Provision for Credit Losses

12 Months Ended

Dec. 31, 2023

Provision For Credit Losses

Provision for Credit Losses

5. Provision for Credit Losses

Effective January 1, 2022, the Company adopted amended accounting guidance “ASU No.2016-13 – Credit Losses” for the measurement of credit losses on financial instruments and other financial assets. That guidance requires an allowance for credit losses to be deducted from the amortized cost basis of financial assets to present the net carrying value that is expected to be collected over the contractual term of the assets considering relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance replaced the previous incurred loss model for determining the allowance for credit losses.

Accounts receivable are stated at the amount owed by the customer. The Company maintains an allowance for credit losses for accounts receivable and unbilled receivables, based on expected credit losses resulting from the inability of our customers to make required payments. The allowance for credit losses is estimated based on historical experience, current economic conditions and the creditworthiness of customers. Receivables are charged to the allowance when determined to be no longer collectible. The Company regularly monitors and assesses its risk of not collecting amounts owed by customers and records its allowance for credit losses based on the results of this analysis.

As of December 31, 2023, we have reviewed the entire loan portfolio as well as all financial assets of the Company for the purpose of evaluating the loan portfolio and the loan balances, including a review of individual and collective portfolio loan quality, loan(s) performance, including past due status and covenant defaults, assessment of the ability of the borrower to repay the loan on the loan terms, whether any loans should be placed on nonaccrual or returned to accrual, any concentrations in any single borrower and/or industry that we might need to further manage, and if any specific or general loan loss reserve should be established for the entire loan portfolio or for any specific loan.

We analyzed the loan loss reserve from three basis: general loan portfolio reserves; industry portfolio reserves, and specific loan loss reserves. As of year-ended December 31, 2023 and December 2022, the Company recorded a Loan loss reserve of approximately $4,933,000 and $1,041,000, respectively.

General Loan Portfolio Reserve - Based upon a relatively young loan portfolio that are relatively new loans to generally credit worthy borrowers, we do not believe that a substantial general loan portfolio reserve is due at this time. However, we do recognize that some inherent risks are in all loan portfolios, thus we recorded a general contingent portfolio reserve of $194,000 for December 31, 2023 and $145,000 for December 31, 2022 or approximately ¼ of 1% of the loan portfolio loan balance.

Industry Portfolio Reserves – Given the relatively young loan portfolio and a diversification of the portfolio over several different loan products, the risk is reduced. Accordingly, we have not recorded a discretionary reserve as of December 31, 2023 and December 31, 2022

Specific Loan Reserves - Previously, we had identified credit weaknesses and borrower repayment weakness in the Borrower 4 loan, which has a current principal and interest balance of $884,000. As of December 31, 2023 and December 31, 2022 we have recorded a specific loan loss reserve for the full balance due the Company. As of December 31, 2023, the Company identified credit weakness in borrower 2 and has placed a reserve approximating $2,884,000 against the outstanding principal and interest. As of December 31, 2023, the Company identified credit weakness in borrower 16 and placed a reserve of $1,046,000 against the outstanding principal and interest. The Company identified credit weakness in Borrower 19 and has placed a reserve of $1,102,000 against the outstanding principal and interest.

The following table identifies the loan loss reserve for the period ending December 31, :

		2023		2022
General Loan Portfolio Reserve	$	194,000	$	145,000
Specific Loan Reserves	$	5,916,000	$	896,000
Total	$	6,110,000	$	1,041,000

Changes in the allowance for doubtful accounts and loan loss reserve were as follows:  

	Allowance for credit losses			Loan loss reserve		Total
Balance at January 1, 2022	$	20,000		$	-	$	20,000
Adoption of CECL		-			1,041,000		1,041,000
Bad debt expense		9,000			-		9,000
Write-offs		-			-		-
Recoveries		-			-		-
Balance at December 31, 2022		29,000			1,041,000		1,070,000
Bad debt expense		2,000			5,069,000		5,071,000
Write-offs		3,500,000			-		3,500,000
Recoveries		(1,037,000	)		-		(1,037,000	)
Balance at December 31, 2023	$	2,494,000		$	6,110,000	$	8,604,000