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Note 8 - Loans Receivable, Net

9 Months Ended

Sep. 30, 2023

NOTE 8 - LOANS RECEIVABLE, NET

Loans receivable, net, consisted of the following as of the dates indicated below:

	*September 30, 2023*		December 31, 2022
Real Estate Loans:
Construction	$	101,493,816	$	112,793,694
Residential Mortgage		159,980,843		110,056,973
Commercial		256,175,825		252,154,475
Commercial and Agricultural Loans		34,404,989		30,647,975
Consumer Loans:
Home Equity Lines of Credit (HELOC)		33,318,762		31,736,676
Other Consumer		24,409,030		23,598,110
Total Loans Held for Investment, Gross		609,783,265		560,987,903
Less:
Allowance for Credit Losses		12,348,125		11,177,753
Deferred Loan Fees		459,424		806,238
		12,807,549		11,983,991
Total Loans Receivable, Net	$	596,975,716	$	549,003,912

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for credit losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered to have the least amount of risk in terms of determining the allowance for credit losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.

The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023.

Term Loans by Year of Origination

2023

2022

2021

2020

2019

Prior

Revolving

Total

Real Estate - Construction

Pass

19,418,021

26,601,678

16,516,378

4,725,200

648,158

1,465,033

5,027,869

74,402,337

Caution

2,968,429

14,796,433

2,083,717

3,193,709

418,495

416,565

—

23,877,348

Special Mention

—

29,265

—

921,594

458,064

—

1,408,923

Substandard

—

333,376

136,960

1,237,579

97,293

—

1,805,208

Total

22,386,450

41,427,376

18,933,471

8,055,869

3,225,826

2,436,955

5,027,869

101,493,816

Current period gross write-offs

—

1,270

—

1,270

Real Estate - Mortgage

Pass

23,244,544

32,870,741

10,942,223

14,632,321

4,096,019

23,193,947

9,576,457

118,556,252

Caution

10,537,035

11,122,672

5,868,656

1,699,406

1,617,666

4,237,468

—

35,082,903

Special Mention

1,878,200

158,315

434,467

399,325

—

245,555

—

3,115,862

Substandard

74,550

—

621,239

—

48,601

2,481,436

—

3,225,826

Total

35,734,329

44,151,728

17,866,585

16,731,052

5,762,286

30,158,406

9,576,457

159,980,843

Current period gross write-offs

—

Real Estate - Commercial

Pass

11,017,973

48,666,315

48,839,955

12,796,698

24,093,992

54,378,489

2,687,505

202,480,927

Caution

9,786,032

4,949,460

4,272,692

6,488,251

7,234,125

8,389,414

—

41,119,974

Special Mention

212,500

879,781

455,971

414,263

—

5,784,828

99,811

7,847,154

Substandard

—

68,176

58,602

—

4,600,992

—

4,727,770

Total

21,016,505

54,563,732

53,627,220

19,699,212

31,328,117

73,153,723

2,787,316

256,175,825

Current period gross write-offs

—

Commercial and Agricultural

Pass

3,819,756

6,182,554

8,078,460

692,988

379,558

2,558,790

4,153,369

25,865,475

Caution

3,416,339

1,529,379

1,732,343

82,772

18,316

217,590

639,351

7,636,090

Special Mention

459,064

40,621

116,875

15,852

11,089

95,193

—

738,694

Substandard

—

1,975

—

65,179

97,576

164,730

Total

7,695,159

7,752,554

9,927,678

793,587

408,963

2,936,752

4,890,296

34,404,989

Current period gross write-offs

—

15,880

—

15,880

Home Equity Lines of Credit

Pass

—

27,331,177

Caution

—

4,964,475

Special Mention

—

401,065

Substandard

—

622,045

Total

—

33,318,762

Current period gross write-offs

—

1,488

Other Consumer

Pass

5,493,794

4,261,711

1,849,151

859,558

238,942

211,390

4,683,874

17,598,420

Caution

2,059,332

2,262,793

1,024,964

547,223

181,936

60,196

282,634

6,419,078

Special Mention

39,199

129,630

—

6,285

175,114

Substandard

—

60,550

79,324

43,459

16,985

9,885

6,215

216,418

Total

7,592,325

6,714,684

2,953,439

1,450,240

437,863

281,471

4,979,008

24,409,030

Current period gross write-offs

—

20,456

13,970

17,036

—

72,971

124,433

Total Loans

94,424,768

154,610,074

103,308,393

46,729,960

41,163,055

108,967,307

60,579,708

609,783,265

The table below summarizes the balance within each risk category by loan type, excluding loans held for sale, at December 31, 2022.

December 31, 2022	Pass		Caution		Special Mention		Substandard		Total Loans
Construction Real Estate	$	91,564,058	$	18,837,894	$	2,013,824	$	377,918	$	112,793,694
Residential Real Estate		84,028,037		22,372,649		887,874		2,768,413		110,056,973
Commercial Real Estate		196,063,300		47,821,422		3,270,916		4,998,837		252,154,475
Commercial and Agricultural		25,383,994		4,593,283		371,071		299,627		30,647,975
Consumer HELOC		25,693,252		5,018,419		401,550		623,455		31,736,676
Other Consumer		16,515,206		6,725,317		178,638		178,949		23,598,110
Total	$	439,247,847	$	105,368,984	$	7,123,873	$	9,247,199	$	560,987,903

Past Due and Nonaccrual Loans

The tables below present an age analysis of past due balances by loan category at the dates indicated.

September 30, 2023

30-59 Days

60-89 Days

90 Days or

Total Past

Total Loans

Past Due

More Past Due

Due

Current

Receivable

Construction Real Estate

124,822

—

124,822

101,368,994

101,493,816

Residential Real Estate

855,243

49,507

266,093

1,170,843

158,810,000

159,980,843

Commercial Real Estate

1,507,997

145,677

340,906

1,994,580

254,181,245

256,175,825

Commercial and Agricultural

7,141

1,975

24,639

33,755

34,371,234

34,404,989

Consumer HELOC

181,306

51,663

20,687

253,656

33,065,106

33,318,762

Other Consumer

342,780

49,189

87,542

479,511

23,929,519

24,409,030

Total

3,019,289

298,011

739,867

4,057,167

605,726,098

609,783,265

	December 31, 2022
	30-59 Days		60-89 Days		90 Days or		Total Past				Total Loans
	Past Due		Past Due		More Past Due		Due		Current		Receivable
Construction Real Estate	$	—	$	—	$	100,472	$	100,472	$	112,693,222	$	112,793,694
Residential Real Estate		1,557,114		—		471,430		2,028,544		108,028,429		110,056,973
Commercial Real Estate		2,670,997		89,342		354,406		3,114,745		249,039,730		252,154,475
Commercial and Agricultural		5,683		2,113		55,468		63,264		30,584,711		30,647,975
Consumer HELOC		199,414		—		74,159		273,573		31,463,103		31,736,676
Other Consumer		271,774		78,566		17,321		367,661		23,230,449		23,598,110
Total	$	4,704,982	$	170,021	$	1,073,256	$	5,948,259	$	555,039,644	$	560,987,903

At September 30, 2023 and December 31, 2022, the Company did not have any loans that were 90 days or more past due and still accruing interest. The Company's strategy is to work with its borrowers to reach acceptable payment plans while protecting its interests in the existing collateral. In the event an acceptable arrangement cannot be reached, the Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The following table shows nonaccrual loans by category at the dates indicated.

	*CECL*						*Incurred Loss*
	*September 30, 2023*						*December 31, 2022*
	*Nonaccrual Loans*		*Nonaccrual Loans*		*Total*
	*with No Allowance*		*with an Allowance*		*Nonaccrual Loans*		*Nonaccrual Loans*
Construction Real Estate	$	234,252	$	—	$	234,252	$	114,630
Residential Real Estate		1,296,522		—		1,296,522		1,544,762
Commercial Real Estate		4,238,537		—		4,238,537		4,281,975
Commercial and Agricultural		52,886		—		52,886		112,652
Consumer HELOC		420,484		—		420,484		188,540
Other Consumer		96,091		—		96,091		28,671
Total Nonaccrual Loans	$	6,338,772	$	—	$	6,338,772	$	6,271,230

The Company did not recognize any interest income on nonaccrual loans during the nine months ended September 30, 2023.

The following table represents the accrued interest receivables written off by reversing interest income during the three and nine months ended September 30, 2023:

	*For the Three Months Ended*
	*September 30, 2023*
Construction Real Estate	$	—
Residential Real Estate		—
Commercial Real Estate		—
Commercial and Agricultural		—
Consumer HELOC		—
Other Consumer		696
Total Loans	$	696

	*For the Nine Months Ended*
	*September 30, 2023*
Construction Real Estate	$	2,882
Residential Real Estate		6,814
Commercial Real Estate		1,461
Commercial and Agricultural		1,103
Consumer HELOC		66
Other Consumer		1,607
Total Loans	$	13,933

Allowance for Credit Losses

The following table shows the activity in the allowance for credit losses on loans by category for the three and nine months ended September 30, 2023 under the CECL methodology:

Three Months Ended September 30, 2023

Real Estate

Consumer

Commercial and

Construction

Residential

Commercial

Agricultural

HELOC

Other

Total

Beginning Balance

2,200,850

3,260,891

4,427,006

1,102,070

654,278

638,230

12,283,325

(Reversal of) Provision for Credit Losses

(55,278

)

236,084

(117,370

)

(75,644

)

690

61,518

50,000

Charge-Offs

—

(53,513

)

(53,513

)

Recoveries

3,911

31,317

5,016

6,866

11,360

9,843

68,313

Ending Balance

2,149,483

3,528,292

4,314,652

1,033,292

666,328

656,078

12,348,125

Nine Months Ended September 30, 2023

Real Estate

Consumer

Commercial and

Construction

Residential

Commercial

Agricultural

HELOC

Other

Total

Beginning Balance

2,323,397

2,124,835

4,804,282

874,092

598,807

452,340

11,177,753

Adjustment to Allowance for Credit Loss on adoption of ASU 2016-13

263,737

461,879

(340,492

)

112,452

107,548

179,070

784,194

(Reversal of) Provision for Credit Losses

(449,432

)

896,261

(164,187

)

44,001

(76,130

)

125,487

376,000

Charge-Offs

(1,270

)

(15,880

)

(1,488

)

(124,433

)

(143,071

)

Recoveries

13,051

45,317

15,049

18,627

37,591

23,614

153,249

Ending Balance

2,149,483

3,528,292

4,314,652

1,033,292

666,328

656,078

12,348,125

The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

•

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

	•	Construction real estate loans are typically secured by commercial and residential lots.
	•	Commercial and agricultural business loans are primarily secured by business equipment, furniture and fixtures, inventory and receivables.
	•	Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

•

Home equity lines of credit are generally secured by second mortgages on residential real estate property.

•

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table summarizes the amortized cost of collateral dependent loans:

	*September 30, 2023*
Construction Real Estate	$	97,292
Residential Real Estate		1,020,423
Commercial Real Estate		4,008,101
Commercial and Agricultural		28,246
Consumer HELOC		338,160
Total Loans	$	5,492,222

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2022:

	*Three Months Ended September 30, 2022*
	*Real Estate*										*Consumer*
								*Commercial and*
	*Construction*		*Residential*			*Commercial*		*Agricultural*			*HELOC*			*Other*			*Total*
Beginning Balance	$	2,104,386	$	1,870,696		$	4,736,314	$	1,403,818		$	606,847		$	475,893		$	11,197,954
(Reversal of) Provision for Loan Losses		99,612		(17,503	)		44,664		(117,519	)		(37,681	)		28,427			—
Charge-Offs		—		—			—		—			—			(54,192	)		(54,192	)
Recoveries		15,460		9,678			77,479		1,281			38,190			12,995			155,083
Ending Balance	$	2,219,458	$	1,862,871		$	4,858,457	$	1,287,580		$	607,356		$	463,123		$	11,298,845

	*Nine Months Ended September 30, 2022*
	*Real Estate*										*Consumer*
									*Commercial and*
	*Construction*			*Residential*		*Commercial*			*Agricultural*		*HELOC*		*Other*			*Total*
Beginning Balance	$	2,401,196		$	1,663,423	$	4,832,440		$	1,241,828	$	517,512	$	430,765		$	11,087,164
(Reversal of) Provision for Loan Losses		(212,761	)		161,839		(100,941	)		19,643		44,068		88,152			—
Charge-Offs		—			—		—			—		—		(97,884	)		(97,884	)
Recoveries		31,023			37,609		126,958			26,109		45,776		42,090			309,565
Ending Balance	$	2,219,458		$	1,862,871	$	4,858,457		$	1,287,580	$	607,356	$	463,123		$	11,298,845

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. Non-accrual commercial loans under $200,000 and non-accrual consumer loans under $100,000 were considered immaterial and are excluded from the impairment review. The tables below include all loans deemed impaired, whether individually assessed for impairment or not. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.

Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.

The table below summarizes the impaired loan balances evaluated individually and collectively for impairment within the allowance for loan losses and loans receivable balances at December 31, 2022:

	Allowance For Loan Losses						Loans Receivable
December 31, 2022	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total		Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Construction Real Estate	$	—	$	2,323,397	$	2,323,397	$	114,630	$	112,679,064	$	112,793,694
Residential Real Estate		—		2,124,835		2,124,835		1,089,308		108,967,665		110,056,973
Commercial Real Estate		—		4,804,282		4,804,282		4,281,702		247,872,773		252,154,475
Commercial and Agricultural		—		874,092		874,092		31,446		30,616,529		30,647,975
Consumer HELOC		—		598,807		598,807		48,792		31,687,884		31,736,676
Other Consumer		—		452,340		452,340		—		23,598,110		23,598,110
Total	$	—	$	11,177,753	$	11,177,753	$	5,565,878	$	555,422,025	$	560,987,903

The following tables present information related to impaired loans by loan category at December 31, 2022 and for the three and nine months ended September 30, 2022 under the Incurred Loss methodology.

	December 31, 2022
	Recorded		Unpaid Principal		Related
Impaired Loans	Investment		Balance		Allowance
Construction Real Estate	$	114,630	$	114,630	$	—
Residential Real Estate		1,089,308		1,626,308		—
Commercial Real Estate		4,281,702		4,281,702		—
Commercial and Agricultural		31,446		926,446		—
Consumer HELOC		48,792		48,792		—
Other Consumer		—		—		—
Total	$	5,565,878	$	6,997,878	$	—

	Three Months Ended September 30,
	2022
	Average Recorded		Interest Income
Impaired Loans	Investment		Recognized
Construction Real Estate	$	116,495	$	—
Residential Real Estate		1,121,686		—
Commercial Real Estate		743,998		—
Commercial and Agricultural		31,446		—
Consumer HELOC		50,725		—
Other Consumer		—		—
Total	$	2,064,350	$	—

	Nine Months Ended September 30,
	2022
	Average Recorded		Interest Income
Impaired Loans	Investment		Recognized
Construction Real Estate	$	117,881	$	—
Residential Real Estate		1,144,363		—
Commercial Real Estate		756,394		—
Commercial and Agricultural		31,446		—
Consumer HELOC		52,643		—
Other Consumer		—		—
Total	$	2,102,727	$	—

Modifications to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the same loan within the current reporting period each much be reported. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The Company had two modified loans with a combined balance of $354,000 at September 30, 2023, compared to two modified loans with a combined balance of $385,000 at December 31, 2022. The Company did not modify any loans to borrowers experiencing financial difficulty during the nine months ended September 30, 2023 or 2022.

As of September 30, 2023 and 2022, there were no loans modified with borrowers experiencing financial difficulty for which there was a payment default within 12 months of the restructuring date. The Company considers any loan 30 days or more past due to be in default.

Allowance for Credit Losses - Unfunded Commitments

The Company maintains an allowance for credit losses - unfunded commitments for credit exposures such as unfunded balances for existing lines of credit and commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for credit losses - unfunded commitments is adjusted through the provision for (reversal of) credit losses. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in this Note 8. The allowance for credit losses - unfunded commitments of $1.1 million and $0 at September 30, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within "Other Liabilities."

The following tables present the balance and activity in the allowance for credit losses - unfunded loan commitments for the three and nine months ended September 30, 2023.

	*Three Months Ended September 30, 2023*
	*Allowance for Credit Losses - Unfunded Commitments*
Beginning Balance	$	1,108,614
Reversal of provision for unfunded commitments		(50,000	)
Ending Balance	$	1,058,614

	*Nine Months Ended September 30, 2023*
	*Allowance for Credit Losses - Unfunded Commitments*
Beginning Balance	$	—
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13		1,213,614
Reversal of provision for unfunded commitments		(155,000	)
Ending Balance	$	1,058,614