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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _________ to _________
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |||
Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At July 28, 2022, the latest practicable date for determination,
TABLE OF CONTENTS
2
Part I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
June 30, | December 31, | ||||||
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| 2022 |
| 2021 |
| ||
Assets | |||||||
Cash and due from banks | $ | | $ | | |||
Interest-bearing deposits in other banks |
| |
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Total cash and cash equivalents |
| |
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Securities—available for sale at fair value, amortized cost of |
| |
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Loans held for sale, at fair value |
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Loans, net of allowance for loan losses of $ |
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Restricted stock, at cost |
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Corporate premises and equipment, net |
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Other real estate owned |
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Accrued interest receivable |
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Goodwill |
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Other intangible assets, net |
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Bank-owned life insurance | | | |||||
Net deferred tax asset | | | |||||
Other assets |
| |
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Total assets | $ | | $ | | |||
Liabilities | |||||||
Deposits | |||||||
Noninterest-bearing demand deposits | $ | | $ | | |||
Savings and interest-bearing demand deposits |
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Time deposits |
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Total deposits |
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Short-term borrowings |
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Long-term borrowings |
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Trust preferred capital notes |
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Accrued interest payable |
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Other liabilities |
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Total liabilities |
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Commitments and contingent liabilities (Note 10) |
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Equity | |||||||
Common stock ($ |
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Additional paid-in capital |
| |
| | |||
Retained earnings |
| |
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Accumulated other comprehensive loss, net |
| ( |
| ( | |||
Equity attributable to CF Financial Corporation | | | |||||
Noncontrolling interest | | | |||||
Total equity |
| |
| | |||
Total liabilities and equity | $ | | $ | | |||
See notes to consolidated interim financial statements.
3
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended June 30, | Six Months Ended June 30, |
| |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Interest income | |||||||||||||
Interest and fees on loans | $ | | $ | | $ | | $ | | |||||
Interest on interest-bearing deposits and federal funds sold |
| |
| |
| |
| | |||||
Interest and dividends on securities | |||||||||||||
U.S. treasury, government agencies and corporations |
| |
| |
| |
| | |||||
Mortgage-backed securities | | | | | |||||||||
Tax-exempt obligations of states and political subdivisions | | | | | |||||||||
Taxable obligations of states and political subdivisions |
| |
| |
| |
| | |||||
Corporate and other |
| |
| |
| |
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Total interest income |
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Interest expense | |||||||||||||
Savings and interest-bearing deposits |
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Time deposits |
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Borrowings |
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Trust preferred capital notes |
| |
| |
| |
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Total interest expense |
| |
| |
| |
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Net interest income |
| |
| |
| |
| | |||||
Provision for loan losses |
| |
| ( |
| |
| ( | |||||
Net interest income after provision for loan losses |
| |
| |
| |
| | |||||
Noninterest income | |||||||||||||
Gains on sales of loans |
| |
| |
| |
| | |||||
Interchange income | | | | | |||||||||
Service charges on deposit accounts |
| |
| |
| |
| | |||||
Mortgage banking fee income |
| |
| |
| |
| | |||||
Wealth management services income, net |
| |
| |
| |
| | |||||
Mortgage lender services income | | | | | |||||||||
Other service charges and fees |
| |
| |
| |
| | |||||
Net gains on sales, maturities and calls of available for sale securities |
| — |
| |
| — |
| | |||||
Other (loss) income, net |
| ( |
| |
| ( |
| | |||||
Total noninterest income |
| |
| |
| |
| | |||||
Noninterest expenses | |||||||||||||
Salaries and employee benefits |
| |
| |
| |
| | |||||
Occupancy |
| |
| |
| |
| | |||||
Other |
| |
| |
| |
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Total noninterest expenses |
| |
| |
| |
| | |||||
Income before income taxes |
| |
| |
| |
| | |||||
Income tax expense |
| |
| |
| |
| | |||||
Net income | | | | | |||||||||
Less net income attributable to noncontrolling interest |
| |
| |
| |
| | |||||
Net income attributable to CF Financial Corporation | $ | | $ | | $ | | $ | | |||||
Net income per share - basic and diluted | $ | | $ | | | | |||||||
See notes to consolidated interim financial statements.
4
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended June 30, | Six Months Ended June 30, |
| |||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive (loss) income, net of tax: | |||||||||||||
Securities available for sale | ( | | ( | ( | |||||||||
Defined benefit plan | ( | | ( | | |||||||||
Cash flow hedges | | ( | | | |||||||||
Other comprehensive (loss) income, net of tax | ( | | ( | ( | |||||||||
Comprehensive (loss) income | ( | | ( | | |||||||||
Less comprehensive income attributable to noncontrolling interest | | | | | |||||||||
Comprehensive (loss) income attributable to CF Financial Corporation | $ | ( | $ | | $ | ( | $ | | |||||
See notes to consolidated interim financial statements.
5
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(Dollars in thousands, except per share amounts)
Attributable to CF Financial Corporation | |||||||||||||||||||
Accumulated | |||||||||||||||||||
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| Additional |
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| Other |
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| ||||||||||||
Common | Paid - In | Retained | Comprehensive | Noncontrolling | Total |
| |||||||||||||
Stock | Capital | Earnings | Loss, Net | Interest | Equity |
| |||||||||||||
Balance March 31, 2022 | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | | $ | | |||
Comprehensive income: | |||||||||||||||||||
Net income |
| — |
| — |
| |
| — |
| |
| | |||||||
Other comprehensive loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Share-based compensation |
| — |
| |
| — |
| — |
| — |
| | |||||||
Common stock issued |
| |
| |
| — |
| — |
| — |
| | |||||||
Common stock purchased | ( | ( | — | — | — | ( | |||||||||||||
Cash dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||
Distributions to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||
Balance June 30, 2022 | $ | | $ | | $ | | $ | ( |
| $ | | $ | | ||||||
Attributable to CF Financial Corporation | |||||||||||||||||||
Accumulated | |||||||||||||||||||
|
| Additional |
|
| Other |
|
| ||||||||||||
Common | Paid - In | Retained | Comprehensive | Noncontrolling | Total |
| |||||||||||||
Stock | Capital | Earnings | Loss, Net | Interest | Equity |
| |||||||||||||
Balance March 31, 2021 | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | | $ | | |||
Comprehensive income: | |||||||||||||||||||
Net income |
| — |
| — |
| |
| — |
| |
| | |||||||
Other comprehensive income |
| — |
| — |
| — |
| |
| — |
| | |||||||
Share-based compensation |
| — |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock vested |
| | ( |
| — |
| — |
| — |
| — | ||||||||
Common stock issued |
| | |
| — |
| — |
| — |
| | ||||||||
Common stock purchased | ( | ( | — | — | — | ( | |||||||||||||
Cash dividends declared ($ |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Distributions to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||
Balance June 30, 2021 | $ | | $ | | $ | | $ | ( |
| $ | | $ | | ||||||
See notes to consolidated interim financial statements.
6
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
(Dollars in thousands, except per share amounts)
Attributable to CF Financial Corporation | |||||||||||||||||||
|
|
|
| Accumulated |
|
| |||||||||||||
Additional | Other | ||||||||||||||||||
Common | Paid - In | Retained | Comprehensive | Noncontrolling | Total |
| |||||||||||||
| Stock | Capital | Earnings | Loss, Net | Interest | Equity |
| ||||||||||||
Balance December 31, 2021 | $ | | $ | | $ | | $ | ( |
| $ | | $ | | ||||||
Comprehensive income: | |||||||||||||||||||
Net income |
| — |
| — |
| |
| — |
| |
| | |||||||
Other comprehensive loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Share-based compensation |
| — | |
| — |
| — |
| — |
| | ||||||||
Restricted stock vested |
| | ( |
| — |
| — |
| — |
| — | ||||||||
Common stock issued |
| | | — |
| — |
| — |
| | |||||||||
Common stock purchased | ( | ( | — | — | — | ( | |||||||||||||
Cash dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||
Distributions to noncontrolling interest | — | — | — | — | ( | ( | |||||||||||||
Balance June 30, 2022 | $ | | $ | | $ | | $ | ( |
| $ | | $ | | ||||||
Attributable to CF Financial Corporation | |||||||||||||||||||
Accumulated | |||||||||||||||||||
|
| Additional |
|
| Other |
|
| ||||||||||||
Common | Paid - In | Retained | Comprehensive | Noncontrolling | Total |
| |||||||||||||
Stock | Capital | Earnings | Loss, Net | Interest | Equity |
| |||||||||||||
Balance December 31, 2020 | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | | $ | | |||
Comprehensive income: | |||||||||||||||||||
Net income |
| — |
| — |
| |
| — |
| |
| | |||||||
Other comprehensive loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||||
Share-based compensation |
| — |
| |
| — |
| — |
| — |
| | |||||||
Restricted stock vested |
| | ( |
| — |
| — |
| — |
| — | ||||||||
Common stock issued |
| |
| |
| — |
| — |
| — |
| | |||||||
Common stock purchased | ( | ( | — | — | — | ( | |||||||||||||
Cash dividends declared ($ | — | — | ( | — | — | ( | |||||||||||||
Distributions to noncontrolling interest |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||||
Balance June 30, 2021 | $ | | $ | | $ | | $ | ( |
| $ | | $ | | ||||||
See notes to consolidated interim financial statements.
7
CF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended June 30, |
| ||||||
|
| 2022 |
| 2021 |
| ||
Operating activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Provision for (reversal of) loan losses |
| |
| ( | |||
Accretion of certain acquisition-related discounts, net |
| ( |
| ( | |||
Share-based compensation |
| |
| | |||
Depreciation and amortization |
| |
| | |||
Amortization of premiums and accretion of discounts on securities, net |
| |
| | |||
(Reversal of) provision for indemnifications | ( | | |||||
Income from bank-owned life insurance | ( | ( | |||||
Pension expense | | | |||||
Proceeds from sales of loans held for sale |
| |
| | |||
Origination of loans held for sale |
| ( |
| ( | |||
Gains on sales of loans held for sale | ( | ( | |||||
Other gains, net | ( | ( | |||||
Change in other assets and liabilities: | |||||||
Accrued interest receivable |
| ( |
| | |||
Other assets |
| |
| | |||
Accrued interest payable |
| ( |
| ( | |||
Other liabilities |
| ( |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
Investing activities: | |||||||
Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities |
| |
| | |||
Purchases of securities available for sale |
| ( |
| ( | |||
Maturities of time deposits, net | | | |||||
Repayments on loans held for investment by non-bank affiliates | | | |||||
Purchases of loans held for investment by non-bank affiliates | ( | ( | |||||
Net increase in community banking loans held for investment | ( | ( | |||||
Purchases of corporate premises and equipment |
| ( |
| ( | |||
Proceeds from sales of other real estate owned | | | |||||
Changes in collateral posted with other financial institutions, net | | | |||||
Other investing activities, net |
| ( |
| | |||
Net cash used in investing activities |
| ( |
| ( | |||
Financing activities: | |||||||
Net increase in demand and savings deposits |
| |
| | |||
Net decrease in time deposits |
| ( |
| ( | |||
Net increase in short-term borrowings |
| |
| | |||
Repurchases of common stock | ( | ( | |||||
Cash dividends paid | ( | ( | |||||
Other financing activities, net |
| ( |
| ( | |||
Net cash provided by financing activities |
| |
| | |||
Net (decrease) increase in cash and cash equivalents |
| ( |
| | |||
Cash and cash equivalents at beginning of period |
| |
| | |||
Cash and cash equivalents at end of period | $ | | $ | | |||
Supplemental cash flow disclosures: | |||||||
Interest paid | $ | | $ | | |||
Income taxes paid |
| |
| | |||
Supplemental disclosure of noncash investing and financing activities: | |||||||
Transfers from corporate premises and equipment to other real estate owned | $ | | $ | — | |||
Liabilities assumed to acquire right of use assets under operating leases | | | |||||
Transfers from loans held for sale to loans held for investment | | | |||||
See notes to consolidated interim financial statements.
8
CF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the CF Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2021.
The unaudited consolidated financial statements include the accounts of CF Financial Corporation (the Corporation), its direct wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or CF Bank) and indirect subsidiaries that are wholly-owned or controlled. Subsidiaries that are less than wholly owned are fully consolidated if they are controlled by the Corporation or one of its subsidiaries, and the portion of any subsidiary not owned by the Corporation is reported as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns all of the common stock of CF Financial Statutory Trust I, CF Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation. The accounting and reporting policies of the Corporation conform to U.S. GAAP and to predominant practices within the banking industry.
Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, CF Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.
CF Bank has
Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans and evaluation of goodwill for impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. None of these reclassifications are considered material and did not affect net income or total equity.
9
Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans and related forward sales of mortgage loans and mortgage backed securities. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs, forward sales contracts and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported as noninterest income. The Corporation’s derivative financial instruments are described more fully in Note 11.
Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three and six months ended June 30, 2022 was $
A summary of activity for restricted stock awards during the first six months of 2022 and 2021 is presented below:
2022 |
| |||||
|
| Weighted- |
| |||
Average |
| |||||
Grant Date |
| |||||
Shares | Fair Value |
| ||||
Unvested, December 31, 2021 |
| | $ | | ||
Granted | |
| | |||
Vested |
| ( |
| | ||
Forfeited |
| ( |
| | ||
Unvested, June 30, 2022 |
| | | |||
2021 | ||||||
|
| Weighted- | ||||
Average | ||||||
Grant Date | ||||||
Shares | Fair Value | |||||
Unvested, December 31, 2020 |
| | $ | | ||
Granted |
| |
| | ||
Vested |
| ( |
| | ||
Forfeited |
| ( |
| | ||
Unvested, June 30, 2021 |
| | | |||
Recent Significant Accounting Pronouncements:
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326). ASC 326 introduces an approach based
10
on expected losses to estimate credit losses on certain types of financial instruments. It modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. It also modifies the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses is measured for such loans. The Corporation expects to adopt the new standard effective January 1, 2023.
The amendments of ASC 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption. The Corporation has established a working group to prepare for and implement changes related to ASC 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard. The Corporation has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326. The Corporation has engaged a vendor to assist in modeling expected lifetime losses under ASC 326. The Corporation expects to utilize primarily discounted cash flow methods for estimating the allowance for credit losses on loans, and is reviewing the policies and procedures to be utilized for developing that estimate. The Corporation is still evaluating the impact of the standard on its process for measuring impairment of available for sale securities. The adoption of ASC 326 will result in significant changes to the Corporation’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in total equity and regulatory capital of CF Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses, charge-offs and recoveries of loans, and certain loan modifications. The Corporation has not yet determined an estimate of the effect of these changes, which will be determined based on the facts and circumstances at the time of adoption. The adoption of the standard will also result in significant changes in the Corporation’s internal control over financial reporting related to the allowance for credit losses.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, hedging relationships and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. The amendments are effective as of March 12, 2020 through December 31, 2022, can be adopted at an instrument level. The Corporation has utilized certain optional expedients and exceptions under Topic 848 in the case of modifications to certain loans, borrowings and cash flow hedges during 2022. These modifications have not had and are not expected to have a material impact on the consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” This amendment clarifies the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. It also introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The amendments are effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. Early adoption is permitted. The amendments will be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. The Corporation is currently evaluating the effect that ASU 2022-03 may have on its consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Corporation’s financial position, results of operations or cash flows.
11
NOTE 2: Securities
The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:
June 30, 2022 |
| ||||||||||||
|
| Gross |
| Gross |
|
| |||||||
Amortized | Unrealized | Unrealized |
| ||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Fair Value |
| ||||||||
U.S. Treasury securities | $ | | $ | — | $ | ( | $ | | |||||
U.S. government agencies and corporations | | | ( | | |||||||||
Mortgage-backed securities |
| |
| |
| ( |
| | |||||
Obligations of states and political subdivisions |
| |
| |
| ( |
| | |||||
Corporate and other debt securities | | | ( | | |||||||||
$ | | $ | | $ | ( | $ | | ||||||
December 31, 2021 |
| ||||||||||||
|
| Gross |
| Gross |
|
| |||||||
Amortized | Unrealized | Unrealized |
| ||||||||||
(Dollars in thousands) | Cost | Gains | Losses | Fair Value |
| ||||||||
U.S. government agencies and corporations | $ | | $ | | $ | ( | $ | | |||||
Mortgage-backed securities |
| |
| |
| ( |
| | |||||
Obligations of states and political subdivisions |
| |
| |
| ( |
| | |||||
Corporate and other debt securities |
| |
| |
| ( |
| | |||||
$ | | $ | | $ | ( | $ | | ||||||
The amortized cost and estimated fair value of securities at June 30, 2022, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
June 30, 2022 |
| ||||||
| Amortized |
|
| ||||
(Dollars in thousands) | Cost | Fair Value |
| ||||
Due in one year or less | $ | | $ | | |||
Due after one year through five years |
| |
| | |||
Due after five years through ten years |
| |
| | |||
Due after ten years |
| |
| | |||
$ | | $ | | ||||
The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the three and six months ended June 30, 2022 and during the three months ended June 30, 2021 there were
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 | 2021 | |||||
Realized gains from sales, maturities and calls of securities: | ||||||||||||
Gross realized gains | $ | — | $ | | $ | — | $ | | ||||
Gross realized losses |
| — |
| — |
| — |
| — | ||||
Net realized gains | $ | — | $ | | $ | — | $ | | ||||
Proceeds from sales, maturities, calls and paydowns of securities | $ | | $ | | $ | | $ | | ||||
12
The Corporation pledges securities primarily to secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $
Securities in an unrealized loss position at June 30, 2022, by duration of the period of the unrealized loss, are shown below.
Less Than 12 Months | 12 Months or More | Total |
| ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| |||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss |
| ||||||||||||
U.S. Treasury securities | $ | | $ | | $ | — | $ | — | $ | | $ | | |||||||
U.S. government agencies and corporations | | | | | | | |||||||||||||
Mortgage-backed securities |
| | |
| |
| |
| |
| | ||||||||
Obligations of states and political subdivisions |
| |
| |
| |
| |
| |
| | |||||||
Corporate and other debt securities | | | | | | | |||||||||||||
Total temporarily impaired securities | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
There were
Securities in an unrealized loss position at December 31, 2021, by duration of the period of the unrealized loss, are shown below.
Less Than 12 Months | 12 Months or More | Total |
| ||||||||||||||||
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| |||||||
(Dollars in thousands) | Value | Loss | Value | Loss | Value | Loss |
| ||||||||||||
U.S. government agencies and corporations | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Mortgage-backed securities | |
| |
| |
| |
| |
| | ||||||||
Obligations of states and political subdivisions | | | | | | | |||||||||||||
Corporate and other debt securities |
| |
| |
| — |
| — |
| |
| | |||||||
Total temporarily impaired securities | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
The Corporation’s investment in restricted stock totaled $
13
NOTE 3: Loans
Major classifications of loans are summarized as follows:
June 30, | December 31, |
| |||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Real estate – residential mortgage | $ | | $ | | |||
Real estate – construction 1 |
| |
| | |||
Commercial, financial and agricultural 2 |
| |
| | |||
Equity lines |
| |
| | |||
Consumer |
| |
| | |||
Consumer finance3 |
| |
| | |||
| |
| | ||||
Less allowance for loan losses |
| ( |
| ( | |||
Loans, net | $ | | $ | | |||
| 1 | Includes the Corporation’s real estate construction lending and consumer real estate lot lending. |
| 2 | Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the Paycheck Protection Program). |
| 3 | Includes the Corporation’s automobile lending and marine and recreational vehicle lending. |
Consumer loans included $
Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The outstanding principal balance and the carrying amount at June 30, 2022 and December 31, 2021 of loans acquired in business combinations were as follows:
June 30, 2022 | December 31, 2021 | ||||||||||||||||||
| Acquired Loans - |
| Acquired Loans - |
|
| Acquired Loans - |
| Acquired Loans - |
|
| |||||||||
Purchased | Purchased | Acquired Loans - | Purchased | Purchased | Acquired Loans - |
| |||||||||||||
(Dollars in thousands) | Credit Impaired | Performing | Total | Credit Impaired | Performing | Total |
| ||||||||||||
Outstanding principal balance | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Carrying amount | |||||||||||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Real estate – construction | — | — | — | — | | | |||||||||||||
Commercial, financial and agricultural1 |
| |
| |
| |
| |
| |
| | |||||||
Equity lines |
| |
| |
| |
| |
| |
| | |||||||
Consumer |
| |
| |
| |
| |
| |
| | |||||||
Total acquired loans | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
| 1 | Includes acquired loans classified by the Corporation as commercial real estate lending and commercial business lending. |
14
The following table presents a summary of the change in the accretable yield of loans classified as purchased credit impaired (PCI):
Six Months Ended June 30, | |||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Accretable yield, balance at beginning of period | $ | | $ | | |||
Accretion |
| ( |
| ( | |||
Reclassification of nonaccretable difference due to improvement in expected cash flows |
| |
| | |||
Other changes, net |
| ( |
| | |||
Accretable yield, balance at end of period | $ | | $ | | |||
Loans on nonaccrual status were as follows:
June 30, | December 31, |
| |||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Real estate – residential mortgage | $ | | $ | | |||
Commercial, financial and agricultural: | |||||||
Commercial business lending |
| — |
| | |||
Equity lines |
| |
| | |||
Consumer |
| |
| | |||
Consumer finance: |
| ||||||
Automobiles | | | |||||
Total loans on nonaccrual status | $ | | $ | | |||
The past due status of loans as of June 30, 2022 was as follows:
|
|
|
|
|
|
| 90+ Days |
| |||||||||||||||||
30 - 59 Days | 60 - 89 Days | 90+ Days | Total | Past Due and |
| ||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | Past Due | Past Due | PCI | Current1 | Total Loans | Accruing |
| ||||||||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||||
Real estate – construction: | |||||||||||||||||||||||||
Construction lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Consumer lot lending |
| |
| — |
| — |
| | — |
| |
| |
| — | ||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||
Commercial real estate lending |
| — |
| — |
| |
| | |
| |
| |
| | ||||||||||
Land acquisition and development lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Builder line lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Commercial business lending |
| |
| — |
| — |
| | — |
| |
| |
| — | ||||||||||
Equity lines |
| |
| — |
| |
| | |
| |
| |
| | ||||||||||
Consumer |
| |
| — |
| — |
| | |
| |
| |
| — | ||||||||||
Consumer finance: | |||||||||||||||||||||||||
Automobiles | | | | | — | | | — | |||||||||||||||||
Marine and recreational vehicles |
| |
| — |
| — |
| | — |
| |
| |
| — | ||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
| 1 | For the purposes of the table above, “Current” includes loans that are 1-29 days past due. |
The table above includes nonaccrual loans that are current of $
15
The past due status of loans as of December 31, 2021 was as follows:
|
|
|
|
|
|
| 90+ Days |
| |||||||||||||||||
30 - 59 Days | 60 - 89 Days | 90+ Days | Total | Past Due and |
| ||||||||||||||||||||
(Dollars in thousands) | Past Due | Past Due | Past Due | Past Due | PCI | Current1 | Total Loans | Accruing |
| ||||||||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Real estate – construction: | |||||||||||||||||||||||||
Construction lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Consumer lot lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Commercial, financial and agricultural: | |||||||||||||||||||||||||
Commercial real estate lending |
| — |
| |
| — |
| | |
| |
| |
| — | ||||||||||
Land acquisition and development lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Builder line lending |
| — |
| — |
| — |
| — | — |
| |
| |
| — | ||||||||||
Commercial business lending |
| |
| — |
| — |
| | — |
| |
| |
| — | ||||||||||
Equity lines |
| |
| |
| |
| | |
| |
| |
| | ||||||||||
Consumer |
| |
| — |
| — |
| | |
| |
| |
| — | ||||||||||
Consumer finance: | |||||||||||||||||||||||||
Automobiles | | | | | — | | | — | |||||||||||||||||
Marine and recreational vehicles |
| | — | — | | — | | | — | ||||||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
| 1 | For the purposes of the table above, “Current” includes loans that are 1-29 days past due. |
The table above includes nonaccrual loans that are current of $
There were
All TDRs are considered impaired loans and are individually evaluated in the determination of the allowance for loan losses. A TDR payment default occurs when, within
Impaired loans, which included TDRs of $
|
|
|
|
| |||||||||||||||
Recorded | Recorded |
| |||||||||||||||||
Investment | Investment | Average |
| ||||||||||||||||
Unpaid | in Loans | in Loans | Balance- | Interest | |||||||||||||||
Principal | without | with | Related | Impaired | Income | ||||||||||||||
(Dollars in thousands) | Balance | Specific Reserve | Specific Reserve | Allowance | Loans | Recognized |
| ||||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Commercial, financial and agricultural: | |||||||||||||||||||
Commercial real estate lending |
| |
| — |
| |
| |
| |
| | |||||||
Equity lines |
| |
| |
| — |
| — |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
16
Impaired loans, which included TDRs of $
|
|
|
|
| |||||||||||||||
Recorded | Recorded |
| |||||||||||||||||
Investment | Investment | Average |
| ||||||||||||||||
Unpaid | in Loans | in Loans | Balance- | Interest | |||||||||||||||
Principal | without | with | Related | Impaired | Income | ||||||||||||||
(Dollars in thousands) | Balance | Specific Reserve | Specific Reserve | Allowance | Loans | Recognized |
| ||||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Commercial, financial and agricultural: | |||||||||||||||||||
Commercial real estate lending |
| |
| — |
| |
| |
| |
| | |||||||
Commercial business lending |
| |
| — |
| |
| |
| |
| — | |||||||
Equity lines |
| |
| |
| — |
| — |
| |
| | |||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
NOTE 4: Allowance for Loan Losses
The following table presents the changes in the allowance for loan losses by major classification during the six months ended June 30, 2022:
| Real Estate |
|
| Commercial, |
|
|
|
|
| |||||||||||||
Residential | Real Estate | Financial | Equity | Consumer |
| |||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer | Finance | Total |
| ||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at December 31, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Provision (credited) charged to operations | ( | | ( | ( | | | | |||||||||||||||
Loans charged off | — | — | ( | — | ( | ( | ( | |||||||||||||||
Recoveries of loans previously charged off | | — | | | | | | |||||||||||||||
Balance at June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
The following table presents the changes in the allowance for loan losses by major classification during the six months ended June 30, 2021:
| Real Estate |
|
| Commercial, |
|
|
|
|
| |||||||||||||
Residential | Real Estate | Financial | Equity | Consumer |
| |||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer | Finance | Total |
| ||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||
Balance at December 31, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Provision (credited) charged to operations | ( | ( | | ( | ( | ( | ( | |||||||||||||||
Loans charged off | — | — | — | — | ( | ( | ( | |||||||||||||||
Recoveries of loans previously charged off | | — | | | | | | |||||||||||||||
Balance at June 30, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
17
The following table presents, as of June 30, 2022, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.
| Real Estate |
|
| Commercial, |
|
|
|
|
| |||||||||||||
Residential | Real Estate | Financial | Equity | Consumer |
| |||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer | Finance | Total |
| ||||||||||||||
Allowance balance attributable to loans: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | | $ | — | $ | | $ | — | $ | — | $ | — | $ | | ||||||||
Collectively evaluated for impairment | | | | | | | | |||||||||||||||
Acquired loans - PCI | — | — | — | — | — | — | — | |||||||||||||||
Total allowance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Loans: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | | $ | — | $ | | $ | | $ | — | $ | — | $ | | ||||||||
Collectively evaluated for impairment | | | | | | | | |||||||||||||||
Acquired loans - PCI | | — | | | | — | | |||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
The following table presents, as of December 31, 2021, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.
| Real Estate |
|
| Commercial, |
|
|
|
|
| |||||||||||||
Residential | Real Estate | Financial | Equity | Consumer |
| |||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer | Finance | Total |
| ||||||||||||||
Allowance balance attributable to loans: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | | $ | — | $ | | $ | — | $ | — | $ | — | $ | | ||||||||
Collectively evaluated for impairment | | | | | | | | |||||||||||||||
Acquired loans - PCI | — | — | — | — | — | — | — | |||||||||||||||
Total allowance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Loans: | ||||||||||||||||||||||
Individually evaluated for impairment | $ | | $ | — | $ | | $ | | $ | — | $ | — | $ | | ||||||||
Collectively evaluated for impairment | | | | | | | | |||||||||||||||
Acquired loans - PCI | | — | | | | — | | |||||||||||||||
Total loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Loans by credit quality indicators as of June 30, 2022 were as follows:
|
| Special |
|
| Substandard |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Nonaccrual | Total1 |
| ||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | ||||||
Real estate – construction: | ||||||||||||||||
Construction lending |
| |
| — |
| — |
| — |
| | ||||||
Consumer lot lending |
| |
| — |
| — |
| — |
| | ||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial real estate lending |
| |
| |
| |
| — |
| | ||||||
Land acquisition and development lending |
| |
| — |
| — |
| — |
| | ||||||
Builder line lending |
| |
| — |
| — |
| — |
| | ||||||
Commercial business lending |
| |
| — |
| — |
| — |
| | ||||||
Equity lines |
| |
| — |
| |
| |
| | ||||||
Consumer |
| |
| — |
| — |
| |
| | ||||||
$ | | $ | | $ | | $ | | $ | | |||||||
| 1 | At June 30, 2022, the Corporation did |
18
Non- | |||||||||
(Dollars in thousands) |
| Performing |
| Performing |
| Total | |||
Consumer finance: | |||||||||
Automobiles | $ | | $ | | $ | | |||
Marine and recreational vehicles | | - | | ||||||
$ | | $ | | $ | | ||||
Loans by credit quality indicators as of December 31, 2021 were as follows:
|
| Special |
|
| Substandard |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Nonaccrual | Total1 |
| ||||||||||
Real estate – residential mortgage | $ | | $ | | $ | | $ | | $ | | ||||||
Real estate – construction: | ||||||||||||||||
Construction lending |
| |
| — |
| — |
| — |
| | ||||||
Consumer lot lending |
| |
| — |
| — |
| — |
| | ||||||
Commercial, financial and agricultural: | ||||||||||||||||
Commercial real estate lending |
| |
| |
| |
| — |
| | ||||||
Land acquisition and development lending |
| |
| — |
| — |
| — |
| | ||||||
Builder line lending |
| |
| — |
| — |
| — |
| | ||||||
Commercial business lending |
| |
| — |
| — |
| |
| | ||||||
Equity lines |
| |
| |
| |
| |
| | ||||||
Consumer |
| |
| — |
| |
| |
| | ||||||
$ | | $ | | $ | | $ | | $ | | |||||||
| 1 | At December 31, 2021, the Corporation did |
Non- | |||||||||
(Dollars in thousands) |
| Performing |
| Performing |
| Total | |||
Consumer finance: | |||||||||
Automobiles | $ | | $ | | $ | | |||
Marine and recreational vehicles | | - | | ||||||
$ | | $ | | $ | | ||||
NOTE 5: Goodwill and Other Intangible Assets
The carrying amount of goodwill was $
The Corporation had $
June 30, | December 31, | |||||||||||
2022 | 2021 | |||||||||||
Gross | Gross | |||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||
(Dollars in thousands) | Amount | Amortization | Amount | Amortization | ||||||||
Amortizable intangible assets: | ||||||||||||
Core deposit intangibles | $ | | $ | ( | $ | | $ | ( | ||||
Other amortizable intangibles |
| | ( | | ( | |||||||
Total | $ | | $ | ( | $ | | $ | ( | ||||
Amortization expense was $
19
NOTE 6: Equity, Other Comprehensive Income (Loss) and Earnings Per Share
Equity and Noncontrolling Interest
The Corporation’s Board of Directors authorized a program, effective December 1, 2021, to repurchase up to $
The Corporation’s previous share repurchase program, which was authorized by the Board of Directors in November 2020, expired on November 30, 2021. There were
Additionally during the six months ended June 30, 2022 and 2021, the Corporation withheld
Noncontrolling interest represents an ownership interest in CF Select LLC, a subsidiary of CF Mortgage, held by an unrelated investor.
Accumulated Other Comprehensive Loss, Net
Changes in each component of accumulated other comprehensive loss were as follows for the three months ended June 30, 2022 and 2021:
|
| Defined |
| Cash |
| |||||||
Available | Benefit | Flow | ||||||||||
(Dollars in thousands) | For Sale | Plan | Hedges | Total | ||||||||
Accumulated other comprehensive (loss) income at March 31, 2022 | $ | ( | $ | ( | $ | | $ | ( | ||||
Net (loss) income arising during the period |
| ( |
| — |
| |
| ( | ||||
Related income tax effects |
| |
| — |
| ( |
| | ||||
( | — | | ( | |||||||||
Reclassifications into net income | — | ( | ( | ( | ||||||||
Related income tax effects | — | | — | | ||||||||
— | ( | ( | ( | |||||||||
Other comprehensive (loss) income, net of tax | ( | ( | | ( | ||||||||
Accumulated other comprehensive (loss) income at June 30, 2022 | $ | ( | $ | ( | $ | | $ | ( | ||||
20
| Securities |
| Defined |
| Cash |
| ||||||
Available | Benefit | Flow | ||||||||||
(Dollars in thousands) | For Sale | Plan | Hedges | Total | ||||||||
Accumulated other comprehensive income (loss) at March 31, 2021 | $ | | $ | ( | $ | ( | $ | ( | ||||
Net income (loss) arising during the period |
| |
| — |
| ( |
| | ||||
Related income tax effects |
| ( |
| — |
| |
| ( | ||||
| — | ( | | |||||||||
Reclassifications into net income | ( | | ( | | ||||||||
Related income tax effects | | ( | — | ( | ||||||||
( | | ( | | |||||||||
Other comprehensive income (loss), net of tax | | | ( | | ||||||||
Accumulated other comprehensive income (loss) at June 30, 2021 | $ | | $ | ( | $ | ( | $ | ( | ||||
Changes in each component of accumulated other comprehensive loss were as follows for the six months ended June 30, 2022 and 2021:
| Securities |
| Defined |
| Cash |
| ||||||
Available | Benefit | Flow | ||||||||||
(Dollars in thousands) | For Sale | Plan | Hedges | Total | ||||||||
Accumulated other comprehensive income (loss) at December 31, 2021 | $ | | $ | ( | $ | ( | $ | ( | ||||
Net (loss) income arising during the period |
| ( |
| — |
| |
| ( | ||||
Related income tax effects |
| |
| — |
| ( |
| | ||||
( | — | | ( | |||||||||
Reclassifications into net income | — | ( | ( | ( | ||||||||
Related income tax effects | — | | | | ||||||||
— | ( | ( | ( | |||||||||
Other comprehensive (loss) income, net of tax | ( | ( | | ( | ||||||||
Accumulated other comprehensive (loss) income at June 30, 2022 | $ | ( | $ | ( | $ | | $ | ( | ||||
21
| Securities |
| Defined |
| Cash |
| ||||||
Available | Benefit | Flow | ||||||||||
(Dollars in thousands) | For Sale | Plan | Hedges | Total | ||||||||
Accumulated other comprehensive income (loss) at December 31, 2020 | $ | | $ | ( | $ | ( | $ | ( | ||||
Net (loss) income arising during the period |
| ( |
| — |
| |
| ( | ||||
Related income tax effects |
| |
| — |
| ( |
| | ||||
( | — | | ( | |||||||||
Reclassifications into net income | ( | | ( | | ||||||||
Related income tax effects | | ( | | ( | ||||||||
( | | ( | | |||||||||
Other comprehensive (loss) income, net of tax | ( | | | ( | ||||||||
Accumulated other comprehensive income (loss) at June 30, 2021 | $ | | $ | ( | $ | ( | $ | ( | ||||
The following table provides information regarding reclassifications from accumulated other comprehensive loss into net income for the three and six months ended June 30, 2022 and 2021:
22
Three Months Ended June 30, | Six Months Ended June 30, | Line Item In the | |||||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | Consolidated Statements of Income | ||||||
Securities available for sale: | |||||||||||||||
Reclassification of net realized gains into net income | $ | — | $ | | $ | — | $ | | Net gains on sales, maturities and calls of available for sale securities | ||||||
Related income tax effects | — | ( | — | ( | Income tax expense | ||||||||||
— | | — | | Net of tax | |||||||||||
Defined benefit plan:1 | |||||||||||||||
Reclassification of recognized net actuarial losses into net income | ( | ( | ( | ( | Noninterest expenses - Other | ||||||||||
Amortization of prior service credit into net income | | | | | Noninterest expenses - Other | ||||||||||
Related income tax effects | ( | | ( | | Income tax expense | ||||||||||
| ( | | ( | Net of tax | |||||||||||
Cash flow hedges: | |||||||||||||||
Amortization of hedging gains into net income | | | | | Interest expense - Trust preferred capital notes | ||||||||||
Related income tax effects | — | — | ( | ( | Income tax expense | ||||||||||
| | | | Net of tax | |||||||||||
|
|
|
| ||||||||||||
Total reclassifications into net income | $ | | $ | ( | $ | | $ | ( | |||||||
| 1 | See “Note 7: Employee Benefit Plans,” for additional information. |
Earnings Per Share (EPS)
The components of the Corporation’s EPS calculations are as follows:
Three Months Ended June 30, |
| ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Net income attributable to CF Financial Corporation | $ | | $ | | |||
Weighted average shares outstanding—basic and diluted |
| |
| | |||
Six Months Ended June 30, |
| ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Net income attributable to CF Financial Corporation | $ | | $ | | |||
Weighted average shares outstanding—basic and diluted |
| |
| | |||
The Corporation has applied the two-class method of computing basic and diluted EPS for each period presented because the Corporation’s unvested restricted shares outstanding contain rights to nonforfeitable dividends equal to dividends on
23
the Corporation’s common stock. Accordingly, the weighted average number of shares used in the calculation of basic and diluted EPS includes both vested and unvested shares outstanding.
NOTE 7: Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Bank’s non-contributory cash balance pension plan.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Components of net periodic benefit cost: | |||||||||||||
Service cost, included in salaries and employee benefits | $ | | $ | | $ | | $ | | |||||
Other components of net periodic benefit cost: | |||||||||||||
Interest cost |
| |
| |
| |
| | |||||
Expected return on plan assets |
| ( |
| ( |
| ( |
| ( | |||||
Amortization of prior service credit |
| ( |
| ( |
| ( |
| ( | |||||
Recognized net actuarial losses |
| |
| |
| |
| | |||||
Other components of net periodic benefit cost, included in other noninterest expense | ( | ( | ( | ( | |||||||||
Net periodic benefit cost | $ | | $ | | $ | | $ | | |||||
NOTE 8: Fair Value of Assets and Liabilities
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
| ● | Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt securities traded in an active exchange market, as well as U.S. Treasury securities. |
| ● | Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3—Valuation is determined using model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Corporation’s estimates of assumptions that market participants would use in pricing the respective asset or liability. Valuation techniques may include the use of pricing models, discounted cash flow models and similar techniques. |
U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).
24
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.
Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At June 30, 2022 and December 31, 2021, the Corporation’s entire securities portfolio was comprised of investments in debt securities classified as available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE), Refinitiv, and Bloomberg Valuation Service (BVAL). Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics. Refinitiv and BVAL provide evaluated prices for the Corporation’s U.S. treasury, government agencies and corporations, mortgage-backed, and corporate categories of securities. U.S. treasury securities and fixed-rate callable securities of U.S. government agencies and corporations are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.
Other investments. The Corporation holds equity investments in funds that provide debt and equity financing to small businesses. These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets. Changes in fair value are recognized in net income. The funds are managed by investment companies, and the net asset value of each fund is reported regularly by the investment companies. At June 30, 2022 and December 31, 2021, the fair value of these investments, based on net asset value, was $
Loans held for sale. Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.
Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.
Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value. The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using standard valuation techniques. All of the Corporation’s interest rate swaps on loans are classified as Level 2.
25
Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The fair value of the Corporation’s cash flow hedges is determined using the discounted cash flow method. All of the Corporation’s cash flow hedges are classified as Level 2.
Derivative asset/liability – forward sales of TBA securities. The Corporation recognizes forward sales of TBA securities at fair value. The fair value of forward sales of TBA securities is based on prices obtained from market makers and live trading systems for TBA securities of similar issuer programs, coupons and maturities. All of the Corporation’s forward sales of TBA securities are classified as Level 2.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis.
June 30, 2022 |
| ||||||||||||
Fair Value Measurements Classified as | Assets/Liabilities at |
| |||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value |
| ||||
Assets: | |||||||||||||
Securities available for sale | |||||||||||||
U.S. Treasury securities | $ | — | $ | | $ | — | $ | | |||||
U.S. government agencies and corporations | — | | — | | |||||||||
Mortgage-backed securities |
| — |
| |
| — |
| | |||||
Obligations of states and political subdivisions |
| — |
| |
| — |
| | |||||
Corporate and other debt securities | — | | — | | |||||||||
Total securities available for sale |
| — |
| |
| — |
| | |||||
Loans held for sale |
| — |
| |
| — |
| | |||||
Derivatives | |||||||||||||
IRLC |
| — |
| |
| — |
| | |||||
Interest rate swaps on loans | — | | — | | |||||||||
Cash flow hedges |
| — |
| |
| — |
| | |||||
Total assets | $ | — | $ | | $ | — | $ | | |||||
Liabilities: | |||||||||||||
Derivatives | |||||||||||||
Interest rate swaps on loans | $ | — | $ | | $ | — | $ | | |||||
Total liabilities | $ | — | $ | | $ | — | $ | | |||||
26
December 31, 2021 |
| ||||||||||||
Fair Value Measurements Classified as | Assets/Liabilities at |
| |||||||||||
(Dollars in thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value |
| ||||
Assets: | |||||||||||||
Securities available for sale | |||||||||||||
U.S. government agencies and corporations | $ | — | $ | | $ | — | $ | | |||||
Mortgage-backed securities |
| — |
| |
| — |
| | |||||
Obligations of states and political subdivisions |
| — |
| |
| — |
| | |||||
Corporate and other debt securities |
| — |
| |
| — |
| | |||||
Total securities available for sale |
| — |
| |
| — |
| | |||||
Loans held for sale |
| — |
| |
| — |
| | |||||
Derivatives | |||||||||||||
IRLC |
| — |
| |
| — |
| | |||||
Interest rate swaps on loans |
| — |
| |
| — |
| | |||||
Total assets | $ | — | $ | | $ | — | $ | | |||||
Liabilities: | |||||||||||||
Derivatives | |||||||||||||
Interest rate swaps on loans | $ | — | $ | | $ | — | $ | | |||||
Cash flow hedges | — | | — | | |||||||||
Forward sales of TBA securities | — | | — | | |||||||||
Total liabilities | $ | — | $ | | $ | — | $ | | |||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Impaired loans. The Corporation does not record loans held for investment at fair value on a recurring basis. However, there are instances when a loan is considered impaired and an allowance for loan losses is established. The Corporation measures impairment either based on the fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate, which is not a fair value measurement. The Corporation maintains a valuation allowance to the extent that this measure of the impaired loan is less than the recorded investment in the loan. When an impaired loan is measured at fair value based solely on observable market prices or a current appraisal without further adjustment for unobservable inputs, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 2. However, if based on management’s review, additional discounts to observed market prices or appraisals are required or if observable inputs are not available, the Corporation records the impaired loan as a nonrecurring fair value measurement classified as Level 3.
Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest, are not recorded at fair value and are therefore excluded from fair value disclosure requirements.
Other Real Estate Owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intent with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to
27
sell if valuations indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.
At June 30, 2022 and December 31, 2021 there were
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
| Carrying |
| Fair Value Measurements at June 30, 2022 Classified as |
| Total Fair |
| ||||||||||
(Dollars in thousands) | Value | Level 1 | Level 2 | Level 3 | Value |
| ||||||||||
Financial assets: | ||||||||||||||||
Cash and short-term investments | $ | | $ | | $ | | $ | — | $ | | ||||||
Securities available for sale |
| | — |
| | — |
| | ||||||||
Loans, net |
| |
| — |
| — |
| |
| | ||||||
Loans held for sale |
| |
| — |
| |
| — |
| | ||||||
Derivatives | ||||||||||||||||
IRLC | | — | | — | | |||||||||||
Interest rate swaps on loans | | — | | — | | |||||||||||
Cash flow hedges | | — | | — | | |||||||||||
Bank-owned life insurance | | — | | — | | |||||||||||
Accrued interest receivable |
| |
| |
| — |
| — |
| | ||||||
Financial liabilities: | ||||||||||||||||
Demand and savings deposits | | | — | — | | |||||||||||
Time deposits |
| |
| — |
| |
| — |
| | ||||||
Borrowings |
| |
| — |
| |
| — |
| | ||||||
Derivatives | ||||||||||||||||
Interest rate swaps on loans | | — | | — | | |||||||||||
Accrued interest payable |
| |
| |
| — |
| — |
| | ||||||
28
| Carrying |
| Fair Value Measurements at December 31, 2021 Classified as |
| Total Fair |
| ||||||||||
(Dollars in thousands) | Value | Level 1 | Level 2 | Level 3 | Value |
| ||||||||||
Financial assets: | ||||||||||||||||
Cash and short-term investments | $ | | $ | | $ | | $ | — | $ | | ||||||
Securities available for sale |
| | — |
| | — |
| | ||||||||
Loans, net |
| |
| — |
| — |
| |
| | ||||||
Loans held for sale |
| |
| — |
| |
| — |
| | ||||||
Derivatives | ||||||||||||||||
IRLC | | — | | — | | |||||||||||
Interest rate swaps on loans | | — | | — | | |||||||||||
Bank-owned life insurance | | — | | — | | |||||||||||
Accrued interest receivable |
| |
| |
| — |
| — |
| | ||||||
Financial liabilities: | ||||||||||||||||
Demand and savings deposits | | | — | — | | |||||||||||
Time deposits |
| |
| — |
| |
| — |
| | ||||||
Borrowings |
| |
| — |
| |
| — |
| | ||||||
Derivatives | ||||||||||||||||
Cash flow hedges |
| | — |
| | — |
| | ||||||||
Interest rate swaps on loans | | — | | — | | |||||||||||
Forward sales of TBA securities | | — | | | ||||||||||||
Accrued interest payable |
| |
| |
| — |
| — |
| | ||||||
NOTE 9: Business Segments
The Corporation operates in a decentralized fashion in
29
The Corporation’s revenues and expenses are comprised primarily of interest expense associated with the Corporation’s trust preferred capital notes and subordinated debt, general corporate expenses, and changes in the value of the rabbi trust and deferred compensation liability related to its nonqualified deferred compensation plan. The results of the Corporation, which includes funding and operating costs that are not allocated to the business segments, are included in the column labeled “Other” in the tables below.
Three Months Ended June 30, 2022 |
| ||||||||||||||||||
| Community |
| Mortgage |
| Consumer |
|
|
|
| ||||||||||
(Dollars in thousands) | Banking | Banking | Finance | Other | Eliminations | Consolidated |
| ||||||||||||
Interest income | $ | | $ | | $ | | $ | — | $ | ( | $ | | |||||||
Interest expense |
| | |
| |
| |
| ( |
| | ||||||||
Net interest income |
| |
| |
| |
| ( |
| |
| | |||||||
Gain on sales of loans | — | | — | — | ( | | |||||||||||||
Other noninterest income | | | | ( | ( | | |||||||||||||
Net revenue |
| |
| |
| |
| ( |
| ( |
| | |||||||
Provision for loan losses |
| — |
| | | — | — |
| | ||||||||||
Noninterest expense |
| |
| | | ( | ( |
| | ||||||||||
Income (loss) before taxes |
| |
| |
| |
| ( |
| ( |
| | |||||||
Income tax expense (benefit) |
| |
| | | ( |
| ( |
| | |||||||||
Net income (loss) | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Other data: | |||||||||||||||||||
Capital expenditures | $ | | $ | | $ | — | $ | — | $ | — | $ | | |||||||
Depreciation and amortization | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Three Months Ended June 30, 2021 |
| ||||||||||||||||||
| Community |
| Mortgage |
| Consumer |
|
|
|
| ||||||||||
(Dollars in thousands) | Banking | Banking | Finance | Other | Eliminations | Consolidated |
| ||||||||||||
Interest income | $ | | $ | | $ | | $ | — | $ | ( | $ | | |||||||
Interest expense |
| | |
| |
| |
| ( |
| | ||||||||
Net interest income |
| |
| |
| |
| ( |
| |
| | |||||||
Gain on sales of loans | — | | — | — | ( | | |||||||||||||
Other noninterest income | | | | | ( | | |||||||||||||
Net revenue |
| |
| |
| |
| |
| ( |
| | |||||||
Provision for loan losses |
| ( |
| | ( | — | — |
| ( | ||||||||||
Noninterest expense |
| |
| | | | — |
| | ||||||||||
Income (loss) before taxes |
| |
| |
| |
| ( |
| ( |
| | |||||||
Income tax expense (benefit) |
| |
| | | ( |
| ( |
| | |||||||||
Net income (loss) | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Other data: | |||||||||||||||||||
Capital expenditures | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Depreciation and amortization | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
30
Six Months Ended June 30, 2022 |
| ||||||||||||||||||
| Community |
| Mortgage |
| Consumer |
|
|
|
| ||||||||||
(Dollars in thousands) | Banking | Banking | Finance | Other | Eliminations | Consolidated |
| ||||||||||||
Interest income | $ | | $ | | $ | | $ | — | $ | ( | $ | | |||||||
Interest expense |
| | |
| |
| |
| ( |
| | ||||||||
Net interest income |
| |
| |
| |
| ( |
| |
| | |||||||
Gain on sales of loans | — | | — | — | ( | | |||||||||||||
Other noninterest income | | | | ( | ( | | |||||||||||||
Net revenue |
| |
| |
| |
| ( |
| ( |
| | |||||||
Provision for loan losses |
| ( |
| | | — | — |
| | ||||||||||
Noninterest expense |
| |
| | | ( | ( |
| | ||||||||||
Income (loss) before taxes |
| |
| |
| |
| ( |
| ( |
| | |||||||
Income tax expense (benefit) |
| |
| | | ( |
| ( |
| | |||||||||
Net income (loss) | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Other data: | |||||||||||||||||||
Capital expenditures | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Depreciation and amortization | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Six Months Ended June 30, 2021 |
| ||||||||||||||||||
| Community |
| Mortgage |
| Consumer |
|
|
|
| ||||||||||
(Dollars in thousands) | Banking | Banking | Finance | Other | Eliminations | Consolidated |
| ||||||||||||
Interest income | $ | | $ | | $ | | $ | — | $ | ( | $ | | |||||||
Interest expense |
| | |
| |
| |
| ( |
| | ||||||||
Net interest income |
| |
| |
| |
| ( |
| |
| | |||||||
Gain on sales of loans | — | | — | — | ( | | |||||||||||||
Other noninterest income | | | | | ( | | |||||||||||||
Net revenue |
| |
| |
| |
| |
| ( |
| | |||||||
Provision for loan losses |
| ( |
| | ( | — | — |
| ( | ||||||||||
Noninterest expense |
| |
| | | | — |
| | ||||||||||
Income (loss) before taxes |
| |
| |
| |
| ( |
| ( |
| | |||||||
Income tax expense (benefit) |
| |
| | | ( |
| ( |
| | |||||||||
Net income (loss) | $ | | $ | | $ | | $ | ( | $ | ( | $ | | |||||||
Other data: | |||||||||||||||||||
Capital expenditures | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Depreciation and amortization | $ | | $ | | $ | | $ | — | $ | — | $ | | |||||||
Community |
| Mortgage |
| Consumer |
|
|
| ||||||||||||
(Dollars in thousands) | Banking | Banking | Finance | Other | Eliminations | Consolidated | |||||||||||||
Total assets at June 30, 2022 | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
Total assets at December 31, 2021 | $ | | $ | | $ | | $ | | $ | ( | $ | | |||||||
The community banking segment extends
31
expenses recorded by the holding company, certain overhead costs are incurred by the community banking segment and are not allocated to the mortgage banking and consumer finance segments.
NOTE 10: Commitments and Contingent Liabilities
The Corporation enters into commitments to extend credit in the normal course of business to meet the financing needs of its customers, including loan commitments and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amounts recorded on the Consolidated Balance Sheets. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management’s credit assessment of the customer.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was $
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $
The mortgage banking segment sells substantially all of the residential mortgage loans it originates to third-party investors. As is customary in the industry, the agreements with these investors require the mortgage banking segment to extend representations and warranties with respect to program compliance, borrower misrepresentation, fraud, and early payment performance. Under the agreements, the investors are entitled to make loss claims and repurchase requests of the mortgage banking segment for loans that contain covered deficiencies. The mortgage banking segment has obtained early payment default recourse waivers for a significant portion of its business. Recourse periods for early payment default for the remaining investors vary from
NOTE 11: Derivative Financial Instruments
The Corporation uses derivative financial instruments primarily to manage risks to the Corporation associated with changing interest rates, and to assist customers with their risk management objectives. The Corporation designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income. Derivative contracts that are not designated in a qualifying hedging relationship include customer accommodation loan swaps and contracts related to mortgage banking activities.
32
Cash flow hedges. The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes. These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of June 30, 2022, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.
All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these derivative contracts is not significant.
Unrealized gains or losses recorded in other comprehensive income related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.
Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to
Mortgage banking. The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by either (1) entering into forward sales contracts with investors at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for TBA securities until it can enter into forward sales contracts with investors for mortgage loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.
At June 30, 2022, the mortgage banking segment had $
At December 31, 2021, the mortgage banking segment had $
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The following tables summarize key elements of the Corporation’s derivative instruments other than forward sales of mortgage loans. The fair values of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at June 30, 2022 or December 31, 2021.
June 30, 2022 |
| ||||||||||
| Notional |
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|
|
| ||||||
(Dollars in thousands) | Amount | Assets | Liabilities |
| |||||||
Cash flow hedges: | |||||||||||
Interest rate swap contracts | $ | | $ | | $ | — | |||||
Not designated as hedges: |
|
|
| ||||||||
Customer-related interest rate swap contracts: |
|
|
| ||||||||
Matched interest rate swaps with borrower |
| |
| |
| | |||||
Matched interest rate swaps with counterparty | | | | ||||||||
Mortgage banking contracts: | |||||||||||
IRLCs | | | — | ||||||||
December 31, 2021 | |||||||||||
| Notional |
|
|
| |||||||
(Dollars in thousands) | Amount | Assets | Liabilities | ||||||||
Cash flow hedges: | |||||||||||
Interest rate swap contracts | $ | | $ | — | $ | | |||||
Not designated as hedges: |
|
| |||||||||
Customer-related interest rate swap contracts: |
|
|
| ||||||||
Matched interest rate swaps with borrower |
| |
| |
| | |||||
Matched interest rate swaps with counterparty | | | | ||||||||
Mortgage banking contracts: | |||||||||||
IRLCs | | | — | ||||||||
Forward sales of TBA securities | |
| — |
| | ||||||
The Corporation and the Bank are required to maintain cash collateral with dealer counterparties for interest rate swap relationships in a loss position. At December 31, 2021, $
NOTE 12: Other Noninterest Expenses
The following table presents the significant components in the Consolidated Statements of Income line “Noninterest Expenses-Other.”
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Data processing fees | $ | | $ | | $ | | $ | | ||||
Professional fees | | | | | ||||||||
Mortgage banking loan processing expenses | | | | | ||||||||
Marketing and advertising expenses | | | | | ||||||||
Travel and educational expenses |
| |
| | | | ||||||
Telecommunication expenses | | | | | ||||||||
Provision for indemnifications | ( | | ( | | ||||||||
Net periodic pension income | ( | ( | ( | ( | ||||||||
Other real estate (gain)/loss and expenses, net | | ( | | ( | ||||||||
All other noninterest expenses |
| |
| |
| |
| | ||||
Total other noninterest expenses | $ | | $ | | $ | | $ | | ||||
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Cautionary Statement About Forward-Looking Statements” at the end of this discussion and analysis.
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity (ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three business segments: community banking, mortgage banking, and consumer finance. We also actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a strong capital position.
The following table presents selected financial performance highlights for the periods indicated:
TABLE 1: Financial Performance Highlights
(Dollars in thousands, except for per share data) | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||||||
Net Income (Loss): | ||||||||||||||||
Community Banking | $ | 4,816 | $ | 3,925 | $ | 8,333 | $ | 6,718 | ||||||||
Mortgage Banking | 782 | 1,968 | 1,648 | 4,513 | ||||||||||||
Consumer Finance | 2,195 | 2,875 | 4,257 | 5,402 | ||||||||||||
Other | (1,010) | (678) | (1,720) | (1,378) | ||||||||||||
Consolidated net income | $ | 6,783 | $ | 8,090 | $ | 12,518 | $ | 15,255 | ||||||||
Earnings per share - basic and diluted | $ | 1.91 | $ | 2.19 | $ | 3.49 | $ | 4.11 | ||||||||
Annualized return on average equity | 13.80 | % | 16.49 | % | 12.36 | % | 15.83 | % | ||||||||
Annualized return on average tangible common equity1 | 16.15 | % | 19.21 | % | 14.33 | % | 18.50 | % | ||||||||
Annualized return on average assets | 1.16 | % | 1.50 | % | 1.09 | % | 1.43 | % | ||||||||
1 | Refer to “Use of Certain Non-GAAP Financial Measures,” below, for information about these non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP. |
Consolidated net income for the Corporation was $6.8 million for the second quarter of 2022, or $1.91 per share, compared with $8.1 million for the second quarter of 2021, or $2.19 per share. Consolidated net income for the Corporation was $12.5 million for the first six months of 2022, or $3.49 per share, compared with consolidated net income of $15.3 million for the first six months of 2021, or $4.11 per share. The Corporation’s annualized ROE and ROA were 13.80 percent and 1.16 percent, respectively, for the second quarter of 2022, compared to 16.49 percent and 1.50 percent, respectively, for the second quarter of 2021. The Corporation’s annualized ROE and ROA were 12.36 percent and 1.09 percent, respectively, for the first six months of 2022, compared to 15.83 percent and 1.43 percent, respectively, for the first six months of 2021.
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Return on average tangible common equity (ROTCE), which excludes the effect of intangible assets, on an annualized basis was 16.15 percent and 14.33 percent for the second quarter and first six months of 2022, respectively, compared to 19.21 percent and 18.50 percent, respectively, for the same periods in 2021. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for a reconciliation of ROTCE, which is a non-GAAP financial measure, to the most directly comparable financial measure calculated in accordance with U.S. GAAP.
Consolidated net income decreased $1.3 million and $2.7 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The decrease in net income for the second quarter and first six months of 2022 compared to the same periods of 2021 were due primarily to lower net income of the mortgage banking segment, resulting from broad declines in mortgage origination volume across the industry, and the consumer finance segment, partially offset by higher net income of the community banking segment.
A discussion of the performance of our business segments is included under the heading “Business Segments” in the “Results of Operations” section of this discussion and analysis.
Key highlights for the three and six months ended June 30, 2022 are as follows.
| ● | Community banking segment loans as of June 30, 2022 grew $43.5 million or 16.9 percent annualized compared to March 31, 2022, excluding the effect of Paycheck Protection Program (PPP) loans. Average community bank segment loans increased 9.9 percent and 7.9 percent for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, excluding the effect of PPP loans; |
| ● | Consumer finance segment loans as of June 30, 2022 grew $40.3 million or 40.7 percent annualized compared to March 31, 2022. Average consumer finance segment loans increased 28.4 percent and 24.9 percent for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021; |
| ● | Average deposits increased 8.1 percent and 7.0 percent for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021; |
| ● | The community banking segment recorded no provision for loan losses for the second quarter of 2022, compared to a net reversal of $200,000 for the second quarter of 2021. For the first six months of 2022, the community banking segment recorded a net reversal of provision for loan losses of $700,000, compared to a net reversal of $200,000 for the first six months of 2021; |
| ● | The consumer finance segment recorded provision for loan losses of $520,000 for the second quarter of 2022, compared to a net reversal of provision of $430,000 for the second quarter of 2021. For the first six months of 2022, the consumer finance segment recorded provision for loan losses of $870,000, compared with a net reversal of $180,000 for the first six months of 2021; |
| ● | The consumer finance segment experienced net recoveries at an annualized rate of 0.10 percent of average total loans for the first six months of 2022, compared to net recoveries of 0.07 for the first six months of 2021. Delinquencies remain lower than pre-pandemic levels and a strong used car market has mitigated losses on defaulted loans; |
| ● | Consolidated annualized net interest margin was 4.12 percent for the second quarter of 2022, compared to 4.37 percent and 3.93 percent for the second quarter of 2021 and first quarter of 2022, respectively. Consolidated annualized net interest margin was 4.02 percent for the first six months of 2022, compared to 4.35 percent for the first six months of 2021. The increase in the second quarter of 2022 compared to the first quarter of 2022 was due primarily to utilizing lower yielding cash to fund growth in higher yielding loans and investments, as well as higher average yields on earning assets, including the effects of rising market interest rates; |
| ● | The community banking segment recognized net PPP origination fees of $242,000 and $679,000 in the second quarter and first six months of 2022, respectively, compared to $1.2 million and $2.1 million in the second quarter and first six months of 2021, respectively; |
| ● | The consumer finance segment’s average loan yield declined for the second quarter and first six months of 2022 compared to the same periods in 2021 as a result of pursuing growth in higher quality, lower yielding loans; and |
| ● | Mortgage banking segment loan originations decreased 44.6 percent and 50.1 percent for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, amid declines in mortgage industry volume and rising mortgage interest rates. |
36
Capital Management and Dividends
Total equity was $196.3 million at June 30, 2022, compared to $211.0 million at December 31, 2021. Under regulatory capital standards, the Corporation’s tier 1 capital and total capital ratios at June 30, 2022 were 12.8 percent and 15.5 percent, respectively, compared to 13.0 percent and 15.8 percent, respectively, at December 31, 2021. At June 30, 2022, the book value per share of the Corporation’s common stock was $55.52, and tangible book value per share, which is a non-GAAP financial measure, was $47.85, compared to $59.32 and $51.66, respectively, at December 31, 2021.
Total consolidated equity decreased $14.7 million at June 30, 2022 compared to December 31, 2021, due primarily to unrealized losses in the market value of securities available for sale of $24.8 million (net of tax), which are recognized as a component of other comprehensive income, partially offset by net income. The Corporation’s securities available for sale are fixed income debt securities, and their decline in market value during the first six months of 2022 was a result of increases in market interest rates. The Corporation expects to recover its investments in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Corporation or the Bank.
For the second quarter of 2022, the Corporation’s 40 cents per share cash dividend equated to a payout ratio of 20.9 percent of earnings per share. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.
The Corporation has a share repurchase program that was authorized by the Board of Directors in November 2021 to repurchase up to $10.0 million of the Corporation’s common stock through November 30, 2022. During the second quarter of 2022, the Corporation repurchased 22,164 shares, or $1.1 million of its common stock under the Corporation’s share repurchase program.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require management’s most difficult, subjective or complex judgments affecting the application of these policies, and the greatest likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.
Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. Our judgment in determining the level of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs for relevant periods of time, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. In evaluating the level of the allowance, we consider a range of possible assumptions and outcomes related to the various factors identified above. Under alternative assumptions that we considered in developing our estimate of an allowance that will be adequate to absorb probable losses inherent in the loan portfolio at June 30, 2022, our estimate of the allowance varied between $37 million and $42 million.
Impairment of Loans: We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We measure impairment on a loan-by-loan basis
37
based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. All troubled debt restructurings (TDRs) are also considered impaired loans and are evaluated individually. A TDR occurs when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. For more information see the section titled “Asset Quality” within this Item 2.
Loans Acquired in a Business Combination: Acquired loans are classified as either (i) purchased credit-impaired (PCI) loans or (ii) purchased performing loans and are recorded at fair value on the date of acquisition.
PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are aggregated into pools of loans based on common risk characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference.” Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the “accretable yield” and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
On a quarterly basis, we evaluate our estimate of cash flows expected to be collected on PCI loans. Estimates of cash flows for PCI loans require significant judgment. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. Subsequent significant increases in cash flows may result in a reversal of post-acquisition provision for loan losses or a transfer from nonaccretable difference to accretable yield that increases interest income over the remaining life of the loan or pool(s) of loans. Disposals of loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.
PCI loans are not classified as nonperforming by the Corporation at the time they are acquired, regardless of whether they had been classified as nonperforming by the previous holder of such loans, and they will not be classified as nonperforming so long as, at quarterly re-estimation periods, we believe we will fully collect the new carrying value of the pools of loans.
The Corporation accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses may be required for any deterioration in these loans in future periods.
Goodwill: The Corporation's goodwill was recognized in connection with past business combinations and is reported at the community banking segment and the consumer finance segment. The Corporation reviews the carrying value of goodwill at least annually or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Corporation may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Corporation elects to bypass the qualitative assessment or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying value to determine whether an impairment exists. In the last evaluation of goodwill at the community banking segment and the consumer finance segment, which was the annual evaluation in the fourth quarter of 2021, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.
Income Taxes: Determining the Corporation’s effective tax rate requires judgment. The Corporation’s net deferred tax asset is determined annually based on temporary differences between the financial statement and tax bases of assets and
38
liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. In addition, there may be transactions and calculations for which the ultimate tax outcomes are uncertain and the Corporation’s tax returns are subject to audit by various tax authorities. Although we believe that estimates related to income taxes are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the consolidated financial statements.
For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1: Summary of Significant Accounting Policies” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and six months ended June 30, 2022 and 2021. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Average balances of securities available for sale are included at amortized cost. Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect.
Accretion and amortization of fair value purchase adjustments related to business combinations are included in the computation of yields on loans and investments and on the costs of deposits and borrowings. The accretion contributed approximately 25 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2022, and 12 basis points to both the yield on total earning assets and net interest margin for the second quarter of 2022, compared to approximately 41 basis points and 28 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2021, and 21 basis points to both the yield on total earning assets and net interest margin, for the second quarter of 2021. The accretion contributed approximately 20 basis points and 14 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2022, and 10 basis points to both the yield on total earning assets and net interest margin for the first six months of 2022, compared to approximately 33 basis points and 23 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2021, and 17 basis points to both the yield on total earning assets and net interest margin, for the first six months of 2021.
The yield on loans includes, with respect to PPP loans, interest at a note rate of one percent as well as net deferred origination fees that are amortized based on the contractual maturity of the related loan or accelerated into interest income upon repayment of the loan. Accretion of net PPP origination fees contributed approximately 9 basis points and 6 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2022, and 4 basis points to both the yield on interest earning assets and net interest margin for the second quarter of 2022, compared to approximately 48 basis points and 33 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2021, and 25 basis points to both the yield on interest earning assets and net interest margin for the second quarter of 2021. Accretion of net PPP origination fees contributed approximately 13 basis points and 9 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2022, and 6 basis points to both the yield on interest earning assets and net interest margin for the first six months of 2022, compared to approximately 41 basis points and 28 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2021, and 21 basis points to both the yield on interest earning assets and net interest margin for the first six months of 2021.
39
TABLE 2: Average Balances, Income and Expense, Yields and Rates
Three Months Ended June 30, | |||||||||||||||||
| 2022 |
| 2021 |
| |||||||||||||
Average |
| Income/ |
| Yield/ | Average |
| Income/ |
| Yield/ | ||||||||
(Dollars in thousands) | Balance |
| Expense |
| Rate | Balance |
| Expense |
| Rate | |||||||
Assets | |||||||||||||||||
Securities: | |||||||||||||||||
Taxable | $ | 400,469 | $ | 1,738 |
| 1.74 | % | $ | 255,767 | $ | 916 |
| 1.43 | % | |||
Tax-exempt |
| 69,077 |
| 428 |
| 2.48 |
| 83,893 |
| 552 |
| 2.63 | |||||
Total securities |
| 469,546 |
| 2,166 |
| 1.85 |
| 339,660 |
| 1,468 |
| 1.73 | |||||
Loans: | |||||||||||||||||
Community banking segment | 1,057,527 | 11,113 | 4.21 | 1,038,699 | 12,048 | 4.65 | |||||||||||
Mortgage banking segment | 57,393 | 630 | 4.40 | 138,329 | 1,021 | 2.96 | |||||||||||
Consumer finance segment | 417,503 | 10,223 | 9.82 | 325,218 | 9,422 | 11.62 | |||||||||||
Total loans |
| 1,532,423 |
| 21,966 |
| 5.75 |
| 1,502,246 |
| 22,491 |
| 6.00 | |||||
Interest-bearing deposits in other banks |
| 215,240 |
| 394 |
| 0.73 |
| 165,211 |
| 48 |
| 0.12 | |||||
Total earning assets |
| 2,217,209 |
| 24,526 |
| 4.44 |
| 2,007,117 |
| 24,007 |
| 4.80 | |||||
Allowance for loan losses |
| (40,300) |
| (39,553) | |||||||||||||
Total non-earning assets |
| 168,658 |
| 191,262 | |||||||||||||
Total assets | $ | 2,345,567 | $ | 2,158,826 | |||||||||||||
Liabilities and Equity | |||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||
Interest-bearing demand deposits | $ | 364,224 | 188 | 0.21 | $ | 307,686 | 121 | 0.16 | |||||||||
Money market deposit accounts |
| 404,365 |
| 253 | 0.25 |
| 311,825 |
| 194 | 0.25 | |||||||
Savings accounts |
| 230,300 |
| 30 | 0.05 |
| 207,506 |
| 29 | 0.06 | |||||||
Certificates of deposit |
| 385,094 |
| 630 | 0.66 |
| 453,200 |
| 1,053 | 0.93 | |||||||
Total interest-bearing deposits |
| 1,383,983 |
| 1,101 |
| 0.32 |
| 1,280,217 |
| 1,397 |
| 0.44 | |||||
Borrowings: | |||||||||||||||||
Repurchase agreements | 36,527 | 41 | 0.45 | 22,399 | 26 | 0.47 | |||||||||||
Other borrowings | 55,645 | 619 | 4.45 | 55,840 | 715 | 5.14 | |||||||||||
Total borrowings |
| 92,172 |
| 660 |
| 2.86 |
| 78,239 |
| 741 |
| 3.79 | |||||
Total interest-bearing liabilities |
| 1,476,155 |
| 1,761 |
| 0.48 |
| 1,358,456 |
| 2,138 |
| 0.63 | |||||
Noninterest-bearing demand deposits |
| 630,154 |
| 556,719 | |||||||||||||
Other liabilities |
| 42,718 |
| 47,359 | |||||||||||||
Total liabilities |
| 2,149,027 |
| 1,962,534 | |||||||||||||
Equity |
| 196,540 |
| 196,292 | |||||||||||||
Total liabilities and equity | $ | 2,345,567 | $ | 2,158,826 | |||||||||||||
Net interest income | $ | 22,765 | $ | 21,869 | |||||||||||||
Interest rate spread |
| 3.96 | % |
| 4.17 | % | |||||||||||
Interest expense to average earning assets |
| 0.32 | % |
| 0.43 | % | |||||||||||
Net interest margin |
| 4.12 | % |
| 4.37 | % | |||||||||||
40
Six Months Ended June 30, | |||||||||||||||||
| 2022 |
| 2021 |
| |||||||||||||
Average |
| Income/ |
| Yield/ | Average |
| Income/ |
| Yield/ | ||||||||
(Dollars in thousands) | Balance |
| Expense |
| Rate | Balance |
| Expense |
| Rate | |||||||
Assets | |||||||||||||||||
Securities: | |||||||||||||||||
Taxable | $ | 368,316 | $ | 3,029 | 1.64 | % | $ | 229,299 | $ | 1,664 | 1.45 | % | |||||
Tax-exempt |
| 70,134 |
| 870 |
| 2.48 |
| 85,020 |
| 1,145 |
| 2.69 | |||||
Total securities |
| 438,450 |
| 3,899 |
| 1.78 |
| 314,319 |
| 2,809 |
| 1.79 | |||||
Loans: | |||||||||||||||||
Community banking segment | 1,040,557 | 21,557 | 4.18 | 1,042,268 | 23,505 | 4.55 | |||||||||||
Mortgage banking segment | 58,660 | 1,118 | 3.84 | 156,272 | 2,148 | 2.77 | |||||||||||
Consumer finance segment |
| 399,409 |
| 19,801 |
| 10.00 |
| 319,751 | 18,671 |
| 11.78 | ||||||
Total loans | 1,498,626 | 42,476 | 5.72 | 1,518,291 | 44,324 | 5.89 | |||||||||||
Interest-bearing deposits in other banks |
| 235,023 |
| 500 |
| 0.43 |
| 145,435 | 94 | 0.13 | |||||||
Total earning assets |
| 2,172,099 |
| 46,875 |
| 4.35 |
| 1,978,045 |
| 47,227 |
| 4.81 | |||||
Allowance for loan losses |
| (40,538) |
| (39,542) | |||||||||||||
Total non-earning assets |
| 172,865 |
| 191,685 | |||||||||||||
Total assets | $ | 2,304,426 | $ | 2,130,188 | |||||||||||||
Liabilities and Equity | |||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||
Interest-bearing demand deposits | $ | 350,245 | 328 |
| 0.19 | $ | 304,226 | 251 |
| 0.17 | |||||||
Money market deposit accounts |
| 383,224 |
| 471 |
| 0.25 |
| 308,753 |
| 396 |
| 0.26 | |||||
Savings accounts |
| 226,723 |
| 59 |
| 0.05 |
| 199,722 |
| 56 |
| 0.06 | |||||
Certificates of deposit |
| 400,426 |
| 1,348 |
| 0.68 |
| 458,923 |
| 2,361 |
| 1.03 | |||||
Total interest-bearing deposits |
| 1,360,618 |
| 2,206 |
| 0.33 |
| 1,271,624 |
| 3,064 |
| 0.49 | |||||
Borrowings: | |||||||||||||||||
Repurchase agreements | 34,636 | 78 | 0.45 | 21,797 | 51 | 0.47 | |||||||||||
Other borrowings |
| 55,676 |
| 1,232 |
| 4.43 |
| 55,796 |
| 1,423 |
| 5.14 | |||||
Total borrowings | 90,312 | 1,310 | 2.90 | 77,593 | 1,474 | 3.80 | |||||||||||
Total interest-bearing liabilities |
| 1,450,930 |
| 3,516 |
| 0.49 |
| 1,349,217 |
| 4,538 |
| 0.68 | |||||
Noninterest-bearing demand deposits |
| 608,160 |
| 536,364 | |||||||||||||
Other liabilities |
| 42,722 |
| 51,889 | |||||||||||||
Total liabilities |
| 2,101,812 |
| 1,937,470 | |||||||||||||
Equity |
| 202,614 |
| 192,718 | |||||||||||||
Total liabilities and equity | $ | 2,304,426 | $ | 2,130,188 | |||||||||||||
Net interest income | $ | 43,359 | $ | 42,689 | |||||||||||||
Interest rate spread |
| 3.86 | % |
| 4.13 | % | |||||||||||
Interest expense to average earning assets |
| 0.33 | % |
| 0.46 | % | |||||||||||
Net interest margin |
| 4.02 | % |
| 4.35 | % | |||||||||||
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income on a taxable-equivalent basis. The Corporation calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
41
TABLE 3: Rate-Volume Recap
Three Months Ended June 30, 2022 from 2021 | ||||||||||
Increase (Decrease) | Total | |||||||||
Due to | Increase | |||||||||
(Dollars in thousands) |
| Rate |
| Volume |
| (Decrease) | ||||
Interest income: | ||||||||||
Loans: | ||||||||||
Community banking segment | $ | (1,151) | $ | 216 | $ | (935) | ||||
Mortgage banking segment | 365 | (756) | (391) | |||||||
Consumer finance segment | (1,605) | 2,406 | 801 | |||||||
Securities: | ||||||||||
Taxable |
| 228 |
| 594 |
| 822 | ||||
Tax-exempt |
| (30) |
| (94) |
| (124) | ||||
Interest-bearing deposits in other banks |
| 326 |
| 20 |
| 346 | ||||
Total interest income |
| (1,867) |
| 2,386 |
| 519 | ||||
Interest expense: | ||||||||||
Interest-bearing deposits: | ||||||||||
Interest-bearing demand deposits |
| 42 | 25 |
| 67 | |||||
Money market deposit accounts |
| — | 59 |
| 59 | |||||
Savings accounts |
| — | 1 |
| 1 | |||||
Certificates of deposit |
| (279) | (144) |
| (423) | |||||
Total interest-bearing deposits |
| (237) |
| (59) |
| (296) | ||||
Borrowings: | ||||||||||
Repurchase agreements | (1) | 16 | 15 | |||||||
Other borrowings |
| (94) | (2) |
| (96) | |||||
Total interest expense |
| (332) |
| (45) |
| (377) | ||||
Change in net interest income | $ | (1,535) | $ | 2,431 | $ | 896 | ||||
Six Months Ended June 30, 2022 from 2021 | ||||||||||
Increase (Decrease) | Total |
| ||||||||
Due to | Increase |
| ||||||||
(Dollars in thousands) |
| Rate |
| Volume |
| (Decrease) |
| |||
Interest income: | ||||||||||
Loans: | ||||||||||
Community banking segment | $ | (1,909) | $ | (39) | $ | (1,948) | ||||
Mortgage banking segment | 631 | (1,661) | (1,030) | |||||||
Consumer finance segment | (3,087) | 4,217 | 1,130 | |||||||
Securities: | ||||||||||
Taxable |
| 243 |
| 1,122 |
| 1,365 | ||||
Tax-exempt |
| (85) |
| (190) |
| (275) | ||||
Interest-bearing deposits in other banks |
| 320 |
| 86 |
| 406 | ||||
Total interest income |
| (3,887) |
| 3,535 |
| (352) | ||||
Interest expense: | ||||||||||
Interest-bearing deposits: | ||||||||||
Interest-bearing demand deposits |
| 33 | 44 |
| 77 | |||||
Money market deposit accounts |
| (16) | 91 |
| 75 | |||||
Savings accounts |
| (7) | 10 |
| 3 | |||||
Certificates of deposit |
| (740) | (273) |
| (1,013) | |||||
Total interest-bearing deposits |
| (730) |
| (128) |
| (858) | ||||
Borrowings: | ||||||||||
Repurchase agreements | (2) | 29 | 27 | |||||||
Other borrowings |
| (188) | (3) |
| (191) | |||||
Total interest expense |
| (920) |
| (102) |
| (1,022) | ||||
Change in net interest income | $ | (2,967) | $ | 3,637 | $ | 670 | ||||
Net interest income, on a taxable-equivalent basis, for the second quarter of 2022 was $22.8 million, compared to $21.9 million for the second quarter of 2021. Net interest income, on a taxable-equivalent basis, for the first six months of 2022 was $43.4 million, compared to $42.7 million for the first six months of 2021. The increase in net interest income for the second quarter and first six months of 2022 compared to the same periods in 2021 was due primarily to higher average balances of earning assets, partially offset by a decrease in net interest margin. Average earning assets increased $210.1 million and $194.1 million for the second quarter of 2022 and first six months of 2022, respectively, compared to the same periods of 2021. Annualized net interest margin decreased 25 basis points to 4.12 percent for the second quarter of 2022
42
and decreased 33 basis points to 4.02 percent for the first six months of 2022, relative to the same periods in 2021, due primarily to lower average yields on consumer finance segment loans and lower accretion of net PPP origination fees and discounts on purchased loans included in loan yields at the community banking segment, partially offset by lower average costs of deposits and borrowings and rising yields on cash and securities. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 36 basis points and 15 basis points, respectively, for the second quarter of 2022, and decreased by 46 basis points and 19 basis points, respectively, for the first six months of 2022 compared to the same periods in 2021.
Average loans, which includes both loans held for investment and loans held for sale, increased $30.2 million to $1.5 billion for the second quarter of 2022 and decreased $19.7 million to $1.5 billion for the first six months of 2022, compared to the same periods in 2021. Average loans at the community banking segment increased $18.8 million, or 1.8 percent, for the second quarter of 2022, and decreased $1.7 million, or 0.2 percent, for the first six months of 2022 compared to the same periods in 2021. Excluding the impact of PPP loans, average loans at the community banking segment increased $95.1 million, or 9.9 percent, for the second quarter of 2022, and increased $76.0 million, or 7.9 percent, for the first six months of 2022 compared to the same periods in 2021. The increase in average loans at the community banking segment excluding PPP loans for the second quarter and first six months of 2022 compared to the same periods in 2021 resulted primarily from growth in the commercial real estate and real estate construction segments of the loan portfolio. Average loans at the consumer finance segment increased $92.3 million, or 28.4 percent, for the second quarter of 2022, and increased $79.7 million, or 24.9 percent, for the first six months of 2022 compared to the same periods in 2021 due to higher average balances of automobile loans and marine and RV loans. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $80.9 million, or 58.5 percent, for the second quarter of 2022, and decreased $97.6 million, or 62.5 percent for the first six months of 2022, compared to the same periods in 2021, due primarily to lower mortgage loan production volume.
The overall yield on average loans decreased 25 basis points to 5.75 percent for the second quarter of 2022, and decreased 17 basis points to 5.72 percent for the first six months of 2022, compared to the same periods in 2021 due primarily to lower average yield at the consumer finance segment and lower accretion of net PPP origination fees and discounts on purchased loans (including PCI loans) included in loan yields at the community banking segment, partially offset by the effect of growth in average balances of higher yielding consumer finance loans and a decrease in the average balances of lower yielding mortgage loans held for sale. The community banking segment average loan yield decreased 44 basis points to 4.21 percent for the second quarter of 2022, and decreased 37 basis points to 4.18 percent for the first six months of 2022, compared to the same periods in 2021 primarily as a result of lower recognition of net PPP origination fees and lower interest income on PCI loans. PPP loans earn interest at a note rate of one percent as well as net origination fees that are amortized over the contractual term of the related loan or accelerated into interest income upon repayment of the loan. Net PPP origination fees recognized in the second quarter and first six months of 2022 were $242,000 and $679,000, respectively, compared to net PPP origination fees recognized in the second quarter and first six months of 2021 of $1.2 million and $2.1 million, respectively. As of June 30, 2022, all net PPP origination fees received by CF Bank have been recognized in income, totaling $6.3 million since the inception of the PPP in the second quarter of 2020. The recognition of interest income on PCI loans, which were acquired in connection with past mergers and acquisitions, is based on management’s expectation of future payments of principal and interest, which are inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the second quarters and first six months of 2022 and 2021. Interest income recognized on PCI loans was $656,000 and $1.0 million for the second quarters of 2022 and 2021, respectively, and $1.0 million and $1.5 million for the first six months of 2022 and 2021, respectively. The consumer finance segment average loan yield decreased 180 basis points to 9.82 percent for the second quarter of 2022 and decreased 178 basis points to 10.00 percent for the first six months of 2022, compared to the same periods in 2021, due to the consumer finance segment continuing to pursue loan contracts of higher credit quality and lower average yields. The mortgage banking segment average loan yield increased 144 basis points to 4.40 percent for the second quarter of 2022, and increased 107 basis points to 3.84 percent for the first six months of 2022, compared to the same periods in 2021, due to higher mortgage interest rates.
Average securities available for sale increased $129.9 million and $124.1 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, due primarily to higher purchases of mortgage-backed securities and securities issued by the U.S. Treasury and government agencies and corporations with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves. The average
43
yield on the securities portfolio on a taxable-equivalent basis increased 12 basis points to 1.85 percent for the second quarter of 2022 compared to the second quarter of 2021, due primarily to rising interest rates during 2022, which allowed for purchases of securities at higher yields. The average yield on the securities portfolio on a taxable-equivalent basis decreased 1 basis point to 1.78 percent for the first six months of 2022 compared to the first six months of 2021, due to a shift in the composition of the securities portfolio toward shorter duration and lower-yielding mortgage backed securities and securities issued by the U.S. Treasury and government agencies and corporations, partially offset by rising interest rates during 2022.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, increased $50.0 million for the second quarter of 2022 and increased $89.6 million for the first six months of 2022, compared to the same periods in 2021 due primarily to excess liquidity resulting from deposit growth and decreases in loans held for sale exceeding growth in securities and loans held for investment. The average yield on interest-bearing deposits in other banks increased 61 basis points for the second quarter of 2022, and increased 30 basis points for the first six months of 2022 compared to the same periods in 2021 due to rising interest rates during 2022. The Federal Reserve Bank increased the interest rate on excess cash reserve balances from 0.10 percent at December 31, 2020 to 0.15 percent by the end of 2021 and to 1.65 percent by the end of the second quarter of 2022.
Average money market, savings and interest-bearing demand deposits increased $171.9 million and $147.5 million for the second quarter and first six months of 2022, respectively, and average time deposits decreased $68.1 million and $58.5 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, due primarily to growth in consumer and business money market and savings deposits and a shift to non-time deposits during a period of lower interest rates. Average noninterest-bearing demand deposits increased $73.4 million and $71.8 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021. The average cost of interest-bearing deposits decreased 12 basis points and 16 basis points for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, due primarily to lower rates on time deposits, including maturities of time deposits that were opened when rates were higher, and a shift in composition toward non-time deposits.
Average borrowings increased $13.9 million and $12.7 million for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021 due primarily to increases in balances of repurchase agreements with commercial deposit customers. The average cost of borrowings decreased 93 basis points and 90 basis points for the second quarter and first six months of 2022, respectively, compared to the same periods in 2021 due primarily to the termination of a revolving bank line of credit during the fourth quarter of 2021 and growth in repurchase agreements, which have a lower average cost than long-term borrowings.
The Corporation believes that rising interest rates will continue to have a positive effect on yields of cash reserves, variable rate loans, new loan originations and purchases of securities available for sale at the community banking segment as well as mortgage loans held for sale, and that net interest margin will continue to expand in the near term as higher average yields on earning assets will outweigh the increasing cost of deposits. The extent to which rising interest rates affects net interest margin will depend on a number of factors, including (1) the Corporation’s ability to continue to grow loans at the community banking segment and consumer finance segment, and competition for loans, (2) the continued availability of funding through low-cost deposits and the Corporation’s ability to compete for deposits, (3) average yields on consumer finance loans, which may decline as a result of the higher credit quality of loan contracts purchased by the consumer finance segment, (4) possible lower accretion of discounts on purchased loans, which is included in yields on loans, and (5) further declines in mortgage loan production and therefore lower average loans held for sale at the mortgage banking segment. The Corporation can give no assurance as to the ultimate impact of rising interest rates or as to when or for how long the Corporation may experience an increase in net interest margin.
44
Noninterest Income
TABLE 4: Noninterest Income
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Gains on sales of loans | $ | 2,198 | $ | 5,947 | $ | 4,893 | $ | 13,005 | ||||
Interchange income | 1,559 | 1,471 | 2,989 | 2,789 | ||||||||
Service charges on deposit accounts | 1,071 | 828 | 2,117 | 1,647 | ||||||||
Mortgage banking fee income | 924 | 1,648 | 1,777 | 3,504 | ||||||||
Wealth management services income, net | 625 | 685 | 1,272 | 1,387 | ||||||||
Mortgage lender services income | 438 | 615 | 862 | 1,393 | ||||||||
Other service charges and fees | 402 | 413 | 776 | 802 | ||||||||
Net gains on sales, maturities and calls of available for sale securities |
| — |
| 6 |
| — |
| 38 | ||||
Other (loss) income, net | (1,554) | 1,218 | (2,294) | 2,341 | ||||||||
Total noninterest income | $ | 5,663 | $ | 12,831 | $ | 12,392 | $ | 26,906 | ||||
Total noninterest income decreased $7.2 million, or 55.9 percent, for the second quarter of 2022 and decreased $14.5 million, or 53.9 percent, for the first six months of 2022, compared to the same periods in 2021. The decreases were due primarily to (1) lower volume of mortgage loan production and mortgage lender services, (2) lower margins on sales of mortgage loans and (3) unrealized losses in the second quarter and first six months of 2022 compared to unrealized gains in the second quarter and first six months of 2021 related to the Corporation’s nonqualified deferred compensation plan, included in other (loss) income, net, partially offset by (1) higher income from service charges on deposit accounts and debit card interchange activity and (2) $165,000 of swap fee income earned during the second quarter of 2022, included in other (loss) income, net.
The Corporation recognized unrealized losses related to its nonqualified deferred compensation plan of $2.1 million and $3.4 million for the second quarter and first six months of 2022, respectively, compared to unrealized gains of $947,000 and $1.5 million for the same periods in 2021, respectively. Unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan are offset by changes in deferred compensation, recorded in salaries and employee benefits expense.
Noninterest Expense
TABLE 5: Noninterest Expense
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Salaries and employee benefits | $ | 10,642 | $ | 15,714 | $ | 22,498 | $ | 31,327 | ||||
Occupancy expense | 2,116 | 2,190 | 4,325 | 4,550 | ||||||||
Other expenses: | ||||||||||||
Data processing | 2,645 | 2,825 | 5,246 | 5,728 | ||||||||
Professional fees | 743 | 737 | 1,495 | 1,484 | ||||||||
Mortgage banking loan processing expenses |
| 499 |
| 867 |
| 1,001 |
| 1,761 | ||||
Other real estate loss/(gain) and expense, net | 1 | (395) | 1 | (402) | ||||||||
Provision for indemnifications | (286) | 15 | (869) | 32 | ||||||||
Other expenses |
| 2,739 |
| 2,680 |
| 5,613 |
| 5,172 | ||||
Total other expenses | 6,341 | 6,729 | 12,487 | 13,775 | ||||||||
Total noninterest expense | $ | 19,099 | $ | 24,633 | $ | 39,310 | $ | 49,652 | ||||
Total noninterest expenses decreased $5.5 million, or 22.5 percent, in the second quarter of 2022 and decreased $10.3 million, or 20.8 percent, in the first six months of 2022 compared to the same periods in 2021, due primarily to (1) a
45
decrease in salaries and employee benefits related to deferred compensation, (2) lower expenses tied to mortgage loan production volume reported in salaries and employee benefits, mortgage banking loan processing expenses and data processing and (3) a reversal of provision for indemnifications in 2022 compared to provision recorded in 2021, partially offset by net gains on other real estate in 2021 related primarily to the sale of one property in the second quarter of 2021.
Changes in deferred compensation liabilities decreased salaries and employee benefits expense by $2.1 million and $3.4 million in the second quarter and first six months of 2022, respectively, and increased salaries and employee benefits expense by $947,000 and $1.5 million in the second quarter and first six months of 2021, respectively, and were offset in both periods by unrealized losses and gains, respectively, recorded in noninterest income.
Income Taxes
The Corporation’s consolidated effective income tax rate was 21.7 percent and 23.6 percent for the first six months of 2022 and 2021, respectively. The Corporation’s consolidated effective tax rate for the first six months of 2022 was lower compared to the same period in 2021 primarily as a result of a lower share of income at the mortgage banking segment, which is subject to state income taxes.
Business Segments
The Corporation operates in a decentralized manner in three business segments: community banking, mortgage banking and consumer finance. An overview of the financial results for each of the Corporation’s business segments is presented below.
Community Banking: The community banking segment comprises CF Bank and CF Wealth Management. The following table presents the community banking segment operating results for the periods indicated.
46
TABLE 6: Community Banking Segment Operating Results
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest income | $ | 16,808 | $ | 15,935 | $ | 31,846 | $ | 31,111 | ||||
Interest expense | 1,174 | 1,456 | 2,347 | 3,180 | ||||||||
Net interest income | 15,634 | 14,479 | 29,499 | 27,931 | ||||||||
Provision for loan losses | — | (200) | (700) | (200) | ||||||||
Net interest income after provision for loan losses | 15,634 | 14,679 | 30,199 | 28,131 | ||||||||
Noninterest income: | ||||||||||||
Interchange income | 1,559 | 1,471 | 2,989 | 2,789 | ||||||||
Service charges on deposit accounts | 1,085 | 828 | 2,145 | 1,647 | ||||||||
Investment services income | 625 | 685 | 1,272 | 1,387 | ||||||||
Other income, net | 866 | 599 | 1,653 | 1,447 | ||||||||
Total noninterest income | 4,135 | 3,583 | 8,059 | 7,270 | ||||||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits | 8,165 | 8,309 | 16,652 | 16,557 | ||||||||
Occupancy expense |
| 1,613 |
| 1,644 |
| 3,331 |
| 3,416 | ||||
Data processing | 1,944 | 2,020 | 3,881 | 4,011 | ||||||||
Other real estate loss/(gain) and expense, net | 1 | (395) | 1 | (402) | ||||||||
Other expenses | 2,089 | 1,905 | 4,119 | 3,672 | ||||||||
Total noninterest expenses | 13,812 | 13,483 | 27,984 | 27,254 | ||||||||
Income before income taxes | 5,957 | 4,779 | 10,274 | 8,147 | ||||||||
Income tax expense |
| 1,141 |
| 854 |
| 1,941 |
| 1,429 | ||||
Net income | $ | 4,816 | $ | 3,925 | $ | 8,333 | $ | 6,718 | ||||
The community banking segment reported net income of $4.8 million and $8.3 million for the second quarter and first six months of 2022, respectively, compared to $3.9 million and $6.7 million, respectively, for the same periods in 2021. Community banking segment net income increased $891,000 and $1.6 million for the second quarter and first six months of 2022 compared to the same periods in 2021. The increases in community banking segment net income were due primarily to higher net interest income from growth in earning assets, including securities and loans, and lower provision for loan losses in the first six months of 2022 compared to the first six months of 2021.
Net interest income for the community banking segment increased by $1.2 million to $15.6 million for the second quarter of 2022 and increased $1.6 million to $29.5 million for the first six months of 2022, respectively, compared to the same periods in 2021. These increases were due primarily to (1) higher average balances of loans (excluding PPP loans), securities and cash, funded by low-cost deposits, (2) the effects of rising interest rates during 2022 on asset yields and (3) lower average balances of and rates on time deposits, partially offset by (1) lower recognition of net PPP origination fees and (2) lower interest income on PCI loans. Net PPP origination fees recognized in the second quarter and first six months of 2022 were $242,000, and $679,000, respectively, compared to $1.2 million and $2.1 million, respectively, for the same periods in 2021. As of June 30, 2022, all net PPP origination fees received by CF Bank have been recognized in income, totaling $6.3 million since the inception of the PPP in the second quarter of 2020. Interest income recognized on PCI loans was $656,000 and $1.0 million for the second quarter and first six months of 2022, respectively, and $1.0 million and $1.5 million for the second quarter and first six months of 2021, respectively.
The community banking segment recorded no provision for loan losses for the second quarter of 2022 and recorded a net reversal of provision for loan losses of $700,000 for the first six months of 2022, compared to a net reversal of provision for loan losses of $200,000 for both the second quarter and first six months of 2021. The reversal of provision for loan losses in the first six months of 2022 was due primarily to the resolution of certain impaired loans, which resulted in no losses being realized, and the reduction of certain qualitative adjustments to reserves, partially offset by provision related
47
to loan growth. Noninterest income increased for the second quarter and first six months of 2022 compared to the same periods in 2021 as a result of higher service charges on deposit accounts, higher debit card interchange income and higher swap fee income, included in other income, net. Noninterest expenses increased during the same periods, driven primarily by net gains on other real estate in 2021 related primarily to the sale of one property in the second quarter of 2021.
Mortgage Banking: The following table presents the mortgage banking operating results for the periods indicated.
TABLE 7: Mortgage Banking Segment Operating Results
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest income | $ | 630 | $ | 1,021 | $ | 1,118 | $ | 2,148 | ||||
Interest expense | 194 | 312 | 314 | 685 | ||||||||
Net interest income | 436 | 709 | 804 | 1,463 | ||||||||
Provision for loan losses | 10 | 30 | 32 | 60 | ||||||||
Net interest income after provision for loan losses | 426 | 679 | 772 | 1,403 | ||||||||
Noninterest income: | ||||||||||||
Gains of sales of loans | 2,639 | 5,957 | 5,347 | 13,062 | ||||||||
Mortgage banking fee income | 941 | 1,674 | 1,797 | 3,547 | ||||||||
Mortgage lender services fee income | 438 | 615 | 862 | 1,393 | ||||||||
Other income | 21 | 19 | 62 | 92 | ||||||||
Total noninterest income | 4,039 | 8,265 | 8,068 | 18,094 | ||||||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits | 2,128 | 4,072 | 4,240 | 8,539 | ||||||||
Occupancy expense |
| 338 |
| 357 | 660 | 776 | ||||||
Data processing | 304 | 455 | 614 | 1,071 | ||||||||
Other expenses | 651 | 1,324 | 1,133 | 2,809 | ||||||||
Total noninterest expenses | 3,421 | 6,208 | 6,647 | 13,195 | ||||||||
Income before income taxes | 1,044 | 2,736 | 2,193 | 6,302 | ||||||||
Income tax expense |
| 262 |
| 768 |
| 545 |
| 1,789 | ||||
Net income | $ | 782 | $ | 1,968 | $ | 1,648 | $ | 4,513 | ||||
The mortgage banking segment reported net income of $782,000 and $1.6 million for the second quarter and first six months of 2022, respectively, compared to $2.0 million and $4.5 million, respectively, for the same periods in 2021. The decrease in net income of the mortgage banking segment for the second quarter and first six months of 2022 compared to the same periods in 2021 was due primarily to (1) lower volume of mortgage loan originations and mortgage lender services, which resulted in lower noninterest income and lower noninterest expense, (2) lower margins on sales of mortgage loans and (3) lower net interest income as a result of lower balances of loans held for sale, partially offset by a reversal of provision for indemnification losses, which is included in other expenses, during the second quarter and first six months of 2022.
48
The following table presents mortgage loan originations and mortgage loans sold for the periods indicated.
TABLE 8: Mortgage Loan Originations
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Mortgage loan originations: | ||||||||||||
Purchases | $ | 185,659 | $ | 273,113 | $ | 327,209 | $ | 460,368 | ||||
Refinancings | 25,413 | 108,195 | 73,767 | 343,443 | ||||||||
Total mortgage loan originations1 | $ | 211,072 | $ | 381,308 | $ | 400,976 | $ | 803,811 | ||||
Lock-adjusted originations2 | $ | 215,876 | $ | 348,119 | $ | 423,466 | $ | 765,189 | ||||
| 1 | Total mortgage loan originations does not include mortgage lender services. |
| 2 | Lock-adjusted originations includes an estimate of the effect of changes in the volume of mortgage loan applications in process that have not closed, net of volume not expected to close. |
Mortgage loan originations for the mortgage banking segment decreased 44.6 percent for the second quarter of 2022 and decreased 50.1 percent for the first six months of 2022 compared to the same periods in 2021. Gains on sales of loans, while driven in part by mortgage loan originations, also includes the effects of changes in locked loan commitments, which reflect the volume of mortgage loan applications that are in process and have not closed. Lock-adjusted originations for the mortgage banking segment decreased 38.0 percent for the second quarter of 2022 and decreased 44.7 percent for the first six months of 2022 compared to the same periods in 2021. Following the elevated volume levels in the mortgage industry during 2020 and 2021 that accompanied historically low mortgage interest rates and a highly active residential real estate market, the first six months of 2022 represents a return to levels of mortgage banking segment volume (of both refinancings and home purchases) that are normalized and in line with historical production of the mortgage banking segment.
Locked loan commitments increased by $5.5 million during the second quarter of 2022 and decreased by $37.7 million during the second quarter of 2021. Locked loan commitments increased by $25.6 million during the first six months of 2022 and decreased by $43.9 million during the first six months of 2021. Locked loan commitments were $109.0 million at June 30, 2022, compared to $83.4 million at December 31, 2021 and $154.7 million at June 30, 2021. Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders for a fee. Mortgage lender services volume decreased for the second quarter and first six months of 2022 compared to the same periods in 2021 as a result of lower mortgage industry volume.
The mortgage banking segment recorded a reversal of provisions for indemnification losses of $286,000 and $869,000 for the second quarter and first six months of 2022, respectively, compared to provision for indemnification losses of $15,000 and $32,000, respectively, for the same periods in 2021. The release of indemnification reserves in the second quarter and first six months of 2022 was due primarily to improvement in the mortgage banking segment’s assessment of borrower payment performance and other factors affecting expected losses on mortgage loans sold in the secondary market. The mortgage banking segment increased reserves for indemnification losses during 2020 based on widespread forbearance on mortgage loans and economic uncertainty related to the COVID-19 pandemic. To date, the mortgage banking segment has not made any payments for indemnification losses since the onset of the COVID-19 pandemic, and management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.
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Consumer Finance: The following table presents the consumer finance operating results for the periods indicated.
TABLE 9: Consumer Finance Segment Operating Results
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Interest income | $ | 10,222 | $ | 9,421 | $ | 19,800 | $ | 18,670 | ||||
Interest expense | 3,091 | 2,302 | 5,859 | 4,502 | ||||||||
Net interest income | 7,131 | 7,119 | 13,941 | 14,168 | ||||||||
Provision for loan losses | 520 | (430) | 870 | (180) | ||||||||
Net interest income after provision for loan losses | 6,611 | 7,549 | 13,071 | 14,348 | ||||||||
Noninterest income | 49 | 74 | 115 | 186 | ||||||||
Noninterest expense: | ||||||||||||
Salaries and employee benefits | 2,242 | 2,206 | 4,566 | 4,446 | ||||||||
Occupancy expense |
| 164 |
| 188 | 333 | 357 | ||||||
Data processing | 389 | 343 | 733 | 635 | ||||||||
Other expenses | 850 | 946 | 1,707 | 1,693 | ||||||||
Total noninterest expenses | 3,645 | 3,683 | 7,339 | 7,131 | ||||||||
Income before income taxes | 3,015 | 3,940 | 5,847 | 7,403 | ||||||||
Income tax expense |
| 820 |
| 1,065 | 1,590 | 2,001 | ||||||
Net income | $ | 2,195 | $ | 2,875 | $ | 4,257 | $ | 5,402 | ||||
The consumer finance segment reported net income of $2.2 million and $4.3 million for the second quarter and first six months of 2022, respectively, compared to $2.9 million and $5.4 million, respectively, for the same periods in 2021. The decrease in consumer finance segment net income for the second quarter and first six months of 2022, as compared to the same periods in 2021, was due primarily to lower average yields on automobile loans and higher provision for loan losses, partially offset by loan growth. Comparisons of consumer finance segment net interest income were affected by lower net interest margin and higher average balances of loans outstanding for the second quarter and first six months of 2022 compared to the same periods in 2021. Net interest margin decreased due to lower average yields on loans, as a result of the consumer finance segment’s pursuing growth in higher quality, lower yielding loans. Average loans outstanding increased $92.3 million, or 28.4%, for the second quarter of 2022 and increased $79.7 million, or 24.9%, for the first six months of 2022, compared to the same periods in 2021.
Provision for loan losses increased as a result of significant loan growth in 2022, partially offset by a release of reserves related to continued improvement in loan performance. The consumer finance segment has experienced loan performance since 2020 that has been stronger than periods prior to the onset of the COVID-19 pandemic, resulting in part from the consumer finance segment continuing to purchase higher quality loans, and in part from government stimulus measures in response to the pandemic that benefitted borrowers. Additionally, a strong used car market has continued to mitigate the losses realized upon repossession and sale of automobiles. If loan performance deteriorates, resulting in elevated delinquencies or net charge-offs, or if values of used vehicles decline, provision for loan losses may increase in future periods.
ASSET QUALITY
The allowance for loan losses represents an amount that, in our judgment, will be adequate to absorb probable losses inherent in the loan portfolio. The provision for loan losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. The following table presents the Corporation’s loan loss experience for the periods indicated:
50
TABLE 10: Allowance for Loan Losses
| Real Estate |
|
| Commercial, |
|
|
|
| ||||||||||||||
Residential | Real Estate | Financial | Equity | Consumer | ||||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer1 | Finance | Total | |||||||||||||||
For the three months ended June 30, 2022: | ||||||||||||||||||||||
Balance at beginning of period | $ | 2,628 | $ | 893 | $ | 10,440 | $ | 544 | $ | 164 | $ | 25,099 | $ | 39,768 | ||||||||
Provision charged to operations |
| (80) | 79 | (21) | (22) | 54 | 520 | 530 | ||||||||||||||
Loans charged off |
| — | — | — | — | (68) | (1,009) | (1,077) | ||||||||||||||
Recoveries of loans previously charged off |
| 5 | — | 3 | 2 | 30 | 1,258 | 1,298 | ||||||||||||||
Balance at end of period | $ | 2,553 | $ | 972 | $ | 10,422 | $ | 524 | $ | 180 | $ | 25,868 | $ | 40,519 | ||||||||
Average loans | $ | 218,318 | $ | 86,630 | $ | 713,753 | $ | 40,633 | $ | 8,041 | $ | 417,503 | $ | 1,484,878 | ||||||||
Ratio of annualized net (recoveries) charge-offs to average loans | (0.01) | % | — | % | (0.00) | % | (0.02) | % | 1.89 | % | (0.24) | % | (0.06) | % | ||||||||
For the three months ended June 30, 2021: | ||||||||||||||||||||||
Balance at beginning of period | $ | 2,893 | $ | 822 | $ | 11,007 | $ | 671 | $ | 277 | $ | 23,363 | $ | 39,033 | ||||||||
Provision charged to operations |
| (85) | (29) | 20 | (72) | (4) | (430) | (600) | ||||||||||||||
Loans charged off |
| — | — | — | — | (36) | (791) | (827) | ||||||||||||||
Recoveries of loans previously charged off |
| 6 | — | 1 | 1 | 30 | 1,307 | 1,345 | ||||||||||||||
Balance at end of period | $ | 2,814 | $ | 793 | $ | 11,028 | $ | 600 | $ | 267 | $ | 23,449 | $ | 38,951 | ||||||||
Average loans | $ | 216,276 | $ | 54,468 | $ | 726,351 | $ | 44,498 | $ | 8,976 | $ | 325,218 | $ | 1,375,787 | ||||||||
Ratio of annualized net (recoveries) charge-offs to average loans | (0.01) | % | — | % | (0.00) | % | (0.01) | % | 0.27 | % | (0.63) | % | (0.15) | % | ||||||||
| Real Estate |
|
| Commercial, |
|
|
|
| ||||||||||||||
Residential | Real Estate | Financial | Equity | Consumer | ||||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer1 | Finance | Total | |||||||||||||||
For the six months ended June 30, 2022: | ||||||||||||||||||||||
Balance at beginning of period | $ | 2,660 | $ | 856 | $ | 11,085 | $ | 593 | $ | 172 | $ | 24,791 | $ | 40,157 | ||||||||
Provision charged to operations |
| (118) | 116 | (657) | (71) | 62 | 870 | 202 | ||||||||||||||
Loans charged off |
| — | — | (11) | — | (116) | (2,322) | (2,449) | ||||||||||||||
Recoveries of loans previously charged off |
| 11 | — | 5 | 2 | 62 | 2,529 | 2,609 | ||||||||||||||
Balance at end of period | $ | 2,553 | $ | 972 | $ | 10,422 | $ | 524 | $ | 180 | $ | 25,868 | $ | 40,519 | ||||||||
Average loans | $ | 216,776 | $ | 81,928 | $ | 702,950 | $ | 40,587 | $ | 8,114 | $ | 399,409 | $ | 1,449,764 | ||||||||
Ratio of annualized net (recoveries) charge-offs to average loans | (0.01) | % | — | % | 0.00 | % | (0.01) | % | 1.33 | % | (0.10) | % | (0.02) | % | ||||||||
For the six months ended June 30, 2021: | ||||||||||||||||||||||
Balance at beginning of period | $ | 2,914 | $ | 975 | $ | 10,696 | $ | 687 | $ | 371 | $ | 23,513 | $ | 39,156 | ||||||||
Provision charged to operations |
| (113) | (182) | 331 | (88) | (88) | (180) | (320) | ||||||||||||||
Loans charged off |
| — | — | — | — | (81) | (2,442) | (2,523) | ||||||||||||||
Recoveries of loans previously charged off |
| 13 | — | 1 | 1 | 65 | 2,558 | 2,638 | ||||||||||||||
Balance at end of period | $ | 2,814 | $ | 793 | $ | 11,028 | $ | 600 | $ | 267 | $ | 23,449 | $ | 38,951 | ||||||||
Average loans | $ | 216,121 | $ | 58,064 | $ | 722,749 | $ | 45,972 | $ | 9,629 | $ | 319,751 | $ | 1,372,286 | ||||||||
Ratio of annualized net (recoveries) charge-offs to average loans | (0.01) | % | — | % | (0.00) | % | (0.00) | % | 0.33 | % | (0.07) | % | (0.02) | % | ||||||||
| 1 | Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts. |
51
For further information regarding the adequacy of our allowance for loan losses, refer to “Table 14: Nonperforming Assets” and the accompanying disclosure below.
The allocation of the allowance for loan losses and the ratio of corresponding outstanding loan balances to total loans are as follows as of the dates indicated:
TABLE 11: Allocation of Allowance for Loan Losses
June 30, | December 31, |
| ||||||
(Dollars in thousands) |
| 2022 |
|
| 2021 |
| ||
Allocation of allowance for loan losses: | ||||||||
Real estate—residential mortgage | $ | 2,553 | $ | 2,660 | ||||
Real estate—construction 1 |
| 972 |
| 856 | ||||
Commercial, financial and agricultural 2 |
| 10,422 |
| 11,085 | ||||
Equity lines |
| 524 |
| 593 | ||||
Consumer |
| 180 |
| 172 | ||||
Consumer finance |
| 25,868 |
| 24,791 | ||||
Total allowance for loan losses | $ | 40,519 | $ | 40,157 | ||||
Ratio of loans to total period-end loans: | ||||||||
Real estate—residential mortgage |
| 15 | % |
| 15 | % | ||
Real estate—construction 1 |
| 5 |
| 4 | ||||
Commercial, financial and agricultural 2 |
| 48 |
| 51 | ||||
Equity lines |
| 3 |
| 3 | ||||
Consumer |
| 1 |
| 1 | ||||
Consumer finance |
| 28 |
| 26 | ||||
| 100 | % |
| 100 | % | |||
| 1 | Includes the Corporation’s real estate construction lending and consumer real estate lot lending. |
| 2 | Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending. |
Loans by credit quality indicators are presented in Table 12 below. The characteristics of these loan ratings are as follows:
| ● | Pass rated loans are to persons or business entities with an acceptable financial condition, appropriate collateral margins, appropriate cash flow to service the existing loan, and an appropriate leverage ratio. The borrower has paid all obligations as agreed and it is expected that this type of payment history will continue. When necessary, acceptable personal guarantors support the loan. |
| ● | Special mention loans have a specific identified weakness in the borrower’s operations and in the borrower’s ability to generate positive cash flow on a sustained basis. The borrower’s recent payment history may be characterized by late payments. The Corporation’s risk exposure is mitigated by collateral supporting the loan. The collateral is considered to be well-margined, well maintained, accessible and readily marketable. |
| ● | Substandard loans are considered to have specific and well-defined weaknesses that jeopardize the viability of the Corporation’s credit extension. The payment history for the loan has been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan. The estimated net liquidation value of the collateral pledged and/or ability of the personal guarantor(s) to pay the loan may not adequately protect the Corporation. There is a distinct possibility that the Corporation will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the Corporation’s definition of impaired unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable that the Corporation will be unable to collect all amounts due. |
52
| ● | Substandard nonaccrual loans have the same characteristics as substandard loans; however, they have a nonaccrual classification because it is probable that the Corporation will not be able to collect all amounts due. |
| ● | Doubtful rated loans have all the weaknesses inherent in a loan that is classified substandard but 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. The possibility of loss is extremely high. |
| ● | Loss rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off. |
TABLE 12: Credit Quality Indicators
Loans by credit quality indicators as of June 30, 2022 were as follows:
|
| Special |
|
| Substandard |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Nonaccrual | Total1 |
| ||||||||||
Real estate – residential mortgage | $ | 224,086 | $ | 484 | $ | 626 | $ | 331 | $ | 225,527 | ||||||
Real estate – construction 2 |
| 70,261 |
| — |
| — |
| — |
| 70,261 | ||||||
Commercial, financial and agricultural 3 |
| 730,158 |
| 1,749 |
| 6,033 |
| — |
| 737,940 | ||||||
Equity lines |
| 41,546 |
| — |
| 56 |
| 113 |
| 41,715 | ||||||
Consumer |
| 7,842 |
| — |
| — |
| 1 |
| 7,843 | ||||||
$ | 1,073,893 | $ | 2,233 | $ | 6,715 | $ | 445 | $ | 1,083,286 | |||||||
Non- | |||||||||
(Dollars in thousands) |
| Performing |
| Performing |
| Total | |||
Consumer finance | $ | 436,601 | $ | 464 | $ | 437,065 | |||
| 1 | At June 30, 2022, the Corporation did not have any loans classified as Doubtful or Loss. |
| 2 | Includes the Corporation’s real estate construction lending and consumer real estate lot lending. |
| 3 | Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending. |
Loans by credit quality indicators as of December 31, 2021 were as follows:
|
| Special |
|
| Substandard |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Nonaccrual | Total1 |
| ||||||||||
Real estate – residential mortgage | $ | 215,432 | $ | 664 | $ | 605 | $ | 315 | $ | 217,016 | ||||||
Real estate – construction 2 |
| 57,495 |
| — |
| — |
| — |
| 57,495 | ||||||
Commercial, financial and agricultural 3 |
| 707,633 |
| 1,989 |
| 5,986 |
| 2,122 |
| 717,730 | ||||||
Equity lines |
| 41,013 |
| 47 |
| 181 |
| 104 |
| 41,345 | ||||||
Consumer |
| 8,276 |
| — |
| 1 |
| 3 |
| 8,280 | ||||||
$ | 1,029,849 | $ | 2,700 | $ | 6,773 | $ | 2,544 | $ | 1,041,866 | |||||||
Non- | |||||||||
(Dollars in thousands) |
| Performing |
| Performing |
| Total | |||
Consumer finance | $ | 367,814 | $ | 380 | $ | 368,194 | |||
| 1 | At December 31, 2021, the Corporation did not have any loans classified as Doubtful or Loss. |
| 2 | Includes the Corporation’s real estate construction lending and consumer real estate lot lending. |
| 3 | Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending. |
53
The decrease in substandard nonaccrual loans at June 30, 2022 compared to December 31, 2021 was due primarily to the resolution of certain impaired loans.
Table 13 summarizes the Corporation’s credit ratios on a consolidated basis as of June 30, 2022 and December 31, 2021.
TABLE 13: Consolidated Credit Ratios
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 | |||
Total loans | $ | 1,520,351 | $ | 1,410,060 | |||
Nonaccrual loans | $ | 909 | $ | 2,924 | |||
Allowance for loan losses (ALL) | $ | 40,519 | $ | 40,157 | |||
Nonaccrual loans to total loans | 0.06 | % | 0.21 | % | |||
ALL to total loans | 2.67 | % | 2.85 | % | |||
ALL to nonaccrual loans | 4,457.54 | % | 1,373.36 | % | |||
Table 14 summarizes nonperforming assets by principal business segments as of the dates indicated.
TABLE 14: Nonperforming Assets
Community Banking Segment
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Loans, excluding purchased loans and PPP loans | $ | 1,023,661 | $ | 954,262 | |||
Purchased performing loans1 | 46,266 | 56,798 | |||||
Purchased credit impaired loans1 | 1,728 | 3,655 | |||||
PPP loans2 | 1,187 | 17,762 | |||||
Total loans | $ | 1,072,842 | $ | 1,032,477 | |||
Nonaccrual loans | $ | 125 | $ | 2,359 | |||
OREO | $ | 423 | $ | 835 | |||
Impaired loans3 | $ | 2,360 | $ | 5,058 | |||
ALL | $ | 14,056 | $ | 14,803 | |||
Nonaccrual loans to total loans | 0.01 | % | 0.23 | % | |||
ALL to total loans | 1.31 | % | 1.43 | % | |||
ALL to nonaccrual loans |
| 11,244.80 | % |
| 627.51 | % | |
ALL to total loans, excluding purchased credit impaired loans4 |
| 1.31 | % |
| 1.44 | % | |
ALL to total loans, excluding purchased loans and PPP loans | 1.37 | % | 1.55 | % | |||
Annualized year-to-date net charge-offs to average total loans | 0.01 | % | 0.01 | % | |||
| 1 | Acquired loans are tracked in two separate categories – “purchased performing” and “purchased credit impaired.” The remaining discount for the purchased performing loans was $900,000 at June 30, 2022 and $1.1 million at December 31, 2021. The remaining discount for the purchased credit impaired loans was $3.9 million at June 30, 2022 and $4.7 million at December 31, 2021. |
| 2 | The principal amount of outstanding PPP loans was $1.2 million at June 30, 2022 and $18.4 million at December 31, 2021. |
| 3 | Impaired loans includes $2.2 million of loans on nonaccrual at December 31, 2021. There were no impaired loans on nonaccrual at June 30, 2022. Impaired loans also includes $2.1 million and $2.7 million of TDRs at June 30, 2022 and at December 31, 2021, respectively. |
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| 4 | The ratio of ALL to total loans, excluding purchased credit impaired loans, includes purchased performing loans and loans originated under the PPP for which no allowance for loan losses is required. |
Mortgage Banking Segment
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Total loans1 | $ | 10,445 | $ | 9,389 | |||
Nonaccrual loans | $ | 320 | $ | 185 | |||
Impaired loans | $ | 155 | $ | 150 | |||
ALL | $ | 595 | $ | 563 | |||
Nonaccrual loans to total loans |
| 3.06 | % | 1.97 | % | ||
ALL to total loans |
| 5.70 | % | 6.00 | % | ||
ALL to nonaccrual loans |
| 185.94 | % | 304.32 | % | ||
Annualized year-to-date net charge-offs to average total loans | — | % | — | % | |||
| 1 | Total loans does not include loans held for sale at the mortgage banking segment. |
Consumer Finance Segment
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Total loans | $ | 437,064 | $ | 368,194 | |||
Nonaccrual loans | $ | 464 | $ | 380 | |||
Repossessed assets | $ | 121 | $ | 190 | |||
ALL | $ | 25,868 | $ | 24,791 | |||
Nonaccrual loans to total loans |
| 0.11 | % |
| 0.10 | % | |
ALL to total loans |
| 5.92 | % |
| 6.73 | % | |
ALL to nonaccrual loans | 5,575.00 | % | 6,523.95 | % | |||
Annualized year-to-date net recoveries to average total loans | (0.10) | % | (0.14) | % | |||
Nonperforming assets of the community banking segment totaled $548,000 at June 30, 2022 compared to $3.2 million at December 31, 2021. Nonperforming assets consisted of $125,000 in nonaccrual loans and $423,000 in OREO at June 30, 2022 and consisted of $2.4 million in nonaccrual loans and $835,000 in OREO at December 31, 2021. The decrease in nonaccrual loans at June 30, 2022 as compared to December 31, 2021 was primarily due to the resolution of certain impaired loans during the first six months of 2022.
At June 30, 2022, the allowance for loan losses at the community banking segment decreased to $14.1 million, compared to $14.8 million at December 31, 2021. The allowance for loan losses as a percentage of total loans at the community banking segment, excluding PCI loans, at June 30, 2022 decreased to 1.31 percent, compared to 1.44 percent at December 31, 2021. The allowance for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP decreased to 1.37 percent at June 30, 2022, compared to 1.55 percent at December 31, 2021, due primarily to the resolution of certain impaired loans and continued strong credit quality of the loan portfolio.
Nonaccrual loans at the consumer finance segment were $464,000 at June 30, 2022, compared to $380,000 at December 31, 2021. Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent and due to improvement in loan performance. Repossessed vehicles of the consumer finance segment are classified as other assets and consist only of vehicles the Corporation has the legal right to sell. Prior to the reclassification from loans to repossessed vehicles, the difference between the carrying amount of each loan and the fair value of each vehicle (i.e. the deficiency) is charged against the allowance for loan losses. At June 30, 2022, repossessed vehicles available for sale totaled $121,000, compared to $190,000 at December 31, 2021.
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The consumer finance segment’s allowance for loan losses increased $1.1 million to $25.9 million at June 30, 2022 from $24.8 million at December 31, 2021. The consumer finance segment experienced annualized net recoveries for the first six months of 2022 of 0.10 percent of average total loans, compared to net recoveries of 0.07 percent for the first six months of 2021. The change in the net recovery ratio for the first six months of 2022 compared to the first six months of 2021 reflects a lower number of charge-offs during 2022. Charge-offs in both years were lower than historical levels for the consumer finance segment, due to strong loan performance and a strong market for used autos, which mitigates losses on defaulted auto loans. The consumer finance segment has experienced loan performance since 2020 that has been stronger than periods prior to the onset of the COVID-19 pandemic, resulting in part from the consumer finance segment continuing to purchase higher quality loans, and in part from government stimulus measures in response to the pandemic that benefitted borrowers. At June 30, 2022, total delinquent loans as a percentage of total loans was 2.07 percent, compared to 2.16 percent at December 31, 2021 and 1.77 percent at June 30, 2021. The allowance for loan losses as a percentage of total loans decreased to 5.92 percent at June 30, 2022 from 6.73 percent at December 31, 2021, primarily as a result of improving credit quality of the portfolio, which has resulted in lower net charge-offs, and a reduction of certain qualitative adjustments to reserves related to the COVID-19 pandemic.
The consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. Average amounts of payment deferrals on a monthly basis, which are not included in delinquent loans, were 1.46 percent and 1.16 percent as a percentage of average automobile loans outstanding for the second quarter of 2022 and 2021, respectively and were 1.48 percent and 1.09 percent as a percentage of average automobile loans outstanding for the first six months of 2022 and 2021, respectively.
Impaired Loans
We measure impaired loans either based on fair value of the loan using the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent, or using the present value of expected future cash flows discounted at the loan’s effective interest rate. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment in the loan. TDRs occur when we agree to significantly modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions typically are made for loss mitigation purposes and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs are considered impaired loans.
TABLE 15: Impaired Loans
Impaired loans, which included TDRs of $2.1 million, and the related allowance at June 30, 2022, were as follows:
|
|
|
|
| |||||||||||||||
Recorded | Recorded |
| |||||||||||||||||
Investment | Investment | Average |
| ||||||||||||||||
Unpaid | in Loans | in Loans | Balance- | Interest | |||||||||||||||
Principal | without | with | Related | Impaired | Income | ||||||||||||||
(Dollars in thousands) | Balance | Specific Reserve | Specific Reserve | Allowance | Loans | Recognized |
| ||||||||||||
Real estate – residential mortgage | $ | 1,258 | $ | 435 | $ | 724 | $ | 48 | $ | 1,113 | $ | 27 | |||||||
Commercial, financial and agricultural: | |||||||||||||||||||
Commercial real estate lending |
| 1,329 |
| — |
| 1,329 |
| 90 |
| 1,329 |
| 33 | |||||||
Equity lines |
| 28 |
| 27 |
| — |
| — |
| 28 |
| 1 | |||||||
Total | $ | 2,615 | $ | 462 | $ | 2,053 | $ | 138 | $ | 2,470 | $ | 61 | |||||||
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Impaired loans, which included TDRs of $2.7 million, and the related allowance at December 31, 2021, were as follows:
|
|
|
|
| |||||||||||||||
Recorded | Recorded |
| |||||||||||||||||
Investment | Investment | Average |
| ||||||||||||||||
Unpaid | in Loans | in Loans | Balance- | Interest | |||||||||||||||
Principal | without | with | Related | Impaired | Income | ||||||||||||||
(Dollars in thousands) | Balance | Specific Reserve | Specific Reserve | Allowance | Loans | Recognized |
| ||||||||||||
Real estate – residential mortgage | $ | 1,689 | $ | 550 | $ | 1,035 | $ | 63 | $ | 1,560 | $ | 64 | |||||||
Commercial, financial and agricultural: | |||||||||||||||||||
Commercial real estate lending |
| 1,389 |
| — |
| 1,390 |
| 103 |
| 1,393 |
| 72 | |||||||
Commercial business lending |
| 2,234 |
| — |
| 2,123 |
| 489 |
| 2,257 |
| — | |||||||
Equity lines |
| 118 |
| 110 |
| — |
| — |
| 119 |
| 4 | |||||||
Total | $ | 5,430 | $ | 660 | $ | 4,548 | $ | 655 | $ | 5,329 | $ | 140 | |||||||
The decrease in the recorded investment in impaired loans and the related allowance at June 30, 2022 compared to December 31, 2021 is due primarily to the resolution of certain loans in the first six months of 2022, which resulted in no losses being realized.
TDRs at June 30, 2022 and December 31, 2021 were as follows:
TABLE 16: Troubled Debt Restructurings
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Accruing TDRs | $ | 2,118 | $ | 2,575 | |||
Nonaccrual TDRs1 |
| — |
| 115 | |||
Total TDRs2 | $ | 2,118 | $ | 2,690 | |||
| 1 | Included in nonaccrual loans in Table 14: Nonperforming Assets. |
| 2 | Included in impaired loans in Table 14: Nonperforming Assets and Table 15: Impaired Loans. |
While TDRs are considered impaired loans, not all TDRs are on nonaccrual status. If a loan was on nonaccrual status at the time of the TDR modification, the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the Corporation’s policy for returning loans to accrual status. If a loan was accruing prior to being modified as a TDR and if management concludes that the borrower is able to make such modified payments, and there are no other factors or circumstances that would cause management to conclude otherwise, the TDR will remain on an accruing status.
FINANCIAL CONDITION
At June 30, 2022, the Corporation had total assets of $2.3 billion, which was an increase of $69.8 million since December 31, 2021. The increase was attributable primarily to increases in available for sale securities and loans held for investment, partially offset by a decrease in loans held for sale, and was funded by growth in money market, savings and demand deposits. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.
Loan Portfolio
Tables 17 and 18 present information pertaining to the composition of loans held for investment and the maturity/repricing of certain loans held for investment, respectively.
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TABLE 17: Summary of Loans Held for Investment
June 30, 2022 | December 31, 2021 | |||||||||||
(Dollars in thousands) |
| Amount | Percent |
|
| Amount |
| Percent | ||||
Real estate—residential mortgage | $ | 225,527 | 15 | % | $ | 217,016 | 15 | % | ||||
Real estate—construction 1 |
| 70,261 |
| 5 |
| 57,495 | 4 | |||||
Commercial, financial, and agricultural 2 |
| 737,940 |
| 48 |
| 717,730 | 51 | |||||
Equity lines |
| 41,715 |
| 3 |
| 41,345 | 3 | |||||
Consumer |
| 7,843 |
| 1 |
| 8,280 | 1 | |||||
Consumer finance |
| 437,065 |
| 28 |
| 368,194 | 26 | |||||
Total loans |
| 1,520,351 |
| 100 | % |
| 1,410,060 | 100 | % | |||
Less allowance for loan losses |
| (40,519) |
|
| (40,157) | |||||||
Total loans, net | $ | 1,479,832 |
| $ | 1,369,903 | |||||||
| 1 | Includes the Corporation’s real estate construction lending and consumer real estate lot lending. |
| 2 | Includes the Corporation’s commercial real estate lending, land acquisition and development lending, builder line lending and commercial business lending (which includes loans originated under the PPP of $1.2 million and $17.8 million at June 30, 2022 and December 31, 2021, respectively). Other commercial, financial and agricultural loans were $736.8 million and $699.9 million at June 30, 2022 and December 31, 2021, respectively. |
The increase in total loans from December 31, 2021 to June 30, 2022 was due primarily to growth in automobile loans at the consumer finance segment and commercial real estate and real estate construction lending at the community banking segment, partially offset by repayment of PPP loans.
TABLE 18: Maturity/Repricing Schedule of Loans Held for Investment
June 30, 2022 |
| |||||||||||||||||||||
| Real Estate |
| Commercial, |
| ||||||||||||||||||
Residential | Real Estate | Financial | Equity | Consumer |
| |||||||||||||||||
(Dollars in thousands) | Mortgage | Construction | Agricultural | Lines | Consumer | Finance | Total |
| ||||||||||||||
Variable Rate: | ||||||||||||||||||||||
Within 1 year | $ | 879 | $ | 43,886 | $ | 197,304 | $ | 40,530 | $ | 48 | $ | — | $ | 282,647 | ||||||||
1 to 5 years |
| 2,052 | — | 60,202 | 1,171 |
| — |
| — | 63,425 | ||||||||||||
5 to 15 years | 69 | — | 26,200 | — | — | — | 26,269 | |||||||||||||||
After 15 years |
| — | — | — | — |
| — |
| — | — | ||||||||||||
Fixed Rate: | ||||||||||||||||||||||
Within 1 year | $ | 3,608 | $ | 18,404 | $ | 21,687 | $ | — | $ | 868 | $ | 6,047 | $ | 50,614 | ||||||||
1 to 5 years |
| 27,878 | 5,214 | 175,496 | — |
| 4,972 |
| 163,024 | 376,584 | ||||||||||||
5 to 15 years | 136,738 | 2,463 | 246,931 | — | 1,955 | 267,994 | 656,081 | |||||||||||||||
After 15 years |
| 54,303 | 294 | 10,120 | 14 |
| — |
| — | 64,731 | ||||||||||||
$ | 225,527 | $ | 70,261 | $ | 737,940 | $ | 41,715 | $ | 7,843 | $ | 437,065 | $ | 1,520,351 | |||||||||
Beginning in April 2020, the community banking segment originated loans under the PPP which are guaranteed by the SBA, and in some cases borrowers may be eligible to obtain forgiveness of the loans, in which case loans would be repaid by the SBA. Net PPP origination fees recognized in the second quarter and first six months of 2022 were $242,000 and $679,000, respectively, compared to $1.2 million and $2.1 million, respectively, in the same periods in 2021. As of June 30, 2022, all net PPP origination fees received by CF Bank have been recognized in income, totaling $6.3 million since the inception of the PPP. As repayment of PPP loans is guaranteed by the SBA, the community banking segment does not recognize a reserve for PPP loans in its allowance for loan losses. Table 19 presents the outstanding principal of loans originated under the PPP as of June 30, 2022 and December 31, 2021.
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TABLE 19: Paycheck Protection Program Loans
June 30, | December 31, | ||||||
(Dollars in thousands) |
| 2022 |
| 2021 |
| ||
Outstanding principal | $ | 1,187 | $ | 18,441 | |||
Unrecognized deferred fees, net |
| — |
| (679) | |||
$ | 1,187 | $ | 17,762 | ||||
Securities
The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At June 30, 2022 and December 31, 2021, all securities in the Corporation’s investment portfolio were classified as available for sale.
Table 20 sets forth the composition of the Corporation’s securities available for sale in dollar amounts at fair value and as a percentage of the Corporation’s total securities available for sale at the dates indicated.
TABLE 20: Securities Available for Sale
June 30, 2022 | December 31, 2021 |
| |||||||||
(Dollars in thousands) |
| Amount |
| Percent |
| Amount |
| Percent |
| ||
U.S. Treasury securities | $ | 57,130 | 11 | % | $ | — | — | % | |||
U.S. government agencies and corporations | 123,510 | 25 | 68,285 | 18 | |||||||
Mortgage-backed securities |
| 195,833 | 39 |
| 190,349 | 51 | |||||
Obligations of states and political subdivisions |
| 99,933 | 20 |
| 92,666 | 25 | |||||
Corporate and other debt securities |
| 25,578 | 5 |
| 21,773 | 6 | |||||
Total available for sale securities at fair value | $ | 501,984 | 100 | % | $ | 373,073 | 100 | % | |||
Securities available for sale increased by $128.9 million to $502.0 million at June 30, 2022, compared to $373.1 million at December 31, 2021, due primarily to purchases of U.S. Treasury, U.S. government agencies and corporations and mortgage-backed securities with short maturities, in order to utilize excess liquidity by investing in debt securities rather than holding lower-yielding cash reserves. Net unrealized losses in the market value of securities available for sale were $30.8 million at June 30, 2022 and net unrealized gains in the market value of securities available for sale were $553,000 at December 31, 2021. The decline in market value of securities available for sale during the first six months of 2022 was primarily a result of increases in market interest rates.
For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at June 30, 2022 and December 31, 2021, see Part I, Item 1, “Financial Statements” under the heading “Note 2: Securities” in this Quarterly Report on Form 10-Q.
Table 21 presents additional information pertaining to the composition of the securities portfolio at amortized cost, by the earlier of contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
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TABLE 21: Maturity of Securities
June 30, 2022 | ||||||
|
| Weighted |
| |||
Amortized | Average | |||||
(Dollars in thousands) | Cost | Yield 1 | ||||
U.S. Treasury securities: | ||||||
Maturing within 1 year | $ | 4,913 |
| 2.03 | % | |
Maturing after 1 year, but within 5 years |
| 53,225 |
| 2.08 | ||
Total U.S. Treasury securities |
| 58,138 |
| 2.08 | ||
U.S. government agencies and corporations: | ||||||
Maturing within 1 year | 46,791 |
| 1.70 | |||
Maturing after 1 year, but within 5 years |
| 65,842 |
| 2.21 | ||
Maturing after 5 years, but within 10 years |
| 17,929 |
| 1.42 | ||
Maturing after 10 years |
| 1,610 |
| 1.56 | ||
Total U.S. government agencies and corporations |
| 132,172 |
| 1.91 | ||
Mortgage-backed securities: | ||||||
Maturing within 1 year |
| 635 | 1.85 | |||
Maturing after 1 year, but within 5 years |
| 148,492 | 1.64 | |||
Maturing after 5 years, but within 10 years |
| 59,420 | 1.48 | |||
Maturing after 10 years |
| 2,025 | 3.22 | |||
Total mortgage-backed securities |
| 210,572 |
| 1.61 | ||
States and municipals:1 | ||||||
Maturing within 1 year |
| 19,768 | 3.41 | |||
Maturing after 1 year, but within 5 years |
| 51,327 | 2.35 | |||
Maturing after 5 years, but within 10 years |
| 29,936 | 2.08 | |||
Maturing after 10 years |
| 3,852 | 3.77 | |||
Total states and municipals |
| 104,883 |
| 2.52 | ||
Corporate and other debt securities: | ||||||
Maturing within 1 year |
| 3,711 |
| 2.72 | ||
Maturing after 1 year, but within 5 years |
| 21,310 |
| 3.45 | ||
Maturing after 5 years, but within 10 years |
| 2,000 |
| 4.03 | ||
Total corporate and other debt securities |
| 27,021 |
| 3.39 | ||
Total securities: | ||||||
Maturing within 1 year |
| 75,818 |
| 2.22 | ||
Maturing after 1 year, but within 5 years |
| 340,196 |
| 2.04 | ||
Maturing after 5 years, but within 10 years |
| 109,285 |
| 1.68 | ||
Maturing after 10 years |
| 7,487 |
| 3.15 | ||
Total securities | $ | 532,786 |
| 2.01 | ||
| 1. | Yields on tax-exempt securities have been computed on a taxable-equivalent basis using the federal corporate income tax rate of 21 percent. The weighted average yield is calculated based on the relative amortized costs of the securities. |
Deposits
The Corporation’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Corporation’s deposits are principally provided by individuals and businesses located within the communities served.
During the first six months of 2022, deposits increased $91.4 million to $2.01 billion at June 30, 2022, compared to $1.91 billion at December 31, 2021. Demand and savings deposits increased $136.7 million and time deposits decreased $45.3 million during the same period. This increase in demand and savings deposits was due in part to opening new deposit accounts and higher balances in existing deposit accounts.
The Corporation had $5,000 in brokered money market and time deposits outstanding at June 30, 2022 and December 31, 2021. The source of these brokered deposits is primarily uninvested cash balances held in third-party brokerage sweep
60
accounts. The Corporation uses brokered deposits as a means of diversifying liquidity sources, as opposed to a long-term deposit gathering strategy.
Borrowings
Borrowings increased to $92.5 million at June 30, 2022 from $90.5 million at December 31, 2021 due primarily to fluctuations in balances with commercial deposit customers with repurchase agreements.
Liquidity
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposit and the capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $428.0 million at June 30, 2022, compared to $454.6 million at December 31, 2021. The Corporation’s funding sources, including capacity, amount outstanding and amount available at June 30, 2022 are presented in Table 22.
TABLE 22: Funding Sources
June 30, 2022 |
| |||||||||
(Dollars in thousands) |
| Capacity |
| Outstanding |
| Available |
| |||
Unsecured federal funds agreements | $ | 95,000 | $ | — | $ | 95,000 | ||||
Repurchase lines of credit |
| 35,000 |
| — |
| 35,000 | ||||
Borrowings from FHLB |
| 218,288 |
| — |
| 218,288 | ||||
Borrowings from Federal Reserve Bank |
| 107,161 |
| — |
| 107,161 | ||||
Total | $ | 455,449 | $ | — | $ | 455,449 | ||||
We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the Federal Home Loan Bank of Atlanta (FHLB) above the current lendable collateral value. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on our liquidity levels, our capital position, conditions in the capital markets, our business operations and initiatives, and other factors, we may from time to time consider the issuance of debt, equity or other securities or other possible capital market transactions, the proceeds of which could provide additional liquidity for our operations.
As a result of the Corporation’s management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its operational requirements and contractual obligations.
61
Capital Resources
The disclosure below presents the Corporation’s and the Bank’s actual capital amounts and ratios under currently applicable regulatory capital standards. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Corporation is not subject to regulatory capital requirements. The table below reflects the Corporation’s consolidated capital as determined under regulations that apply to bank holding companies that are not small bank holding companies and minimum capital requirements that would apply to the Corporation if it were not a small bank holding company. Although the minimum regulatory capital requirements are not applicable to the Corporation, the Corporation calculates these ratios for its own planning and monitoring purposes.
TABLE 23: Regulatory Capital
June 30, 2022 | ||||||||||||||||
Minimum Capital | Well Capitalized | |||||||||||||||
Actual | Requirements | Requirements | ||||||||||||||
(Dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
The Corporation | ||||||||||||||||
Total risk-based capital ratio | $ | 267,911 | 15.5 | % | $ | 138,481 | 8.0 | % | $ | N/A | N/A | % | ||||
Tier 1 risk-based capital ratio | 222,040 | 12.8 | 103,861 | 6.0 | N/A | N/A | ||||||||||
Common Equity Tier 1 capital ratio | 197,040 | 11.4 | 77,896 | 4.5 | N/A | N/A | ||||||||||
Tier 1 leverage ratio | 222,040 | 9.5 | 93,915 | 4.0 | N/A | N/A | ||||||||||
The Bank | ||||||||||||||||
Total risk-based capital ratio | $ | 242,962 | 14.2 | % | $ | 137,045 | 8.0 | % | $ | 171,307 | 10.0 | % | ||||
Tier 1 risk-based capital ratio | 221,313 | 12.9 | 102,784 | 6.0 | 137,045 | 8.0 | ||||||||||
Common Equity Tier 1 capital ratio | 221,313 | 12.9 | 77,088 | 4.5 | 111,349 | 6.5 | ||||||||||
Tier 1 leverage ratio | 221,313 | 9.5 | 92,814 | 4.0 | 116,018 | 5.0 | ||||||||||
December 31, 2021 | ||||||||||||||||
Minimum Capital | Well Capitalized | |||||||||||||||
Actual | Requirements | Requirements | ||||||||||||||
(Dollars in thousands) | Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||||
The Corporation | ||||||||||||||||
Total risk-based capital ratio | $ | 257,779 | 15.8 | % | $ | 130,817 | 8.0 | % | $ | N/A | N/A | % | ||||
Tier 1 risk-based capital ratio | 213,095 | 13.0 | 98,113 | 6.0 | N/A | N/A | ||||||||||
Common Equity Tier 1 capital ratio | 188,095 | 11.5 | 73,585 | 4.5 | N/A | N/A | ||||||||||
Tier 1 leverage ratio | 213,095 | 9.7 | 88,121 | 4.0 | N/A | N/A | ||||||||||
The Bank | ||||||||||||||||
Total risk-based capital ratio | $ | 233,780 | 14.5 | % | $ | 128,701 | 8.0 | % | $ | 160,876 | 10.0 | % | ||||
Tier 1 risk-based capital ratio | 213,423 | 13.3 | 96,526 | 6.0 | 128,701 | 8.0 | ||||||||||
Common Equity Tier 1 capital ratio | 213,423 | 13.3 | 72,394 | 4.5 | 104,569 | 6.5 | ||||||||||
Tier 1 leverage ratio | 213,423 | 9.8 | 87,184 | 4.0 | 108,980 | 5.0 | ||||||||||
The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill and intangible assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for loan losses and $24.0 million of outstanding subordinated notes of the Corporation. The Total Capital ratio, Tier 1 Capital ratio and CET1 ratio are calculated as a percentage of risk-weighted assets. The Tier 1 Leverage ratio is calculated as a percentage of average tangible assets. In addition, the Corporation has made the one-time irrevocable election to
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continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in AOCI, including unrealized losses on securities available for sale, do not affect regulatory capital amounts shown in the table above for the Corporation or the Bank. For additional information about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note 17: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021.
The Basel III rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a common equity Tier I risk-based capital ratio of 7.0 percent, a Tier I risk-based capital ratio of 8.5 percent, and a total risk-based capital ratio of 10.5 percent. The Corporation and the Bank exceeded these ratios at June 30, 2022 and December 31, 2021.
The Corporation’s Board of Directors authorized a program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation’s common stock through November 30, 2022 (the 2021 Repurchase Program). The Corporation's capital resources may be affected by the 2021 Repurchase Program. Repurchases under the 2021 Repurchase Program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and shares repurchased will be returned to the status of authorized and unissued shares of common stock. The timing, number and purchase price of shares repurchased under the 2021 Repurchase Program will be determined by management in its discretion and will depend on a number of factors, including the market price of the shares, general market and economic conditions, applicable legal requirements and other conditions, and there is no assurance that the Corporation will purchase any shares under the 2021 Repurchase Program. The 2021 Repurchase Program is authorized through November 30, 2022, and, as of June 30, 2022, there was $8.3 million remaining available for repurchases of the Corporation’s common stock under the 2021 Repurchase Program.
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Corporation conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include return on tangible common equity (ROTCE), tangible book value per share, and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.
Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of balances of intangible assets, including goodwill, that vary significantly between institutions, and tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation’s performance to the most directly comparable GAAP financial measures is presented below.
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TABLE 24: Non-GAAP Table
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(Dollars in thousands, except for share and per share data) | 2022 | 2021 | 2022 | 2021 | |||||||||||
Reconciliation of Certain Non-GAAP Financial Measures |
| ||||||||||||||
Return on Average Tangible Common Equity | |||||||||||||||
Average total equity, as reported | $ | 196,540 | $ | 196,292 | $ | 202,614 | $ | 192,718 | |||||||
Average goodwill | (25,191) | (25,191) | (25,191) | (25,191) | |||||||||||
Average other intangible assets | (1,856) | (2,164) | (1,896) | (2,203) | |||||||||||
Average noncontrolling interest | (628) | (560) | (754) | (731) | |||||||||||
Average tangible common equity | $ | 168,865 | $ | 168,377 | $ | 174,773 | $ | 164,593 | |||||||
Net income | $ | 6,783 | $ | 8,090 | $ | 12,518 | $ | 15,255 | |||||||
Amortization of intangibles | 74 | 79 | 149 | 157 | |||||||||||
Net income attributable to noncontrolling interest | (41) | (82) | (147) | (186) | |||||||||||
Net income attributable to CF Financial Corporation | $ | 6,816 | $ | 8,087 | $ | 12,520 | $ | 15,226 | |||||||
Annualized return on average tangible common equity | 16.15 | % | 19.21 | % | 14.33 | % | 18.50 | % | |||||||
Fully Taxable Equivalent Net Interest Income1 | |||||||||||||||
Interest income on loans | $ | 21,923 | $ | 22,466 | $ | 42,407 | $ | 44,279 | |||||||
FTE adjustment | 43 | 25 | 69 | 45 | |||||||||||
FTE interest income on loans | $ | 21,966 | $ | 22,491 | $ | 42,476 | $ | 44,324 | |||||||
Interest income on securities | $ | 2,075 | $ | 1,352 | $ | 3,716 | $ | 2,569 | |||||||
FTE adjustment | 91 | 116 | 183 | 240 | |||||||||||
FTE interest income on securities | $ | 2,166 | $ | 1,468 | $ | 3,899 | $ | 2,809 | |||||||
Total interest income | $ | 24,392 | $ | 23,866 | $ | 46,623 | $ | 46,942 | |||||||
FTE adjustment | 134 | 141 | 252 | 285 | |||||||||||
FTE interest income | $ | 24,526 | $ | 24,007 | $ | 46,875 | $ | 47,227 | |||||||
Net interest income | $ | 22,631 | $ | 21,728 | $ | 43,107 | $ | 42,404 | |||||||
FTE adjustment | 134 | 141 | 252 | 285 | |||||||||||
FTE net interest income | $ | 22,765 | $ | 21,869 | $ | 43,359 | $ | 42,689 | |||||||
_____________________
| 1 | Assuming a tax rate of 21%. |
June 30, | December 31, | ||||||
2022 | 2021 | ||||||
Tangible Book Value Per Share | |||||||
Equity attributable to CF Financial Corporation | $ | 195,675 | $ | 210,318 | |||
Goodwill | (25,191) | (25,191) | |||||
Other intangible assets | (1,828) | (1,977) | |||||
Tangible equity attributable to CF Financial Corporation | $ | 168,656 | $ | 183,150 | |||
Shares outstanding | 3,524,385 | 3,545,554 | |||||
Book value per share | $ | 55.52 | $ | 59.32 | |||
Tangible book value per share | $ | 47.85 | $ | 51.66 | |||
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts, which may constitute “forward-looking statements” as defined by federal securities laws. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. These statements may include, but are not limited to statements regarding expected future operations and financial performance; future dividend payments; strategic business initiatives and the anticipated effects thereof on net interest income; future recognition of PPP origination fees; mortgage loan originations; technology initiatives; our diversified business strategy; asset quality, credit quality; adequacy of allowances for loan losses and the level of future charge-offs; capital levels; the effect of future market and industry trends; increases in interest rates and the effects of future interest rate levels and fluctuations; cybersecurity risks; and inflation. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Corporation, including, but not limited to, changes in:
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These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021 should be considered in evaluating the forward-looking statements contained herein.
Readers should not place undue reliance on any forward-looking statement. There can be no assurance that actual results will not differ materially from historical results or those expressed in or implied by such forward-looking statements, or that the beliefs, assumptions and expectations underlying such forward-looking statements will be proven to be accurate. Forward-looking statements are made as of the date of this report and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s primary component of market risk is interest rate volatility. A description of the Corporation’s interest rate risk and its asset/liability management process for monitoring and managing this risk can be found in Item 7 of Part II in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021. The Corporation recognizes that recent increases in interest rates and other changes have affected its sensitivity to interest rate risk as measured by the simulation analysis and economic value of equity analysis included in Item 7 of Part II in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021. The Corporation’s process for monitoring and managing this risk remains consistent with the description provided as of December 31, 2021, and the Corporation’s risk profile with respect to interest rates as of June 30, 2022 has not changed materially compared to December 31, 2021.
ITEM 4.CONTROLS AND PROCEDURES
The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2022 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.
There were no changes in the Corporation’s internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1A.RISK FACTORS
There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors authorized a program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation’s common stock through November 30, 2022 (the 2021 Repurchase Program). Repurchases under the 2021 Repurchase Program may be made through privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. There were 22,164 shares repurchased under the 2021 Repurchase Program during the second quarter of 2022. As of June 30, 2022, the Corporation has made aggregate common stock repurchases of 32,987 shares for an aggregate cost of $1.7 million under the 2021 Repurchase Program.
The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended June 30, 2022.
|
|
|
| Maximum Number |
| ||||||
(or Approximate |
| ||||||||||
Total Number of | Dollar Value) of |
| |||||||||
Shares Purchased as | Shares that May Yet |
| |||||||||
Part of Publicly | Be Purchased |
| |||||||||
Total Number of | Average Price Paid | Announced Plans or | Under the Plans or |
| |||||||
Shares Purchased1 | per Share | Programs | Programs |
| |||||||
April 1, 2022 - April 30, 2022 | 9,197 | $ | 51.04 | 9,128 | 8,984,877 | ||||||
May 1, 2022 - May 31, 2022 | 6,326 | $ | 51.26 | 6,326 | 8,660,609 | ||||||
June 1, 2022 - June 30, 2022 | 6,710 | $ | 48.79 | 6,710 | 8,333,202 | ||||||
Total |
| 22,233 | $ | 50.42 |
| 22,164 | |||||
| 1 | During the three months ended June 30, 2022, 69 shares were withheld upon the vesting of restricted shares granted to employees of the Corporation and its subsidiaries in order to satisfy tax withholding obligations. |
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ITEM 6.EXHIBITS
3.1 | |
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|
3.1.1 | |
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|
3.2 | |
10.1 | |
10.2 | |
10.3 | |
31.1 | |
|
|
31.2 | |
|
|
32 | |
|
|
101 | The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited) |
104 | The cover page from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included within Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CF FINANCIAL CORPORATION | ||||
(Registrant) | ||||
Date: | August 1, 2022 | By: | /s/ Thomas F. Cherry | |
Thomas F. Cherry | ||||
President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
Date: | August 1, 2022 | /s/ Jason E. Long | ||
Jason E. Long | ||||
Executive Vice President, Chief Financial Officer and Secretary | ||||
(Principal Financial and Accounting Officer) | ||||
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