,576	$	739
Construction, acquisition and development		816		11		4,610		32		5,426		43
Land		1,763		16		1,415		22		3,178		38
Lines of credit		-		-		381		7		381		7
Commercial real estate		5,517		81		9,720		100		15,237		181
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		2,406		8		2,406		8
Consumer		-		-		-		-		-		-
Total impaired loans	$	24,704	$	276	$	49,500	$	740	$	74,204	$	1,016

Bancorp recognized $435,000 and $1,475,000 of interest income on impaired loans using a cash-basis method of accounting for the three months and nine months ended September 30, 2014. Bancorp did not record any interest income attributable to the change in present value attributable to the passage of time. Bancorp evaluates its impaired loans and assesses them based on either discounted cash flows or if it deems its loans to be collateral based, assesses impairment based on the net value of the underlying collateral.

Included in the above impaired loans amount at September 30, 2014 was $29,720,000 of loans that are not in non-accrual status. In addition, there was a total of $28,959,000 of residential real estate loans included in impaired loans at September 30, 2014, of which $24,058,000 were to consumers and $4,901,000 to builders. The collateral supporting impaired collateral dependent loans is individually reviewed by management to determine its estimated fair market value, less estimated disposal cost and a charge off is taken, if necessary, for the difference between the carrying amount of any loan and the estimated fair value of the collateral less estimated disposal cost.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of September 30, 2014 and December 31, 2013. Included in the Pass column were $36,854,000 and $34,069,000 in unfunded commitments at September 30, 2014 and December 31, 2013, respectively (dollars in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total

September 30, 2014
Residential mortgage	$	279,031	$	2,976	$	13,649	$	-	$	295,656
Construction, acquisition and development		77,487		-		1,618		-		79,105
Land		31,822		-		143		-		31,965
Lines of credit		14,850		2,479		639		-		17,968
Commercial real estate		189,441		5,758		10,076		-		205,275
Commercial non-real estate		9,096		-		262		-		9,358
Home equity		27,464		-		1,502		-		28,966
Consumer		1,061		-		-		-		1,061
Total loans	$	630,252	$	11,213	$	27,889	$	-	$	669,354

	Pass		Special Mention		Substandard		Doubtful		Total

December 31, 2013
Residential mortgage	$	240,325	$	3,454	$	15,140	$	-	$	258,919
Construction, acquisition and development		72,104		250		3,185		-		75,539
Land		33,804		480		145		-		34,429
Lines of credit		19,152		568		1,878		-		21,598
Commercial real estate		205,063		6,775		8,322		-		220,160
Commercial non-real estate		8,583		-		-		-		8,583
Home equity		28,447		115		1,777		-		30,339
Consumer		299		-		886		-		1,185
Total loans	$	607,777	$	11,642	$	31,333	$	-	$	650,752

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. Included in the Current column were $36,854,000 and $34,069,000 in unfunded commitments at September 30, 2014 and December 31, 2013, respectively. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		Non- Accrual
September 30, 2014
Residential mortgage	$	2,517	$	470	$	3,654	$	6,641	$	289,015	$	295,656	$	5,273
Construction, acquisition and development		-		-		-		-		79,105		79,105		113
Land		-		-		6		6		31,959		31,965		829
Lines of credit		-		-		-		-		17,968		17,968		454
Commercial real estate		250		1,138		410		1,798		203,477		205,275		1,033
Commercial non-real estate		-		-		-		-		9,358		9,358		1,806
Home equity		821		-		1,115		1,936		27,030		28,966		1,290
Consumer		-		-		-		-		1,061		1,061		-
Total loans	$	3,588	$	1,608	$	5,185	$	10,381	$	658,973	$	669,354	$	10,798

	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		Non- Accrual
December 31, 2013
Residential mortgage	$	3,644	$	4,471	$	5,506	$	13,621	$	245,298	$	258,919	$	6,802
Construction, acquisition and development		-		-		814		814		74,725		75,539		814
Land		29		-		183		212		34,217		34,429		183
Lines of credit		419		-		66		485		21,113		21,598		304
Commercial real estate		724		28		851		1,603		218,557		220,160		1,155
Commercial non-real estate		1		-		-		1		8,582		8,583		-
Home equity		1,199		138		607		1,944		28,395		30,339		1,777
Consumer		1		-		-		1		1,184		1,185		-
Total loans	$	6,017	$	4,637	$	8,027	$	18,681	$	632,071	$	650,752	$	11,035

Bancorp did not have any greater than 90 days and still accruing loans as of the periods ended September 30, 2014 and December 31, 2013.

Bancorp offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

●

Rate Modification – A modification in which the interest rate is changed.

●

Term Modification – A modification in which the maturity date, timing of payments or frequency of payments is changed.

●

Interest Only Modification – A modification in which the loan is converted to interest only payments for a period of time.

●

Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification above.

●

Loan Balance Modification – A modification in which a portion of the outstanding loan balance is forgiven.

●

Combination Modification – Any other type of modification, including the use of multiple categories above.

Bancorp has not purchased, sold or reclassified any loans to held for sale during the periods discussed. Only mortgage loans originated specifically for sale are recorded as held for sale at the period ended September 30, 2014 and December 31, 2013.

Bancorp considers a modification of a loan term a troubled debt restructuring or “TDR” if Bancorp for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Prior to entering into a loan modification, Bancorp assesses the borrower’s financial condition to determine if the borrower has the means to meet the terms of the modification. This includes obtaining a credit report on the borrower as well as the borrower’s tax returns and financial statements.

There were no TDR’s that subsequently defaulted within 12 months of restructuring during the three and nine months ended September 30, 2014. There were four TDR’s that subsequently defaulted within 12 months of restructuring during the three and nine months ended September 30, 2013.

There was a pre-modification and a post-modification balance of $0 for defaulted loans for the 12 months ended September 30, 2014 compared to the pre-modification balance of $1,757,000 and the post-modification balance of $1,050,000 for the four defaulted loans for the 12 months ended September 30, 2013.

The following tables present loans that were restructured during the nine and three months ended September 30, 2014 (dollars in thousands):

	Nine months ended September 30, 2014
	Rate Modification		Contracts		Combination Modifications		Contracts		Total		Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage		-		-	$	598		2	$	598		2
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		696		8		696		8
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		20		1		20		1
Total loans		-		-	$	1,314		11	$	1,314		11

Post-Modification Outstanding Recorded Investment:

Residential mortgage		-		-	$	446		2	$	446		2
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		638		8		638		8
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		13		1		13		1
Total loans		-		-	$	1,097		11	$	1,097		11

Three months ended September 30, 2014

Rate Modification

Contracts

Combination Modifications

Contracts

Total

Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage

Construction, acquisition and development

Land

Lines of credit

Commercial real estate

Commercial non-real estate

Home equity

Consumer

Total loans

Post-Modification Outstanding Recorded Investment:

Residential mortgage

Construction, acquisition and development

Land

Lines of credit

Commercial real estate

Commercial non-real estate

Home equity

Consumer

Total loans

In addition, the TDR is evaluated for impairment. A determination is made as to whether an impaired TDR is cash flow or collateral dependent. If the TDR is cash flow dependent, an allowance for loan losses specific reserve is calculated based on the difference in net present value of future cash flows between the original and modified loan terms. If the TDR is collateral dependent, the collateral securing the TDR, which is always real estate, is evaluated for impairment based on either an appraisal or broker price opinion. If a TDR’s collateral valuation is less than its current loan balance, the TDR is written down for accounting purposes by the amount of the difference between the current loan balance and the collateral value. If the borrower performs under the terms of the modification, generally six consecutive months, and the ultimate collectability of all amounts contractually due under the modified terms is not in doubt, the loan is returned to accrual status. There are no loans that have been modified due to the financial difficulties of the borrower that are not considered a TDR.

The following tables present loans that were restructured that occurred during the nine and three months ended September 30, 2013 (dollars in thousands):

	Nine months ended September 30, 2013
	Rate Modification		Contracts		Combination Modifications		Contracts		Total		Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage	$	990		1	$	4,667		7	$	5,657		8
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		1,250		1		1,250		1
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total loans	$	990		1	$	5,917		8	$	6,907		9

Post-Modification Outstanding Recorded Investment:

Residential mortgage	$	818		1	$	3,672		7	$	4,490		8
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		1,239		1		1,239		1
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total loans	$	818		1	$	4,911		8	$	5,729		9

	Three months ended September 30, 2013
	Rate Modification		Contracts		Combination Modifications		Contracts		Total		Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage	$	-		-	$	1,409		1	$	4,667		1
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		1,250		1		1,250		1
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total loans	$	-		-	$	2,659		2	$	2,659		2

Post-Modification Outstanding Recorded Investment:

Residential mortgage	$	-		-	$	1,158		1	$	1,158		1
Construction, acquisition and development		-		-		-		-		-		-
Land		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-
Commercial real estate		-		-		1,239		1		1,239		1
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total loans	$	-		-	$	2,397		2	$	2,397		2

Interest on TDRs was accounted for under the following methods as of September 30, 2014 and December 31, 2013 (dollars in thousands):

	Number of Contracts		Accrual Status		Number of Contracts		Non- Accrual Status		Total Number of Contracts		Total Modifications
September 30, 2014
Residential mortgage		58	$	23,218		5	$	1,612		63	$	24,830
Construction, acquisition and development		2		803		-		-		2		803
Land		5		997		1		6		6		1,003
Lines of credit		-		-		-		-		-		-
Commercial real estate		6		3,642		1		109		7		3,751
Commercial non-real estate		5		155		2		126		7		281
Home equity		-		-		-		-		-		-
Consumer		1		13		-		-		1		13
Total loans		77	$	28,828		9	$	1,853		86	$	30,681

December 31, 2013
Residential mortgage		66	$	28,966		5	$	856		71	$	29,822
Construction, acquisition and development		3		1,994		1		705		4		2,699
Land		5		1,080		2		6		7		1,086
Lines of credit		-		-		-		-		-		-
Commercial real estate		5		3,199		1		112		6		3,311
Commercial non-real estate		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total loans		79	$	35,239		9	$	1,679		88	$	36,918

Unless otherwise noted, the Bank requires collateral or other security to support financial instruments with off-balance-sheet credit risk (dollars in thousands).

Financial Instruments Whose Contract	Contract Amount At
Amounts Represent Credit Risk	September 30, 2014		December 31, 2013
Standby letters of credit	$	12,214	$	14,719
Home equity lines of credit		8,732		12,345
Unadvanced construction commitments		36,955		34,023
Mortgage loan commitments		4,104		4,193
Lines of credit		20,985		30,965
Loans sold with limited repurchase provisions		20,531		28,134

Standby letters of credit are conditional commitments issued by the Bank guaranteeing performance by a customer to various municipalities. These guarantees are issued primarily to support performance arrangements, limited to real estate transactions. The majority of these standby letters of credit expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Bank requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2014 and December 31, 2013 for guarantees under standby letters of credit issued was $1,326,000 and $0, respectively.

Home equity lines of credit are loan commitments to individuals as long as there is no violation of any condition established in the contract. Commitments under home equity lines expire ten years after the date the loan closes and are secured by real estate. The Bank evaluates each customer's credit worthiness on a case-by-case basis.

Unadvanced construction commitments are loan commitments made to borrowers for both residential and commercial projects that are either in process or are expected to begin construction shortly.

Mortgage loan commitments not reflected in the accompanying statements of financial condition at September 30, 2014 included $4,104,000 at a fixed range of 3.875% to 4.750% and none at floating interest rates, and at December 31, 2013 included $4,193,000 at a fixed interest rate range of 3.625% to 5.250% and none at floating interest rates.

Lines of credit are loan commitments to individuals and companies as long as there is no violation of any condition established in the contract. Lines of credit have a fixed expiration date. The Bank evaluates each customer's credit worthiness on a case-by-case basis.

The Bank has entered into several agreements to sell mortgage loans to third parties. The loans sold under these agreements for the nine month period ended September 30, 2014 and year ended December 31, 2013 were $61,391,000 and $116,788,000, respectively. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within the terms specified by the agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers.

Except for the liability recorded for standby letters of credit at September 30, 2014, liabilities for credit loss associated with these commitments were not material at September 30, 2014 and December 31, 2013.