What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-28 compared with 2021-03-01 · 498 added, 431 removed, 1415 unchanged (40% of the section changed)

11 unchanged sentences

Change in Accounting Principle

As discussed in Note A to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No.

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No.

326, Financial Instruments – Credit Losses (ASC 326) .

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

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The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans and Provision Expense

In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2020 as described in Notes A and F of the consolidated financial statements using the modified retrospective method.

See also the explanatory paragraph above for the change in accounting principle.

The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the contractual life of financial assets carried at amortized cost and off-balance-sheet credit exposures.

The ASU requires a financial asset (or a group of financial assets), including the Company's loan portfolio, measured at amortized cost to be presented at the net amount expected to be collected.

Allowance and Provision for Credit Losses on Loans

The allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the contractual life of loans carried at amortized cost as described in Notes 1 and 5 of the consolidated financial statements.

T he Company's loan portfolio, which is measured at amortized cost, is required to be presented at the net amount expected to be collected.

Estimates of expected credit losses for loans are based on historical experience, current conditions and reasonable and supportable forecasts over the expected life of the loans.

In order to estimate the expected credit losses, the Company implemented a new loss estimation model.

The Company disclosed the impact of adoption of this standard on January 1, 2020 with a $21.2 million increase to the allowance for credit losses, a $1.8 million increase for unfunded loan commitments and a $16.9 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption.

Provision expense for loans for the year ending December 31, 2020 was $37.8 million and the allowance for credit losses on loans at December 31, 2020 was $92.7 million.

The Company estimates expected credit losses for loans using a methodology based on the probability of default (“PD”) and loss given default (“LGD”), which is defined as credit loss incurred when an obligor of the bank defaults.

PDs and LGDs are developed by analyzing the average historical loss migration of loans to default.

The ACL estimation process for loans also applies an economic forecast scenario over a three-year forecast period.

The ACL estimation process for loans also applies economic forecast scenarios over a three-year forecast period.

The forecast may use a single scenario or a composite of scenarios.

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For portfolio segments with a weighted average life longer than three years, the Company reverts to longer-term historical loss experience, adjusted for prepayments, to estimate losses over the remaining life of the loans within each segment.

Qualitative adjustments are applied to the quantitative component to adjust for factors such as current conditions and the possibility that the characteristics of the economic downturn could be sustained over a more extended period of time.

Adjustments may be made to baseline reserves based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model.

These influences may include elements such as changes in concentration, macroeconomic conditions, recent observable asset quality trends, staff turnover, regional market conditions, employment levels and loan growth.

These qualitative adjustments are based upon management's assessments of the factors.

management throughout the initial adoption and subsequent application processes, including the need to involve our valuation services specialists.

Outcomes in any or all of these factors could differ from the baseline scenario, and the Company incorporated qualitative considerations reflecting the risk of uncertain economic conditions.

These qualitative adjustments are based upon management's assessment of the factors.

We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the application processes, including the need to involve our valuation services specialists.

The principal considerations resulting in our determination included the following:

• Significant auditor judgment and audit effort to evaluate the appropriateness of selection of the loss estimation models, appropriateness of loan segmentation, and the reasonableness of PD and LGD assumptions

• Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecast of economic variables

• Significant auditor judgment and effort were used in evaluating the qualitative adjustments used in the calculation

• Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecasts of economic variables and reasonableness of other model assumptions.

• Significant auditor judgment and effort were used in evaluating the qualitative adjustments used in the model computation.

• Significant audit effort related to the completeness and accuracy of the high volume of data used to develop assumptions and in the model computation

The primary procedures performed to address the critical audit matter included:

• Testing the effectiveness of management’s internal controls over the Company’s significant model assumptions and judgments, loan segmentation, reasonable and supportable forecasts, qualitative adjustments, information systems and model validation

• Testing the effectiveness of controls over the completeness and accuracy of historical inputs used in the development of the PD models and LGD assumptions, data imputation, use of third-party data, and loan data used in the computation

• Testing the effectiveness of controls over the Company’s preparation and review of the allowance for credit loss calculation, including data used as the basis for adjustments related to the qualitative adjustments and the development and reasonableness of qualitative adjustments and mathematical accuracy and appropriateness of the overall calculation

• With the assistance of our valuation specialists, evaluating the reasonableness of assumptions and judgments related to the PD, LGD and loan segmentation, the conceptual design of the credit loss estimation models, model assumption sensitivity analysis and the adequacy of the independent model validation

• Evaluating management’s judgments in the selection and application of reasonable and supportable forecast of economic variables

• Testing the effectiveness of management’s internal controls over the Company’s significant model assumptions and judgments, reasonable and supportable forecasts, qualitative adjustments, and information systems.

• Testing the effectiveness of controls over the completeness and accuracy of historical inputs, including loan segmentation, used in the development of the PD method and LGD assumptions, data imputation, use of third-party data, and loan data used in the computation.

• Testing the effectiveness of controls over the Company’s preparation and review of the allowance for credit losses calculation, including the relevance and reliability of data used as the basis for adjustments related to the qualitative factors and the development and reasonableness of qualitative adjustments and mathematical accuracy and appropriateness of the overall calculation.

• With the assistance of our valuation specialists, evaluating the reasonableness of assumptions and judgments related to the PD, LGD and loan segmentation, the conceptual design of the credit losses estimation models, and model assumption sensitivity analysis.

• Evaluating management’s judgments in the selection and application of reasonable and supportable forecasts of economic variables

• Substantively testing management’s process for developing the qualitative factors and assessing reasonableness, relevance and reliability of data used to develop factors, including evaluating management’s judgments and assumptions for reasonableness

• Substantively testing the mathematical accuracy of the PD and LGD model on a pooled loan level with the assistance of valuation specialists, including the completeness and accuracy of loan data used in the model

• Substantively testing the mathematical accuracy of the PD and LGD methods on a pooled loan level with the assistance of valuation specialists, including the completeness and accuracy of loan data used in the model

/s/ Crowe LLP

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Net Interest Income After Provision for Credit Losses 285,446 224,564 232,619

Noninterest Income (see “Note N - Noninterest Income and Expenses”)

Securities gains (losses), net (includes net gains of $ 0.2 million for 2020, net gains of $ 6.2 million for 2019 and net losses of $ 0.1 million for 2018 in other comprehensive income reclassifications)

1,235 1,217 ( 623 )

Noninterest Income:

Service charges on deposit accounts 9,777 9,429 11,529

Interchange income 16,231 13,711 13,399

Wealth management income 9,628 7,507 6,352

Mortgage banking fees 11,782 14,696 6,490

Marine finance fees 665 690 1,053

SBA gains 1,531 685 2,472

BOLI income 4,154 3,561 3,674

SBIC income 6,778 1,373 904

Other 10,759 8,683 9,642

Total Noninterest Income 61,570 56,732 50,022

Noninterest Expense (See “Note N - Noninterest Income and Expenses”)

71,305 60,335 55,515

Securities (losses) gains, net (includes net gains of $ 2.2 million for 2021, net gains of $ 0.2 million for 2020 and net gains of $ 6.2 million for 2019 in other comprehensive income reclassifications)

( 578 ) 1,235 1,217

Total Noninterest Income 70,727 61,570 56,732

Noninterest Expense:

Salaries and wages 97,283 88,539 73,829

Employee benefits 17,873 15,544 13,697

Outsourced data processing costs 19,919 19,053 15,077

Telephone / data lines 3,223 2,984 2,958

Occupancy 14,140 14,150 14,284

Furniture and equipment 5,390 5,874 6,245

Marketing 4,583 4,833 4,161

Legal and professional fees 11,376 9,167 8,553

FDIC assessments 2,405 1,268 881

Amortization of intangibles 5,033 5,857 5,826

Foreclosed property expense and net (gain) loss on sale ( 264 ) 2,263 51

Provision for credit losses on unfunded commitments 133 185 —

Other 16,341 15,835 15,177

Total Noninterest Expense 197,435 185,552 160,739

Income Before Income Taxes 158,738 100,582 128,612

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Available-for-sale securities:

Unrealized gains (losses) on available-for-sale securities, net of tax expense of $ 5.0 million in 2020, tax expense of $ 5.9 million in 2019 and tax benefit of $ 3.5 million in 2018

Unrealized (losses) gains on available-for-sale securities, net of tax benefit of $ 8.2 million in 2021, tax expense of $ 5.0 million in 2020 and tax expense of $ 5.9 million in 2019

$ ( 27,377 ) $ 16,628 $ 19,016

1 unchanged sentence

Amortization of unrealized losses on securities transferred to held-to-maturity, net of tax expense of $ 21 thousand, $ 40 thousand, and $ 87 thousand, respectively

Reclassification adjustment for (gains) losses included in net income, net of tax expense of $ 314 thousand in 2020, tax expense of $ 95 thousand in 2019 and tax benefit of $ 37 thousand in 2018

Reclassification adjustment for losses (gains) included in net income, net of tax benefit of $ 85 thousand in 2021, tax expense of $ 314 thousand in 2020 and tax expense of $ 95 thousand in 2019

278 ( 782 ) ( 936 )

Available-for-sale securities, net of tax $ ( 27,013 ) $ 16,030 $ 17,525

Unrealized losses on derivatives designated as cash flow hedges, net of reclassifications to income, net of tax expense of $ 42 thousand

Unrealized losses on derivatives designated as cash flow hedges, net of reclassifications to income, net of tax expense of $ 120 thousand in 2021 and tax expense of $ 42 thousand in 2020

$ ( 351 ) $ ( 125 ) $ —

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Securities sold under agreements to repurchase, maturing within 30 days 121,565 119,609

Federal Home Loan Bank (“FHLB”) borrowings

Subordinated debt 71,646 71,365

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(In thousands, except share data) 2021 2020

Commitments and Contingencies (See “Note J - Borrowings and “Note Q - Contingent Liabilities and Commitments with Off-Balance Sheet Risk”)

Commitments and Contingencies (See “Note 9 - Borrowings” and “Note 15 - Contingent Liabilities and Commitments with Off-Balance Sheet Risk”)

Shareholders' Equity

5 unchanged sentences

1,317,730 1,110,032

Accumulated other comprehensive income, net 20,370 4,465

Accumulated other comprehensive (loss) income, net ( 6,994 ) 20,370

Total Shareholders' Equity 1,310,736 1,130,402

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Deferred income taxes 3,836 ( 4,926 ) 6,791

(Gains) losses on sale of securities ( 1,096 ) ( 1,031 ) 485

Losses (gains) on sale of securities 363 ( 1,096 ) ( 1,031 )

Gains on sale of loans ( 15,276 ) ( 13,930 ) ( 9,794 )

Losses (gains) on sale and write-downs of other real estate owned 1,139 ( 432 ) ( 107 )

(Gains) losses on sale and write-downs of other real estate owned ( 635 ) 1,139 ( 432 )

Losses on disposition of fixed assets 817 791 511

1 unchanged sentence

Changes in operating assets and liabilities, net of effects from acquired companies:

Net (increase) decrease in other assets ( 35,555 ) ( 5,614 ) 10,331

Net (decrease) increase in other liabilities 18,776 ( 4,206 ) 8,827

Net increase in other assets ( 42,437 ) ( 35,555 ) ( 5,614 )

Net increase (decrease) in other liabilities 28,883 18,776 ( 4,206 )

Net Cash Provided by Operating Activities 154,572 60,652 117,745

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Purchases of available-for-sale debt securities ( 1,145,193 ) ( 830,300 ) ( 309,461 )

Purchases of held-to-maturity debt securities ( 377,159 ) — —

Maturities of time deposits with other banks 750 2,992 4,501

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Purchase of FHLB and Federal Reserve Bank Stock ( 3,020 ) ( 28,278 ) ( 75,193 )

Proceeds from sale of Visa Class B stock — — 21,333

Redemption of bank owned life insurance — — 14,218

Net cash from bank acquisitions 98,100 71,965 —

Purchase of bank owned life insurance ( 60,000 ) — —

Additions to bank premises and equipment ( 4,327 ) ( 1,587 ) ( 2,523 )

3 unchanged sentences

Cash Flows From Financing Activities

Net increase (decrease) in deposits 844,405 407,513 ( 39,769 )

Net increase in deposits 640,108 844,405 407,513

Net increase (decrease) in repurchase agreements 1,956 33,488 ( 128,202 )

Net (decrease) increase in FHLB borrowings with original maturities of three months or less ( 235,000 ) ( 67,000 ) 32,000

Net decrease in FHLB borrowings with original maturities of three months or less — ( 235,000 ) ( 67,000 )

Repayments of FHLB borrowings with original maturities of more than three months ( 33,000 ) ( 115,000 ) ( 63,000 )

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Cash paid during the period for taxes 30,887 27,712 16,000

Recognition of operating lease right-of-use assets 2,095 30,301 —

Recognition of operating lease liabilities 2,095 34,627 —

Recognition of operating lease right-of-use assets, other than through bank acquisition 12,459 2,095 30,301

Recognition of operating lease liabilities, other than through bank acquisition 12,459 2,095 34,627

Supplemental disclosure of non-cash investing activities:

Transfer of debt securities from available-for-sale to held-to-maturity $ 210,805 $ — $ —

Transfer of debt securities from held-to-maturity to available-for-sale — — 52,796

Unsettled sales of debt securities available-for-sale 17,147 — —

Transfer from loans to other real estate owned — 5,624 5,665

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Common Stock Paid-in Retained Treasury Comprehensive

(Dollars and shares in thousands) Shares Amount Capital Earnings Stock Income (Loss), Net Total

(Dollars and shares in thousands) Shares Amount Capital Earnings Stock Income (Loss) Total

Balance at December 31, 2018 51,361 $ 5,136 $ 778,501 $ 97,074 $ ( 3,384 ) $ ( 13,060 ) $ 864,267

Comprehensive income — — — 98,739 — 17,525 116,264

Reclassification of disproportionate tax effects upon adoption of new accounting pronouncement — — — ( 115 ) — 115 —

Stock based compensation expense 30 — 7,244 — — — 7,244

1 unchanged sentence

Common stock issued for stock options 29 3 425 — — — 428

Issuance of common stock, pursuant to acquisition 4,000 400 107,086 — — — 107,486

Other — — 104 — — — 104

Balance at December 31, 2019 51,514 $ 5,151 $ 786,242 $ 195,813 $ ( 6,032 ) $ 4,465 $ 985,639

3 unchanged sentences

Common stock issued for stock options 62 6 760 — — — 766

Other — — 104 — — — 104

Cumulative change in accounting principle upon adoption of new accounting pronouncement — — — ( 16,876 ) — — ( 16,876 )

Issuance of common stock, pursuant to acquisitions 3,163 316 61,836 — — — 62,152

Balance at December 31, 2020 55,243 $ 5,524 $ 856,092 $ 256,701 $ ( 8,285 ) $ 20,370 $ 1,130,402

3 unchanged sentences

Common stock issued for stock options 384 38 7,298 — — — 7,336

Cumulative change in accounting principle upon adoption of new accounting pronouncement (See Note A - Basis of Presentation) — — — ( 16,876 ) — — ( 16,876 )

Issuance of common stock, pursuant to acquisitions 3,163 316 61,836 — — — 62,152

Issuance of common stock, pursuant to acquisition 2,687 269 86,218 — — — 86,487

Conversion of options, pursuant to acquisition — — 5,607 — — — 5,607

Dividends on common stock ($ 0.39 per share)

— — — ( 22,506 ) — — ( 22,506 )

Balance at December 31, 2021 58,504 $ 5,850 $ 963,851 $ 358,598 $ ( 10,569 ) $ ( 6,994 ) $ 1,310,736

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Seacoast Banking Corporation of Florida and Subsidiaries

Note A - Significant Accounting Policies

Note 1 - Significant Accounting Policies

Seacoast Banking Corporation of Florida (“Seacoast” or the “Company”) is a single segment financial holding company with one operating subsidiary bank, Seacoast National Bank (“Seacoast Bank”).

The Company provides integrated financial services including commercial and retail banking, wealth management, and mortgage services to customers through advanced banking solutions and a network of traditional branch offices and commercial banking centers operated by Seacoast Bank.

Seacoast operates primarily in Florida, with concentrations in the state's fastest growing markets, each with unique characteristics and opportunities.

Offices stretch from the southeast, including Fort Lauderdale, Boca Raton and Palm Beach, north along the east coast to the Daytona area, into Orlando and Central Florida and the adjacent Tampa market, and west to Okeechobee and surrounding counties.

The Company provides integrated financial services including commercial and consumer banking, wealth management, mortgage services to customers at more than 50 full-service branches across Florida, and through advanced mobile and online banking solutions.

The consolidated financial statements include the accounts of Seacoast and all its majority-owned subsidiaries but exclude trusts created for the issuance of trust preferred securities.

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Specific areas, among others, requiring the application of management’s estimates include determination of the allowance for credit losses, acquisition accounting and purchased loans, intangible assets and impairment testing, other fair value measurements, and contingent liabilities.

Recently Adopted Accounting Pronouncements:

On January 1, 2020, the Company adopted ASC Topic 326 - Financial Instruments - Credit Losses, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity (“HTM”) debt securities.

It also applies to off-balance sheet credit exposure such as loan commitments, standby letters of credit, financial guarantees and other similar instruments.

In addition, ASC Topic 326 changed the accounting for impairment of available-for-sale (“AFS”) debt securities.

The Company adopted ASC Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for the reporting period beginning after January 1, 2020 are presented under ASC Topic 326, while prior amounts continue to be reported in accordance with previously applicable GAAP.

The following table reflects the cumulative effect of adoption:

(in thousands) December 31, 2019 CECL adoption impact January 1, 2020

Loans $ 5,198,404 $ ( 706 ) $ 5,197,698

Allowance for credit losses 35,154 21,226 56,380

Reserve for unfunded commitments 140 1,837 1,977

Deferred tax assets 16,457 ( 5,481 ) 10,976

Retained earnings 195,813 ( 16,876 ) 178,937

ASC Topic 326 introduced new definitions and criteria for categorizing purchased loans.

Loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination are classified as purchased credit deteriorated (“PCD”).

Acquired loans which do not meet the definition of PCD are classified by the Company as acquired Non-PCD.

At the date of adoption, the Company reclassified all loans previously classified as purchased credit

impaired (“PCI”) to PCD, and increased the allowance $ 0.7 million with a corresponding adjustment to these loans' amortized cost basis.

The remaining noncredit discount on loans previously classified as PCI was $ 0.9 million, which will be accreted into interest income over the remaining life of the loans.

Under CECL, the Company estimates the allowance using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit losses provide the basis for the estimation of expected credit losses.

Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, loan to value ratios, borrower credit characteristics, loan seasoning or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, occupancy rates, and other macroeconomic metrics.

For loans analyzed on a collective basis, the Company has developed an allowance model based on an analysis of the probability of default (“PD”) and loss given default (“LGD”) to determine an expected loss by loan segment.

PDs and LGDs are developed by analyzing the average historical loss migration of loans to default.

The Company excludes accrued interest on loans from its determination of allowance.

The allowance estimation process also applies an economic forecast scenario over a three year forecast period.

The forecast may utilize one scenario or a composite of scenarios based on management's judgment and expectations around the current and future macroeconomic outlook.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate.

The contractual term of a loan excludes expected extensions, renewals, and modification unless either of the following applies:

management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and not unconditionally cancellable by the Company.

For portfolio segments with a weighted average life longer than three years, the Company reverts to longer term historical loss experience, adjusted for prepayments, to estimate losses over the remaining life of the loans within each segment.

Adjustments may be made to baseline reserves for some of the loan pools based on an assessment of internal and external influences on credit quality not fully reflected in the quantitative components of the allowance model.

Based upon management's assessments of these factors, the Company may apply qualitative adjustments to the allowance.

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

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

When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.

All HTM debt securities are issued by government-sponsored entities, which are either explicitly or implicitly guaranteed by the U.S.

government and have a long history of no credit losses.

In addition, the credit rating on all the Company's HTM debt securities as of the date of adoption is AA+.

There is no history of the government withholding or limiting support to these agencies, nor is there any indication of a change to that historical support.

While the potential for default on these securities may be something greater than zero, the long history with no credit losses, the implied government guarantee of principal and interest payments and the high credit rating of the HTM portfolio provide sufficient basis for the current expectation that there is zero risk of loss if default were to occur.

As a result, the Company recorded no allowance for HTM debt securities with fair value less than amortized cost basis at the date of adoption.

ASC Topic 326 amended the existing other-than-temporary-impairment guidance for AFS securities, requiring credit losses to be recorded as an allowance rather than through a permanent write-down.

When evaluating AFS debt securities under ASC Topic 326, the Company has evaluated whether the decline in fair value is attributed to credit losses or other factors using both quantitative and qualitative analyses, including cash flow analysis, review of credit ratings, remaining payment terms, prepayment speeds and analysis of macro-economic conditions.

At the date of adoption, collateralized loan obligations had unrealized losses of $ 1.2 million.

The collateral for these securities is first lien senior secured corporate debt, and the Company holds senior tranches rated A or higher.

Based on this analysis, the Company believes that the unrealized loss position for AFS debt securities at the time of adoption was the result of both broad investment type spreads and the current rate environment.

Each investment is expected to recover its price depreciation over its holding period as it moves to maturity and the Company has the intent and ability to hold these securities to maturity if necessary.

As a result of this evaluation, the Company concluded that no allowance was appropriate at the date of adoption.

Cash and Cash Equivalents:

17 unchanged sentences

The adjusted cost of each specific security sold is used to compute realized gains or losses on the sale of securities on a trade date basis.

Seacoast Bank is a member of the Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) systems.

Members are required to own a certain amount of FHLB and FRB stock based on the level of borrowings and other factors, and may invest in additional amounts.

Both cash and stock dividends are reported as income.

Credit losses on securities:

For securities classified as held-to-maturity, management must estimate expected credit losses over the remaining expected life and recognize this estimate as an allowance for credit losses.

Debt securities that are available-for-sale are analyzed quarterly for credit losses.

The analysis is performed on an individual security basis for all securities where fair value has declined below amortized cost.

Fair value is based upon pricing obtained from third party pricing services.

However, on occasion pricing provided by the pricing services may not be consistent with other observed prices in the market for similar securities.

Using observable market factors, including interest rate and yield curves, volatilities, prepayment speeds, loss severities and default rates, the Company may at times validate the observed prices using a discounted cash flow model and using the observed prices for similar securities to determine the fair value of its securities.

Both quantitative and qualitative assessments are utilized to determine if a security has a credit loss.

Quantitative assessments are based on a discounted cash flow method.

Qualitative assessments consider a range of factors including:

percent decline in fair value, rating downgrades, subordination, duration, amortized loan-to-value, and the ability of the issuers to pay all amounts due in accordance with the contractual terms.

Loans Held for Sale:

22 unchanged sentences

Interest income on nonaccrual loans is either recorded using the cash basis method of accounting or recognized after the principal has been reduced to zero, depending on the type of loan.

In response to the COVID-19 pandemic beginning in early 2020, rules defined in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and a joint statement issued by federal regulators in consultation with FASB provide financial institutions with the option not to apply troubled debt restructure (“TDR”) accounting to eligible loan modifications provided to borrowers affected by the economic impact of the COVID-19 pandemic.

In response to the COVID-19 pandemic beginning in early 2020 and effective through 2021, rules defined in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and a joint statement issued by federal regulators in consultation with FASB provided financial institutions with the option not to apply troubled debt restructure (“TDR”) accounting to eligible loan modifications provided to borrowers affected by the economic impact of the COVID-19 pandemic.

Outside of this guidance, a loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulty, is considered to be a TDR.

5 unchanged sentences

Commercial loans and real estate loans are typically placed on nonaccrual status when principal or interest is past due for 90 days or more, unless the loan is both secured by collateral having realizable value sufficient to discharge the debt in-full and the loan is in process of collection.

Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest reversed against interest income.

Secured loans may be charged-down to the estimated value of the collateral with previously accrued unpaid interest

reversed against interest income.

Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects.

2 unchanged sentences

however, collateral values are evaluated periodically based on market information and incremental charge-offs are recorded if it is determined that collateral values have declined from their initial estimates.

Allowance for credit losses on loans:

On January 1, 2020, the Company adopted Accounting Standards Codification No.

326, Financial Instruments - Credit Losses (ASC 326), which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology.

The Company adopted ASC Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures.

Results for the reporting period beginning January 1, 2020 are presented under ASC Topic 326, while prior amounts continue to be reported in accordance with previously applicable GAAP.

ASC Topic 326 introduced new definitions and criteria for categorizing purchased loans.

Loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination are classified as purchased credit ("PCD").

Acquired loans which do not meet the definition of PCD are classified by the Company as acquired Non-PCD.

The Company estimates the allowance for credit losses on loans using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Historical credit losses provide the basis for the estimation of expected credit losses.

The allowance for credit losses is measured on a collective basis when similar risk characteristics exist.