What changed in this filing

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Item 1. Financial Statements

2023-05-12 compared with 2022-11-14 · 302 added, 387 removed, 589 unchanged (54% of the section changed)

3 unchanged sentences

and Subsidiary

September 30,

Consolidated Balance Sheets

4 unchanged sentences

Restricted equity securities, at cost

Loans held-for-sale

Allowance for loan losses

Allowance for credit losses

( 9,256,170 )

( 8,709,225 )

Deferred net loan costs (fees)

Deferred net loan costs

Bank premises and equipment, net

18 unchanged sentences

Shareholders' Equity

Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding at 09/30/22 and 12/31/21 ( 100,000 liquidation value, per share)

Preferred stock, 1,000,000 shares authorized, 15 shares issued and outstanding

at 03/31/23 and 12/31/22 ($ 100,000 liquidation value, per share)

Common stock - $ 2.50 par value;

15,000,000 shares authorized, 5,628,909 shares issued at 09/30/22 and 5,587,939 shares issued at 12/31/21

15,000,000 shares authorized, 5,665,187

shares issued at 03/31/23 and 5,647,710 shares issued at 12/31/22

Additional paid-in capital

15 unchanged sentences

and Subsidiary

Three Months Ended September 30,

Consolidated Statements of Income

Interest income

Interest and fees on loans

Interest on taxable debt securities

Interest on tax-exempt debt securities

Interest on federal funds sold and overnight deposits

Total interest income

Interest expense

Interest on deposits

Interest on borrowed funds

Interest on repurchase agreements

Interest on junior subordinated debentures

Total interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Non-interest income

Income from sold loans

Other income from loans

Total non-interest income

Non-interest expense

Salaries and wages

Employee benefits

Occupancy expenses, net

Other expenses

Total non-interest expense

Income before income taxes

Income tax expense

Earnings per common share

Weighted average number of common shares used in computing earnings per share

Dividends declared per common share

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Community Bancorp.

and Subsidiary

Nine Months Ended September 30,

Three Months Ended March 31

Consolidated Statements of Income

12 unchanged sentences

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses

Net interest income after provision for credit losses

Non-interest income

11 unchanged sentences

Earnings per common share

Weighted average number of common shares used in computing earnings per share

Weighted average number of common shares

used in computing earnings per share

Dividends declared per common share

2 unchanged sentences

and Subsidiary

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended September 30,

Other comprehensive loss, net of tax:

Unrealized holding loss on securities AFS arising during the period

( 8,978,128 )

Other comprehensive loss, net of tax

( 7,092,721 )

Total comprehensive (loss) income

$ ( 3,482,215

Nine Months Ended September 30,

Other comprehensive loss, net of tax:

Unrealized holding loss on securities AFS arising during the period

( 27,078,956 )

( 1,515,004 )

Other comprehensive loss, net of tax

Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31

Other comprehensive income (loss), net of tax:

Unrealized holding gain (loss) on securities AFS arising during the period

( 11,069,161 )

Other comprehensive income (loss), net of tax

( 8,744,637 )

Total comprehensive (loss) income

Total comprehensive income (loss)

$ ( 6,339,095 )

3 unchanged sentences

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2022

Three Months Ended March 31 2023

shareholders'

2 unchanged sentences

$ ( 2,622,777 )

Cumulative change in accounting principle (Note 2)

Balance at January 1, 2023 (as adjusted for

Change in accounting principle)

Issuance of common stock

4 unchanged sentences

Comprehensive income

Other comprehensive loss

( 8,744,637 )

Other comprehensive income

March 31, 2023

1 unchanged sentence

$ ( 2,622,777 )

Issuance of common stock

Cash dividends declared

( 1,240,049 )

Preferred stock

Comprehensive income

Other comprehensive loss

( 5,555,018 )

June 30, 2022

$ ( 15,466,626 )

$ ( 2,622,777 )

Issuance of common stock

Cash dividends declared

( 1,243,187 )

Preferred stock

Comprehensive income

Other comprehensive loss

( 7,092,721 )

September 30, 2022

$ ( 22,559,347 )

$ ( 2,622,777 )

*Accumulated other comprehensive loss

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

Community Bancorp.

and Subsidiary

Consolidated Statements of Changes in Shareholders' Equity

Nine Months Ended September 30, 2021

Three Months Ended March 31 2022

shareholders'

1 unchanged sentence

$ ( 1,166,971 )

$ ( 2,622,777 )

Issuance of common stock

3 unchanged sentences

Preferred stock

Redemption of preferred stock

Comprehensive income

Comprehensive loss

Other comprehensive loss

4 unchanged sentences

$ ( 2,622,777 )

Issuance of common stock

Cash dividends declared

( 1,173,253 )

Preferred stock

Comprehensive income

Other comprehensive income

June 30, 2021

$ ( 2,622,777 )

Issuance of common stock

Cash dividends declared

( 1,176,771 )

Preferred stock

Comprehensive income

Other comprehensive loss

September 30, 2021

$ ( 281,505 )

$ ( 2,622,777 )

*Accumulated other comprehensive income (loss)

3 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31

Cash Flows from Operating Activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization, bank premises and equipment

Provision for loan losses

Provision for credit losses

Deferred income tax

Gain on sale of loans

Gain on sale of bank premises and equipment

Capital loss on leases

Income from CFS Partners

4 unchanged sentences

( 4,529,766 )

Increase (decrease) in taxes payable

(Increase) decrease in interest receivable

Decrease in mortgage servicing rights

Increase in taxes payable

Decrease (increase) in interest receivable

Decrease (increase) in mortgage servicing rights

Decrease in right-of-use assets

6 unchanged sentences

Decrease in accrued expenses

( 1,040,367 )

Increase (decrease) in other liabilities

4 unchanged sentences

( 19,103,623 )

( 65,972,109 )

Proceeds from redemption of restricted equity securities

Purchases of restricted equity securities

Decrease in limited partnership contributions payable

Proceeds from distribution from CFS Partners

(Increase) decrease in loans, net

Investments in limited liability entities

Increase in loans, net

( 10,074,935 )

Capital expenditures net of proceeds from sales of bank premises and equipment

( 6,998,537 )

Capital expenditures net of proceeds from sales of bank

premises and equipment

Recoveries of loans charged off

3 unchanged sentences

Cash Flows from Financing Activities:

Net increase in demand and interest-bearing transaction accounts

Net increase in money market and savings accounts

Net decrease in time deposits

Net decrease in demand and interest-bearing transaction accounts

( 29,855,106 )

( 12,916,068 )

Net decrease in repurchase agreements

Net (decrease) increase in money market and savings accounts

( 8,183,145 )

Repayments on long-term borrowings

Net increase in time deposits

Net increase (decrease) in repurchase agreements

( 3,865,864 )

Decrease in finance lease obligations

1 unchanged sentence

Dividends paid on common stock

Net cash used in financing activities

( 30,462,493 )

( 6,931,260 )

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

( 33,495,328 )

Cash and cash equivalents:

( 25,906,154 )

Cash and cash equivalents:

Supplemental Schedule of Cash Paid During the Period:

Income taxes, net of refunds

Supplemental Schedule of Noncash Investing and Financing Activities:

Change in unrealized loss on securities AFS

$ ( 27,078,956

Change in unrealized gain (loss) on securities AFS

$ ( 11,069,161 )

Additions to finance lease obligations

Common Shares Dividends Paid:

Dividends declared

Increase in dividends payable attributable to dividends declared

Decrease (increase) in dividends payable attributable to dividends declared

Dividends reinvested

9 unchanged sentences

The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 contained in the Company's Annual Report on Form 10-K.

Certain amounts in the 2022 consolidated financial statements were reclassified to conform to the current period presentation.

The reclassification had no effect on net income or shareholders’ equity as previously reported.

The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for any other interim period or the full annual period ending December 31, 2023.

Certain amounts disclosed in the Notes below for the 2021 annual and three- and nine-month periods of 2021 have been reclassified to conform to the current year presentation.

The Company is considered a “smaller reporting company” under the disclosure rules of the SEC, as amended in 2018.

6 unchanged sentences

Available-for-sale

Federal Home Loan Bank of Boston

Improvement Act of 1991

MBS issued by a US government agency

Federal Home Loan Bank of Boston

Federal Home Loan Mortgage Corporation

Allowance for Credit Losses

Federal Open Market Committee

29 unchanged sentences

Current Expected Credit Loss

Other comprehensive income (loss)

Off-balance sheet

Community Financial Services Group, LLC

Other real estate owned

Other comprehensive income (loss)

CFS Partners:

Community Financial Services Partners,

Other real estate owned

Other-than-temporary impairment

Private mortgage insurance

Collateralized Mortgage Obligations

Paycheck Protection Program

Private mortgage insurance

Community Bancorp.

and Subsidiary

USDA Rural Development

Paycheck Protection Program

Coronavirus Disease 2019

Small Business Administration

USDA Rural Development

Commercial Real Estate

Securities and Exchange Commission

Small Business Administration

Demand Deposit Account(s)

Secured Overnight Financing Rate

Securities and Exchange Commission

Depository Trust Company

Troubled-debt restructuring

Secured Overnight Financing Rate

Dividend Reinvestment Plan

Department of Agriculture

Troubled-debt restructuring

Exchange Act:

Securities Exchange Act of 1934

Veterans Administration

Department of Agriculture

Financial Accounting Standards Board

Veterans Administration

Federal Deposit Insurance Corporation

Recent Accounting Developments

In June 2016, the FASB issued ASU No.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

In December 2022, the FASB issued ASU No.

2022-06, Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848 , which extended the sunset date of December 31, 2022 to December 31, 2024.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2024.

The Company is assessing ASU No.

2020-04 and its impact on the transition away from LIBOR for its Junior Subordinated Debentures due December 15, 2037, the Company’s only financial instruments that utilize LIBOR as a reference rate.

That transition will become effective for the Debentures as of the first London banking day after June 30, 2023 (see the Interest Rate Risk and Asset and Liability Management section of the accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations following these Notes).

Accounting Standards Adopted in 2023

The Company has adopted the following accounting standards and has applied them to the Company’s interim consolidated financial statements for the three months ended March 31, 2023.

Prior periods have not been restated as a result of adoption of these accounting standards.

2016-13, Financial Instruments—Credit Losses (Topic 326) In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses over the life of a loan.

Under the new guidance, which replaces the existing incurred loss model for recognizing credit losses, banks and other lending institutions are required to recognize the full amount of expected credit losses over the life of a loan.

The new guidance, which is referred to as the current expected credit loss, or CECL model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses over the life of the loans.

A modified version of these requirements also applies to debt securities classified as available for sale, which will require that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down.

The ASU will require a change in the Company's methodology for calculating its ALL and allowance on unused commitments.

The Company will transition from an incurred loss model to an expected loss model, which may result in an increase in the ALL upon adoption and may negatively impact the Company’s and the Bank's retained earnings and regulatory capital ratios.

The Company has formed a committee to assess the implications of this new pronouncement and transitioned to a software solution for preparing the ALL calculation and related reports that management believes provides the Company with stronger data integrity, ease and efficiency in ALL preparation.

The new software solution also provides numerous training opportunities for the appropriate personnel within the Company.

The Company has gathered and is continuing to analyze the historical data to serve as a basis for estimating the ALL under CECL and continues to evaluate the anticipated impact of the adoption of the ASU on its consolidated financial statements.

The ASU will become effective for the Company beginning with the 2023 fiscal year including interim periods.

Parallel calculations under the existing ALL methodology and the CECL model are being run throughout 2022 in preparation for the transition to CECL.

Based on the September 30, 2022 parallel calculation, the required adjustment would not have a material impact to retained earnings and regulatory capital.

A modified version of these requirements also applies to debt securities classified as available for sale, which requires that credit losses on those securities be recorded through an allowance for credit losses rather than a write-down.

The ASU became effective for the Company beginning with the 2023 fiscal year including interim periods.

Upon adoption of this ASU on January 1, 2023, a cumulative-effect adjustment of $ 549,113 was recorded as a reduction to retained earnings, with a corresponding adjustment of $ 243,376 increasing the ACL on loans, an adjustment of $ 451,704 , increasing other liabilities for the ACL on off-balance sheet credit exposures, and an adjustment of $ 145,967 increasing deferred tax assets.

There was no allowance recorded for credit losses on AFS debt securities resulting from adoption of this ASU.

2022-02, Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures.

In March 2022, the FASB issued ASU No.

5 unchanged sentences

Additionally, the amendments to Topic 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination.

The guidance will become effective for the Company beginning with the fiscal year 2023, including interim periods.

The Company is assessing the impact of ASU No.

2022-02 but does not expect that its adoption will have a material impact on the consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848):

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

The Company is assessing ASU No.

The guidance has become effective for the Company beginning with the fiscal year 2023, including interim periods.

Adoption of this ASU did not have a material impact on the consolidated financial statements.

Earnings per Common Share

1 unchanged sentence

The following tables illustrate the calculation of earnings per common share for the periods presented, as adjusted for the cash dividends declared on the preferred stock:

Three Months Ended September 30,

Net income, as reported

$ 3,610,506 $ 3,699,202

dividends to preferred shareholders

17,813 12,188

Net income available to common shareholders

$ 3,592,693 $ 3,687,014

Weighted average number of common shares

used in calculating earnings per share

5,409,612 5,354,187

Earnings per common share

$ 0.66 $ 0.69

Nine Months Ended September 30,

Three Months Ended March 31

Net income, as reported

6 unchanged sentences

Debt securities AFS as of the balance sheet dates consisted of the following:

September 30, 2022

March 31, 2023

GSE debt securities

13 unchanged sentences

$ 192,918,109

Investments pledged as collateral for repurchase agreements consisted of U.S.

The Company had investments in Agency MBS exceeding 10 % of stockholders’ equity with a book value of $ 132.4 million and $ 135.2 million, respectively, and a fair value of $ 114.5 million and $ 115.2 million, respectively, at March 31, 2023 and December 31, 2022.

Investments securities pledged as collateral for repurchase agreements consisted of certain U.S.

GSE debt securities, Agency MBS, ABS and OAS, and CMO.

These repurchase agreements mature daily.

These pledged investments as of the balance sheet dates were as follows:

September 30, 2022

The aggregate amortized cost and fair value of these pledged investments as of the balance sheet dates were as follows:

March 31, 2023

December 31, 2022

There were no sales of debt securities during the first nine months of 2022 or 2021.

There were no sales of debt securities during the first three months of 2023 or 2022.

The scheduled maturities of debt securities as of the balance sheet dates were as follows:

September 30, 2022

March 31, 2023

Due in one year or less

15 unchanged sentences

12 months or more

September 30, 2022

March 31, 2023

GSE debt securities

15 unchanged sentences

$ 185,857,483

The unrealized losses for all periods presented were principally attributable to changes in prevailing interest rates for similar types of securities and not deterioration in the creditworthiness of the issuer.

Management evaluates its debt securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions, or adverse developments relating to the issuer, warrant such evaluation.

Consideration is given to (1) the length of time and the extent to which the fair value has been less than the carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment for a period of time sufficient to allow for any anticipated recovery in fair value.

In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies or other adverse developments in the status of the securities have occurred, and the results of reviews of the issuer's financial condition.

As of September 30, 2022 and December 31, 2021, there were no declines in the fair value of any of the securities reflected in the table above that were deemed by management to be OTTI.

Loans, Allowance for Loan Losses and Credit Quality

The Company adopted ASU No.

2016-13 effective January 1, 2023 which requires credit losses on debt securities AFS to be recorded in an allowance for credit losses and eliminates the concept of OTTI for debt securities AFS.

Under the ASU, if the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, then the credit loss is recorded through an allowance rather than as a write-down of the security.

As of March 31, 2023, the Company did not have the intent to sell, nor was it more likely than not that we would be required to sell any of the debt securities AFS in an unrealized loss position prior to recovery.

As of March 31, 2023, the Company also determined that no individual debt securities in an unrealized loss position represented credit losses that would require an allowance for credit losses.

The Company concluded that the unrealized losses were primarily attributed to increases in market interest rates since these securities were purchased under other market conditions.

As of December 31, 2022, the Company believed the unrealized losses on securities AFS were due to market conditions rather than reduced estimated cash flows or deterioration in the creditworthiness of the issuer.

At December 31, 2022, the Company did not intend to sell these securities, did not anticipate that these securities will be required to be sold before anticipated recovery, and expected full principal and interest to be collected.

Therefore, under the accounting principles pertaining to OTTI analysis then in effect, the Company did not consider the declines in the fair value of these securities to be OTTI as of December 31, 2022.

Loans, Allowance for Credit Losses and Credit Quality

The composition of net loans as of the balance sheet dates was as follows:

September 30,

March 31, 2023

December 31, 2022

Commercial & industrial

1 unchanged sentence

$ 112,951,873

Purchased loans

Commercial real estate

6 unchanged sentences

$ 740,332,658

Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods indicated:

Three Months Ended

Provision for credit losses on loans

Provision for credit losses on OBS credit exposure

Provision for credit losses

The following tables present the activity in the ACL on loans at adoption of ASU 2016-13 (CECL) on January 1, 2023 and for the first three months of 2023 and select information on impairment evaluation by portfolio segment

As of or for the first three months ended March 31, 2023

ACL beginning balance

Impact of adopting CECL

Provision (credit)

ACL ending balance

ACL evaluated for impairment

Loans evaluated for impairment

$ 118,898,281

$ 362,136,416

$ 199,033,728

$ 758,586,712

The following tables present activity in the ALL and select loan information on impairment evaluation, by portfolio segment, under the incurred loss methodology, for the periods indicated:

As of or for the year ended December 31, 2022

ALL beginning balance

Provision (credit)

ALL ending balance

ALL evaluated for impairment

Loans evaluated for impairment

$ 112,951,873

$ 356,892,986

$ 198,743,375

$ 748,548,608

As of or for the three months ended March 31, 2022

ALL beginning balance

Provision (credit)

ALL ending balance

ALL evaluated for impairment

Loans evaluated for impairment

$ 112,382,987

$ 308,311,734

$ 181,610,294

$ 696,293,182

The following is an age analysis of past due loans (including non-accrual) as of the balance sheet dates, by portfolio segment:

September 30, 2022

March 31, 2023

Commercial & industrial

1 unchanged sentence

$ 118,898,281

Purchased loans

Commercial real estate

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

$ 751,521,896

4 unchanged sentences

$ 112,951,873

Purchased loans

Commercial real estate

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

$ 741,017,727

1 unchanged sentence

For all loan segments, loans over 30 days past due are considered delinquent.

As of the balance sheet dates presented, loans in process of foreclosure consisted of the following residential mortgage loans:

Number of loans

September 30, 2022

The following tables present the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing as of the dates presented:

March 31, 2023

Commercial & industrial

Commercial real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

December 31, 2022

Allowance for loan losses

The ALL is established through a provision for loan losses charged to earnings.

Loan losses are charged against the allowance when management believes that future payments of a loan balance are unlikely.

Commercial & industrial

Commercial real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

As of March 31, 2023, there were no loans in process of foreclosure, compared to 5 loans with an aggregate balance of $ 195,082 at December 31, 2022.

Allowance for credit losses

The ACL is established through a provision for credit losses charged to earnings.

Credit losses are charged against the allowance when management believes that future payments of a loan balance are unlikely.

Subsequent recoveries, if any, are credited to the allowance.

6 unchanged sentences

The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.

As described below, the allowance consists of general, specific and unallocated components.

However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.

As described below, the allowance consists of general and specific components.

However, the entire allowance is available to absorb losses in the loan portfolio, regardless of general or specific components considered in determining the amount of the allowance.

General component

The general component of the ALL is based on historical loss experience and various qualitative factors and is stratified by the following loan segments:

The general component of the ACL is based on methodologies, inputs, and assumptions utilized to estimate lifetime credit losses when applied to the following loan segments:

commercial and industrial, purchased loans, CRE, municipal, residential real estate 1st lien, residential real estate Jr lien and consumer loans.

The Company does not disaggregate its portfolio segments further into classes.

Loss ratios are calculated by loan segment using appropriate look back periods.

Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment in the current economic climate.

During periods of economic stability, a relatively longer period (e.g., five years) may be appropriate.

During periods of significant expansion or contraction, the Company may appropriately shorten the historical time period.

Due primarily to the effects of COVID-19, during 2020 the Company shortened its look back period to one year, however, as of March 31, 2022, the look back period was changed to two years.

Qualitative factors include the levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of CRE loans.

The Company utilizes a discounted cash flow (DCF) approach to calculate the expected loss for each portfolio segment.

Within the DCF model, a probability of default (PD) and loss given default (LGD) assumption is applied to calculate the expected loss for each segment.

PD is the probability the asset will default within a given timeframe and LGD is the percentage of assets not expected to be collected due to default.

The Company's PD and LGD assumptions may be derived from internal historical default and loss experience or from external data where there are not statistically meaningful loss events for a loan segment or it does not have default and loss data that covers a full economic cycle.

As of March 31, 2023, the primary macroeconomic drivers used within the DCF model included forecasts of Civilian unemployment and changes in National gross domestic product (GDP).

Management monitors and assesses its macroeconomic drivers at least annually (generally in the fourth quarter) to determine if or that they continue to be the most predictive indicator of losses within the Company's loan portfolio, and these macroeconomic drivers may change from time to time.

To determine its reasonable and supportable forecast, management may leverage macroeconomic forecasts obtained from various reputable sources, which may include, but is not limited to, the FOMC forecast and other publicly available forecasts from well recognized, leading economists or firms.

The Company's reasonable and supportable forecast period generally ranges from one to three years, depending on the facts and circumstances of the current state of the economy, portfolio segment, and management's judgment of what can be reasonably supported.

The model reversion period generally ranges from one to six years, and it also depends on the current state of the economy and management's judgments of such.

Management monitors and assesses the forecast and reversion period at least annually.

The Company used a one-year forecast and reversion period to calculate the ACL on loans as of March 31, 2023.

When the DCF method is used to determine the ACL, management does not adjust the effective interest rate used to discount expected cash flows to incorporate expected prepayments.

Expected credit losses are estimated over the contractual term of the loans.

For term loans, the contractual life is calculated based on the maturity date.

For commercial revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date.

For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date.

The contractual term excludes expected extensions, renewals, and modifications.

In calculating the ACL on loans, the contractual life of a loan must be adjusted for prepayments to arrive at expected cash flows.

The Company models term loans using an annualized prepayment.

When the Company has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually.

For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the cash flow.

Management has elected loss rate methodologies appropriate for each loan segment.

The DCF method was chosen for the commercial and industrial, CRE, residential real estate 1 st lien, residential real estate Jr Lien and consumer loans.

The DCF model, being periodic in nature, allows for effective incorporation of a reasonable and supportable forecast in a directionally consistent and objective manner.

For the purchased loans segment, a long-term average loss rate is calculated and applied on a quarterly basis for the remaining life of the pool.

Due to the lack of any historical loss data, a manual entry methodology was chosen for the municipal loans given the immaterial nature of the pool when considering prior loss history as well as the inability to reasonably forecast defaults or loss given default for the pool.

Qualitative factors are also applied to include the levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly, concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of CRE loans.

This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available.

7 unchanged sentences

A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.

Purchased Loans – Loans in this segment are loans purchased through a loan purchasing program with Bankers Healthcare Group (BHG).

Purchased – Loans in this segment are loans purchased through a loan purchasing program with Bankers Healthcare Group (BHG).

BHG originates commercial loans to medical professionals nationwide and sells them individually to a secondary market, primarily banks, through a bid process.

13 unchanged sentences

Municipal – Loans in this segment are made to local municipalities, attributable to municipal financing transactions and backed by the full faith and credit of town governments or dedicated governmental revenue sources, with no historical losses recognized by the Company.

Qualitative factors are not utilized in the manual entry method for municipal loans.

Residential Real Estate - 1 st Lien – Loans in this segment are collateralized by first mortgages on 1 – 4 family owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.

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Specific component

The specific component of the ALL relates to loans that are impaired.

Impaired loans are loans to a borrower that in the aggregate are greater than $ 100,000 and that are in non-accrual status or are TDRs regardless of amount.

A specific allowance is established for an impaired loan when its estimated fair value or net present value of future cash flows is less than the carrying value of the loan.

For all loan segments, except consumer loans, a loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant or temporary payment delays and payment shortfalls generally are not classified as impaired.

Management evaluates 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 and frequency 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.

Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Impaired loans also include troubled loans that are restructured.

A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted.

TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

Under March 2020 guidance from the federal banking agencies and concurrence by the FASB, certain short-term loan accommodations made in good faith prior to January 1, 2022 for borrowers experiencing financial difficulties due to the COVID-19 health emergency are not considered TDRs.

Loans that do not share risk characteristics are evaluated on an individual basis.

Loans evaluated individually are not also included in the collective evaluation.

In general, loans individually evaluated for estimated credit losses include those (i) greater than $ 100,000 and that are on nonaccrual or (ii) have other unique characteristics differing from the portfolio segment.

Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan.

However, when management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.

Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.

Unallocated component

An unallocated component of the ALL is maintained to cover uncertainties that could affect management’s estimate of probable losses.

The unallocated component reflects management’s estimate of the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The tables below summarize changes in the ALL and select loan information, by portfolio segment, for the periods indicated.

As of or for the three months ended September 30, 2022

ALL beginning balance

Provision (credit)

ALL ending balance

As of or for the nine months ended September 30, 2022

ALL beginning balance

Provision (credit)

ALL ending balance

ALL evaluated for impairment

Loans evaluated for impairment

$ 121,224,062

$ 324,327,160

$ 192,566,579

$ 724,194,001

As of or for the year ended December 31, 2021

ALL beginning balance

Provision (credit)

ALL ending balance

ALL evaluated for impairment

Loans evaluated for impairment

$ 111,125,622

$ 300,958,931

$ 181,316,345

$ 689,988,533

As of or for the three months ended September 30, 2021

ALL beginning balance

Provision (credit)

ALL ending balance

As of or for the nine months ended September 30, 2021

ALL beginning balance

Provision (credit)

ALL ending balance

Impaired loans, by portfolio segment, were as follows:

As of September 30, 2022

Investment(1)

Related allowance recorded

Commercial & industrial

Commercial real estate

Residential real estate

Total with related allowance

No related allowance recorded

Commercial & industrial

Commercial real estate

Residential real estate

Total with no related allowance

Total impaired loans

Recorded investment in impaired loans as of September 30, 2022 includes accrued interest receivable of $ 12,627 .

As of September 30, 2022

Three Months Ended

Nine Months Ended

Related allowance recorded

Commercial & industrial

Commercial real estate

Residential real estate

Total with related allowance

No related allowance recorded

Commercial & industrial

Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation.

Allowance for loan losses (prior to adoption of CECL)

Please refer to Note 4 to the audited consolidated financial statements contained in the Company’s 2022 Annual Report on 10-K for the description on disclosure of the ALL in periods prior to adoption of CECL.

The following table presents the amortized cost basis of collateral-dependent loans as of March 31, 2023 by collateral type:

Commercial real estate

Residential real estate

Total with no related allowance

Total impaired loans

Residential real estate - 1st lien

Total collateral-dependent loans

(1) Including, but not limited to, inventory, equipment and accounts receivable.

Impaired loans, by portfolio segment, prior to adoption of ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures), were as follows:

As of December 31, 2022

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Related allowance recorded

Residential real estate

Commercial & industrial

Residential real estate – 1st lien

Total with related allowance

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Commercial real estate

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

Total with no related allowance

Total impaired loans

Recorded investment in impaired loans as of December 31, 2021 includes accrued interest receivable and deferred net loan costs of $ 33,077 .

As of September 30, 2021

(1) Recorded investment in impaired loans in the table above includes accrued interest receivable and deferred net loan costs of $ 11,517 .

As of March 31, 2022

Investment(1)

Related allowance recorded

Residential real estate

Residential real estate - 1st lien

Total with related allowance

2 unchanged sentences

Commercial real estate

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

Total with no related allowance

Total impaired loans

Recorded investment in impaired loans as of September 30, 2021 includes accrued interest receivable and deferred net loan costs of $ 34,179 .

As of September 30, 2021

(1 ) Recorded investment in impaired loans in the table above includes accrued interest receivable of $ 38,479 .

As of March 31, 2022

Three Months Ended

Nine Months Ended

Related allowance recorded

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

Total with related allowance

2 unchanged sentences

Commercial real estate

Residential real estate

Residential real estate - 1st lien

Residential real estate - Jr lien

Total with no related allowance

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Credit Quality Grouping

In developing the ALL, management uses credit quality groupings to help evaluate trends in credit quality.

In developing the ACL, management uses credit quality groupings to help evaluate trends in credit quality.

The Company groups credit risk into Groups A, B and C.

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Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk – are loans that are expected to perform as agreed under their respective terms.

Group A loans - Pass – are loans that are expected to perform as agreed under their respective terms.

Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size.

Group A loans include commercial purpose loans that are individually risk rated, including purchased loans, and retail loans that are rated by pool.

Group A loans include commercial purpose loans that are individually risk rated, including purchased and retail loans that are rated by pool.

Group A retail loans include performing consumer and residential real estate loans.

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Loan balances fully secured by deposit accounts or that are fully guaranteed by the federal government are considered acceptable risk.

Group B loans – Management Involved - are loans that require greater attention than the acceptable risk loans in Group A.

Group B loans – Special Mention - are loans that require greater attention than the acceptable risk loans in Group A.

Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or borrowers that have had unexpected or adverse changes in management.

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Group B is limited to commercial purpose loans that are individually risk rated.

Group C loans – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention.

Group C loans – Substandard/Doubtful – are loans that have distinct shortcomings that require a greater degree of management attention.

Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency.

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For larger, more complex or adversely rated loans, risk ratings are also assessed at the time of annual or periodic review.

Lenders are required to make immediate disclosure to the Senior Credit Officer of any known increase in loan risk, even if considered temporary in nature.

The risk ratings within the loan portfolio, by segment, as of the balance sheet dates were as follows:

As of September 30, 2022

$ 112,114,846

$ 313,323,279

$ 189,037,878

$ 700,313,040

$ 121,224,062

$ 324,327,160

$ 192,566,579

$ 724,194,001

As of December 31, 2021

Lenders are required to make immediate disclosure to the Chief Lending Officer of any known increase in loan risk, even if considered temporary in nature.

The risk ratings within the loan portfolio and current period gross charge-offs, by loan segment and origination year, as of March 31, 2023 were as follows:

As of March 31, 2023

(In thousands)

Special mention

Substandard/Doubtful

Total commercial

Current period gross charge-offs

Total purchased

Commercial Real Estate:

Special mention

Substandard/Doubtful

Total commercial real estate

Total municipal

Residential real estate - 1st lien:

Substandard/Doubtful

Total residential real estate - 1st lien

Residential real estate - Jr lien:

Substandard/Doubtful

Total residential real estate - Jr lien

Total consumer

Current period gross charge-offs

There were no current period gross charge-offs within the Purchased, CRE, Municipal, Residential real estate 1st lien and Residential real estate Jr lien loan segments.

There were no Special mention loans within the Residential real estate 1st lien or Jr lien loan segments.

There were no Special mention or Substandard/Doubtful loans within the Purchased, Municipal and Consumer loan segments.

Before the adoption of ASC 326 (CECL), the risk ratings within the loan portfolio, by segment, as of December 31, 2022 were as follows:

$ 104,697,047

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$ 748,548,608

Modifications of Loans and TDRs

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company is deemed to have granted such a concession if it has modified a troubled loan in any of the following ways:

Modifications of Loans

A loan is considered modified if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company is deemed to have granted such a concession if it has modified a loan in any of the following ways:

Reduced accrued interest;

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Capitalized delinquent accrued interest.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as modified.

However, pursuant to regulatory guidance, any payment delay longer than three months is generally not considered insignificant.

Management’s assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantors, provided that the third party has the ability to perform on the guarantee.

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties.

The Company’s modified loans are principally a result of extending loan repayment terms to relieve cash flow difficulties.

The Company has only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower.

The Company has not forgiven principal or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms.

However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

The Company has adopted the TDR guidance issued by the federal banking agencies in March and April 2020 regarding the treatment of certain short-term loan modifications relating to the COVID-19 pandemic.

Under this guidance, qualifying concessions and modifications are not considered TDRs.

In total, throughout the pandemic, the Company granted short term loan concessions and/or modifications within the terms of this guidance to 595 borrowers.

Of those loans, 322 remained on the books with an aggregate principal balance of $ 89.6 million as of September 30, 2022.

None of these loans were in a deferral status as of September 30, 2022;

however these loans may bear a higher risk of default in future periods.

There were no new TDRs for the three months ended September 30, 2022.

New TDRs, by portfolio segment, during the periods presented below were as follows:

Nine months ended September 30, 2022

Residential real estate - 1st lien

However, the Company evaluates each potential loan modification on its own merits and does not foreclose the granting of any particular type of concession.

There were no new loan modifications for the first three months of 2023.

Prior to adoption of ASU 2022-02, new TDRs, by portfolio segment, during the periods presented below were as follows:

Year ended December 31, 2022

Commercial & industrial

Commercial real estate

Residential real estate – 1st lien

Three months ended September 30, 2021

Nine months ended September 30, 2021

Commercial & industrial

Commercial real estate

Three months ended March 31, 2022

Residential real estate – 1st lien

There were no TDRs for which there was a payment default during the twelve month period ended December 31, 2022.

The TDRs for which there was a payment default during the twelve month periods presented below were as follows:

For the twelve months ended September 30, 2022

Commercial real estate

For the twelve months ended December 31, 2021

Commercial & industrial

For the twelve months ended March 31, 2022

Commercial real estate

For the twelve months ended September 30, 2021

Commercial & industrial

TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the ALL.

These loans are categorized as non-performing, may be past due, and are generally adversely risk rated.

The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve is typically calculated using the fair value of collateral method.

The specific allowances within the ALL related to TDRs as of the balance sheet dates are presented in the table below.

September 30,

Specific Allocation

Prior to adoption of ASU 2022-02, TDRs were treated as other impaired loans and carried individual specific reserves with respect to the calculation of the ALL.

These loans were categorized as non-performing, may have been past due, and were generally adversely risk rated.

The TDRs that had defaulted under their restructured terms were generally in collection status and their ALL reserve was typically calculated using the fair value of collateral method.

Prior to adoption of ASU 2022-02, the specific allowances within the ALL related to TDRs as of December 31, 2022 totaled $ 106,280 .

As of the balance sheet dates, the Company evaluates whether it is contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.

The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously restructured.

The Company is contractually committed to lend on one SBA guaranteed line of credit to a borrower whose lending relationship was previously modified.

OBS Credit Exposures:

In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit.

Such financial instruments are recorded as loans when they are funded.

Allowance for Credit Losses on OBS Credit Exposures:

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company.

The ACL on OBS credit exposures is adjusted through credit loss expense.

To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio.

An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company's own historical experience to estimate the expected funded amount for each loan segment as of the reporting date.

Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on OBS credit exposures as of the reporting date.

The ACL on OBS credit exposures is presented within accrued interest and other liabilities on the consolidated balance sheets.

Goodwill and Other Intangible Assets

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Fair value measurement is based upon quoted prices for similar assets, if available.

If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as yield curves, prepayment speeds and default rates.

Level 1 securities would include U.S.

1 unchanged sentence

Level 2 securities include federal agency securities, municipal securities and other asset-backed securities.

Impaired loans:

Impaired loans are reported based on one of three measures:

Individually analyzed loans:

Individually analyzed loans are reported based on one of three measures:

the present value of expected future cash flows discounted at the loan’s effective interest rate;

1 unchanged sentence

or the fair value of the collateral if the loan is collateral dependent.

If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL.

Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis.

If the fair value is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ACL.

Accordingly, certain individually analyzed loans may be subject to measurement at fair value on a non-recurring basis.

Management has estimated the fair values of collateral-dependent loans using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals.

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Assets measured at fair value on a recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy, are summarized below.

There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either 2022 or 2021.

September 30,

There were no Level 3 assets or liabilities measured on a recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between Levels during either of the periods presented for 2023 or 2022.

(market approach)

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The following table includes assets measured at fair value on a non-recurring basis that have had a fair value adjustment since their initial recognition.

Impaired loans measured at fair value only include impaired loans with a partial write-down or with a related specific ALL and are presented net of the specific allowances as disclosed in Note 5.

Individually analyzed loans measured at fair value only include those loans with a partial write-down or with a related specific ACL and are presented net of the specific allowances as disclosed in Note 5.

Assets measured at fair value on a non-recurring basis and reflected in the consolidated balance sheets at the dates presented, segregated by fair value hierarchy level, are summarized below.

There were no Level 1 or Level 3 assets or liabilities measured on a non-recurring basis as of the balance sheet dates presented, nor were there any transfers of assets between levels during either 2022 or 2021.

September 30,

(market approach)

Impaired loans, net of related allowance

Loans held-for-sale

Individually analyzed loans, net of related allowance

(1) Represents MSRs at lower of cost or fair value.

9 unchanged sentences

The estimated fair values of the Company's financial instruments as of the balance sheet dates were as follows:

September 30, 2022

March 31, 2023

(Dollars in Thousands)

3 unchanged sentences

Restricted equity securities

Loans and loans held-for-sale, net of ALL

Loans and loans held-for-sale, net of ACL

Commercial & industrial

Purchased loans

Commercial real estate

18 unchanged sentences

Restricted equity securities

Loans and loans held-for-sale, net of ALL

Loans and loans held-for-sale, net of ACL

Commercial & industrial

Purchased loans

Commercial real estate

14 unchanged sentences

The following table shows the changes in the carrying amount of the MSRs, included in other assets in the consolidated balance sheets, for the periods indicated:

Nine Months Ended

September 30, 2022

December 31, 2021

Three Months Ended

Balance at beginning of year

8 unchanged sentences

The Company has evaluated events and transactions through the date that the financial statements were issued for potential recognition or disclosure in these financial statements, as required by GAAP.

On September 7, 2022, the Company’s Board declared a cash dividend of $ 0.23 per common share, payable November 1, 2022 to shareholders of record as of October 15, 2022.

On March 15, 2023, the Company’s Board declared a cash dividend of $ 0.23 per common share, payable May 1, 2023 to shareholders of record as of April 15, 2023.

This dividend has been recorded in the Company’s consolidated financial statements as of the declaration date, including shares issuable under the DRIP.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements