Note 3 - Loans Receivable

Loans receivable, including unfunded commitments consist of the following:

	December 31
	2014			2013
	(dollars in thousands)
Residential mortgage, total	$	309,461		$	258,919
Individually evaluated for impairment		28,535			35,064
Collectively evaluated for impairment		280,926			223,855
Construction, land acquisition and development, total		84,325			75,539
Individually evaluated for impairment		917			2,808
Collectively evaluated for impairment		83,408			72,731
Land, total		30,426			34,429
Individually evaluated for impairment		2,039			1,263
Collectively evaluated for impairment		28,387			33,166
Lines of credit, total		19,251			21,598
Individually evaluated for impairment		454			304
Collectively evaluated for impairment		18,797			21,294
Commercial real estate, total		198,539			220,160
Individually evaluated for impairment		6,309			4,672
Collectively evaluated for impairment		192,230			215,488
Commercial non-real estate, total		10,167			8,583
Individually evaluated for impairment		274			-
Collectively evaluated for impairment		9,893			8,583
Home equity, total		28,750			30,339
Individually evaluated for impairment		3,551			1,777
Collectively evaluated for impairment		25,199			28,562
Consumer, total		1,040			1,185
Individually evaluated for impairment		12			-
Collectively evaluated for impairment		1,028			1,185
Total Loans		681,959			650,752
Less
Unfunded commitments included above		(36,162	)		(34,069	)
		645,797			616,683
Individually evaluated for impairment		42,091			45,888
Collectively evaluated for impairment		603,706			570,795
		645,797			616,683
Allowance for loan losses		(9,435	)		(11,739	)
Deferred loan origination fees and costs, net		(2,480	)		(2,131	)
Net Loans	$	633,882		$	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.

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.

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.

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.

The following is a summary of the allowance for loan losses for the years ended December 31, 2014 and December 31, 2013 (dollars in thousands):

2014	Total			Residential Mortgage			Acquisition and Development			Land			Lines of Credit			Commercial Real Estate			Commercial Non-Real Estate			Home Equity			Consumer
Beginning Balance	$	11,739		$	6,291		$	414		$	1,346		$	36		$	2,512		$	135		$	1,003		$	2
Provision		831			(1,089	)		11			(1,049	)		1,285			59			1,396			221			(3	)
Charge-offs		(3,994	)		(844	)		(63	)		-			(1,324	)		(92	)		(1,410	)		(261	)		-
Recoveries		859			306			-			349			15			25			159			-			5
Ending Balance	$	9,435		$	4,664		$	362		$	646		$	12		$	2,504		$	280		$	963		$	4

Allowance on loans individually evaluated for impairment	$	2,777		$	2,113		$	-		$	53		$	-		$	224		$	15		$	370		$	2
Allowance on loans collectively evaluated for impairment	$	6,658		$	2,551		$	362		$	593		$	12		$	2,280		$	265		$	593		$	2

2013	Total			Residential Mortgage			Acquisition and Development			Land			Lines of Credit			Commercial Real Estate			Commercial Non-Real Estate			Home Equity			Consumer
Beginning Balance	$	17,478		$	8,418		$	2,120		$	2,245		$	87		$	3,295		$	46		$	1,254		$	13
Provision		16,520			4,758			667			1,857			410			7,506			768			543			11
Charge-offs		(25,293	)		(7,919	)		(2,439	)		(4,529	)		(521	)		(8,343	)		(687	)		(809	)		(46	)
Recoveries		3,034			1,034			66			1,773			60			54			8			15			24
Ending Balance	$	11,739		$	6,291		$	414		$	1,346		$	36		$	2,512		$	135		$	1,003		$	2

Allowance on loans individually evaluated for impairment	$	3,303		$	2,749		$	-		$	67		$	-		$	241		$	-		$	246		$	-
Allowance on loans collectively evaluated for impairment	$	8,436		$	3,542		$	414		$	1,279		$	36		$	2,271		$	135		$	757		$	2

The allowance for loan losses is based on management’s judgment and evaluation of the loan portfolio. Management assesses the adequacy of the allowance for loan losses and the need for any addition thereto, by considering the nature and size of the loan portfolio, overall portfolio quality, review of specific problem loans, economic conditions that may affect the borrowers’ ability to pay or the value of property securing loans, and other relevant factors. While management believes the allowance was adequate as December 31, 2014, changing economic and market conditions may require future adjustments to the allowance for loan losses.

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.

During the year ended December 31, 2014, the provision for loan losses was $831,000 compared to $16,520,000 for the year ended December 31, 2013. This decrease of $15,689,000, or 94.5%, was a result of management’s decision to sell approximately $48,514,000 of its loan portfolio to reduce the amount of problem loans in its portfolio as of December 31, 2013. In accordance with generally accepted accounting principles, the losses on these sales, totaling approximately $14,199,000, were charged off and recorded in the allowance for loan losses in 2013.

The following tables summarize impaired loans at December 31, 2014 and 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
December 31, 2014
Residential mortgage	$	14,094	$	2,113	$	14,441	$	28,535	$	29,487
Construction, acquisition and development		-		-		917		917		917
Land		355		53		1,684		2,039		2,157
Lines of credit		-		-		454		454		545
Commercial real estate		2,529		224		3,780		6,309		6,533
Commercial non-real estate		274		15		-		274		274
Home equity		1,472		370		2,079		3,551		4,274
Consumer		12		2		-		12		12
Total Impaired loans	$	18,736	$	2,777	$	23,355	$	42,091	$	44,199

	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	$	51,302

The following tables summarize average impaired loans for the years ended December 31, 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
December 31, 2014
Residential mortgage	$	14,222	$	592	$	17,342	$	648	$	31,564	$	1,240
Construction, acquisition and development		-		-		1,831		54		1,831		54
Land		359		13		1,774		89		2,133		102
Lines of credit		599		15		616		41		1,215		56
Commercial real estate		2,556		120		4,515		230		7,071		350
Commercial non-real estate		258		5		406		23		664		28
Home equity		1,460		-		2,174		65		3,634		65
Consumer		13		-		-		-		13		-
Total Impaired loans	$	19,467	$	745	$	28,658	$	1,150	$	48,125		1,895

	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
December 31, 2013
Residential mortgage	$	18,024	$	781	$	28,941	$	1,148	$	46,965	$	1,929
Construction, acquisition and development		952		44		5,284		164		6,236		208
Land		1,920		59		1,538		79		3,458		138
Lines of credit		-		-		365		24		365		24
Commercial real estate		5,698		272		6,949		270		12,647		542
Commercial non-real estate		-		-		-		-		-		-
Home equity		491		22		1,684		88		2,175		110
Consumer		-		-		1,077		43		1,077		43
Total Impaired loans	$	27,085	$	1,178	$	45,838	$	1,816	$	72,923		2,994

During 2013, management elected to sell approximately $48,514,000 of loans in two separate bulk sales. The loans sold included approximately $24,084,000 of non-accruing loans, $7,844,000 of performing troubled debt restructurings (“TDR’s”), and $16,586,000 of classified and other loans.

Commercial loans represented approximately $24,256,000, residential loans approximately $15,283,000 and land loan approximately $8,975,000. The loss on the two 2013 bulk loan sales totaled approximately $14,199,000.

Included in the above impaired loans amount at December 31, 2014 is $29,301,000 of loans that are not in non-accrual status. In addition, there was a total of $28,535,000 of residential real estate loans included in impaired loans at December 31, 2014, of which $23,626,000 were to consumers and $4,909,000 to builders. The collateral supporting impaired loans is individually reviewed by management to determine its estimated fair market value, less estimated disposal cost and a charge-off to the loan is made, if necessary, for the difference between the carrying amount of any loan and the estimated fair value of the collateral less estimated disposal cost. A specific allowance is established if the net collateral value has not been finalized, but management determines that it is likely that the net collateral value of the loan is lower than the carrying value of the loan.

The following tables present the classes of the loan portfolio, including unfunded commitments summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2014 and 2013 (dollars in thousands):

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2014
Residential mortgage	$	295,589	$	1,331	$	12,541	$	-	$	309,461
Construction acquisition and development		82,778		-		1,547		-		84,325
Land		30,285		-		141		-		30,426
Lines of credit		16,112		2,479		660		-		19,251
Commercial real estate		181,686		7,172		9,681		-		198,539
Commercial non-real estate		9,275		637		255		-		10,167
Home equity		25,769		-		2,981		-		28,750
Consumer		985		-		55		-		1,040
Total loans	$	642,479	$	11,619	$	27,861	$	-	$	681,959

	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

Included in the Pass column were $36,162,000 and $34,069,000 in unfunded commitments at December 31, 2014 and 2013, respectively.

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. There were no loans past due greater than 90 days and still accruing as of December 31, 2014 and 2013. Included in the Current column were $36,162,000 and $34,069,000 in unfunded commitments at December 31, 2014 and 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 December 31, 2014 and 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
December 31, 2014
Residential mortgage	$	2,549	$	2,333	$	3,095	$	7,977	$	301,484	$	309,461	$	6,052
Construction acquisition and development		-		-		-		-		84,325		84,325		115
Land		-		-		6		6		30 420		30,426		847
Lines of credit		-		-		-		-		19,251		19,251		388
Commercial real estate		447		45		375		867		197,672		198,539		652
Commercial non-real estate		-		-		-		-		10,167		10,167		1,775
Home equity		174		242		2,417		2,833		25,917		28,750		3,016
Consumer		-		-		-		-		1,040		1,040		-
Total loans	$	3,170	$	2,620	$	5,893	$	11,683	$	670,276	$	681,959	$	12,845

	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	$	2,985	$	3,834	$	3,678	$	10,497	$	248,422	$	258,919	$	6,802
Construction acquisition and development		-		-		705		705		74,834		75,539		814
Land		29		-		-		29		34,400		34,429		183
Lines of credit		181		-		-		181		21,417		21,598		304
Commercial real estate		420		28		350		798		219,362		220,160		1,155
Commercial non-real estate		1		-		-		1		8,582		8,583		-
Home equity		29		138		469		636		29,703		30,339		1,777
Consumer		1		-		-		1		1,184		1,185		-
Total loans	$	3,646	$	4,000	$	5,202	$	12,848	$	637,904	$	650,752	$	11,035

The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of financial condition. The contract amounts of these instruments express the extent of involvement the Bank has in each class of financial instruments.

The Bank's exposure to credit loss from non-performance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments.

The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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

Financial Instruments Whose Contract Amounts Represent Credit Risk	Contract Amount At December 31,
	2014		2013
	(dollars in thousands)
Standby letters of credit	$	7,357	$	14,719
Home equity lines of credit		8,571		12,345
Unadvanced construction commitments		36,162		34,023
Mortgage loan commitments		2,120		4,193
Lines of credit		23,844		30,965
Loans sold with limited repurchase provisions		38,247		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, except for certain standby letters of credit, 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 December 31, 2014 and 2013 for guarantees under standby letters of credit issued was $314,000 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 December 31, 2014 include $2,120,000 at a fixed interest rate range of 3.750% to 4.50% and none at floating interest rates, and at December 31, 2013 included $4,193,000 at a fixed 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 years ended December 31, 2014 and 2013 were $90,560,000 and $124,178,000, respectively. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging from 90 to 120 days after the sale date depending on the investor’s agreement. The credit risk involved in these financial instruments is essentially the same as that involved in extending loan facilities to customers. No amount has been recognized in the consolidated statement of financial condition at December 31, 2014 and 2013 as a liability for credit loss related to these loans. The Bank repurchased no loans under these agreements in 2014 or 2013.

Only loans originated specifically for sale are recorded as held for sale at the period ended December 31, 2014 and December 31, 2013.

Except for the $314,000 liability recorded for standby letters of credit at December 31, 2014, liabilities for credit losses associated with these commitments were not material at December 31, 2014 and 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 considers a modification of a loan term a 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.

The following tables present newly restructured loans that occurred during the years ended December 31, 2014 and 2013 by the type of concession (dollars in thousands):

	Year ended December 31, 2014
	Rate Modification		Contracts		Term Modifications		Contracts		Combination Modifications		Contracts		Total		Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage		-		-		-		-	$	447		2	$	447		2
Construction, acquisition and development		-		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-		-		-
Commercial real estate		-		-		-		-		541		3		541		3
Commercial non-real estate		-		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total loans		-		-		-		-	$	988		5	$	988		5

Post-Modification Outstanding Recorded Investment:

Residential mortgage		-		-		-		-	$	447		2	$	447		2
Construction, acquisition and development		-		-		-		-		-		-		-		-
Land		-		-		-		-		-		-		-		-
Lines of credit		-		-		-		-		-		-		-		-
Commercial real estate		-		-		-		-		541		3		541		3
Commercial non-real estate		-		-		-		-		-		-		-		-
Home equity		-		-		-		-		-		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total loans		-		-		-		-	$	988		5	$	988		5

	Year ended December 31, 2013
	Rate Modification		Contracts		Term Modifications		Contracts		Combination Modifications		Contracts		Total		Total Contracts

Pre-Modification Outstanding Recorded Investment:

Residential mortgage	$	219		1		-		-	$	5,279		8	$	5,498		9
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	$	219		1		-		-	$	6,529		9	$	6,748		10

Post-Modification Outstanding Recorded Investment:

Residential mortgage	$	210		1		-		-	$	4,077		8	$	4,287		9
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	$	210		1		-		-	$	5,316		9	$	5,526		10

In addition, the TDR is considered an impaired loan. A determination is made as to whether an impaired TDR is cash flows or collateral dependent. If the TDR is cash flows 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 an appraisal. 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. 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 but continues to be an impaired loan. There are no loans that have been modified due to the financial difficulties of the borrower that are not considered a TDR.

Interest on TDRs was accounted for under the following methods as of December 31, 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
December 31, 2014
Residential mortgage		57	$	22,154		5	$	2,402		62	$	24,556
Construction, acquisition and development		2		803		-		-		2		803
Land		5		982		1		6		6		988
Lines of credit		-		-		-		-		-		-
Commercial real estate		6		3,623		1		109		7		3,732
Commercial non-real estate		5		150		2		124		7		274
Home equity		-		-		-		-		-		-
Consumer		1		12		-		-		1		12
Total loans		76	$	27,724		9	$	2,641		85	$	30,365

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

Management does not charge off a TDR, or a portion of a TDR, until one of the following conditions has 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 face value 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.

Prior to either of the above conditions, a loan is assessed for impairment when a loan becomes a TDR. If, based on management’s assessment of the underlying collateral of the loan, it is determined that the 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.