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C&F Financial (CFFI) - 2022 Q2 - Quarterly Report
C&F Financial C&F Financial (US:CFFI)2022-07-31 16:00

Report Information Filing Details This report is C&F FINANCIAL CORPORATION's (CFFI) Form 10-Q for the quarter ended June 30, 2022, with 3,519,786 common shares outstanding as of July 28, 2022 - Filing type: Quarterly Report (Form 10-Q) for the period ended June 30, 20223 - Registrant: C&F FINANCIAL CORPORATION (CFFI)34 - Filing status: Accelerated filer, smaller reporting company5 - Shares outstanding: 3,519,786 common shares as of July 28, 20225 PART I - Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements of C&F Financial Corporation and its subsidiaries, including balance sheets, income statements, comprehensive income (loss) statements, equity statements, cash flow statements, and related notes Consolidated Balance Sheets (Unaudited) Total assets increased to $2.334 billion as of June 30, 2022, from $2.265 billion at December 31, 2021, driven by increases in available-for-sale securities and net loans, while total equity decreased due to accumulated other comprehensive loss Consolidated Balance Sheets (Unaudited) | Metric | June 30, 2022 (thousands of dollars) | December 31, 2021 (thousands of dollars) | | :--- | :-------------------- | :-------------------- | | Total Assets | $2,334,340 | $2,264,521 | | Total Liabilities | $2,138,057 | $2,053,497 | | Total Equity | $196,283 | $211,024 | - Key asset changes (June 30, 2022 vs. December 31, 2021): Available-for-sale securities increased from $373,073 thousand to $501,984 thousand; net loans increased from $1,369,903 thousand to $1,479,832 thousand; total cash and cash equivalents decreased from $267,745 thousand to $138,902 thousand9 - Key liability change (June 30, 2022 vs. December 31, 2021): Total deposits increased from $1,914,614 thousand to $2,006,017 thousand9 - Net accumulated other comprehensive loss: Significantly increased from $(2,087) thousand to $(25,525) thousand9 Consolidated Statements of Income (Unaudited) Net income attributable to C&F Financial Corporation decreased for both the three and six months ended June 30, 2022, primarily due to reduced noninterest income, especially from loan sales, despite an increase in net interest income for the six-month period Net Income Attributable to C&F Financial Corporation | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :------------------------------------ | :------------------ | :------------------ | :------------- | :------------- | | Net income attributable to C&F Financial Corporation (three months) | $6,742 | $8,008 | $(1,266) | -15.8% | | Net income attributable to C&F Financial Corporation (six months) | $12,371 | $15,069 | $(2,698) | -17.9% | | Net earnings per share - Basic and Diluted (three months) | $1.91 | $2.19 | $(0.28) | -12.8% | | Net earnings per share - Basic and Diluted (six months) | $3.49 | $4.11 | $(0.62) | -15.1% | Key Income Statement Metrics | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :------------------------------------ | :------------------ | :------------------ | :------------- | :------------- | | Total interest income (three months) | $24,392 | $23,866 | $526 | 2.2% | | Total interest income (six months) | $46,623 | $46,942 | $(319) | -0.7% | | Total noninterest income (three months) | $5,663 | $12,831 | $(7,168) | -55.9% | | Total noninterest income (six months) | $12,392 | $26,906 | $(14,514) | -53.9% | | Total noninterest expense (three months) | $19,099 | $24,633 | $(5,534) | -22.5% | | Total noninterest expense (six months) | $39,310 | $49,652 | $(10,342) | -20.8% | Consolidated Statements of Comprehensive Income (Loss) (Unaudited) The company reported significant comprehensive losses for the three and six months ended June 30, 2022, primarily due to other comprehensive losses (net of tax) related to available-for-sale securities, contrasting with comprehensive income in the prior year Comprehensive Income (Loss) Attributable to C&F Financial Corporation | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | Year-over-year change (thousands of dollars) | | :------------------------------------ | :------------------ | :------------------ | :------------- | | Comprehensive (loss) income attributable to C&F Financial Corporation (three months) | $(2,919) | $8,644 | $(11,563) | | Comprehensive (loss) income attributable to C&F Financial Corporation (six months) | $(11,067) | $14,100 | $(25,167) | Other Comprehensive (Loss) Income, Net of Tax (Available-for-Sale Securities) | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | | :------------------------------------ | :------------------ | :------------------ | | Other comprehensive (loss) income, net of tax (available-for-sale securities) (three months) | $(10,080) | $777 | | Other comprehensive (loss) income, net of tax (available-for-sale securities) (six months) | $(24,770) | $(1,596) | Consolidated Statements of Equity (Unaudited) Total equity decreased to $196.3 million as of June 30, 2022, from $211 million at December 31, 2021, primarily due to net accumulated other comprehensive loss related to available-for-sale securities, partially offset by net income and reduced by share repurchases Total Equity | Metric | June 30, 2022 (thousands of dollars) | December 31, 2021 (thousands of dollars) | | :--- | :-------------------- | :-------------------- | | Total Equity | $196,283 | $211,024 | - Net accumulated other comprehensive loss: Increased from $(2,087) thousand at December 31, 2021, to $(25,525) thousand at June 30, 202219 Common Stock Repurchases and Cash Dividends Declared | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | | :--- | :------------------ | :------------------ | | Common stock repurchases (for the six months ended June 30) | $(1,843) | $(4,765) | | Cash dividends declared (for the six months ended June 30) | $(2,831) | $(2,845) | Consolidated Statements of Cash Flows (Unaudited) Net cash provided by operating activities significantly decreased for the six months ended June 30, 2022, compared to the prior year, with a substantial increase in cash used in investing activities and an increase in cash provided by financing activities, resulting in a net decrease in cash and cash equivalents Consolidated Statements of Cash Flows (Unaudited) | Metric | 2022 (thousands of dollars) | 2021 (thousands of dollars) | | :------------------------------------ | :------------------ | :------------------ | | Net cash provided by operating activities (for the six months ended June 30) | $49,396 | $105,661 | | Net cash used in investing activities (for the six months ended June 30) | $(266,913) | $(97,489) | | Net cash provided by financing activities (for the six months ended June 30) | $88,674 | $74,624 | | Net (decrease) increase in cash and cash equivalents (for the six months ended June 30) | $(128,843) | $82,796 | Cash and Cash Equivalents at Period End | Metric | June 30, 2022 (thousands of dollars) | June 30, 2021 (thousands of dollars) | | :--- | :-------------------- | :-------------------- | | Cash and cash equivalents at end of period | $138,902 | $169,465 | Notes to Consolidated Interim Financial Statements (Unaudited) These notes detail significant accounting policies, financial instruments, loan portfolios, goodwill, intangible assets, equity, comprehensive income, earnings per share, employee benefit plans, fair value measurements, business segments, commitments, contingent liabilities, and derivative financial instruments, providing critical context and disaggregated data for the financial statements NOTE 1: Summary of Significant Accounting Policies This note outlines consolidation principles, nature of operations, basis of presentation, and reclassifications, detailing the company's structure, including its wholly-owned subsidiaries like C&F Bank, C&F Mortgage, C&F Finance, and C&F Wealth Management, and their respective business activities, also discussing recent significant accounting pronouncements, including ASC 326 (CECL) effective January 1, 2023, and its potential impact - Consolidation scope: Includes C&F Financial Corporation, Citizens and Farmers Bank, and their wholly-owned or controlled subsidiaries26 - Nature of operations: Bank holding company with primary subsidiary C&F Bank, which has subsidiaries including C&F Mortgage, C&F Finance, and C&F Wealth Management2728 - ASC 326 (CECL) adoption: Expected to be effective January 1, 2023, using the modified retrospective approach, anticipated to result in significant changes to financial statements, including reduced allowance for loan losses, total equity, and regulatory capital, and expanded disclosures3738 Stock-Based Compensation Expense (for the six months ended June 30) | Year | Amount (thousands of dollars) | Net of Tax (thousands of dollars) | | :--- | :------------------ | :------------------ | | 2022 | $1,010 | $719 | | 2021 | $820 | $592 | NOTE 2: Securities All debt securities are classified as available-for-sale, increasing to $502 million as of June 30, 2022, from $373.1 million at December 31, 2021, with this growth accompanied by a significant increase in total unrealized losses primarily due to rising market interest rates, and no other-than-temporary impairment was identified Total Available-for-Sale Securities (Fair Value) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $501,984 | | December 31, 2021 | $373,073 | Total Unrealized Gains/Losses on Securities | Date | Total Unrealized Gains (thousands of dollars) | Total Unrealized Losses (thousands of dollars) | | :--------------- | :-------------------- | :-------------------- | | June 30, 2022 | $202 | $(31,004) | | December 31, 2021 | $3,494 | $(2,941) | - Temporarily impaired securities (June 30, 2022): 495 debt securities with a total fair value of $450.02 million, primarily due to rising market interest rates, with no other-than-temporary impairment recognized49 - Pledged securities (June 30, 2022): Amortized cost of $229.2 million and fair value of $212.85 million47 NOTE 3: Loans Total loans, net of allowance for loan losses, increased to $1.48 billion as of June 30, 2022, from $1.37 billion at December 31, 2021, primarily in commercial, financial, and agricultural loans and consumer finance loans, with a significant improvement in nonperforming loan status Total Loans, Net | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $1,479,832 | | December 31, 2021 | $1,369,903 | - Key loan categories (June 30, 2022 vs. December 31, 2021): Commercial, financial, and agricultural loans increased from $717,730 thousand to $737,940 thousand; consumer finance loans increased from $368,194 thousand to $437,065 thousand53 Nonperforming Loan Balances | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $909 | | December 31, 2021 | $2,924 | - Troubled Debt Restructurings (TDRs) (June 30, 2022): $2.12 million63 - Impaired loans (June 30, 2022): $2.62 million in outstanding principal with related allowance of $138 thousand63 NOTE 4: Allowance for Loan Losses The Allowance for Loan Losses (ALL) slightly increased from $40.2 million at December 31, 2021, to $40.5 million at June 30, 2022, primarily due to a $202 thousand provision for loan losses and $160 thousand in net recoveries for the six months ended June 30, 2022, with ALL predominantly allocated to consumer finance and commercial, financial, and agricultural loans Allowance for Loan Losses (ALL) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $40,519 | | December 31, 2021 | $40,157 | Provision for Loan Losses (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $202 | | 2021 | $(320) | - Net recoveries (for the six months ended June 30, 2022): $160 thousand (recoveries of $2,609 thousand, charge-offs of $(2,449) thousand)66 - ALL allocation (June 30, 2022): Consumer finance $25,868 thousand (63.8%); commercial, financial, and agricultural $10,422 thousand (25.7%)68 - Loan credit quality (June 30, 2022): Pass $1,073,893 thousand; special mention $2,233 thousand; substandard $6,715 thousand; substandard nonaccrual $445 thousand70 NOTE 5: Goodwill and Other Intangible Assets Goodwill remained unchanged at $25.19 million as of June 30, 2022, while other intangible assets, primarily core deposit intangibles and customer relationships, slightly decreased due to amortization, with amortization expense totaling $149 thousand for the six months ended June 30, 2022 - Goodwill: $25,191 thousand at both June 30, 2022, and December 31, 2021, with no change74 Other Intangible Assets (Net) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $1,828 | | December 31, 2021 | $1,977 | Amortization Expense (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $149 | | 2021 | $157 | NOTE 6: Equity, Other Comprehensive Income (Loss) and Earnings Per Share This note details changes in equity, including the share repurchase program and accumulated other comprehensive loss, with total equity decreasing due to significant unrealized losses on available-for-sale securities, and earnings per share calculations also showing a decline for both the three and six months ended June 30, 2022 - Share repurchase program (2021): Authorized to repurchase up to $10 million of common stock by November 30, 2022; 22,164 shares repurchased for $1.12 million in Q2 2022, and 31,881 shares for $1.61 million in H1 202277 - Net accumulated other comprehensive loss (June 30, 2022): $(25,525) thousand, a significant increase from $(2,087) thousand at December 31, 2021, primarily due to unrealized losses on available-for-sale securities8082 Net Income Attributable to C&F Financial Corporation (for EPS Calculation) | Period | 2022 (thousands of dollars) | 2021 (thousands of dollars) | | :------------------------------------ | :------------------ | :------------------ | | For the three months ended June 30 | $6,742 | $8,008 | | For the six months ended June 30 | $12,371 | $15,069 | Weighted Average Common Shares Outstanding (Basic and Diluted) (for the six months ended June 30) | Year | Number of Shares | | :--- | :----- | | 2022 | 3,541,098 | | 2021 | 3,664,752 | NOTE 7: Employee Benefit Plans This note summarizes the components of net periodic benefit cost for the bank's noncontributory cash balance pension plan, showing a decrease in net periodic benefit cost for both the three and six months ended June 30, 2022, compared to the prior year Net Periodic Benefit Cost (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $320 | | 2021 | $434 | NOTE 8: Fair Value of Assets and Liabilities This note defines fair value and outlines the fair value hierarchy (Level 1, 2, 3), detailing valuation techniques for assets and liabilities measured at fair value on a recurring basis, such as available-for-sale securities (primarily Level 2), loans held for sale (Level 2), and derivatives (Level 2), also discussing nonrecurring fair value measurements for impaired loans and other real estate owned (OREO), noting no impaired loans or OREO were measured at fair value as of June 30, 2022 - Fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (quoted prices for similar instruments or observable inputs), Level 3 (unobservable assumptions)979899 - Assets measured at fair value on a recurring basis (June 30, 2022): Available-for-sale securities $501,984 thousand (all Level 2); loans held for sale $43,362 thousand (all Level 2); derivatives (IRLCs, interest rate swaps, cash flow hedges) $5,565 thousand (all Level 2)111 - No impaired loans or OREO were measured at fair value on a nonrecurring basis as of June 30, 2022119 NOTE 9: Business Segments The company operates through three decentralized business segments: Community Banking, Mortgage Banking, and Consumer Finance, with this note providing a breakdown of revenue, expenses, and net income for each segment, as well as intersegment transactions - Business segments: Community Banking, Mortgage Banking, Consumer Finance126 Net Income by Segment (for the six months ended June 30) | Segment | 2022 (thousands of dollars) | 2021 (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :----------------- | :------------------ | :------------------ | :------------- | :------------- | | Community Banking | $8,333 | $6,718 | $1,615 | 24.0% | | Mortgage Banking | $1,648 | $4,513 | $(2,865) | -63.5% | | Consumer Finance | $4,257 | $5,402 | $(1,145) | -21.2% | | Other | $(1,370) | $(1,309) | $(61) | 4.7% | | Consolidated Total | $12,518 | $15,255 | $(2,737) | -17.9% | Total Assets by Segment (June 30, 2022 vs. December 31, 2021) | Segment | June 30, 2022 (thousands of dollars) | December 31, 2021 (thousands of dollars) | Change (thousands of dollars) | Change (%) | | :----------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Community Banking | $2,201,240 | $2,131,391 | $69,849 | 3.3% | | Mortgage Banking | $67,894 | $105,547 | $(37,653) | -35.7% | | Consumer Finance | $440,297 | $372,292 | $68,005 | 18.3% | NOTE 10: Commitments and Contingent Liabilities The company has commitments to extend credit of $314.69 million and standby letters of credit of $14.53 million as of June 30, 2022, with the mortgage banking segment also having contingent liabilities related to representations and warranties on residential mortgage loans sold, for which an indemnification reserve of $2.38 million was held as of June 30, 2022, with a partial reversal in the first half of 2022 due to improved loan performance - Loan commitments: $314.69 million as of June 30, 2022 (vs. $305.37 million at December 31, 2021)138 - Standby letters of credit: $14.53 million as of June 30, 2022 (vs. $15.11 million at December 31, 2021)139 - Indemnification reserve: $2.38 million as of June 30, 2022 (vs. $3.25 million at December 31, 2021)140 - Indemnification reserve reversal (for the six months ended June 30, 2022): $869 thousand140 NOTE 11: Derivative Financial Instruments The company uses derivatives to manage interest rate risk, including cash flow hedges for floating-rate borrowings and interest rate swaps for commercial loan customers, with mortgage banking operations also involving derivatives like interest rate lock commitments (IRLCs) and forward sales contracts to mitigate interest rate risk, and all derivatives are reported at fair value, with cash flow hedges impacting other comprehensive income and other derivatives affecting noninterest income or gain on loan sales - Derivative uses: Managing interest rate risk (cash flow hedges, loan swaps) and mitigating interest rate risk in mortgage banking (IRLCs, forward sales)141143146147 - Cash flow hedges: Interest rate swaps designated to manage floating-rate borrowings, with fair value changes reported in other comprehensive income143 - Loan swaps: Back-to-back interest rate swaps with customers and counterparties, with fair value changes recorded in other noninterest income, resulting in a net zero impact146 - Mortgage banking derivatives: IRLCs and forward sales contracts reported at fair value, with changes recorded as gain on loan sales147 - IRLCs (June 30, 2022): $108.69 million148 - Cash collateral maintained with counterparties (December 31, 2021): $3.88 million151 NOTE 12: Other Noninterest Expenses This note provides a breakdown of significant components within "Other Noninterest Expenses," showing a decrease in data processing fees and mortgage banking loan processing expenses for the six months ended June 30, 2022, compared to the prior year, while professional fees remained stable Total Other Noninterest Expenses (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $12,487 | | 2021 | $13,775 | - Key expense changes (for the six months ended June 30, 2022 vs. 2021): Data processing fees decreased from $5,728 thousand to $5,246 thousand; mortgage banking loan processing expenses decreased from $1,761 thousand to $1,001 thousand; indemnification reserve had a reversal of $(869) thousand in 2022 compared to $32 thousand in 2021152 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, liquidity, and capital resources, offering a detailed analysis of key financial metrics and segment performance OVERVIEW The company aims to maximize earnings and shareholder value by tracking return on average assets (ROA), return on average equity (ROE), and earnings growth across its three business segments, with consolidated net income decreasing in Q2 and H1 2022 due to underperformance in mortgage banking and consumer finance, partially offset by growth in community banking Consolidated Net Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $12,518 | | 2021 | $15,255 | Annualized Return on Average Equity (ROE) (for the six months ended June 30) | Year | Ratio | | :--- | :------ | | 2022 | 12.36 % | | 2021 | 15.83 % | Annualized Return on Average Assets (ROA) (for the six months ended June 30) | Year | Ratio | | :--- | :------ | | 2022 | 1.09 % | | 2021 | 1.43 % | - Community Banking segment loans (June 30, 2022): Increased by $43.5 million (annualized 16.9%) from March 31, 2022, excluding PPP loans164 - Consumer Finance segment loans (June 30, 2022): Increased by $40.3 million (annualized 40.7%) from March 31, 2022164 - Mortgage Banking segment loan originations (for the six months ended June 30, 2022): Decreased by 50.1% compared to 2021164 Capital Management and Dividends Total equity decreased to $196.3 million as of June 30, 2022, from $211 million at December 31, 2021, primarily due to unrealized losses on available-for-sale securities, while regulatory capital ratios remained strong, and the company continued its share repurchase program and paid a $0.40 per share cash dividend Total Equity | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $196,300 | | December 31, 2021 | $211,000 | - Book value per share (June 30, 2022): $55.52166 - Tangible book value per share (June 30, 2022): $47.85166 - Unrealized losses on available-for-sale securities (H1 2022): $24.8 million (net of tax)167 - Cash dividend (Q2 2022): $0.40 per share, with a payout ratio of 20.9%168 - Share repurchase program (2021): 22,164 shares repurchased for $1.1 million in Q2 2022169 CRITICAL ACCOUNTING ESTIMATES This section highlights critical accounting estimates requiring significant management judgment, including the allowance for loan losses (ALL), loan impairment, accounting for acquired loans in business combinations (PCI and purchased performing loans), goodwill, and income taxes, all of which are susceptible to material changes based on different assumptions or conditions - Allowance for Loan Losses (ALL): Subjective estimate based on collectibility, delinquency and charge-off trends, changes in loan portfolio nature and volume, current economic conditions, and collateral values; estimated range between $37 million and $42 million as of June 30, 2022171 - Loan impairment: Loans are considered impaired when it is probable that all interest and principal payments will not be collected according to the loan agreement; impairment is measured based on the present value of expected future cash flows, the loan's observable market price, or the fair value of collateral172174 - Acquired loans in business combinations: Classified as purchased credit impaired (PCI) loans and purchased performing loans, recorded at fair value on the acquisition date; PCI loans involve complex cash flow estimations175176179 - Goodwill: Reviewed for impairment at least annually; no impairment identified in the Q4 2021 assessment180 - Income taxes: Determination of effective tax rate involves judgment regarding temporary differences and uncertain tax positions181182 RESULTS OF OPERATIONS This section provides a detailed analysis of the company's operating results, encompassing net interest income, noninterest income, noninterest expense, income taxes, and the performance of each business segment NET INTEREST INCOME Net interest income (on a fully tax-equivalent basis) increased for both the second quarter and six months ended June 30, 2022, compared to 2021, primarily due to an increase in the average balance of interest-earning assets, despite a decrease in net interest margin, with asset growth mainly from securities and consumer finance loans, and reduced PPP loan fee recognition Net Interest Income (Fully Tax-Equivalent, for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $43,359 | | 2021 | $42,689 | Annualized Net Interest Margin (for the six months ended June 30) | Year | Ratio | | :--- | :------ | | 2022 | 4.02 % | | 2021 | 4.35 % | - Average interest-earning assets (for the six months ended June 30): Increased by $210.1 million in 2022 compared to 2021194 - Average loans (for the six months ended June 30): Decreased by $19.7 million to $1.5 billion in 2022 compared to 2021, with Community Banking loans (excluding PPP) increasing by $76 million (7.9%), Consumer Finance loans increasing by $79.7 million (24.9%), and Mortgage Banking loans decreasing by $97.6 million (62.5%)197 PPP Loan Net Origination Fees Recognized (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $679 | | 2021 | $2,100 | PCI Loan Interest Income Recognized (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $1,000 | | 2021 | $1,500 | - Average available-for-sale securities (for the six months ended June 30): Increased by $124.1 million in 2022 compared to 2021199 - Average cost of interest-bearing deposits (for the six months ended June 30): Decreased by 16 basis points in 2022 compared to 2021203 Noninterest Income Total noninterest income significantly decreased for both the second quarter and six months ended June 30, 2022, compared to 2021, primarily attributed to reduced mortgage loan originations, lower loan sale margins, and unrealized losses on non-qualified deferred compensation plans, partially offset by increased service charges and bank card interchange income Total Noninterest Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $12,392 | $(14,514) | -53.9% | | 2021 | $26,906 | | | Gain on Loan Sales (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $4,893 | $(8,112) | -62.4% | | 2021 | $13,005 | | | Other (Loss) Income, Net (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | | :--- | :------------------ | :------------- | | 2022 | $(2,294) | $(4,635) | | 2021 | $2,341 | | - Unrealized losses on non-qualified deferred compensation plans (for the six months ended June 30, 2022): $3.4 million208 Noninterest Expense Total noninterest expense significantly decreased for both the second quarter and six months ended June 30, 2022, compared to 2021, primarily benefiting from reduced salaries and employee benefits (due to deferred compensation changes and lower mortgage originations), decreased mortgage banking loan processing expenses, and a reversal of indemnification reserves Total Noninterest Expense (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $39,310 | $(10,342) | -20.8% | | 2021 | $49,652 | | | Salaries and Employee Benefits (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $22,498 | $(8,829) | -28.2% | | 2021 | $31,327 | | | - Deferred compensation liability change (for the six months ended June 30): Salaries and employee benefits decreased by $3.4 million in 2022 (compared to an increase of $1.5 million in 2021)212 - Indemnification reserve (for the six months ended June 30): Reversal of $(869) thousand in 2022 (compared to $32 thousand in 2021)209 Income Taxes The company's consolidated effective income tax rate decreased to 21.7% for the six months ended June 30, 2022, from 23.6% in the prior year, primarily due to a reduced share of income from the mortgage banking segment, which is subject to state income taxes Consolidated Effective Income Tax Rate (for the six months ended June 30) | Year | Ratio | | :--- | :------ | | 2022 | 21.7 % | | 2021 | 23.6 % | Business Segments This section details the operating performance of the company's three business segments: Community Banking, Mortgage Banking, and Consumer Finance Community Banking The Community Banking segment achieved net income growth in both the second quarter and first half of 2022, driven by increased net interest income from growth in interest-earning assets (excluding PPP loans) and a reduction in the provision for loan losses, with noninterest income also rising due to increased service charges and bank card interchange income Net Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $8,333 | $1,615 | 24.0% | | 2021 | $6,718 | | | Net Interest Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $29,499 | $1,568 | 5.6% | | 2021 | $27,931 | | | - Provision for loan losses (for the six months ended June 30): Net reversal of $(700) thousand in 2022 (compared to $(200) thousand in 2021)217 PPP Loan Net Origination Fees Recognized (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $679 | | 2021 | $2,100 | PCI Loan Interest Income Recognized (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $1,000 | | 2021 | $1,500 | Mortgage Banking The Mortgage Banking segment experienced a significant decline in net income for both the second quarter and first half of 2022, primarily due to reduced mortgage loan originations, lower loan sale margins, and decreased net interest income from a smaller balance of loans held for sale, partially offset by a reversal of indemnification reserves Net Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $1,648 | $(2,865) | -63.5% | | 2021 | $4,513 | | | Mortgage Loan Originations (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $400,976 | $(402,835) | -50.1% | | 2021 | $803,811 | | | Gain on Loan Sales (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $5,347 | $(7,715) | -59.0% | | 2021 | $13,062 | | | - Indemnification reserve reversal (for the six months ended June 30, 2022): $869 thousand (compared to $32 thousand in 2021)232 Consumer Finance The Consumer Finance segment experienced a decrease in net income for both the second quarter and first half of 2022, primarily due to lower average yields on auto loans and an increased provision for loan losses, despite significant loan growth, as the segment continues to pursue higher quality, lower yielding loans Net Income (for the six months ended June 30) | Year | Amount (thousands of dollars) | Year-over-year change (thousands of dollars) | Year-over-year change (%) | | :--- | :------------------ | :------------- | :------------- | | 2022 | $4,257 | $(1,145) | -21.2% | | 2021 | $5,402 | | | - Average outstanding loans (for the six months ended June 30): Increased by $79.7 million (24.9%) in 2022 compared to 2021237 Provision for Loan Losses (for the six months ended June 30) | Year | Amount (thousands of dollars) | | :--- | :------------------ | | 2022 | $870 | | 2021 | $(180) | - Annualized net recovery rate as a percentage of average total loans (for the six months ended June 30): 0.10% in 2022 (compared to 0.07% in 2021)238 ASSET QUALITY This section details the company's asset quality, focusing on the allowance for loan losses (ALL), loan loss experience, credit quality indicators, nonperforming assets, and impaired loans, showing overall improved asset quality with reduced nonperforming loans and strong ALL coverage Allowance for Loan Losses (ALL) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $40,519 | | December 31, 2021 | $40,157 | Credit Ratios | Metric | June 30, 2022 | December 31, 2021 | | :--- | :------------ | :------------- | | ALL as a percentage of total loans | 2.67 % | 2.85 % | | Nonperforming loans as a percentage of total loans | 0.06 % | 0.21 % | | ALL as a percentage of nonperforming loans | 4,457.54 % | 1,373.36 % | - Community Banking segment nonperforming assets: Decreased to $548 thousand as of June 30, 2022 (vs. $3.2 million at December 31, 2021), primarily due to the resolution of impaired loans266 - Consumer Finance segment nonperforming loans: $464 thousand as of June 30, 2022 (vs. $380 thousand at December 31, 2021)268 Troubled Debt Restructurings (TDRs) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $2,118 | | December 31, 2021 | $2,690 | FINANCIAL CONDITION Total assets increased to $2.3 billion as of June 30, 2022, driven by growth in available-for-sale securities and loans held for investment, funded by deposit growth, with this section detailing the composition and changes in the loan portfolio, securities, deposits, borrowings, and liquidity position Loan Portfolio Total loans held for investment increased to $1.52 billion as of June 30, 2022, from $1.41 billion at December 31, 2021, with this growth primarily from consumer finance (auto loans) and community banking (commercial real estate and construction loans), partially offset by PPP loan repayments Total Loans Held for Investment (Net) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $1,479,832 | | December 31, 2021 | $1,369,903 | - Loan composition (June 30, 2022 vs. December 31, 2021): Consumer finance increased from $368,194 thousand to $437,065 thousand; commercial, financial, and agricultural increased from $717,730 thousand to $737,940 thousand285 PPP Loans Outstanding Principal | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $1,187 | | December 31, 2021 | $18,441 | Securities Available-for-sale securities increased by $128.9 million to $502 million as of June 30, 2022, primarily due to purchases of U.S. Treasury, government agency, and mortgage-backed securities to deploy excess liquidity; however, net unrealized losses significantly increased due to rising market interest rates Total Available-for-Sale Securities (Fair Value) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $501,984 | | December 31, 2021 | $373,073 | - Net unrealized losses (June 30, 2022): $30.8 million (compared to net unrealized gains of $553 thousand at December 31, 2021)298 - Composition (June 30, 2022): Mortgage-backed securities (39%), U.S. government agencies and corporations (25%), state and local government bonds (20%), U.S. Treasury securities (11%)296 Deposits Total deposits increased by $91.4 million to $2.01 billion as of June 30, 2022, driven by growth in demand and savings deposits, while time deposits decreased, and the company utilized brokered deposits for liquidity diversification Total Deposits | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $2,006,017 | | December 31, 2021 | $1,914,614 | - Demand and savings deposits: Increased by $136.7 million in H1 2022305 - Time deposits: Decreased by $45.3 million in H1 2022305 - Brokered deposits: $5 thousand outstanding as of June 30, 2022306 Borrowings Total borrowings slightly increased to $92.5 million as of June 30, 2022, from $90.5 million at December 31, 2021, primarily due to fluctuations in repurchase agreement balances with commercial deposit customers Total Borrowings | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $92,500 | | December 31, 2021 | $90,500 | Liquidity The company maintains ample liquidity through stable core deposits, strong capital, and diverse funding sources, with total liquid assets of $428 million as of June 30, 2022, and substantial borrowing capacity from federal funds lines, repurchase lines of credit, FHLB, and the Federal Reserve Bank Liquid Assets (Cash, Interest-Bearing Deposits, Unpledged AFS Securities) | Date | Amount (thousands of dollars) | | :--------------- | :------------------ | | June 30, 2022 | $428,000 | | December 31, 2021 | $454,600 | - Total available funding capacity (June 30, 2022): $455.449 million313 Capital Resources The company and its bank maintain capital ratios well above regulatory minimums, including capital buffers, with the company's total risk-weighted capital ratio at 15.5% as of June 30, 2022, and has elected to exclude AOCI from regulatory capital calculations, mitigating volatility from unrealized securities losses, while the share repurchase program remains ongoing with $8.3 million available for repurchase Company Regulatory Capital Ratios (June 30, 2022) | Ratio | Actual Ratio | Minimum Required Ratio | | :----------------------------- | :----------- | :----------- | | Total Risk-Weighted Capital Ratio | 15.5 % | 8.0 % | | Tier 1 Risk-Weighted Capital Ratio | 12.8 % | 6.0 % | | Common Equity Tier 1 Capital Ratio | 11.4 % | 4.5 % | | Tier 1 Leverage Ratio | 9.5 % | 4.0 % | Bank Regulatory Capital Ratios (June 30, 2022) | Ratio | Actual Ratio | Minimum Required Ratio | Capital Adequacy Ratio | | :----------------------------- | :----------- | :----------- | :----------- | | Total Risk-Weighted Capital Ratio | 14.2 % | 8.0 % | 10.0 % | | Tier 1 Risk-Weighted Capital Ratio | 12.9 % | 6.0 % | 8.0 % | | Common Equity Tier 1 Capital Ratio | 12.9 % | 4.5 % | 6.5 % | | Tier 1 Leverage Ratio | 9.5 % | 4.0 % | 5.0 % | - Capital buffer: Both the company and the bank exceed minimum requirements, including the 2.5% capital buffer325 - AOCI election: Irrevocably elected to exclude AOCI from regulatory capital to prevent volatility from unrealized securities losses324 - 2021 Repurchase Program: $8.3 million remained available for repurchase as of June 30, 2022326 USE OF CERTAIN NON-GAAP FINANCIAL MEASURES This section explains the use of non-GAAP financial measures, such as return on tangible common equity (ROTCE) and tangible book value per share, and fully tax-equivalent (FTE) metrics, which management uses to enhance comparability and provide meaningful insights into operating performance, while acknowledging they are not GAAP substitutes - Non-GAAP metrics used: Return on tangible common equity (ROTCE), tangible book value per share, and fully tax-equivalent (FTE) metrics for interest income and net interest income327 - Purpose: To provide meaningful information about operating performance, enhance comparability with peers and other institutions, and exclude the impact of intangible assets and tax benefits328 Annualized Return on Average Tangible Common Equity (for the six months ended June 30) | Year | Ratio | | :--- | :------ | | 2022 | 14.33 % | | 2021 | 18.50 % | Tangible Book Value Per Share | Date | Amount | | :--------------- | :------ | | June 30, 2022 | $47.85 | | December 31, 2021 | $51.66 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with its asset/liability management process for monitoring and managing this risk consistent with prior disclosures, and no material changes to the risk profile since December 31, 2021 - Primary market risk: Interest rate volatility337 - Risk management: Asset/liability management process for monitoring and managing interest rate risk remains consistent337 - Risk profile: No material changes to the interest rate risk profile as of June 30, 2022, compared to December 31, 2021337 Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting during the quarter - Disclosure controls and procedures: Effective as of June 30, 2022338 - Internal control over financial reporting: No material changes during the three months ended June 30, 2022339 PART II - Other Information Item 1A. Risk Factors The company's risk factors have not materially changed from those disclosed in the Form 10-K annual report for the fiscal year ended December 31, 2021 - No material changes: Risk factors are consistent with the Form 10-K annual report for fiscal year 2021341 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company continued its 2021 share repurchase program, repurchasing 22,164 shares for a total cost of $1.1 million during the second quarter of 2022, with a total of 32,987 shares repurchased under the program for $1.7 million as of June 30, 2022 - 2021 Repurchase Program: Authorized to repurchase up to $10 million of common stock by November 30, 2022343 - Shares repurchased (Q2 2022): 22,164 shares valued at $1.1 million343344 - Total shares repurchased (as of June 30, 2022, under 2021 program): 32,987 shares valued at $1.7 million343 - Remaining authorization: Approximately $8,333,202 as of June 30, 2022344 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, stock and incentive plans, CEO and CFO certifications, and financial statements in Inline XBRL format - Exhibits include: Amended and Restated Articles of Incorporation and Bylaws, 2022 Stock and Incentive Plan, Restricted Stock Agreement, CEO/CFO Certifications (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350), and Financial Statements in Inline XBRL format346 Signatures This report was formally signed on August 1, 2022, by Thomas F. Cherry, President and Chief Executive Officer, and Jason E. Long, Executive Vice President, Chief Financial Officer, and Secretary - Signatories: Thomas F. Cherry (President and Chief Executive Officer) and Jason E. Long (Executive Vice President, Chief Financial Officer, and Secretary)350 - Date: August 1, 2022350