Note 3 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:

	September 30, 2017			December 31, 2016
	(dollars in thousands)
Residential mortgage	$	292,068		$	260,603
Commercial		37,485			46,468
Commercial real estate		223,167			195,710
Construction, land acquisition, and development		84,164			90,102
Home equity/2nds		15,861			19,129
Consumer		1,118			1,210
Total loans receivable		653,863			613,222
Unearned loan fees		(2,899	)		(2,944	)
Net loans receivable	$	650,964		$	610,278

Certain loans in the amount of $210.4 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances.

Credit Quality

An Allowance 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. Management has an established methodology to determine the adequacy of the Allowance that assesses the risks and losses inherent in the loan portfolio. The methodology takes 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 requires the use of estimates and assumptions. Actual results could differ significantly from those estimates. While management uses available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies periodically review the Allowance as an integral part of their examination process. Such agencies may require us to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination. Management believes the Allowance is adequate as of September 30, 2017 and December 31, 2016.

For purposes of determining the Allowance, we have segmented our loan portfolio by product type. Our portfolio loan segments are residential mortgage, commercial, commercial real estate, construction, land acquisition, and development (“ADC”), Home equity/2nds, and consumer. We have looked at all segments and have determined that no additional subcategorization is warranted based upon our credit review methodology and our portfolio classes are the same as our portfolio segments.

Inherent Credit Risks

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

Residential mortgage - 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 (“LTV”) of 80% or less.

Commercial - underwritten in accordance with our policies and include evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial 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. Additionally, lines of credit are subject to the underwriting standards and processes similar to commercial 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 - 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.

ADC - underwritten in accordance with our underwriting policies which include a financial analysis of the developers, property owners, construction cost estimates, and 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. Additionally, land is underwritten according to our policies which include 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.

The sources of repayment of these loans is typically 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.

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.

Home equity/2nds - subject to the underwriting standards and processes similar to residential mortgages and secured by one to four family dwelling units. Home equity/2nds loans have greater risk than residential mortgages as a result of the Bank generally being in a second lien position.

Consumer - consist of loans to individuals through the Bank’s retail network and typically unsecured or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the lower value of the underlying collateral, if any.

Risk Ratings

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified as 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. Loans not classified are rated pass.

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 in nonaccrual status 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 in nonaccrual status 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, generally after nine months of consecutive current payments and completion of an updated analysis of the borrower’s ability to service the loan.

Loans that experience insignificant payment delays and payment shortfalls may not be placed in nonaccrual status or classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the 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.

Allowance Methodology

The Allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. The general component relates to loans that are classified as doubtful, substandard, or special mention that are not considered impaired, as well as loans that are not classified.

A loan is considered impaired if it meets any of the following three criteria:

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

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; or

Loans that are modified and qualify as troubled debt restructured loans (“TDR” or “TDRs”).

If a loan is considered to be impaired, it is then determined to be either cash flow or collateral dependent for purposes of Allowance determination.

With respect to all loan segments, we do 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. At the time of foreclosure, a charge off is recorded for the difference between the recorded amount of the loan and the fair 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, a charge-off is recorded for the difference between the recorded amount of the loan and the agreed upon proceeds amount.

The loan is considered to be a collateral dependent impaired loan when 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.

Specific Allowance Component

Impaired loans secured by real estate - when a secured real estate 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 LTV ratio based on the original appraisal, and the condition of the property. Appraised values are discounted, if appropriate, 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.

Impaired loans secured by collateral other than real estate - for loans secured by nonreal 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 fair value of the underlying collateral less its estimated disposal costs is lower than the carrying value of the 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 the loan.

General Allowance Component

The general component of the Allowance is based on historical loss experience adjusted for qualitative factors. Loans are pooled by portfolio class and an historical loss percentage, based upon a four-year net charge-off history, is applied to each class. The result of that calculation for each loan class is then applied to the current loan portfolio balances to determine the required general component of the Allowance per loan class. We then apply additional loss multipliers to the different classes of loans to reflect various qualitative factors. These qualitative factors include, but are not limited to:

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.

The following tables present, by portfolio segment, the changes in the Allowance and the recorded investment in loans:

	Three Months Ended September 30, 2017
	Residential Mortgage			Commercial		Commercial Real Estate			ADC		Home Equity/ 2nds			Consumer			Total
	(dollars in thousands)
Beginning Balance	$	3,403		$	389	$	2,571		$	984	$	367		$	4		$	7,718
Charge-offs		-			-		-			-		-			-			-
Recoveries		156			-		40			-		22			-			218
Net recoveries		156			-		40			-		22			-			218
(Reversal of) provision for loan losses		(137	)		53		(44	)		158		(28	)		(2	)		-
Ending Balance	$	3,422		$	442	$	2,567		$	1,142	$	361		$	2		$	7,936

	Nine Months Ended September 30, 2017
	(dollars in thousands)
Beginning Balance	$	3,833		$	478		$	2,535		$	1,390		$	728		$	5		$	8,969
Charge-offs		(707	)		-			-			-			(98	)		-			(805	)
Recoveries		295			-			100			-			27			-			422
Net (charge-offs) recoveries		(412	)		-			100			-			(71	)		-			(383	)
Provision for (reversal of) loan losses		1			(36	)		(68	)		(248	)		(296	)		(3	)		(650	)
Ending Balance	$	3,422		$	442		$	2,567		$	1,142		$	361		$	2		$	7,936

Ending balance - individually evaluated for impairment	$	1,544		$	-		$	186		$	50		$	-		$	2		$	1,782
Ending balance - collectively evaluated for impairment		1,878			442			2,381			1,092			361			-			6,154
	$	3,422		$	442		$	2,567		$	1,142		$	361		$	2		$	7,936

Ending loan balance - individually evaluated for impairment	$	20,379		$	-		$	3,419		$	1,003		$	-		$	87		$	24,888
Ending loan balance - collectively evaluated for impairment		268,790			37,485			219,748			83,161			15,861			1,031			626,076
	$	289,169		$	37,485		$	223,167		$	84,164		$	15,861		$	1,118		$	650,964

	December 31, 2016
	Residential Mortgage		Commercial		Commercial Real Estate		ADC		Home Equity/ 2nds		Consumer		Total
	(dollars in thousands)
Ending Allowance balance - individually evaluated for impairment	$	1,703	$	15	$	196	$	53	$	402	$	4	$	2,373
Ending Allowance balance - collectively evaluated for impairment		2,130		463		2,339		1,337		326		1		6,596
	$	3,833	$	478	$	2,535	$	1,390	$	728	$	5	$	8,969

Ending loan balance - individually evaluated for impairment	$	20,403	$	148	$	5,656	$	858	$	3,137	$	96	$	30,298
Ending loan balance - collectively evaluated for impairment		237,256		46,320		190,054		89,244		15,992		1,114		579,980
	$	257,659	$	46,468	$	195,710	$	90,102	$	19,129	$	1,210	$	610,278

	Three Months Ended September 30, 2016
	Residential Mortgage			Commercial			Commercial Real Estate			ADC			Home Equity/ 2nds		Consumer			Total
	(dollars in thousands)
Beginning Balance	$	3,892		$	752		$	2,577		$	983		$	593	$	7		$	8,804
Charge-offs		-			-			-			(72	)		-		-			(72	)
Recoveries		137			10			4			-			2		50			203
Net recoveries (charge-offs)		137			10			4			(72	)		2		50			131
(Reversal of) provision for loan losses		(161	)		(63	)		(189	)		289			226		(52	)		50
Ending Balance	$	3,868		$	699		$	2,392		$	1,200		$	821	$	5		$	8,985

	Nine Months Ended September 30, 2016
	(dollars in thousands)
Beginning Balance	$	4,188		$	291		$	2,792		$	956		$	528		$	3		$	8,758
Charge-offs		(151	)		(17	)		(178	)		(72	)		(28	)		-			(446	)
Recoveries		322			43			4			100			4			50			523
Net recoveries (charge-offs)		171			26			(174	)		28			(24	)		50			77
(Reversal of) provision for loan losses		(491	)		382			(226	)		216			317			(48	)		150
Ending Balance	$	3,868		$	699		$	2,392		$	1,200		$	821		$	5		$	8,985

Ending balance - individually evaluated for impairment	$	1,583		$	15		$	200		$	55		$	402		$	4		$	2,259
Ending balance - collectively evaluated for impairment		2,285			684			2,192			1,145			419			1			6,726
	$	3,868		$	699		$	2,392		$	1,200		$	821		$	5		$	8,985

Ending loan balance - individually evaluated for impairment	$	22,521		$	495		$	5,696		$	1,446		$	3,519		$	100		$	33,777
Ending loan balance - collectively evaluated for impairment		246,375			41,864			193,219			79,894			16,220			1,109			578,681
	$	268,896		$	42,359		$	198,915		$	81,340		$	19,739		$	1,209		$	612,458

The following tables present the credit quality breakdown of our loan portfolio by class:

	September 30, 2017
	Pass		Special Mention		Substandard		Total
	(dollars in thousands)
Residential mortgage	$	281,954	$	1,397	$	5,818	$	289,169
Commercial		37,299		50		136		37,485
Commercial real estate		216,373		4,668		2,126		223,167
ADC		82,958		-		1,206		84,164
Home equity/2nds		14,531		471		859		15,861
Consumer		1,118		-		-		1,118
	$	634,233	$	6,586	$	10,145	$	650,964

	December 31, 2016
	Pass		Special Mention		Substandard		Total
	(dollars in thousands)
Residential mortgage	$	248,819	$	4,316	$	4,524	$	257,659
Commercial		46,011		204		253		46,468
Commercial real estate		184,820		7,420		3,470		195,710
ADC		89,324		-		778		90,102
Home equity/2nds		16,056		472		2,601		19,129
Consumer		1,210		-		-		1,210
	$	586,240	$	12,412	$	11,626	$	610,278

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. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans:

	September 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total		Non- Accrual
	(dollars in thousands)
Residential mortgage	$	1,173	$	1,216	$	2,364	$	4,753	$	284,416	$	289,169	$	4,531
Commercial		-		-		-		-		37,485		37,485		84
Commercial real estate		-		478		-		478		222,689		223,167		160
ADC		-		-		239		239		83,925		84,164		318
Home equity/2nds		-		-		458		458		15,403		15,861		1,284
Consumer		-		-		-		-		1,118		1,118		-
	$	1,173	$	1,694	$	3,061	$	5,928	$	645,036	$	650,964	$	6,377

	December 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total		Non- Accrual
	(dollars in thousands)
Residential mortgage	$	1,472	$	2,074	$	964	$	4,510	$	253,149	$	257,659	$	3,580
Commercial		-		-		-		-		46,468		46,468		151
Commercial real estate		-		171		515		686		195,024		195,710		2,938
ADC		106		-		6		112		89,990		90,102		269
Home equity/2nds		34		-		2,174		2,208		16,921		19,129		2,914
Consumer		4		-		-		4		1,206		1,210		-
	$	1,616	$	2,245	$	3,659	$	7,520	$	602,758	$	610,278	$	9,852

We do not have any greater than 90 days and still accruing loans as of September 30, 2017 or December 31, 2016.

The interest which would have been recorded on the above nonaccrual loans if those loans had been performing in accordance with their contractual terms was approximately $1.2 million and $338,000 for the nine months ended September 30, 2017 and 2016, respectively. The actual interest income recorded on those loans was approximately $403,000 and $130,000 for the nine months ended September 30, 2017 and 2016, respectively.

The following tables summarize impaired loans:

	September 30, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related Allowance:	(dollars in thousands)
Residential mortgage	$	12,856	$	11,306	$	-	$	9,854	$	9,338	$	-
Commercial		-		-		-		-		-		-
Commercial real estate		1,576		1,527		-		3,900		3,698		-
ADC		636		636		-		441		441		-
Home equity/2nds		-		-		-		2,139		1,529		-
Consumer		-		-		-		-		-		-
With a related Allowance:
Residential mortgage		9,306		9,073		1,544		11,176		11,065		1,703
Commercial		-		-		-		148		148		15
Commercial real estate		1,892		1,892		186		1,958		1,958		196
ADC		402		367		50		417		417		53
Home equity/2nds		-		-		-		1,608		1,608		402
Consumer		87		87		2		96		96		4
Totals:
Residential mortgage		22,162		20,379		1,544		21,030		20,403		1,703
Commercial		-		-		-		148		148		15
Commercial real estate		3,468		3,419		186		5,858		5,656		196
ADC		1,038		1,003		50		858		858		53
Home equity/2nds		-		-		-		3,747		3,137		402
Consumer		87		87		2		96		96		4

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related Allowance:	(dollars in thousands)
Residential mortgage	$	10,423	$	138	$	12,734	$	132	$	9,696	$	353	$	13,774	$	417
Commercial		-		-		274		2		-		-		150		3
Commercial real estate		1,531		22		3,730		57		2,652		69		4,655		134
ADC		637		9		1,031		9		487		21		1,431		36
Home equity/2nds		918		15		1,911		18		679		40		1,991		59
Consumer		-		-		-		-		-		-		23		-
With a related Allowance:
Residential mortgage		8,910		116		9,831		106		9,231		286		10,684		356
Commercial		-		-		149		2		37		-		182		7
Commercial real estate		1,896		23		1,977		25		1,919		73		2,040		77
ADC		369		6		426		6		385		16		513		20
Home equity/2nds		180		-		1,078		6		715		-		370		7
Consumer		88		1		102		1		91		2		73		2
Totals:
Residential mortgage		19,333		254		22,565		238		18,927		639		24,458		773
Commercial		-		-		423		4		37		-		332		10
Commercial real estate		3,427		45		5,707		82		4,571		142		6,695		211
ADC		1,006		15		1,457		15		872		37		1,944		56
Home equity/2nds		1,098		15		2,989		24		1,394		40		2,361		66
Consumer		88		1		102		1		91		2		96		2

Residential mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction totaled $3.1 million as of September 30, 2017. Residential mortgage loans in real estate acquired through foreclosure amounted to $287,000 and $393,000 at September 30, 2017 and December 31, 2016, respectively.

TDRs

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered, the related loan is classified as a TDR. Such concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. At the time that a loan is modified, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. Any impairment amount is then set up as a specific reserve in the Allowance.

The following table presents loans that were modified during the nine months ended September 30:

	2017						2016
	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification		Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification
	(dollars in thousands)
Residential Mortgage								3	$	624	$	624
		-	$	-	$	-		3	$	624	$	624

We did not modify any loans during the three months ended September 30, 2017 or 2016.

Interest on our portfolio of TDRs was accounted for under the following methods:

	September 30, 2017
	Number of Modifications		Accrual Status		Number of Modifications		Nonaccrual Status		Total Number of Modifications		Total Balance of Modifications
	(dollars in thousands)
Residential mortgage		43	$	13,086		4	$	2,285		47	$	15,371
Commercial real estate		3		1,875		1		84		4		1,959
ADC		1		138		1		6		2		144
Home equity/2nds		1		230		-		-		1		230
Consumer		4		87		-		-		4		87
		52	$	15,416		6	$	2,375		58	$	17,791

	December 31, 2016
	Number of Modifications		Accrual Status		Number of Modifications		Nonaccrual Status		Total Number of Modifications		Total Balance of Modifications
	(dollars in thousands)
Residential mortgage		48	$	15,886		4	$	2,137		52	$	18,023
Commercial real estate		3		1,914		2		249		5		2,163
ADC		2		170		1		6		3		176
Consumer		5		96		-		-		5		96
		58	$	18,066		7	$	2,392		65	$	20,458

During the three and nine months ended September 30, 2017 and 2016, there were no TDRs that subsequently defaulted during the 12 month period ended September 30, 2017 and 2016.

Off-Balance Sheet Instruments

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 we have in each class of financial instruments.

Our exposure to credit loss from nonperformance by the other party to the above mentioned financial instruments is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Unless otherwise noted, we require collateral or other security to support financial instruments with off-balancesheet credit risk.

The following table shows the contract amounts for our off-balance sheet instruments:

	September 30, 2017		December 31, 2016
	(dollars in thousands)
Standby letters of credit	$	3,854	$	4,022
Home equity lines of credit		12,425		7,736
Unadvanced construction commitments		72,045		15,728
Mortgage loan commitments		-		574
Lines of credit		13,092		34,125
Loans sold and serviced with limited repurchase provisions		19,979		70,773

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 and are limited to real estate transactions. The majority of these standby letters of credit expire within 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 September 30, 2017 and December 31, 2016 for guarantees under standby letters of credit issued was $79,000 and $94,000, 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. We evaluate 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, 2016 included two loans at a fixed interest rate of 4.25% totaling $574,000. There were no such commitments at September 30, 2017.

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. These agreements contain limited provisions that require the Bank to repurchase a loan if the loan becomes delinquent within a period ranging generally from 120 to 180 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. We established a reserve for potential repurchases for these loans, which amounted to $59,000 at September 30, 2017 and $48,000 at December 31, 2016. We did not repurchase any loans during the nine months ended September 30, 2017 or 2016.