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Note 4 - Loans Receivable

12 Months Ended

Dec. 31, 2023

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE 4 – Loans Receivable

Year end loans are summarized below:

(Dollars in thousands)
	December 31, 2023		December 31, 2022
Loans secured by real estate:
Residential real estate	$	484,948	$	484,595
Home equity		46,599		38,978
Commercial real estate		503,202		486,431
Construction and land development		115,227		108,926
Multifamily		219,917		251,014
Total loans secured by real estate		1,369,893		1,369,944
Commercial business		97,386		93,278
Consumer		610		918
Manufactured homes		30,845		34,882
Government		10,021		9,549
Loans receivable		1,508,755		1,508,571
Add (less):
Net deferred loan origination costs		3,705		5,083
Undisbursed loan funds		135		(23	)
Loans receivable, net of deferred fees and costs	$	1,512,595	$	1,513,631

The Bancorp's age analysis of past due loans is summarized below:

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due and Accruing		Total Past Due and Accruing		Current		Accruing Loans		Non-accrual Loans		Total Loans Receivable
December 31, 2023
Residential real estate	$	5,857	$	4,362	$	1,131	$	11,350	$	471,905	$	483,255	$	1,693	$	484,948
Home equity		226		18		-		244		45,887		46,131		468		46,599
Commercial real estate		3,168		262		712		4,142		498,227		502,369		833		503,202
Construction and land development.		2,523		-		-		2,523		112,704		115,227		-		115,227
Multifamily		5,333		-		-		5,333		210,869		216,202		3,715		219,917
Commercial business		105		29		-		134		94,355		94,489		2,897		97,386
Consumer		12		-		-		12		596		608		2		610
Manufactured homes		634		379		-		1,013		29,832		30,845		-		30,845
Government		-		-		-		-		10,021		10,021		-		10,021
Total	$	17,858	$	5,050	$	1,843	$	24,751	$	1,474,396	$	1,499,147	$	9,608	$	1,508,755

December 31, 2022
Residential real estate	$	3,758	$	2,520	$	166	$	6,444	$	472,804	$	479,248	$	5,347	$	484,595
Home equity		315		42		-		357		38,027		38,384		594		38,978
Commercial real estate		1,399		150		-		1,549		481,640		483,189		3,242		486,431
Construction and land development		2,673		-		-		2,673		106,253		108,926		-		108,926
Multifamily		1,724		616		-		2,340		241,610		243,950		7,064		251,014
Commercial business		1,775		-		-		1,775		89,622		91,397		1,881		93,278
Consumer		3		-		-		3		915		918		-		918
Manufactured homes		601		256		82		939		33,943		34,882		-		34,882
Government		-		-		-		-		9,549		9,549		-		9,549
Total	$	12,248	$	3,584	$	248	$	16,080	$	1,474,363	$	1,490,443	$	18,128	$	1,508,571

The following table shows the amortized cost of loans, segregated by portfolio segment, credit quality rating and year of origination as of December 31, 2023, and gross charge-offs for the year ended December 31, 2023.

December 31, 2023	2023			2022			2021		2020			2019			Prior			Revolving			Revolving Converted to Term		Total
Total Loans Receivable	$	148,105		$	323,820		$	321,183	$	234,861		$	108,683		$	274,027		$	94,893		$	3,183	$	1,508,755
Total current period gross charge-off	$	(95	)	$	(150	)	$	-	$	(367	)	$	(50	)	$	(1,882	)	$	(27	)	$	-		(2,571	)

Residential real estate
Pass (1-6)	$	20,740		$	97,671		$	106,778	$	115,001		$	23,873		$	113,987		$	1,716		$	-	$	479,766
Special Mention (7)		405			-			473		173			431			1,602			-			-		3,084
Substandard (8)		-			786			152		471			217			472			-			-		2,098
Total	$	21,145		$	98,457		$	107,403	$	115,645		$	24,521		$	116,061		$	1,716		$	-	$	484,948
Current period gross charge-off		-			(40	)		-		(25	)		(39	)		(893	)		-			-		(997	)

Home equity
Pass (1-6)	$	110		$	114		$	101	$	14		$	61		$	2,051		$	42,801		$	700	$	45,952
Special Mention (7)		-			-			-		-			4			31			70			63		168
Substandard (8)		-			161			-		-			-			67			251			-		479
Total	$	110		$	275		$	101	$	14		$	65		$	2,149		$	43,122		$	763	$	46,599
Current period gross charge-off		-			-			-		-			-			(16	)		(27	)		-		(43	)

Commercial real estate
Pass (1-6)	$	52,880		$	127,607		$	90,108	$	55,236		$	56,255		$	108,489		$	2,649		$	-	$	493,224
Special Mention (7)		-			69			2,429		1,274			1,123			2,397			142			-		7,434
Substandard (8)		-			-			-		230			-			2,314			-			-		2,544
Total	$	52,880		$	127,676		$	92,537	$	56,740		$	57,378		$	113,200		$	2,791		$	-	$	503,202
Current period gross charge-off		-			-			-		-			-			(372	)		-			-		(372	)

*Construction and land development*
Pass (1-6)	$	48,518		$	24,948		$	13,411	$	1,732		$	4,284		$	473		$	12,539		$	2,420	$	108,325
Special Mention (7)		365			76			4,205		2,256			-			-			-			-		6,902
Total	$	48,883		$	25,024		$	17,616	$	3,988		$	4,284		$	473		$	12,539		$	2,420	$	115,227
Current period gross charge-off		-			-			-		-			-			-			-			-		-

Multifamily
Pass (1-6)	$	9,333		$	53,493		$	78,122	$	41,773		$	13,156		$	19,609		$	186		$	-	$	215,672
Substandard (8)		-			-			1,666		1,562			-			1,017			-			-		4,245
Total	$	9,333		$	53,493		$	79,788	$	43,335		$	13,156		$	20,626		$	186		$	-	$	219,917
Current period gross charge-off		-			-			-		-			-			-			-			-		-

Commercial business
Pass (1-6)	$	13,110		$	13,774		$	9,327	$	5,705		$	4,105		$	12,905		$	33,954		$	-	$	92,880
Special Mention (7)		373			197			58		-			129			436			417			-		1,610
Substandard (8)		43			1,094			256		214			-			1,121			168			-		2,896
Total	$	13,526		$	15,065		$	9,641	$	5,919		$	4,234		$	14,462		$	34,539		$	-	$	97,386
Current period gross charge-off		-			(110	)		-		(342	)		(11	)		(601	)		-			-		(1,064	)

Consumer
Pass (1-6)	$	338		$	73		$	108	$	4		$	14		$	71		$	-		$	-	$	608
Substandard (8)		-			-			-		2			-			-			-			-		2
Total	$	338		$	73		$	108	$	6		$	14		$	71		$	-		$	-	$	610
Current period gross charge-off		(95	)		-			-		-			-			-			-			-		(95	)

Manufactured homes
Pass (1-6)	$	-		$	1,942		$	12,556	$	9,214		$	5,031		$	2,102		$	-		$	-	$	30,845
Total	$	-		$	1,942		$	12,556	$	9,214		$	5,031		$	2,102		$	-		$	-	$	30,845
Current period gross charge-off		-			-			-		-			-			-			-			-		-

Government
Pass (1-6)	$	1,890		$	1,815		$	1,433	$	-		$	-		$	4,883		$	-		$	-	$	10,021
Total	$	1,890		$	1,815		$	1,433	$	-		$	-		$	4,883		$	-		$	-	$	10,021
Current period gross charge-off		-			-			-		-			-			-			-			-		-

The Bancorp's credit quality indicators are summarized below at December 31, 2022:

	December 31, 2022
(Dollars in thousands)	1-6		7		8

Loan Segment	Pass		Special mention		Substandard		Total
Residential real estate	$	477,222	$	1,338	$	6,035	$	484,595
Home equity		37,981		385		612		38,978
Commercial real estate		474,055		4,955		7,421		486,431
Construction and land development		106,580		2,346		-		108,926
Multifamily		242,091		1,859		7,064		251,014
Commercial business		90,694		703		1,881		93,278
Consumer		918		-		-		918
Manufactured homes		34,882		-		-		34,882
Government		9,549		-		-		9,549
Total	$	1,473,972	$	11,586	$	23,013	$	1,508,571

The Bancorp has established a standard loan grading system to assist management, lenders and review personnel in their analysis and supervision of the loan portfolio. The use and application of these grades by the Bancorp is uniform and conforms to regulatory definitions. Thehe Bancorp reassesses its risk ratings annually, and no changes to our credit quality indicators have occurred. The loan grading system is as follows:

1 – Superior Quality

Loans in this category are substantially risk free. Loans fully collateralized by a Bank certificate of deposit or Bank deposits with a hold are substantially risk free.

2 – Excellent Quality

The borrower generates excellent and consistent cash flow for debt coverage, excellent average credit scores, excellent liquidity and net worth and are reputable operators with over 15 years’ experience. Current and debt to tangible net worth ratios are excellent. Loan to value is substantially below policy and collateral condition is excellent.

3 – Great Quality

The borrower generates more than sufficient cash flow to fund debt service and cash flow is improving. Average credit scores are very strong. Operators are reputable with significant years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are very strong. Loan to value is significantly below policy and collateral condition is significantly above average.

4 – Above Average Quality

The borrower generates more than sufficient cash flow to fund debt service but cash flow trends may be stable or slightly declining. Average credit scores are strong. The borrower is a reputable operator with many years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are strong. Loan to value is below policy and collateral condition is above average.

5 – Average Quality

Borrowers are considered creditworthy and can repay the debt in the normal course of business, however, cash flow trends may be inconsistent or fluctuating. Average credit scores are satisfactory and years of experience is acceptable. Liquidity and net worth are satisfactory. Current and debt to tangible net worth ratios are average. Loan to value is slightly below policy and the collateral condition is slightly above average.

6 – Pass

Borrowers are considered credit worthy but financial condition may show signs of weakness due to internal or external factors. Cash flow trends may be declining annually. Average credit scores may be low but remain acceptable. Borrower has limited years of experience. Liquidity, net worth, current and debt to tangible net worth ratios are below average. Loan to value is nearing policy limits and collateral condition is average.

7 – Special Mention

A special mention asset has identified weaknesses that deserve Management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Bank institution to sufficient risk to warrant adverse classification. There is still adequate protection by the current sound worth and paying capacity of the obligor or of the collateral pledged. The Special Mention rating is viewed as transitional and will be monitored closely.

Loans in this category may exhibit some of the following risk factors. Cash flow trends may be consistently declining or may be questionable. Debt coverage ratios may be at or near 1:1. Average credit scores may be very weak or the borrower may have minimal years of experience. Liquidity, net worth, current and debt to tangible net worth ratios may be very weak. Loan to value may be at policy limits or may exceed policy limits. Collateral condition may be below average.

8 – Substandard

This classification consists of loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Loans are still considered collectible, but due to increased risks and defined weaknesses of the credit, some loss could be incurred in collection if the deficiencies are not corrected.

9 – Doubtful

Such loans have been placed on nonaccrual status and may be heavily dependent upon collateral possessing a value that is difficult to determine or based upon some near-term event which lacks clear certainty. These loans have all of the weaknesses of those classified as Substandard; however, based on existing conditions, these weaknesses make full collection of the principal balance highly improbable.

10 – Loss

Loans that are considered uncollectible and of such little value that continuing to carry them as assets is not warranted.

Performing loans are loans that are paying as agreed and are approximately less than ninety days past due on payments of interest and principal.

Non-performing loans include those loans that are 90 days or more past due and those loans that have

been placed on non-accrual status.

Loan Modification Disclosures Pursuant to ASU 2022-02

The following table shows the amortized cost of loans at December 31, 2023, that were both experiencing financial difficulty and modified during the year ended December 31, 2023, segregated by portfolio segment and type of modification. The percentage of the amortized cost of loans that were modified to borrowers in financial distress as compared to the amortized cost of each segment of financial receivable is also presented below.

	For the year ended December 31, 2023
(Dollars in thousands)	Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Interest Rate Reduction		% of Total Segment Financing Receivables
Residential Real Estate	$	-	$	868	$	-	$	-		0.18	%
Total	$	-	$	868	$	-	$	-		0.06	%

There were no commitments to lend additional amounts to the borrowers included in the previous table.

The Bancorp closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of such loans and leases that have been modified during the year ended December 31, 2023.

(Dollars in thousands)

Current

30-59 Days

Past Due

60-89 Days

Past Due

Greater Than 90

Days Past Due

Residential Real Estate

868

Total

868

The borrowers with term extension have had their maturity dates extended and as a result their monthly payments were reduced.

Upon the Bancorp’s determination that a modified loan has subsequently been deemed uncollectible, the loan or lease is written off. Therefore, the amortized cost of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

Troubled Debt Restructuring (TDR) Disclosures Prior to the Adoption of ASU 2022-02

During the year ending December 31, 2022, nine residential real estate loans to nine customers totaling $743 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification. Two home equity loans to two customers totaling $189 thousand were modified to include deferral of principal or interest resulting in troubled debt restructuring classification. One commercial real estate loan totaling $1.4 million was provided a short-term renewal resulting in troubled debt restructuring classification. No troubled debt restructuring loans had subsequently defaulted during the year ending December 31, 2022.

As of December 31, 2023, the Bancorp had one residential real estate loan in the process of foreclosure totaling $32 thousand. The Bancorp was not in the process of foreclosing on any residential real estate loan as of December 31, 2022.

All of the loans classified as troubled debt restructurings are also considered impaired. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of cash flows, unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.

Acquired Loan Purchase Discounts

As part of the fair value of loans receivable, there was a net fair value discount for loans acquired of $5.2 million at December 31, 2023, compared to $5.5 million at December 31, 2022.

Accretable yield, or income recorded for the twelve months ended December 31, is as follows:

(dollars in thousands)	Total
2022	$	1,010
2023		1,078

Accretable yield, or income expected to be recorded in the future is as follows:

(dollars in thousands)	Total
2024	$	673
2025		667
2026		484
2027		313
2028 and thereafter		3,068
Total	$	5,205

AllowanceforCreditLosses

The allowance for credit losses is established for current expected credit losses on the Bancorp’s loan portfolios utilizing guidance in Accounting Standards Codification (ASC) Topic 326. The Bancorp adopted ASU 2016-13 on January 1, 2023. Therefore, as of December 31, 2022, the provision for credit losses and other allowance for loan loss disclosures for the year ended December 31, 2022, were calculated under the incurred loss method.

The determination of the allowance requires significant judgment to estimate credit losses measured on a collective pool basis when similar risk characteristics exist, and for loans evaluated individually. In determining the allowance, the Bancorp estimates expected future losses for the loan’s entire contractual term adjusted for expected payments when appropriate. The allowance estimate considers relevant available information, from internal and external sources relating to the historical loss experience, current conditions, and reasonable and supportable forecasts for the Bancorp’s outstanding loan balances. The allowance is an estimation that reflects management’s evaluation of expected losses related to the Bancorp’s financial assets measured at amortized cost. To ensure that the allowance is maintained at an adequate level, a detailed analysis is performed on a quarterly basis and an appropriate provision is made to adjust the allowance.

The Bancorp categorizes the loan portfolios into nine segments based on similar risk characteristics. Loans within each segment are collectively evaluated using the Probability of Default (“PD”)/Loss Given Default (“LGD”) methodology (PD/LGD). In creating the CECL model, the Bancorp has established a two-year reasonable and supportable forecast period with a two-year straight line reversion to the long-term historical average. Due to its minimal loss history, the Bancorp elected to use peer data for a more reasonable calculation. The following table shows the changes in the allowance for loan losses, segregated by portfolio segment, for the year ended December 31, 2023, and 2022.

(Dollars in thousands)	Beginning Balance		Adoption of ASC 326		PCD Gross-up		Charge-offs			Recoveries		Provisions			Ending Balance

The Bancorp's activity in the allowance for credit losses, by loan segment, is summarized below for the twelve months ended December 31, 2023:

Allowance for credit losses:
Residential real estate	$	3,021	$	1,688	$	535	$	(997	)	$	149	$	(412	)	$	3,984
Home equity		410		99		29		(43	)		-		203			698
Commercial real estate		5,784		1,003		443		(372	)		3		184			7,045
Construction and land development		1,253		1,735		-		-			-		1,218			4,206
Multifamily		1,007		141		-		-			131		(346	)		933
Commercial business		1,365		320		5		(1,064	)		265		758			1,649
Consumer		57		5		17		(95	)		15		8			7
Manufactured homes		-		112		-		-			-		69			181
Government		-		55		-		-			-		10			65
Total	$	12,897	$	5,158	$	1,029	$	(2,571	)	$	563	$	1,692		$	18,768

The Bancorp's activity in the allowance for loan losses, by loan segment, is summarized below for the twelve months ended December 31, 2022:

Allowance for loan losses:
Residential real estate	$	2,480	$	-	$	-	$	(29	)	$	53	$	517		$	3,021
Home equity		357		-		-		-			-		53			410
Commercial real estate		5,515		-		-		(431	)		-		700			5,784
Construction and land development		2,119		-		-		-			-		(866	)		1,253
Multifamily		848		-		-		-			-		159			1,007
Commercial business		2,009		-		-		(57	)		89		(676	)		1,365
Consumer		15		-		-		(91	)		20		113			57
Manufactured homes		-		-		-		-			-		-			-
Government		-		-		-		-			-		-			-
Total	$	13,343	$	-	$	-	$	(608	)	$	162	$	-		$	12,897

A collateral dependent loan relies solely on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with the loan, the Bancorp considers character, overall financial condition and resources, and payment record of the borrower; the prospects for support from any financially responsible guarantors; and the nature and degree of protection provided by the cash flow and value of any underlying collateral. However, as other sources of repayment become inadequate over time, the significance of the collateral's value increases and the loan may become collateral dependent.

The table below presents the amortized cost basis and allowance for credit losses (“ACL”) allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses.

(Dollars in thousands)	December 31, 2023
	Real Estate		Equipment/Inventory		Accounts Receivable		Other		Total		ACL Allocation
Residential real estate	$	30	$	-	$	-	$	-	$	-	$	30
Commercial real estate		2,541		-		-		-		2,541		53
Multifamily		4,244		-		-		-		4,244		85
Commercial business		-		1,583		1,557		192		3,332		738
	$	6,815	$	1,583	$	1,557	$	192	$	10,117	$	906

A deferred cost reserve is maintained for the portfolio of manufactured home loans that have been purchased. This reserve is available for use for manufactured home loan nonperformance and costs associated with nonperformance. If the segment performs in line with expectations, the deferred cost reserve is paid as a premium to the third party originator of the loan. The unamortized balance of the deferred cost reserve totaled $3.5 million and $4.6 million as of December 31, 2023, and December 31, 2022, respectively, and is included in net deferred loan origination cost.

The following table presents non–accrual loans, and loans past due over 90 days still on accrual by class of loans:

As of December 31, 2023	Nonaccrual with No Allowance for Credit Loss		Nonaccrual		Loans Past Due over 90 Days Still Accruing
Residential real estate	$	442	$	1,251	$	1,131
Home equity		161		307		-
Commercial real estate		603		230		712
Construction and land development		-		-		-
Multifamily		2,357		1,358		-
Commercial business		1,724		1,173		-
Consumer		-		2		-
Manufactured homes		-		-		-
Government		-		-		-
Total	$	5,287	$	4,321	$	1,843

The Bancorp's impairment analysis is summarized below:

	Ending Balances

(Dollars in thousands)	Individually evaluated for impairment reserves		Collectively evaluated for impairment reserves		Loan receivables		Individually evaluated for impairment		Purchased credit impaired individually evaluated for impairment		Collectively evaluated for impairment

The Bancorp's allowance for loan losses impairment evaluation and loan receivables are summarized below at December 31, 2022:

Residential real estate	$	24	$	2,997	$	484,595	$	1,518	$	988	$	482,089
Home equity		3		407		38,978		294		125		38,559
Commercial real estate		13		5,771		486,431		2,392		2,935		481,104
Construction and land development		-		1,253		108,926		-		-		108,926
Multifamily		-		1,007		251,014		6,739		382		243,893
Commercial business		297		1,068		93,278		1,758		953		90,567
Consumer		-		57		918		-		17		901
Manufactured homes		-		-		34,882		-		-		34,882
Government		-		-		9,549		-		-		9,549
Total	$	337	$	12,560	$	1,508,571	$	12,701	$	5,400	$	1,490,470

	December 31, 2023
(dollars in thousands)	Interest income recognized during the period on nonaccrual loans
Residential real estate	$	173
Home equity		19
Commercial real estate		70
Construction and land development		9
Multifamily		31
Commercial business		156
Consumer		2
Total	$	460

							For the twelve months ended
	As of December 31, 2022						December 31, 2022
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential real estate	$	2,255	$	3,711	$	-	$	2,528	$	202
Home equity		399		416		-		253		12
Commercial real estate		5,314		5,406		-		3,409		205
Construction & land development		-		-		-		344		-
Multifamily		7,121		7,163		-		3,387		16
Farmland		-		-		-		-		-
Commercial business		2,278		2,392		-		1,365		76
Consumer		17		17		-		15		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

With an allowance recorded:
Residential real estate	$	251	$	276	$	24	$	194	$	5
Home equity		20		20		3		21		1
Commercial real estate		13		14		13		678		-
Construction & land development		-		-		-		-		-
Multifamily		-		-		-		-		-
Farmland		-		-		-		-		-
Commercial business		433		561		297		352		13
Consumer		-		-		-		-		-
Manufactured homes		-		-		-		-		-
Government		-		-		-		-		-

Total:
Residential real estate	$	2,506	$	3,987	$	24	$	2,722	$	207
Home equity	$	419	$	436	$	3	$	274	$	13
Commercial real estate	$	5,327	$	5,420	$	13	$	4,087	$	205
Construction & land development	$	-	$	-	$	-	$	344	$	-
Multifamily	$	7,121	$	7,163	$	-	$	3,387	$	16
Farmland	$	-	$	-	$	-	$	-	$	-
Commercial business	$	2,711	$	2,953	$	297	$	1,717	$	89
Consumer	$	17	$	17	$	-	$	15	$	-
Manufactured homes	$	-	$	-	$	-	$	-	$	-
Government	$	-	$	-	$	-	$	-	$	-

Accrued interest receivable on loans totaled $5.7 million and is excluded from the estimate of credit losses. The Bancorp made the accounting policy election to not measure an ACL for accrued interest receivable. Accrued interest deemed uncollectible will be written off through interest income.

Liability for Credit Losses on Unfunded Loan Commitments

The liability for credit losses inherent in unfunded loan commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheet. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the ACL. The following table shows the changes in the liability for credit losses on unfunded loan commitments.

	Year ended,
	December 31,
(Dollars in thousands)	2023
Balance, beginning of period	$	-
Adoption of ASC 326		3,108
Provision		333
Balance, end of period	$	3,441