Note 4 - Loans Receivable and Allowance for Loan Losses

Loans receivable are summarized as follows:


	September 30, 2018		December 31, 2017
	(dollars in thousands)
Residential mortgage	$	287,258	$	287,656
Commercial		43,180		37,356
Commercial real estate		236,105		236,302
Construction, land acquisition, and development		112,994		93,060
Home equity/2nds		12,173		15,703
Consumer		1,065		1,084
Total loans receivable		692,775		671,161
Unearned loan fees		(3,063)		(3,010)
Loans receivable	$	689,712	$	668,151

Certain loans in the amount of $173.0 million have been pledged under a blanket floating lien to the Federal Home Loan Bank of Atlanta (“FHLB”) as collateral against advances at September 30, 2018.

At September 30, 2018, the Bank was servicing $30.1 million in loans for the Federal National Mortgage Association (“FNMA”) and $15.3 million in loans for the Federal Home Loan Mortgage Corporation (“FHLMC”). At December 31, 2017, the Bank was servicing $33.5 million in loans for the FNMA and $16.0 million in loans for the FHLMC.

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 all available information to estimate losses on loans, future additions to the Allowance may be necessary based on changes in economic conditions and our actual loss experience. 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, 2018 and December 31, 2017.

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 consideration of risk. 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, and are generally 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 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, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as loans secured by real estate and secondarily as cash flow dependent. As repayment of these loans is generally dependent upon the successful operation of the property securing the loan, we look closely at the cash flows generated by the property securing the loan, although the primary underwriting criteria for these loan types is the sufficient value of the underlying collateral. 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.

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.

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


	Three Months Ended September 30, 2018
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total
	(dollars in thousands)
Beginning Balance	$	2,962	$	414	$	2,591	$	2,060	$	229	$	1	$	—	$	8,257
Charge-offs		(148)		—		—		(6)		—		—		—		(154)
Recoveries		3		—		31		—		219		—		—		253
Net (charge-offs) recoveries		(145)		—		31		(6)		219		—		—		99
Provision for (reversal of) loan losses		204		219		10		(494)		(267)		—		28		(300)
Ending Balance	$	3,021	$	633	$	2,632	$	1,560	$	181	$	1	$	28	$	8,056


	Nine Months Ended September 30, 2018
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total
	(dollars in thousands)
Beginning Balance	$	3,099	$	527	$	2,805	$	1,236	$	386	$	2	$	—	$	8,055
Charge-offs		(508)		—		—		(19)		—		—		—		(527)
Recoveries		225		—		364		—		239		—		—		828
Net (charge-offs) recoveries		(283)		—		364		(19)		239		—		—		301
Provision for (reversal of) loan losses		205		106		(537)		343		(444)		(1)		28		(300)
Ending Balance	$	3,021	$	633	$	2,632	$	1,560	$	181	$	1	$	28	$	8,056

Ending balance - individually evaluated for impairment	$	1,090	$	—	$	166	$	900	$	2	$	1	$	—	$	2,159
Ending balance - collectively evaluated for impairment		1,931		633		2,466		660		179		—		28		5,897
	$	3,021	$	633	$	2,632	$	1,560	$	181	$	1	$	28	$	8,056

Ending loan balance -individually evaluated for impairment	$	15,038	$	—	$	2,053	$	1,582	$	772	$	78			$	19,523
Ending loan balance -collectively evaluated for impairment		270,432		43,180		232,777		111,412		11,401		987				670,189
	$	285,470	$	43,180	$	234,830	$	112,994	$	12,173	$	1,065			$	689,712


	December 31, 2017
	Residential				Commercial					Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total
	(dollars in thousands)
Ending balance - individually evaluated for impairment	$	1,181	$	—	$	182	$	48	$	—	$	2	$	—	$	1,413
Ending balance - collectively evaluated for impairment		1,918		527		2,623		1,188		386		—		—		6,642
	$	3,099	$	527	$	2,805	$	1,236	$	386	$	2	$	—	$	8,055

Ending loan balance - individually evaluated for impairment	$	18,219	$	—	$	2,917	$	991	$	—	$	84			$	22,211
Ending loan balance - collectively evaluated for impairment		267,600		37,356		232,212		92,069		15,703		1,000				645,940
	$	285,819	$	37,356	$	235,129	$	93,060	$	15,703	$	1,084			$	668,151


	Three Months Ended September 30, 2017
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		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
	Residential				Commercial				Home Equity/
	Mortgage		Commercial		Real Estate		ADC		2nds		Consumer		Unallocated		Total
	(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

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


	September 30, 2018
			Special
	Pass		Mention		Substandard		Total
	(dollars in thousands)
Residential mortgage	$	281,529	$	833	$	3,108	$	285,470
Commercial		43,156		24		—		43,180
Commercial real estate		229,305		3,682		1,843		234,830
ADC		111,217		—		1,777		112,994
Home equity/2nds		11,574		442		157		12,173
Consumer		1,065		—		—		1,065
	$	677,846	$	4,981	$	6,885	$	689,712


	December 31, 2017
			Special
	Pass		Mention		Substandard		Total
	(dollars in thousands)
Residential mortgage	$	279,040	$	1,563	$	5,216	$	285,819
Commercial		37,312		44		—		37,356
Commercial real estate		227,573		4,615		2,941		235,129
ADC		91,868		—		1,192		93,060
Home equity/2nds		14,384		465		854		15,703
Consumer		1,084		—		—		1,084
	$	651,261	$	6,687	$	10,203	$	668,151

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, 2018
	30-59		60-89		90+
	Days		Days		Days		Total						Non-
	Past Due		Past Due		Past Due		Past Due		Current		Total		Accrual
	(dollars in thousands)
Residential mortgage	$	800	$	143	$	2,901	$	3,844	$	281,626	$	285,470	$	3,784
Commercial		—		—		—		—		43,180		43,180		—
Commercial real estate		452		113		159		724		234,106		234,830		476
ADC		388		67		856		1,311		111,683		112,994		923
Home equity/2nds		23		—		429		452		11,721		12,173		548
Consumer		—		—		—		—		1,065		1,065		—
	$	1,663	$	323	$	4,345	$	6,331	$	683,381	$	689,712	$	5,731


	December 31, 2017
	30-59		60-89		90+
	Days		Days		Days		Total						Non-
	Past Due		Past Due		Past Due		Past Due		Current		Total		Accrual
	(dollars in thousands)
Residential mortgage	$	1,006	$	—	$	—	$	1,006	$	284,813	$	285,819	$		3,891
Commercial		—		—		—		—		37,356		37,356			78
Commercial real estate		948		—		—		948		234,181		235,129		159
ADC		—		—		—		—		93,060		93,060			314
Home equity/2nds		—		—		—		—		15,703		15,703			1,268
Consumer		—		—		—		—		1,084		1,084			—
	$	1,954	$	—	$	—	$	1,954	$	666,197	$	668,151	$		5,710

We did not have any loans greater than 90 days past due and still accruing as of September 30, 2018 or December 31, 2017.

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 $238,000 and $200,000 for the three months ended September 30, 2018 and 2017, respectively. The actual interest income recorded on those loans was approximately $69,000 and $67,000 for the three months ended September 30, 2018 and 2017, respectively.

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 $713,000 and $1.2 million for the nine months ended September 30, 2018 and 2017, respectively. The actual interest income recorded on those loans was approximately $208,000 and $403,000 for the nine months ended September 30, 2018 and 2017, respectively.

The following tables summarize impaired loans:


	September 30, 2018						December 31, 2017
	Unpaid						Unpaid
	Principal		Recorded		Related		Principal		Recorded		Related
	Balance		Investment		Allowance		Balance		Investment		Allowance
With no related Allowance:	(dollars in thousands)
Residential mortgage	$	9,819	$	8,995	$	—	$	12,929	$	11,572	$	—
Commercial		—		—		—		—		—		—
Commercial real estate		1,019		908		—		1,562		1,507		—
ADC		522		522		—		636		636		—
Home equity/2nds		987		760		—		—		—		—
Consumer		—		—		—		—		—		—
With a related Allowance:
Residential mortgage		6,159		6,043		1,090		6,761		6,647		1,181
Commercial		—		—		—		—		—		—
Commercial real estate		1,102		1,145		166		1,410		1,410		182
ADC		1,147		1,060		900		392		355		48
Home equity/2nds		14		12		2		—		—		—
Consumer		78		78		1		84		84		2
Totals:
Residential mortgage		15,978		15,038		1,090		19,690		18,219		1,181
Commercial		—		—		—		—		—		—
Commercial real estate		2,121		2,053		166		2,972		2,917		182
ADC		1,669		1,582		900		1,028		991		48
Home equity/2nds		1,001		772		2		—		—		—
Consumer		78		78		1		84		84		2


	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2017				2018				2017
	Average		Interest		Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
With no related Allowance:	(dollars in thousands)
Residential mortgage	$	6,718	$	75	$	10,423	$	138	$	9,618	$	229	$	9,696	$	353
Commercial		6		—		—		—		59		—		—		—
Commercial real estate		1,572		21		1,531		22		1,240		56		2,652		69
ADC		674		7		637		9		547		20		487		21
Home equity/2nds		371		10		918		15		552		34		679		40
Consumer		—		—		—		—		—		—		—		—
With a related Allowance:
Residential mortgage		6,020		79		8,910		116		6,899		219		9,231		286
Commercial		—		—		—		—		—		—		37		—
Commercial real estate		774		4		1,896		23		1,243		19		1,919		73
ADC		176		2		369		6		1,103		9		385		16
Home equity/2nds		400		4		180		—		6		11		715		—
Consumer		79		1		88		1		81		2		91		2
Totals:
Residential mortgage		12,738		154		19,333		254		16,517		448		18,927		639
Commercial		6		—		—		—		59		—		37		—
Commercial real estate		2,346		25		3,427		45		2,483		75		4,571		142
ADC		850		9		1,006		15		1,650		29		872		37
Home equity/2nds		771		14		1,098		15		558		45		1,394		40
Consumer		79		1		88		1		81		2		91		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 $3.7 million and $3.1 million as of September 30, 2018 and December 31, 2017, respectively.

Troubled Debt Restructure Loans (“TDR” or “TDRs”)

Our portfolio of TDRs was accounted for under the following methods:


	September 30, 2018
							Total	Total
	Number of	Accrual		Number of	Nonaccrual		Number of	Balance of
	Modifications	Status		Modifications	Status		Modifications	Modifications
	(dollars in thousands)
Residential mortgage	38	$	10,031	4	$	997	42	$	11,028
Commercial real estate	2		1,028	—		—	2		1,028
ADC	1		134	—		—	1		134
Consumer	3		78	—		—	3		78
	44	$	11,271	4	$	997	48	$	12,268


	December 31, 2017
							Total	Total
	Number of	Accrual		Number of	Nonaccrual		Number of	Balance of
	Modifications	Status		Modifications	Status		Modifications	Modifications
	(dollars in thousands)
Residential mortgage	42	$	11,631	2	$	736	44	$	12,367
Commercial real estate	3		1,862	1		78	4		1,940
ADC	1		137	1		6	2		143
Consumer	4		84	—		—	4		84
	50	$	13,714	4	$	820	54	$	14,534

There were no TDRs that defaulted during the three and nine months ended September 30, 2018 or 2017 which were modified during the previous 12 month period.

We did not modify any loans during the three and nine months ended September 30, 2018 or 2017.