Form 8-K/A Stock Yards Bancorp, For: Mar 07

May 16, 2022 9:46 AM EDT

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Exhibit 23.1

 

CONSENT OF INDEPENDENT AUDITOR

 

 

 

We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-128809 and 333-96742), Form S-3 (File No. 033-96744) and Form S-3ASR (File No. 333-261637) of Stock Yards Bancorp, Inc. of our report dated March 30, 2022 on the consolidated financial statements of Commonwealth Bancshares, Inc., which is included in this Current Report on Form 8-K/A.

 

 

 

 

 

 

    /s/ Crowe LLP

 

Louisville, Kentucky

May 16, 2022

 


 

 

Exhibit 99.1

 

 

 

 

 

COMMONWEALTH BANCSHARES, INC.

AND SUBSIDIARIES

Louisville, Kentucky

 

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

 

COMMONWEALTH BANCSHARES, INC.

AND SUBSIDIARIES

Louisville, Kentucky

 

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

 

 

CONTENTS

 

INDEPENDENT AUDITOR’S REPORT 1
   
CONSOLIDATED FINANCIAL STATEMENTS  
   
CONSOLIDATED BALANCE SHEETS 3
   
CONSOLIDATED STATEMENTS OF INCOME 4
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 5
   
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 6
   
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8

 

 

 

 

crowe.jpg
 
 

Crowe LLP

 

Independent Member Crowe Global         

 

INDEPENDENT AUDITOR'S REPORT

 

 

Board of Directors and Stockholders

 

Commonwealth Bancshares, Inc.

 

Louisville, Kentucky

 

Opinion

 

We have audited the consolidated financial statements of Commonwealth Bancshares, Inc., which comprise the consolidated balance sheets as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Commonwealth Bancshares, Inc. as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Commonwealth Bancshares, Inc. and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Emphasis of Matter

 

As discussed in Note 14 to the financial statements, Commonwealth Bancshares, Inc. entered into a definitive Stock Purchase Agreement on August 3, 2021. This transaction closed on March 7, 2022.

 

Responsibilities of Management for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

1

 

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Commonwealth Bancshares, Inc.’s ability to continue as a going concern for one year from the date the consolidated financial statements are available to be issued.

 

Auditors Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements.

 

In performing an audit in accordance with GAAS, we:

 

Exercise professional judgment and maintain professional skepticism throughout the audit.

 

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Commonwealth Bancshares, Inc.’s internal control. Accordingly, no such opinion is expressed.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.

 

Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about Commonwealth Bancshares, Inc.’s ability to continue as a going concern for a reasonable period of time.

 

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control–related matters that we identified during the audit.

 

 

 

 

 

 crowesig.jpg

 

 

 

 

 

 

 

Crowe LLP

 

 

Louisville, Kentucky

 

March 30, 2022

 

2

 

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2021 and 2020

(Dollar amounts in thousands except share data)

 


 

   

2021

   

2020

 

ASSETS

               

Cash and due from financial institutions

  $ 304,053     $ 93,420  

Federal funds sold

    10,242       892  

Cash and cash equivalents

    314,295       94,312  
                 

Equity securities

    -       391  

Investment securities available for sale

    263,985       211,491  

Mortgage loans held for sale

    2,539       47,848  

Loans, net of allowance of $16,147 and $15,930

    663,488       774,401  

Premises and equipment, net

    29,111       30,957  

Federal Home Loan Bank stock

    4,436       4,684  

Accrued interest receivable

    2,557       4,051  

Mortgage servicing rights, net

    9,752       8,984  

Goodwill

    5,529       6,235  

Other assets

    10,591       13,802  
                 

Total assets

  $ 1,306,283     $ 1,197,156  
                 

LIABILITIES AND EQUITY

               

Deposits

               

Non‑interest bearing

  $ 294,306     $ 288,813  

Savings and NOW

    741,623       633,296  

Time

    122,337       124,182  

Total deposits

    1,158,266       1,046,291  
                 

Federal Home Loan Bank advances

    6,000       6,000  

Subordinated debentures – trust preferred

    26,000       26,000  

Notes payable to correspondent

    3,255       3,950  

Accrued interest payable

    87       115  

Other liabilities

    17,334       20,626  

Total liabilities

    1,210,942       1,102,982  
                 

Shareholders’ equity

               

Common stock, no par value; 3,500,000 shares authorized; 2,767,025 shares issued and outstanding in 2021 and 2020

    24,940       24,940  

Retained earnings

    64,831       61,990  

Accumulated other comprehensive income

    3,406       4,785  

Total shareholders’ equity

    93,177       91,715  
                 

Non-controlling interest

    2,164       2,459  
                 

Total equity

    95,341       94,174  
                 
                 

Total liabilities and equity

  $ 1,306,283     $ 1,197,156  

 


 

See accompanying notes.

 

3

 

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2021 and 2020

(Dollar amounts in thousands)

 


 

   

2021

   

2020

 

Interest and dividend income

               

Loans, including fees

  $ 32,873     $ 37,923  

Taxable securities

    1,335       1,808  

Tax exempt securities

    1,978       2,157  

Federal funds sold and other

    258       257  
      36,444       42,145  
                 

Interest expense

               

Savings and NOW deposits

    1,795       2,918  

Time deposits

    1,072       2,572  

Federal funds purchased

    -       1  

Federal Home Loan Bank advances

    94       96  

Notes payable to correspondent

    153       175  

Subordinated debentures and other

    662       755  
      3,776       6,517  
                 

Net interest income

    32,668       35,628  

Provision for loan losses

    300       7,890  
                 

Net interest income after provision for loan losses

    32,368       27,738  
                 

Noninterest income

               

Trust / financial advisory fees

    14,106       11,600  

Mortgage banking activities

    21,360       42,524  

Service charges on deposit accounts

    4,670       4,605  

Net gains (losses) on sales of securities

    16       (1 )

Realized gain (loss) on equity securities

    10,393       (36 )

Net gains (losses) on sales of assets

    92       (252 )

Rental income

    556       566  

Other

    29       495  
      51,222       59,501  
                 

Noninterest expense

               

Salaries and employee benefits

    38,561       45,153  

Occupancy, equipment, and data processing

    8,411       8,824  

Advertising

    1,226       1,448  

Legal and professional fees

    1,898       1,845  

Regulatory licenses and fees

    740       1,433  

Federal deposit insurance

    395       395  

Supplies

    107       283  

Data communications

    649       720  

Goodwill amortization

    706       706  

Other

    7,740       7,607  
      60,433       68,514  
                 

Net Income

    23,157       18,725  
                 

Less net income attributable to non-controlling interest

    362       229  
                 

Net income attributable to controlling interest

  $ 22,795     $ 18,496  

 


 

See accompanying notes.

 

4

 

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2021 and 2020   

 


      

 

   

2021

   

2020

 
                 

Net income

  $ 23,157     $ 18,725  
                 

Other comprehensive income:

               

Unrealized holding gains (losses) on available for sale securities arising during period

    (1,669 )     3,059  

Reclassification adjustment for (gains) losses realized in income

    (16 )     1  

Unrealized gains (losses) on cash flow hedge

    306       (353 )

Total other comprehensive income

    (1,379 )     2,707  
                 

Comprehensive income

    21,778       21,432  
                 

Less comprehensive income attributable to non-controlling interest

    362       229  
                 

Comprehensive income attributable to controlling interest

  $ 21,416     $ 21,203  

 


 

See accompanying notes.

 

5

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Years ended December 31, 2021 and 2020

(Dollar amounts in thousands except share data)

 


 

   

Shares

   

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income / (Loss)

   

Non-Controlling Interest

   

Total

Equity

 
                                                 

Balance at January 1, 2020

    2,767,025     $ 24,940     $ 53,926     $ 2,078     $ 2,753     $ 83,697  
                                                 

Non-controlling interest distributions

    -       -       -       -       (523 )     (523 )
                                                 

Net income

    -       -       18,496       -       229       18,725  
                                                 

Other comprehensive income

    -       -       -       2,707       -       2,707  
                                                 

Shareholder distribution ($3.77 per share)

    -       -       (10,432 )     -       -       (10,432 )
                                                 

Balance at December 31, 2020

    2,767,025     $ 24,940     $ 61,990     $ 4,785     $ 2,459     $ 94,174  
                                                 

Non-controlling interest distributions

    -       -       -       -       (657 )     (657 )
                                                 

Net income

    -       -       22,795       -       362       23,157  
                                                 

Other comprehensive loss

    -       -       -       (1,379 )     -       (1,379 )
                                                 

Shareholder distribution ($7.21 per share)

    -       -       (19,954 )     -       -       (19,954 )
                                                 

Balance at December 31, 2021

    2,767,025     $ 24,940     $ 64,831     $ 3,406     $ 2,164     $ 95,341  

 


 

See accompanying notes.

 

6

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2021 and 2020

(Dollar amounts in thousands)

 


       

 

   

2021

   

2020

 

Cash flows from operating activities

               

Net income

  $ 23,157     $ 18,725  

Adjustments to reconcile net income to net cash from operating activities

               

Provision for loan losses

    300       7,890  

Depreciation and amortization

    2,877       2,952  

Net amortization of securities

    345       546  

Net realized (gain) loss on equity securities

    (10,393 )     36  

Net realized (gain) loss on sales of securities

    (16 )     1  

Net (gain) loss on sale of assets

    (92 )     252  

Net gain on sale of loans

    (21,791 )     (38,239 )

Loans originated for sale

    (579,051 )     (856,609 )

Proceeds from sales of loans held for sale

    643,801       871,761  

Net change is mortgage servicing rights

    (768 )     (1,994 )

Warehouse loans purchased

    (97 )     (21,525 )

Proceeds from sales of warehouse loans held for sale

    2,447       31,490  

Net change in:

               

Accrued income and other assets

    4,735       (4,039 )

Accrued expenses and other liabilities

    (3,359 )     8,991  

Net cash from operating activities

    62,095       20,238  
                 

Cash flows from investing activities

               

Available-for-sale securities:

               

Sales

    11,059       -  

Maturities, prepayments and calls

    231,543       116,670  

Purchases

    (286,050 )     (145,617 )

Proceeds from sale of Federal Home Loan Bank stock

    248       -  

Net change in loans

    110,613       (19,855 )

Proceeds from sale of assets

    172       -  

Net additions to premises and equipment

    (405 )     (1,880 )

Net cash from investing activities

    67,180       (50,682 )
                 

Cash flows from financing activities

               

Net change in deposits

    111,973       49,021  

Proceeds from note payable to correspondent bank

    200       450  

Repayments on note payable to correspondent bank

    (895 )     (888 )

Proceeds from Federal Home Loan Bank advances

    -       24,025  

Repayments on Federal Home Loan Bank advances

    -       (24,188 )

Cash disbursements to non-controlling interest

    (617 )     (527 )

Cash disbursements to shareholders

    (19,954 )     (10,432 )

Net cash from financing activities

    90,708       37,461  
                 

Net change in cash and cash equivalents

    219,983       7,017  
                 

Beginning cash and cash equivalents

    94,312       87,295  
                 

Ending cash and cash equivalents

  $ 314,295     $ 94,312  

 

See Note 15 regarding non-cash transactions included in the acquisition.

 


 

See accompanying notes.

 

7

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Principles of Consolidation: The consolidated financial statements include the accounts of Commonwealth Bancshares, Inc. (the Company), Commonwealth Bank and Trust Company (CBT), and Landmark Financial Advisors (LFA).

 

The Company provides financial services through its offices in Jefferson, Shelby, Boone and Kenton Counties in Kentucky. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area.

 

The Company acquired a 60% interest in Landmark Financial Advisors during 2019. LFA provides wealth management services from its office in Bowling Green, Kentucky. LFA is consolidated into the Company. Non-controlling interest within the income statement and equity section represents the interest in LFA not owned by the Company.

 

Subsequent Events: The Company has evaluated subsequent events for recognition and disclosure through March 30, 2022, which is the date the financial statements were available to be issued.

 

Risks and uncertainties: In December 2019, a novel strain of coronavirus surfaced in Wuhan, China, and spread around the world resulting in business and social disruption.  The coronavirus was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020.  The economic pressures and uncertainties arising from COVID-19 is expected to significantly impact the Bank’s retail and commercial customers. The Bank’s credit delinquencies and losses may be adversely impacted with many businesses substantially reducing operations.

 

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

 

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased.

 

Investment Securities: All debt securities are classified as available for sale and recorded at fair value, with unrealized holding gains and losses reported in other comprehensive income.

 

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

 

 


(Continued)

 

8

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

 

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

 

Equity Securities: Equity securities are carried at fair value, with changes in fair value reported in net income. Equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment.

 

Mortgage Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are under mandatory delivery or best efforts contracts. The Company has opted to carry loans under mandatory delivery contracts at fair value to better align the accounting of these loans with the related derivatives. The fair value of these loans held for sale is determined using quoted secondary market prices. Loans sold under best efforts contracts are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net gains and losses on all contracts are reported in mortgage banking activities on the statement of income.

 

Mortgage loans held for sale are sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold and are reported in mortgage banking activities on the statement of income.

 

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rate from the date the interest on the loan is locked. Changes in the fair values of these derivatives are reported in mortgage banking activities on the statement of income.

 

 


(Continued)

 

9

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Servicing Rights: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking activities. Fair value is based on market prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into mortgage banking activities in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

 

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with mortgage banking activities in the statement of income.

 

Servicing fee income, which is reported in the statement of income within mortgage banking activities, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.

 

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported as the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.

 

Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, generally after 90 days of non-payment.

 

All interest accrued but not received for loans placed on nonaccrual are reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost‑recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within Jefferson, Shelby, Boone, Kenton and surrounding counties. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in these areas.

 

 


 

(Continued)

 

10

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

 

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, resulting in a concession and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

 

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length 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.

 

All loans risk rated as substandard are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

 

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component covers non‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments and their associated risks have been identified:

 

 


 

(Continued)

 

11

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Commercial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses. Commercial loans are advances for equipment purchases or to provide working capital or meet other financing needs of business enterprises. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrower to evaluate ability to repay the loans.

 

 

Commercial real estate loans are dependent on the industries tied to these loans as well as the local commercial real estate market. Commercial real estate loans include completed projects as well as construction loans. These loans are secured by the real estate, and appraisals are obtained to support the loan amount. An evaluation of the project’s cash flows is performed to evaluate the borrower’s ability to repay the loan.

 

 

Construction and land development loans primarily consist of borrowings to purchase and develop raw land into 1-4 family residential properties. Construction loans are extended to individuals as well as corporations for the construction of an individual or multiple properties and are secured by raw land and the subsequent improvements. Repayments of the loans to real estate developers is dependent upon the sale of properties to third parties in a timely fashion upon completion. Should there be delays in construction or a downturn in the market for those properties, there may be significant erosion in value which may be absorbed by the Company.

 

 

Residential real estate loans are affected by the local residential real estate market, the local economy, and, for variable rate mortgages, movement in indices tied to these loans. The Bank evaluates the borrower’s repayment ability through a review of credit scores and debt to income ratios. Appraisals are obtained to support the loan amount.

 

 

Consumer and other loans are dependent on local economies. Consumer and other loans are generally secured by consumer assets, but may be unsecured. The Bank evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios.   

 

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

 

 


 

(Continued)

 

12

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight‑line method with useful lives ranging from 5 to 40 years. Leasehold improvements are depreciated over the lesser of the life of the lease or the economic life of the asset. Furniture, fixtures and equipment are depreciated using the straight‑line method with useful lives ranging from 3 to 15 years.

 

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

 

Goodwill: Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquired, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The goodwill is being amortized over 10 years.

 

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

 

Retirement Plans: Employee 401(k) plan expense is the amount of matching contributions.

 

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow-hedges which are also recognized as separate components of equity.

 

Income Taxes:  The Company has elected to be taxed under Subchapter S of the Internal Revenue Code, consequently taxable income of the corporation is passed through to its individual shareholders and the shareholders are subject to tax on the income. The Company is no longer subject to examination by federal taxing authorities for the years before 2018 and state taxing authorities for the years before 2017.

 

The Company recognizes interest and/or penalties related to income tax matters in other noninterest expense.

 

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

 

 


(Continued)

 

13

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings a fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

 

The Company does not use derivatives for trading purposes. An interest rate swap was executed on a loan to swap a fixed rate to floating. The Company has one fair value hedge with a notional amount of $614 and $758 at December 31, 2021 and 2020. The fair value of the derivative was $(64) and $(101) at December 31, 2021 and 2020 presented in other liabilities. The change in fair value of the derivative and the fair value of the hedged loan were equally offset through loan interest income and interest expense.

 

The Company also enters into interest rates swaps with its loan customers. The notional amount of interest rate swaps with its loan customers were $15,081 and $15,655 as of December 31, 2021 and 2020. The Company enters into corresponding offsetting derivatives with third parties. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. The fair value of the derivatives was $(682) and $(1,531) at December 31, 2021 and 2020, respectively presented in other assets and other liabilities. The change in fair value of the derivatives were equally offset through interest income and interest expense.

 

The Company has cash flow hedges used as part of the asset liability management strategy to help manage the interest rate risk position of subordinated debentures – trust preferred and loans with a total notional amount of $12,000 at December 31, 2021 and 2020. The fair value of the cash flow hedges presented in other liabilities was $113 and $419 as of December 31, 2021 and 2020 The hedges are considered effective with the change in the fair value of the cash flow hedge that is included in accumulated other comprehensive income was $306 and $(353) as of December 31, 2021 and 2020.

 

Net cash settlements on derivatives that qualify for hedge accounting are recorded in the interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

 

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the hedged firm commitment is no longer firm, or treatment of the derivative as hedge is no longer appropriate or intended.

 

 


(Continued)

 

14

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

When hedge accounting is discontinued, subsequent changes in fair value of the derivatives are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

 

Trust Fees and Assets: Fees for trust services are recognized on the accrual basis of accounting as the related services are performed. Assets held in trust, approximately $3,197,000 and $2,727,000 at December 31, 2021 and 2020, respectively, are not assets of the Company and, as such, are not included in the consolidated balance sheets.

 

Dividend Restrictions: Banking regulators require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to the shareholders.

 

Consolidated Statements of Cash Flows: For purposes of the consolidated statements of cash flows, the Company considers cash and due from banks and federal funds sold to be cash equivalents. All cash and cash equivalents mature in 90 days. Cash payments of interest totaled approximately $3,805 and $6,627 for 2021 and 2020, respectively.

 

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

 

 


(Continued)

 

15

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 2 SECURITIES

 

The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2021 and 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):                  

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
                                 

2021

                               

U.S. government sponsored agencies

  $ 163,580     $ 246     $ (42 )   $ 163,784  

Municipal bonds

    75,059       2,706       -       77,765  

Agency mortgage-backed securities:

                               

Residential

    14,443       479       (3 )     14,919  

Corporate bonds

    5,696       180       -       5,876  

Collateralized debt obligations

    1,688       157       (204 )     1,641  

Total debt securities

  $ 260,466     $ 3,768     $ (249 )   $ 263,985  

 

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
                                 

2020

                               

U.S. government sponsored agencies

  $ 86,542     $ 841     $ -     $ 87,383  

Municipal bonds

    90,259       3,507       (1 )     93,765  

Agency mortgage-backed securities:

                               

Residential

    22,110       874       (15 )     22,969  

Corporate bonds

    5,695       183       (4 )     5,874  

Collateralized debt obligations

    1,687       81       (268 )     1,500  

Total debt securities

  $ 206,293     $ 5,486     $ (288 )   $ 211,491  

 


(Continued)

 

16

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 2 SECURITIES (Continued)

 

Sales of available for sale securities were as follows:

 

    2021     2020  
                 
Gross gains   $ 17     $ -  
Gross losses     (1 )     (1 )

 

The amortized cost and fair value of debt investment securities, at year end 2021 by contractual maturity:

 

   

Amortized

Cost

   

Fair

Value

 
                 

Due in one year or less

  $ 147,577     $ 147,632  

Due from one to five years

    41,003       41,648  

Due from five to ten years

    26,054       27,041  

Due after ten years

    31,389       32,745  

Agency mortgage-backed securities: residential

    14,443       14,919  
                 

Total

  $ 260,466     $ 263,985  

 

Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

Securities pledged at year end 2021 and 2020 had a carrying amount of $213,219 and $158,735, respectively, and were pledged to secure public deposits and sweeps.

 

At year end 2021 and 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

The following table summarizes the investment securities with unrealized losses at December 31, 2021 and 2020 aggregated by major security type and length of time in a continuous unrealized loss position:

 

    2021  
    Less than 12 Months     12 Months or More     Total  
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

Description of Securities

 

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 
                                                 

U.S. government sponsored agencies

  $ 120     $ (42 )   $ -     $ -     $ 120     $ (42 )

Agency mortgage-backed securities:

                                               

Residential

    49       -       150       (3 )     199       (3 )

Collateralized debt obligations

    -       -       794       (204 )     794       (204 )
                                                 

Total temporarily impaired

  $ 169     $ (42 )   $ 944     $ (207 )   $ 1,113     $ (249 )

 


(Continued)

 

17

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 2 SECURITIES (Continued)

 

   

2020

 
   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

Description of Securities

 

Value

   

Loss

   

Value

   

Loss

   

Value

   

Loss

 
                                                 

Municipal bonds

  $ 169     $ (1 )   $ -     $ -     $ 169     $ (1 )

Agency mortgage-backed securities:

                                               

Residential

    65       -       2,446       (15 )     2,511       (15 )

Corporate bonds

    196       (4 )     -       -       196       (4 )

Collateralized debt obligations

    -       -       730       (268 )     730       (268 )
                                                 

Total temporarily impaired

  $ 430     $ (5 )   $ 3,176     $ (283 )   $ 3,606     $ (288 )

 

As of December 31, 2021, the Company’s securities portfolio consisted of $263,985 securities, $1,113 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s U.S. government-sponsored agencies, collateralized debt obligations and municipals, as discussed below:

 

Agency mortgage backed and U.S. Government-Sponsored Agency Securities: At December 31, 2021, all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. In addition, U.S. government agencies and obligations of states and political subdivisions are of good investment quality. Because any decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2021.

 

Municipal bonds: Unrealized losses on Municipal bonds have not been recognized into income because the issuers bonds are of high credit quality (rated AA or higher) at acquisition date and December 31, 2020, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

 

Corporate bonds: Unrealized losses on Corporate bonds have not been recognized into income because the issuers bonds are of high credit quality, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the bonds approach maturity.

 

Collateralized Debt Obligations: The Company’s unrealized losses in collateralized debt obligations (CDOs) relate primarily to its investment in pooled trust preferred securities. The decline in fair value is primarily attributable to temporary illiquidity, not necessarily the expected cash flows from the individual securities. Due to the illiquidity in the market, it is unlikely that the Company would be able to recover its investment in these securities if the Company sold the securities at this time.

 

The Company’s analysis of two of these investments includes a total of $1,687 of pooled trust preferred securities. These securities were rated high quality (AA and above) at inception, but at December 31, 2021, Moody’s rated these securities as A1, which is defined as upper-medium grade and subject to low credit risk, and B3, which is defined as substantial risks.

 


(Continued)

 

18

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 2 SECURITIES (Continued)

 

The issuers of these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company uses an OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the period. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults or underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. The Company assumes no recoveries on defaults and treats all interest payment deferrals as defaults. In addition, the Company uses the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Company’s note class. The analysis did not indicate any further impairment as of December 31, 2021 or December 31, 2020. These two securities remained classified as available for sale at December 31, 2021, and together, the two securities accounted for $204 of the unrealized loss at December 31, 2021.

 

The table below presents a roll forward of the credit losses recognized in earnings for the years ended:

 

   

2021

   

2020

 

Beginning balance, January 1

  $ 690     $ 681  

Reductions for credit losses on securities due to an increase in cash flows expected to be collected

    -       9  
                 

Ending balance, December 31

  $ 690     $ 690  

 


(Continued)

 

19

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS

 

Loans at year‑end were as follows:

 

   

2021

   

2020

 

Commercial

  $ 64,672     $ 139,540  

Commercial real estate

    348,100       369,376  

Construction and land development

    59,653       78,918  

Residential real estate

    154,420       146,150  

Consumer

    33,912       35,463  

Other

    18,878       20,884  
Subtotal     679,635       790,331  

Less: Allowance for loan losses

    (16,147 )     (15,930 )
                 
Loans, net   $ 663,488     $ 774,401  

 

In April, the Bank began originating Paycheck Protection Program (PPP) loans through the Small Business Administration as part of the CARES Act. The Bank originated $36,666 and $87,253 of PPP loans in 2021 and 2020, respectively. $1,831 and $55,481 of these loans remained outstanding at December 31, 2021 and 2020, respectively.

 


(Continued)

 

20

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2021 and 2020:

 

           

Commercial

   

Construction

   

Residential

                         
           

Real

   

and Land

   

Real

                         
   

Commercial

   

Estate

   

Development

   

Estate

   

Consumer

   

Other

   

Total

 
December 31, 2021                                                        
Allowance for loan losses:                                                        

Beginning balance

  $ 1,879     $ 6,397     $ 4,291     $ 1,875     $ 1,066     $ 422     $ 15,930  

Provision for (recovery of) loan losses

    3,045       (1,192 )     (1,786 )     159       (118 )     192       300  

Loans charged-off

    (253 )     (45 )     -       (25 )     (142 )     (120 )     (585 )

Recoveries

    28       266       -       51       109       48       502  

Total ending allowance balance

  $ 4,699     $ 5,426     $ 2,505     $ 2,060     $ 915     $ 542     $ 16,147  
                                                         

December 31, 2020

                                                       

Allowance for loan losses:

                                                       

Beginning balance

  $ 1,022     $ 3,123     $ 1,323     $ 1,799     $ 857     $ 111     $ 8,235  

Provision for (recovery of) loan losses

    879       3,321       2,914       76       310       390       7,890  

Loans charged-off

    (185 )     (123 )     -       -       (205 )     (107 )     (620 )

Recoveries

    163       76       54       -       104       28       425  

Total ending allowance balance

  $ 1,879     $ 6,397     $ 4,291     $ 1,875     $ 1,066     $ 422     $ 15,930  

 

 


(Continued)

 

21

 

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2021 and 2020:

 

 

         

Commercial

   

Construction

   

Residential

                         

 

         

Real

   

and Land

   

Real

                         

 

 

Commercial

   

Estate

   

Development

   

Estate

   

Consumer

   

Other

   

Total

 
December 31, 2021                                          
Allowance for loan losses:                                          
Ending allowance balance attributable to loans:                                          

Individually evaluated for impairment

  $ 3,683     $ 549     $ 805     $ 4     $ 25     $ -     $ 5,066  

Collectively evaluated for impairment

    1,016       4,877       1,700       2,056       890       542       11,081  
                                                         

Total ending allowance balance

  $ 4,699     $ 5,426     $ 2,505     $ 2,060     $ 915     $ 542     $ 16,147  
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $ 8,685     $ 4,653     $ 7,273     $ 647     $ 143     $ -     $ 21,401  

Loans collectively evaluated for impairment

    55,987       343,447       52,380       153,773       33,769       18,878       658,234  
                                                         

Total ending loans balance

  $ 64,672     $ 348,100     $ 59,653     $ 154,420     $ 33,912     $ 18,878     $ 679,635  

 

           

Commercial

   

Construction

   

Residential

                         
           

Real

   

and Land

   

Real

                         
   

Commercial

   

Estate

   

Development

   

Estate

   

Consumer

   

Other

   

Total

 

December 31, 2020

                                                       

Allowance for loan losses:

                                                       

Ending allowance balance attributable to loans:

                                                       

Individually evaluated for impairment

  $ 462     $ 1,304     $ 2,351     $ 27     $ 11     $ -     $ 4,155  

Collectively evaluated for impairment

    1,417       5,093       1,940       1,848       1,055       422       11,775  
                                                         

Total ending allowance balance

  $ 1,879     $ 6,397     $ 4,291     $ 1,875     $ 1,066     $ 422     $ 15,930  
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $ 3,876     $ 14,686     $ 9,695     $ 297     $ 90     $ -     $ 28,644  

Loans collectively evaluated for impairment

    135,664       354,690       69,223       145,853       35,373       20,884       761,687  
                                                         
Total ending loans balance   $ 139,540     $ 369,376     $ 78,918     $ 146,150     $ 35,463     $ 20,884     $ 790,331  

 


(Continued)

 

22

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

The following table presents information related to impaired loans by segment of loans as of and for the years ended December 31, 2020 and 2019:

 

   

Unpaid

           

Allowance for

   

Average

   

Interest

   

Cash Basis

 
   

Principal

   

Recorded

   

Loan Losses

   

Recorded

   

Income

   

Interest

 
   

Balance

   

Investment

   

Allocated

   

Investment

   

Recognized

   

Recognized

 

December 31, 2021

                                               

With no related allowance recorded:

                                         

Commercial

  $ 11     $ 11     $ -     $ 5     $ -     $ -  

Commercial real estate

    1,327       1,167       -       2,254       28       28  

Construction and land development

    -       -       -       -       -       -  

Residential real estate

    623       614       -       434       -       -  

Consumer

    45       43       -       25       -       -  

Subtotal

    2,006       1,835       -       2,718       28       28  
                                                 

With an allowance recorded:

                                               

Commercial

    8,694       8,674       3,683       6,275       229       229  

Commercial real estate

    3,487       3,486       549       7,416       126       126  

Construction and land development

    7,273       7,273       805       8,484       333       333  

Residential real estate

    33       33       4       38       -       -  

Consumer

    102       100       25       91       -       -  

Subtotal

    19,589       19,566       5,066       22,304       688       688  
                                                 

Total

  $ 21,595     $ 21,401     $ 5,066     $ 25,022     $ 716     $ 716  

 


(Continued)

 

23

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

 

NOTE 3 LOANS (Continued)

 

   

Unpaid

           

Allowance for

   

Average

   

Interest

   

Cash Basis

 
   

Principal

   

Recorded

   

Loan Losses

   

Recorded

   

Income

   

Interest

 
   

Balance

   

Investment

   

Allocated

   

Investment

   

Recognized

   

Recognized

 

December 31, 2020

                                               

With no related allowance recorded:

                                         

Commercial

  $ -     $ -     $ -     $ -     $ -     $ -  

Commercial real estate

    3,493       3,341       -       2,247       -       -  

Construction and land development

    -       -       -       -       -       -  

Residential real estate

    283       253       -       659       -       -  

Consumer

    23       7       -       4       -       -  

Subtotal

    3,799       3,601       -       2,910       -       -  
                                                 
                                                 

Commercial

    3,892       3,876       462       1,944       219       219  

Commercial real estate

    11,345       11,345       1,304       5,933       396       396  

Construction and land development

    9,695       9,695       2,351       4,847       -       -  

Residential real estate

    44       44       27       27       -       -  

Consumer

    126       83       11       81       -       -  

Subtotal

    25,102       25,043       4,155       12,832       615       615  
                                                 

Total

  $ 28,901     $ 28,644     $ 4,155     $ 15,742     $ 615     $ 615  

 

The recorded investment in loans includes the loan origination fees, net. The recorded investment in loans excludes accrued interest receivable, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial net charge-offs.

 


(Continued)

 

24

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by segment of loans as of December 31, 2021 and 2020:

 

                   

Loans Past Due Over

 
   

Nonaccrual

   

90 Days Still Accruing

 
   

2021

   

2020

   

2021

   

2020

 
                                 

Commercial

  $ 2,967     $ 6     $ -     $ -  

Commercial real estate

    673       2,846       -       -  

Construction and land development

    -       -       -       -  

Residential real estate

    647       297       52       -  

Consumer

    143       88       -       44  

Other

    -       -       -       -  
                                 

Total

  $ 4,430     $ 3,237     $ 52     $ 44  

 

The following table presents the aging of the recorded investment in past due loans as of December 31, 2021 and 2020 by segment of loans:

 

     30 - 59      60 - 89    

Greater than

                     
   

Days

   

Days

   

89 Days

   

Total

   

Loans Not

         
   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Total

 
                                                 

December 31, 2021

                                               

Commercial

  $ 3,099     $ 50     $ -     $ 3,149     $ 61,523     $ 64,672  

Commercial real estate

    480       -       589       1,069       347,031       348,100  

Construction and land development

    -       -       -       -       59,653       59,653  

Residential real estate

    875       47       169       1,091       153,329       154,420  

Consumer

    133       25       42       200       33,712       33,912  

Other

    38       17       -       55       18,823       18,878  
                                                 

Total

  $ 4,625     $ 139     $ 800     $ 5,564     $ 674,071     $ 679,635  
                                                 

December 31, 2021

                                               

Commercial

  $ 359     $ 271     $ 6     $ 636     $ 138,904     $ 139,540  

Commercial real estate

    3,663       63       702       4,428       364,948       369,376  

Construction and land development

    -       127       -       127       78,791       78,918  

Residential real estate

    1,077       557       229       1,863       144,287       146,150  

Consumer

    228       48       298       574       34,889       35,463  

Other

    70       5       9       84       20,800       20,884  
                                                 
                                                 

Total

  $ 5,397     $ 1,071     $ 1,244     $ 7,712     $ 782,619     $ 790,331  

 


(Continued)

 

25

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

Troubled Debt Restructurings:

 

The Company has no troubled debt restructurings as of December 31, 2021 or December 31, 2020 The Company has no specific reserves allocated to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2021 or December 31, 2020. The Company has not committed to lend additional amounts as of December 31, 2021 and 2020 to customers with outstanding loans that are classified as troubled debt restructurings.

 

There were no loans modified as troubled debt restructurings in 2021 or 2020.

 

There were no payment defaults within twelve months following the modification of troubled debt restructurings for the years ended 2021 or 2020. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company’s internal underwriting policy.

 

The company is working with borrowers impacted by COVID-19 and providing modifications to include interest only or principal and interest deferral. These modifications are excluded from troubled debt restructurings under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. During 2020, the Company modified 174 loans totaling $197,771. Of these loans, 5 loans with outstanding balances of $26,126 remained on modified terms as of December 31, 2021.

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Residential real estate, consumer and other loans are homogenous loans which are initially assigned a risk grade at origination. For residential, consumer and other loans, the Company evaluates credit quality based on aging status of the loan, which was previously presented and payment activity.

 


(Continued)

 

26

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 3 LOANS (Continued)

 

Based on the most recent analysis performed, the risk category of loans by segment of loans is as follows:

 

           

Special

                         
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Total

 
                                         

December 31, 2021

                                       

Commercial

  $ 50,439     $ 3,212     $ 11,021     $ -     $ 64,672  

Commercial real estate

    322,779       18,420       6,901       -       348,100  

Construction and land development

    42,845       -       16,808       -       59,653  

Residential real estate

    152,537       122       1,761       -       154,420  

Consumer

    33,692       -       220       -       33,912  

Other

    18,878       -       -       -       18,878  
                                         

Total

  $ 621,170     $ 21,754     $ 36,711     $ -     $ 679,635  
                                         

December 31, 2020

                                       

Commercial

  $ 129,136     $ 5,745     $ 4,659     $ -     $ 139,540  

Commercial real estate

    362,566       1,104       5,706       -       369,376  

Construction and land development

    68,928       -       9,990       -       78,918  

Residential real estate

    144,548       -       1,602       -       146,150  

Consumer

    35,180       -       281       2       35,463  

Other

    20,884       -       -       -       20,884  
                                         

Total

  $ 761,242     $ 6,849     $ 22,238     $ 2     $ 790,331  

 

NOTE 4 MORTGAGE BANKING ACTIVITIES

 

The following summarizes mortgage activities for each year:

 

   

2021

   

2020

 

Mortgage banking income:

               

Net gain on sale of loans

  $ 21,791     $ 38,239  

Loss on derivative contracts and other

    (6,151 )     (2,020 )

Servicing income, net of amortization

    5,720       6,305  
                 
    $ 21,360     $ 42,524  
                 

Gross loans originated

  $ 579,051     $ 856,609  

Gross loans sold

    622,011       833,522  

Gross loans serviced for others

    1,584,509       1,528,078  
                 

Warehouse loans held for sale at year end

  $ -     $ 2,350  

Loans held for sale at year end

    229       12,186  

Loans held for sale at year end at fair value

    2,310       33,312  
    $ 2,539     $ 47,848  

 


(Continued)

 

27

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 4 MORTGAGE BANKING ACTIVITIES (Continued)

 

Activity for capitalized mortgage servicing rights presented in other assets:

 

   

2021

   

2020

 

Servicing rights:

               

Beginning of year

  $ 8,984     $ 6,990  

Additions

    4,961       7,256  

Amortized to expense

    (4,193 )     (5,262 )
                 

End of year

  $ 9,752     $ 8,984  

  

The fair value was $15,239 and $9,386 at December 31, 2021 and 2020, respectively. Fair value at year-end 2021 was determined using discount rates ranging from 9.0% to 12.0% and prepayment speeds ranging from 12.2% to 16.0%, depending on the stratification of the specific right and a weighted average default rate of .85%. Fair value at year-end 2020 was determined using discount rates ranging from 9.5% to 12.5% and prepayment speeds range from 19.0% to 25.6%, depending on the stratification of the specific right and a weighted average default rate of 1.30%.

 

Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts and rate lock loan commitments. Mandatory forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.

 

The realized gains (losses) as of year-end relating to free-standing derivative instruments used for risk management are summarized below:

 

 

Location  

2021

   

2020

 

Forward contracts related to:

               

Mortgage loans held for sale

Mortgage banking activities

  $ (986 )   $ (913 )

Interest rate lock commitments

Mortgage banking activities

    (5,726 )     4,618  

 

The following table reflects the amount and fair value of mortgage banking derivatives included in the Consolidated Balance Sheets:

 

   

2021

   

2020

 
   

Notional

   

Fair

   

Notional

   

Fair

 
   

Amount

   

Value

   

Amount

   

Value

 

Included in other assets and other liabilities:

                               

Forward contracts related to:

                               

Mortgage loans held for sale

  $ 10,000     $ (11 )   $ 125,000     $ (997 )

Interest rate lock commitments

    11,524       348       123,031       6,074  
                                 

Total included in other assets

          $ 348             $ 6,074  
                                 

Total included in other liabilities

          $ (11 )           $ (997 )

 


(Continued)

 

28

 

COMMONWEALTH BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

(Dollar amounts in thousands)

 


  

NOTE 4 MORTGAGE BANKING ACTIVITIES (Continued)

 

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Company could potentially incur significant additional costs by replacing the positions at then current market rates. The Company manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management and the Board of Directors. The Company performs periodic analysis on the counterparties to evaluate potential default on their obligations and therefore, does not expect to incur any risk related to counterparty default.

 

The Company is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk, the Company enters into derivatives such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate loan lock commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including market interest rate volatility, the amount of rate lock commitments that close, the ability to fill the forward contracts before expiration, and the time period required to close and sell loans.

 

NOTE 5 - PREMISES AND EQUIPMENT

 

Year‑end premises and equipment were as follows:

 

   

2021

   

2020

 

Land and buildings

  $ 37,393     $ 38,708  

Furniture, fixtures and equipment

    4,766       8,104  

Software

    9       28  
      42,168