C&F FINANCIAL CORPORATION 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 Regarding Forward-Looking Statements" prior to Part I, Item 1. "Business."
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) Year Ended December 31,
2022 2021 2020
Net Income (Loss):
Community Banking $ 24,374 $ 14,085 $ 6,147
Mortgage Banking 1,210 7,683 10,736
Consumer Finance 6,831 9,960 7,612
Other (3,046) (2,605) (2,071)
Consolidated net income $ 29,369 $ 29,123 $ 22,424
Adjusted net income1 $ 26,990 $ 30,011 $ 22,431 Earnings per share - basic and diluted$ 8.29 $ 7.95 $ 6.06 Adjusted earnings per share - basic and diluted1$ 7.61 $ 8.20
Return on average equity 14.84 % 14.77 % 12.54 % Adjusted return on average equity1 13.64 % 15.22 % 12.54 % Return on average assets 1.27 % 1.34 % 1.14 % Adjusted return on average assets1 1.16 % 1.38 % 1.14 % Return on average tangible common equity (ROTCE)1 17.31 % 17.15
% 14.91 % Adjusted ROTCE1 15.92 % 17.68 % 14.91 %
Refer to "Use of Certain Non-GAAP Financial Measures," below, for information
1 about these non-GAAP financial measures, including a reconciliation to the most
directly comparable financial measures calculated in accordance with
The Corporation uses adjusted net income, which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income for 2022, 2021 and 2020 excludes the effects of asset disposal activity related to branch consolidation, a change in accounting policy election related to
the
fair
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value of certain equity investments, charges related to pension settlement accounting, a gain upon sale of a pool of purchased credit impaired (PCI) loans, charges related to early repayment of borrowings, merger related expenses incurred in connection with the Corporation's acquisition ofPeoples Bankshares, Incorporated (Peoples), and changes in tax law. For further information regarding non-GAAP measures, including the impact of the above items on each year, refer to "Use of Certain Non-GAAP Financial Measures" and the accompanying disclosure below within this Item 7. Consolidated net income and earnings per share increased less than one percent and 4.3 percent, respectively, for 2022, compared to 2021. Adjusted net income and adjusted earnings per share decreased 10.1 percent and 7.2 percent, respectively, for 2022, compared to 2021. The increase in consolidated net income for 2022 compared to 2021 was due primarily to higher net income of the community banking segment, offset by lower net income at the mortgage banking segment and the consumer finance segment. The increase in earnings per share for 2022 compared to 2021 was due primarily to fewer shares outstanding, primarily as a result of share repurchases, and higher net income.
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 factors affecting comparisons of consolidated net income for the years endedDecember 31, 2022 and 2021 are as follows. Comparisons are to the prior year unless otherwise stated.
? Average community bank segment loans increased 9.9 percent, excluding the
effect of PPP loans;
? Average consumer finance segment loans increased 29.0 percent;
? Average deposits increased 8.4 percent;
? The community banking segment recorded net reversal of provision for loan
losses of
? The consumer finance segment recorded provision for loan losses of
in 2022, compared to
Consolidated net interest margin was 4.27 percent for 2022, compared to 4.26
? percent. Accretion of net PPP origination fees contributed approximately 3
basis points to net interest margin for 2022, compared to 20 basis points;
The community banking segment recognized net PPP origination fees of
? in 2022, compared to
The community banking segment recognized
2022 from net positive fair value adjustments of other investments, of which
?
election for certain equity investments, primarily consisting of equity
interests in an independent insurance agency and a full service title and
settlement agency;
The community banking segment recognized a
? charge in 2021 in connection with certain lump sum benefit payments during the
year that was not repeated during 2022;
The consumer finance segment experienced net charge-offs as a percentage of
? average total loans of 0.59 percent for 2022, compared to net recoveries of
0.14. Charge-offs and delinquencies remain lower than pre-pandemic levels;
The consumer finance segment's average loan yield declined as a result of
? pursuing growth in higher quality, lower yielding loans, partially offset by
rising interest rates; and
Mortgage banking segment loan originations decreased 52.2 percent for the year
? ended
mortgage industry volume.
Discussion of consolidated net income and earnings per share for the year endedDecember 31, 2020 has been omitted as such discussion was provided in Part II, Item 7. "Management's Discussion and Analysis," under the heading "Overview" in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 1, 2022 , and is incorporated
herein by reference.
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Capital Management and Dividends
Total equity was$196.2 million atDecember 31, 2022 , compared to$211.0 million atDecember 31, 2021 . Under regulatory capital standards, the Corporation's tier I capital and total capital ratios atDecember 31, 2022 were 12.8 percent and 15.4 percent, respectively, compared to 13.0 percent and 15.8 percent, respectively, atDecember 31, 2021 . Total consolidated equity decreased$14.8 million atDecember 31, 2022 compared toDecember 31, 2021 , due primarily to unrealized losses in the market value of securities available for sale of$35.6 million (net of tax), which are recognized as a component of other comprehensive income (loss), partially offset by net income. The Corporation's securities available for sale are fixed income debt securities, and their decline in market value during 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. The Corporation's Board of Directors continued its historical practice of paying dividends in 2022. For the year endedDecember 31, 2022 , the Corporation declared dividends of$1.64 per share. Annual dividends per share increased 3.8 percent over dividends of$1.58 per share declared in 2021. 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.
In
During the year endedDecember 31, 2022 , the Corporation repurchased$4.5 million of its common stock under the 2021 Repurchase Program. At the expiration of the 2021 Repurchase Program, the Corporation had made aggregate common stock repurchases of 89,373 shares for an aggregate cost of$4.6 million under that program. OnNovember 15, 2022 , the Board of Directors of the Corporation authorized a new program, effectiveDecember 1, 2022 , to repurchase up to$10.0 million of the Corporation's common stock throughDecember 31, 2023 (the 2022 Repurchase Program). Repurchases under the 2022 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. During the year endedDecember 31, 2022 , the Corporation repurchased 7,963 shares, or$454,000 , of its common stock under the 2022 Repurchase Program. AtDecember 31, 2022 , the book value per share of the Corporation's common stock was$56.27 , and tangible book value per share, a non-GAAP measure, was$48.54 , compared to$59.32 and$51.66 , respectively, atDecember 31, 2021 . Refer to "Use of Certain Non-GAAP Financial Measures," below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance withU.S. GAAP.
2023 Outlook
Management's overall outlook for 2023 is cautiously positive as a result of the continued successes of our diversified business strategy and initiatives underway at each of our business segments; however, we will continue to face numerous ongoing challenges in 2023, including rising interest rates, economic uncertainty and inflation, cybersecurity risks and increased competition in our markets. The following additional factors could influence our financial performance in 2023:
Community Banking: Growing our loan portfolio has been our primary strategic
goal over the past several years and will continue to be our primary focus at
? the Bank during 2023. We opened our newest
growing its customer base, as it offers banking, mortgage, and wealth
management services. We continue to see robust demand for
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commercial loans and credit quality has been very good over the past few years;
however, we are sensitive to overall economic conditions and will maintain a
careful watch over our loan portfolio in 2023. We expect to make new investments
in technology in 2023, which will support the continued modernization of our
products, services and operations, and may result in higher operating costs. We
will also continue to be competitive with the rates we offer on deposits, given
that competition for deposits is rapidly intensifying in the industry, which may
adversely affect our net interest margin. In 2023, we will also continue to
expand our digital services, pursue new wealth management advisors and strive to
improve our operational efficiency. Mortgage Banking:C&F Mortgage generates noninterest income from the
origination and sale of residential loan products into the secondary market.
Mortgage interest rates increased rapidly during 2022, and home values also
rose, causing decreased mortgage loan production across the industry. Loan
production and revenue in 2023 are highly uncertain and will depend on economic
conditions and market factors beyond our control, including changes in interest
rates, housing prices and inventory and loan demand. The immediate future will
remain difficult for us and the entire industry as the housing market continues
to adjust to developing economic conditions. However, we believe good
? opportunities are still available given our traditional focus on purchase
lending, as opposed to refinancing activity, and the investments we have made
in technology and marketing efforts. Our income from mortgage lender services
offered through
incremental income as it gained new institutional customers during 2022 and
anticipates adding more clients in 2023. During 2022, we significantly improved
our marketing platform at
business in the future and we also deployed a new point of sale system and
began to offer electronic closing to all borrowers to help improve efficiency
and the customer experience.
Consumer Finance: C&F Finance provides indirect financing for automobile,
marine and RVs. Our decision to purchase more higher credit quality contract
purchases over the past several years has helped to keep past due accounts and
charge-offs below pre-pandemic levels. Rising consumer debt and declining
wholesale prices in the used automobile market could lead to increasing
delinquencies and charge-offs in 2023. In the fourth quarter of 2022, we
? implemented a new loan servicing system and expect to continue to capitalize on
efficiencies of this new system including the ability to offer an enhanced
digital experience for our customers in the future. In 2023, C&F Finance plans
to continue to responsibly grow its loan portfolio and actively pursue new
dealership relationships in our current markets. We anticipate declining car
sales, increasing market competition and continuing pressure on loan growth and
margins, as cost of funds are expected to remain elevated throughout 2023.
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.
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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 collectability 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 atDecember 31, 2022 , our estimate of the allowance varied between$37 million and$42 million .
For further information concerning the Corporation's adoption of ASC 326,
effective
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 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 deterioration in the financial condition of the borrower. For more information see the section titled "Asset Quality" within this Item 7.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 2022, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.
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."
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 each of the years endedDecember 31, 2022 , 2021 and 2020. 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 37 Table of Contents
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 15 basis points and 10 basis points to the yields on community banking segment loans and total loans, respectively, and 7 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2022 , compared to approximately 26 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, and 13 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2021 , and approximately 34 basis points and 23 basis points to the yields on community banking segment loans and total loans, respectively, and 18 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2020 . 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 6 basis points and 4 basis points to the yields on community banking segment loans and total loans, respectively, and 3 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2022 , compared to approximately 39 basis points and 27 basis points to the yields on community banking segment loans and total loans, respectively, and 20 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2021 and approximately 16 basis points and 11 basis points to the yields on community banking segment loans and total loans, respectively, and 9 basis points to both the yield on interest earning assets and net interest margin for the year endedDecember 31, 2020 . 38 Table of Contents TABLE 2: Average Balances, Income and Expense, Yields and Rates 2022 2021 2020 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Securities: Taxable$ 415,669 $ 7,620 1.83 %$ 258,138 $ 3,678 1.42 %$ 160,974 $ 3,224 2.00 % Tax-exempt 77,052 2,054 2.67 80,518 2,123 2.64 81,154 2,511 3.09 Total securities 492,721 9,674 1.96 338,656 5,801 1.71 242,128 5,735 2.37 Loans: Community banking segment 1,076,948 46,510 4.32 1,037,285 46,567 4.49 995,726 47,251 4.75 Mortgage banking segment 46,185 2,036 4.41 133,453 3,845 2.88 171,017 4,954 2.90 Consumer finance segment 431,470 42,441 9.84 334,565 37,803 11.30 307,991 38,949 12.65 Total loans 1,554,603 90,987 5.85 1,505,303 88,215 5.86 1,474,734 91,154 6.18 Interest-bearing deposits in other banks 153,398 1,278 0.83 173,050 254 0.15 92,973 713 0.77 Total earning assets 2,200,722 101,939 4.63 2,017,009 94,270 4.67 1,809,835 97,602 5.39 Allowance for loan losses (40,878) (39,582) (35,983) Total non-earning assets 159,839 189,992 192,447 Total assets$ 2,319,683 $ 2,167,419 $ 1,966,299 Liabilities and Equity Interest-bearing deposits: Interest-bearing demand deposits$ 350,996 1,063 0.30$ 303,368 492 0.16$ 260,478 551 0.21 Money market deposit accounts 390,235 1,043 0.27 318,537 802 0.25 260,342 952 0.37 Savings accounts 231,317 122 0.05 208,506 115 0.06 163,763 111 0.07 Certificates of deposit 392,579 2,996 0.76 448,922 4,028 0.90 490,301 8,020 1.64 Total interest-bearing deposits 1,365,127 5,224 0.38 1,279,333 5,437 0.42 1,174,884 9,634 0.82 Borrowings: Repurchase agreements 35,544 180 0.51 27,359 128 0.47 19,469 115 0.59 Other borrowings 55,701 2,486 4.46 55,793 2,794 5.01 109,889 3,633 3.31 Total borrowings 91,245 2,666 2.92 83,152 2,922 3.51 129,358 3,748 2.90 Total interest-bearing liabilities 1,456,372 7,890 0.54 1,362,485 8,359 0.61 1,304,242 13,382 1.03 Noninterest-bearing demand deposits 624,581 556,801 431,789 Other liabilities 40,854 50,929 51,406 Total liabilities 2,121,807 1,970,215 1,787,437 Equity 197,876 197,204 178,862 Total liabilities and equity$ 2,319,683 $ 2,167,419 $ 1,966,299 Net interest income$ 94,049 $ 85,911 $ 84,220 Interest rate spread 4.09 % 4.06 % 4.36 % Interest expense to average earning assets 0.36 % 0.41 % 0.74 % Net interest margin 4.27 % 4.26 % 4.65 % 39 Table of Contents
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 year-to-year 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 theSEC . 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. TABLE 3: Rate-Volume Recap 2022 from 2021 2021 from 2020 Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase (Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease) Interest income: Loans: Community banking segment$ (1,800) $ 1,743 $ (57) $ (2,628) $ 1,944 $ (684) Mortgage banking segment 1,442 (3,251) (1,809) (34) (1,075) (1,109) Consumer finance segment (5,325) 9,963 4,638 (4,352) 3,206 (1,146) Securities: Taxable 1,266 2,676 3,942 (1,114) 1,568 454 Tax-exempt 24 (93) (69) (368) (20) (388) Interest-bearing deposits in other banks 1,056 (32) 1,024 (817) 358 (459) Total interest income (3,337) 11,006 7,669 (9,313) 5,981 (3,332) Interest expense: Interest-bearing deposits:
Interest-bearing demand deposits 484 87 571
(141) 82 (59)
Money market deposit accounts 63 178 241 (343) 193 (150)
Savings accounts (13) 20 7 (20) 24 4
Certificates of deposit (571) (461) (1,032) (3,363) (629) (3,992)Total interest-bearing deposits (37) (176) (213)
(3,867) (330) (4,197)
Borrowings:
Repurchase agreements 12 40 52 (27) 40 13
Other borrowings (303) (5) (308) 1,400 (2,239) (839)
Total interest expense (328) (141) (469) (2,494) (2,529) (5,023)Change in net interest income$ (3,009) $ 11,147 $ 8,138
Net interest income, on a taxable-equivalent basis, for 2022 increased to$94.0 million , compared to$85.9 million for 2021, due primarily to higher average balances of earning assets and the effects of rising interest rates during 2022 on asset yields, partially offset by lower interest income on PPP and PCI loans. Average earning assets grew$183.7 million , or 9.1 percent, in 2022 compared to 2021, and net interest margin increased 1 basis point to 4.27 percent in 2022, compared to 4.26 percent in 2021. The yield on interest-earning assets and cost of interest-bearing liabilities decreased by 4 basis points and 7 basis points, respectively, for 2022, compared to 2021. Average loans, which includes both loans held for investment and loans held for sale, increased$49.3 million to$1.6 billion for the year endedDecember 31, 2022 , compared to 2021. Average loans held for investment at the community banking segment, excluding PPP loans, increased$96.4 million , or 9.9 percent, for 2022, compared to 2021. The increase in average loans outstanding at the community banking segment for 2022 compared to 2021 was due primarily to growth in the commercial real estate and residential mortgage segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased$96.9 million , or 29.0 percent, for 2022, compared to 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$87.3 million , or 65.4 percent, for 2022, compared to 2021, due primarily to lower mortgage loan production volume in 2022, compared to 2021. The community banking segment average loan yield decreased 17 basis points to 4.32 percent for 2022, compared to 2021, due primarily to lower recognition of net origination fees on PPP loans and lower interest income on PCI loans, partially offset by the effects of rising interest rates during 2022. The average loan yield for the community banking segment 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 40
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of the loan. Net PPP origination fees recognized in 2022 were$679,000 , compared to$4.1 million in 2021. As ofDecember 31, 2022 , all net PPP origination fees received byC&F Bank had 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 years endedDecember 31, 2022 and 2021. Interest income recognized on PCI loans was$1.6 million for the year endedDecember 31, 2022 and$2.5 million for the year endedDecember 31, 2021 . The consumer finance segment average loan yield decreased 146 basis points to 9.84 percent for 2022, compared to 2021, due to the consumer finance segment continuing to pursue loan contracts of higher credit quality and lower average yields. This impact on consumer finance segment yields is slowing as the portfolio turns over and new loans are brought on at higher current interest rates. The mortgage banking segment average loan yield increased 153 basis points to 4.41 percent, as mortgage interest rates increased throughout 2022. Average securities available for sale increased$154.1 million for 2022, compared to 2021, due primarily to higher purchases of securities issued by theU.S. Treasury , government agencies and corporations and mortgage-backed securities. The average yield on the securities portfolio on a taxable-equivalent basis increased 25 basis points for 2022, compared to 2021, due primarily to rising interest rates during 2022, which allowed for purchases of securities at higher yields. Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at theFederal Reserve Bank , decreased$19.7 million during 2022, compared to 2021, due primarily to utilizing cash to fund growth in higher yielding loans and securities. The average yield on interest-bearing deposits in other banks increased 68 basis points for 2022, compared to 2021. TheFederal Reserve Bank increased the interest rate on excess cash reserve balances from 0.10 percent at the end of 2020 to 0.15 percent by the end of 2021 and to 4.40 percent by the end of 2022. Average money market, savings and interest-bearing demand deposits increased$142.1 million for 2022, compared to 2021, and average time deposits decreased$56.3 million for 2022, compared to 2021. Average noninterest-bearing demand deposits increased$67.8 million for 2022, compared to 2021. Higher average deposit balances are due primarily to growth in consumer and business checking and money market deposits and a shift to non-time deposits. The average cost of interest-bearing deposits decreased 4 basis points for 2022, compared to 2021, due primarily to lower rates on time deposits and a shift in composition toward non-time deposits, partially offset by higher rates on interest-bearing demand deposits. Offered rates on interest-bearing deposit accounts have increased in response to changes in market interest rates during the second half of 2022. While changes in rates take effect immediately for interest checking, money market and savings accounts, changes in the average cost of time deposits lag changes in pricing based on the repricing of time deposits at maturity. Average borrowings increased$8.1 million for 2022, compared to 2021, due primarily to increases in balances of repurchase agreements with commercial deposit customers. The average cost of borrowings decreased 59 basis points during 2022 compared to 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 higher 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. Although the Corporation expects the cost of deposits and borrowings to increase in connection with higher rates, the extent to which higher interest rates affect 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 because of 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, albeit at a slower rate than in recent periods, 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) the level of mortgage loan production and loans held for sale at the mortgage banking segment. The Corporation can give no assurance as to the timing or extent of further increases in market interest rates or the impact of rising interest rates or any other factor on the Corporation's net interest margin. Alternatively, if market interest rates begin to decline, the Corporation's net interest 41 Table of Contents
margin would be adversely affected as the Corporation generally expects its assets to reprice more quickly than its deposits and borrowings.
Discussion of net interest income for the year ended
Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 1, 2022 , and is incorporated herein by reference. NONINTEREST INCOME TABLE 4: Noninterest Income Year Ended December 31, (Dollars in thousands) 2022 2021 2020 Gains on sales of loans$ 7,498 $ 22,279 $ 29,224 Interchange income 6,030 5,740 4,768
Service charges on deposit accounts 4,306 3,718
3,357
Investment income in other equity interests 3,138 456
72
Mortgage banking fee income 2,931 6,482
7,713
Wealth management services income, net 2,442 2,761
2,618
Mortgage lender services income 1,667 2,492
2,176
Other service charges and fees 1,577 1,585
1,551
Net gains on sales, maturities and calls of available for sale securities - 42
38
Other income (loss), net (1,107) 3,608 3,090
Total noninterest income $ 28,482 $ 49,163 $ 54,607 Total noninterest income decreased$20.7 million , or 42.1 percent, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease in noninterest income was due primarily to (1) lower volume of mortgage loan production and mortgage lender services, which resulted in lower gains on sales of loans and mortgage banking fee income, (2) lower margins on sales of mortgage loans and (3) fluctuations in unrealized gains and losses related to the Corporation's nonqualified deferred compensation plan, included in other income (loss), net, partially offset by (1) an increase in investment income in other equity interests, (2) higher debit card interchange income and service charges on deposit accounts at the community banking segment and (3) an increase in gains on sale of former bank property and equipment of$584,000 , included in other income (loss), net. Investment income in other equity interests for the year endedDecember 31, 2022 includes$2.7 million of net positive fair value adjustments recognized upon a change in accounting policy election for certain equity investments, primarily consisting of equity interests in an independent insurance agency and a full service title and settlement agency, which is not expected to recur. For further information concerning the Corporation's change in accounting policy election, refer to Item 8. "Financial Statements and Supplementary Data" under the heading "Note 2: Adoption of New Accounting Standards." The Corporation recognized unrealized losses related to its nonqualified deferred compensation plan of$3.3 million for the year endedDecember 31, 2022 , respectively, compared to unrealized gains of$2.2 million for the year endedDecember 31, 2021 . Unrealized gains and losses in the Corporation's nonqualified deferred compensation plan are offset by changes in deferred compensation, recorded in salaries and employee benefits expense.
Discussion of noninterest income for the year ended
Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 1, 2022 , and is incorporated herein by reference. 42 Table of Contents NONINTEREST EXPENSE TABLE 5: Noninterest Expense Year Ended December 31, (Dollars in thousands) 2022 2021 2020
Salaries and employee benefits$ 47,867 $ 58,581
$ 57,668 Occupancy expense 8,564 8,859 8,639 Early debt repayment charges - - 2,197 Other expenses: Data processing 10,514 11,088 10,916 Professional fees 2,767 3,066 3,046
Mortgage banking loan processing expenses 1,682 3,128
3,235
Other real estate loss/(gain) and expense, net 2 (379)
213
Other components of net periodic pension cost (1,198) 161
(810)
Provision for indemnifications (858) (104)
881
Other expenses 12,470 11,475 11,854
Total other expenses 25,379 28,435 29,335
Total noninterest expense $ 81,810 $ 95,875 $ 97,839 Total noninterest expense decreased$14.1 million , or 14.7 percent, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease in noninterest expenses was due primarily to (1) lower expenses tied to mortgage loan production volume reported in salaries and employee benefits, mortgage banking loan processing expenses and data processing, (2) decreases in salaries and employee benefits related to deferred compensation, (3) a non-cash charge of$1.3 million recorded in 2021, that was not repeated in 2022, related to pension settlement accounting at the community banking segment, as a result of lump sum distributions under the normal terms ofC&F Bank's cash balance pension plan during the year that exceeded the threshold for settlement accounting and (4) a net reversal of provision for indemnifications of$858,000 during 2022 compared to a net reversal of provision for indemnifications of$104,000 in 2021, partially offset by net losses and expenses on other real estate owned (OREO) in 2022 compared to net gains on OREO sold during 2021 related primarily to the sale of one property. Changes in deferred compensation liabilities decreased salaries and employee benefits expense by$3.3 million for the year endedDecember 31, 2022 , and increased salaries and employee benefits expense by$2.2 million for the year endedDecember 31, 2021 , and were offset in both years by unrealized losses and gains, respectively, recorded in noninterest income.
Discussion of noninterest expense for the year ended
Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 1, 2022 , and is incorporated herein
by reference. INCOME TAXES
Income tax expense on 2022 earnings was
The Corporation's consolidated effective tax rate for the year endedDecember 31, 2022 was lower compared to the year endedDecember 31, 2021 due primarily to (1) lower state income taxes in 2022 as a greater share of income before taxes was earned atC&F Bank , which is not subject to state income tax but rather state franchise tax, which is included in noninterest expense, (2) tax benefits of tax-exempt interest income that was higher as a percentage of pre-tax income in 2022 compared to 2021 and (3) a decrease in nondeductible executive compensation due to incentive based compensation and the timing of deferred
compensation arrangements.
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Discussion of income taxes for the year ended December 31, 2020 has been omitted
as such discussion was provided in Part II, Item 7. "Management's Discussion and
Analysis," under the heading "Income Taxes" in the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2021 , which was filed with the SEC
on March 1, 2022 , and is incorporated herein by reference.
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
TABLE 6: Community Banking Segment Operating Results
Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Interest income $ 72,568 $ 62,402 $ 62,173
Interest expense 5,532 5,693 10,630
Net interest income 67,036 56,709 51,543
Provision for loan losses (600) (200) 4,600Net interest income after provision for loan losses 67,636 56,909
46,943
Noninterest income:
Gain on sales of loans - - 3,489
Interchange income 6,030 5,740 4,768Service charges on deposit accounts 4,366 3,740
3,357
Wealth management services income, net 2,442 2,761
2,618
Investment income in other equity interests 3,138 456
72
Other income, net 3,274 2,511 2,081
Total noninterest income 19,250 15,208 16,385
Noninterest expense:Salaries and employee benefits 33,771 32,156
32,337
Occupancy expense 6,634 6,705 6,386
Data processing 7,889 7,824 7,330Other real estate loss/(gain) and expense, net 2 (379)
213
Other expenses 8,422 8,675 10,504
Total noninterest expenses 56,718 54,981 56,770
Income before income taxes 30,168 17,136 6,558
Income tax expense 5,794 3,051 411
Net income $ 24,374 $ 14,085 $ 6,147 The increase in community banking segment net income for the year ended
higher interest income resulting from higher average balances of
? interest-earning assets, including loans and securities, and the effects of
rising interest rates on asset yields, including on variable rate loans to the
consumer finance segment;
the recognition of
? adjustments of other investments, of which
change in accounting policy election for certain equity investments,
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primarily consisting of equity interests in an independent insurance agency and
a full service title and settlement agency;
? higher revenue from overdraft fees, included in service charges on deposit
accounts, and debit card interchange fees;
gains on the sale of former bank premises and equipment of
? primarily from the sale of two properties formerly used as bank branches,
compared to losses of
a reversal of provision for loan losses of
? the resolution of certain impaired loans and continued strong credit quality of
the loan portfolio, compared to a reversal of provision for loan losses of
? a
lump sum benefit payments during the year that was not repeated during 2022;
partially offset by:
? lower recognition of net PPP origination fees and lower interest income on PCI
loans;
? higher salaries and employee benefits expense, including adding new talent to
the commercial lending team;
? the sale of an OREO property in 2021, which resulted in a gain of
higher marketing and travel expense as typical programs and community and
? educational events return to normalized levels after reduced activity due to
COVID-19 during 2021.
Adjusted net income for the community banking segment, which excludes the effects of real estate disposal activity related to branch consolidation, a change in accounting policy election and pension settlement charges, was$22.0 million for the year endedDecember 31, 2022 , compared to$15.0 million for the same period in 2021. Adjusted net income for the community banking segment increased$7.0 million for the year endedDecember 31, 2022 , compared to the same period in 2021 due primarily to the items discussed above. Net interest income for the community banking segment increased$10.3 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . This increase was due primarily to (1) the effects of rising interest rates during 2022 on asset yields, (2) higher average balances of interest earning assets, and (3) lower average costs of deposits, resulting from a shift in composition toward non-time deposits. Comparisons of interest income on loans were significantly impacted by recognition of net PPP origination fees and interest income on PCI loans, which were lower for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . In addition to the effects of these items, higher interest rates on variable rate loans to subsidiaries contributed to the increase in interest income on loans for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . Net PPP origination fees recognized in the year endedDecember 31, 2022 were$679,000 , compared to$4.1 million for the year endedDecember 31, 2021 and$1.6 million for the year endedDecember 31, 2020 . All net PPP origination fees received byC&F Bank had been recognized in income as ofDecember 31, 2022 , totaling$6.3 million since the inception of the PPP in the second quarter of 2020. Interest income recognized on PCI loans was$1.6 million for the year endedDecember 31, 2022 compared to$2.5 million for the year endedDecember 31, 2021 . The community banking segment recorded a net reversal of provision for loan losses of$600,000 for the year endedDecember 31, 2022 , compared to a net reversal of provision for loan losses of$200,000 for the year endedDecember 31, 2021 , due primarily to the resolution of certain impaired loans and continued strong credit quality of the loan portfolio, which were partially offset by provision related to growth in the loan portfolio. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. Discussion of the community banking segment for the year endedDecember 31, 2020 has been omitted as such discussion was provided in Part II, Item 7. "Management's Discussion and Analysis," under the heading "Principal Business Segments" in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was filed with theSEC onMarch 1, 2022 , and is incorporated herein by reference. 45
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Mortgage Banking: The following table presents the mortgage banking operating results for the periods indicated.
TABLE 7: Mortgage Banking Segment Operating Results
Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Interest income $ 2,036 $ 3,845 $ 4,954
Interest expense 662 1,157 1,579
Net interest income 1,374 2,688 3,375
Provision for loan losses 32 (45) 10Net interest income after provision for loan losses 1,342 2,733
3,365
Noninterest income:
Gains of sales of loans 7,963 22,370 25,792
Mortgage banking fee income 3,083 6,561 7,743Mortgage lender services fee income 1,667 2,492
2,176
Other income 106 139 66
Total noninterest income 12,819 31,562 35,777
Noninterest expense:Salaries and employee benefits 7,600 14,868
13,908
Occupancy expense 1,271 1,464 1,607
Data processing 1,137 1,915 1,828
Other expenses 2,572 5,081 6,671
Total noninterest expenses 12,580 23,328 24,014
Income before income taxes 1,581 10,967 15,128
Income tax expense 371 3,284 4,392
Net income $ 1,210 $ 7,683 $ 10,736 The decrease in mortgage banking segment net income of$6.5 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was due primarily to (1) lower volume of mortgage loan originations and mortgage lender services, which resulted in lower gains on sales of loans and mortgage banking fee income, (2) lower margins on sales of mortgage loans and (3) lower interest income due to lower average balances of loans held for sale, partially offset by lower expenses tied to mortgage loan origination volume such as salaries and employee benefits, loan processing and data processing and larger net reversal of provision for indemnification losses included in other expenses.
The following table presents mortgage loan originations and mortgage loans sold for the periods indicated.
TABLE 8: Mortgage Loan Originations
Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Mortgage loan originations:
Purchases $ 591,889 $ 936,909 $ 854,550
Refinancings 105,434 522,062 917,512
Total mortgage loan originations1 $ 697,323 $ 1,458,971 $ 1,772,062
Lock-adjusted originations2 $ 661,134 $ 1,357,573 1,880,794
1 Total mortgage loan originations does not include mortgage lender services.
Lock-adjusted originations includes an estimate of the effect of changes in the
2 volume of mortgage loan applications in process that have not closed, net of
volume not expected to close.
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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 rapid rise in mortgage interest rates
during 2022, combined with higher home prices, has led to a substantial decline
in mortgage loan originations. Mortgage loan originations for the mortgage
banking segment decreased 52.2 percent for the year ended December 31, 2022 ,
compared to the year ended December 31, 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 by 51.3 percent for the year ended
December 31, 2022 compared to the year ended December 31, 2021 . Locked loan
commitments decreased by $41.1 million in the year ended December 31, 2022 and
decreased by $115.2 million in the year ended December 31, 2021 . Locked loan
commitments were $42.3 million at December 31, 2022 , compared to $83.4 million
at December 31, 2021 and $198.6 million at December 31, 2020 .
The mortgage banking segment recorded a net reversal of provision for
indemnification losses of $858,000 for the year ended December 31, 2022 and a
net reversal of provision for indemnification losses of $104,000 for the year
ended December 31, 2021 . The release of indemnification reserves in 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.
Discussion of the mortgage banking segment for the year ended December 31, 2020
has been omitted as such discussion was provided in Part II, Item 7.
"Management's Discussion and Analysis," under the heading "Principal Business
Segments" in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2021 , which was filed with the SEC on March 1, 2022 , and is
incorporated herein by reference.
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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
Year Ended December 31,
(Dollars in thousands) 2022 2021 2020
Interest income $ 42,441 $ 37,803 $ 38,949
Interest expense 15,124 9,503 8,726
Net interest income 27,317 28,300 30,223
Provision for loan losses 3,740 820 6,470Net interest income after provision for loan losses 23,577 27,480
23,753
Noninterest income 320 378 492
Noninterest expense:Salaries and employee benefits 8,939 8,672
8,716
Occupancy expense 660 690 646
Data processing 1,458 1,326 1,220
Other expenses 3,497 3,525 3,246
Total noninterest expenses 14,554 14,213 13,828
Income before income taxes 9,343 13,645 10,417
Income tax expense 2,512 3,685 2,805
Net income $ 6,831 $ 9,960 $ 7,612
The decrease in consumer finance segment net income was due primarily to margin
compression resulting from lower average yields on automobile loans and
increased costs on variable rate borrowings from the community banking segment
and higher provision for loan losses, partially offset by loan growth. Average
yields on loans decreased as a result of the consumer finance segment's pursuing
growth in higher quality, lower yielding loans.
Provision for loan losses increased $2.9 million for the year ended December 31,
2022 , as compared to the same period of 2021, as a result of significant loan
growth in 2022, partially offset by lower required reserves resulting from
strong loan performance. The consumer finance segment experienced a higher
number of charge-offs during 2022, compared to 2021, as government stimulus
measures in response to the pandemic that benefitted borrowers had a decreased
effect in 2022, the wholesale value of used automobiles declined from a recent
peak during the COVID-19 pandemic, and challenges in repossessing automobiles
increased due to a decline in the number of repossession agencies. Although
charge-offs began to rise during 2022, charge-offs in both 2022 and 2021 were
lower than historical levels for the consumer finance segment, due to strong
loan performance and a strong market for used automobiles, which helped drive
higher sales prices on repossessed automobiles and mitigated losses on defaulted
auto loans. Despite some weakening during second half of 2022, the consumer
finance segment has experienced loan performance since 2020 that has been
consistently stronger than periods prior to the onset of the COVID-19 pandemic,
resulting in part from the consumer finance segment's strategic decision to
purchase higher quality loans, and in part from the impacts of government
stimulus measures. Management believes that the level of the allowance for loan
losses is sufficient to absorb losses inherent in the portfolio. If loan
performance deteriorates resulting in elevated delinquencies or net charge-offs,
provision for loan losses may increase in future periods.
Discussion of the consumer finance segment for the year ended December 31, 2020
has been omitted as such discussion was provided in Part II, Item 7.
"Management's Discussion and Analysis," under the heading "Principal Business
Segments" in the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2021 , which was filed with the SEC on March 1, 2022 , and is
incorporated herein by reference.
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ASSET QUALITY
Allowance and Provision for Loan Losses
Allowance for Loan Losses Methodology - Community Banking and Mortgage Banking. We conduct an analysis of the collectability of the loan portfolio on a regular basis. This analysis does not apply to PCI loans, loans carried at fair value, loans held for sale or off-balance sheet credit exposure (e.g., unfunded loan commitments and standby letters of credit). We use this analysis to assess the sufficiency of the allowance for loan losses and to determine the necessary provision for loan losses.
The analysis, at a minimum, considers the following factors:
? Changes in lending policies and procedures, including underwriting, collection,
charge-off and recovery;
Changes in international, national, regional and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? Changes in the nature and volume of the portfolio and in the terms of loans;
? Changes in the experience, ability and depth of lending management and other
relevant staff;
? Changes in the volume and severity of past due loans, the volume of nonaccrual
loans and the volume and severity of adversely classified or graded loans;
? Changes in the quality of our loan review system;
? Changes in the value of the underlying collateral for collateral-dependent
loans;
? The existence and effect of any concentrations of credit and changes in the
level of such concentrations;
? The effect of other external factors, such as competition;
? Historical trends of actual loan losses based on volume and types of loans; and
? Significant one-time transactions affecting the allowance for loan losses.
In conjunction with the factors described above, we consider the following risk elements that are inherent in the loan portfolio as part of the analysis:
Real estate residential mortgage loans carry risks associated with the
? continued credit-worthiness of the borrower and changes in the value of the
collateral. Real estate construction loans carry risks that the project will not be
finished according to schedule, the project will not be finished according to
budget and the value of the collateral may, at any point in time, be less than
? the principal amount of the loan. Construction loans also bear the risk that
the general contractor, who may or may not be a loan customer, may be unable to
finish the construction project as planned because of financial pressure unrelated to the project.
Commercial, financial and agricultural loans carry risks associated with the
continued successful operation of a business or a real estate project, in
addition to other risks associated with the ownership of real estate, because
? the repayment of these loans may be dependent upon the profitability and cash
flows of the business or project. In addition, there is risk associated with
the value of collateral other than real estate which may depreciate over time
and cannot be appraised with as much precision.
? Equity lines of credit carry risks associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.
Consumer loans carry risks associated with the continued credit-worthiness of
the borrower and the value of the collateral (e.g., rapidly-depreciating assets
? such as automobiles), or lack thereof. Consumer loans are more likely than real
estate loans to be immediately adversely affected by job loss, divorce, illness
or personal bankruptcy.
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The review process generally begins with loan officers or management identifying
problem loans to be reviewed on an individual basis for impairment. This review
of individual loans is limited to those loans that have indications of probable
loss or that may result in significant losses to the Corporation, while all
other loans, which may include delinquent loans and loans classified as special
mention or substandard, are evaluated as a group, as discussed below. In
addition, all TDRs are considered impaired loans and are individually
evaluated. We consider a loan impaired when it is probable that we will be
unable to collect all interest and principal payments as scheduled in the loan
agreement. A loan is not considered impaired during a period of delay in payment
if the ultimate collectability of all amounts due is expected. If a loan is
considered impaired, impairment is measured by either the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. A valuation allowance is established for an impaired
loan to the extent that this measure of the impaired loan is less than the
recorded investment in the loan. When a loan is determined to be impaired, we
follow a consistent process to measure that impairment in our loan portfolio.
For collateral dependent loans we obtain an updated appraisal if we do not have
a current one on file. Appraisals are performed by independent third party
appraisers with relevant industry experience. We may make adjustments to the
appraised value based on recent sales of similar properties or general market
conditions when appropriate. We also estimate costs to sell collateral in the
measurement of impairment if those costs are expected to reduce the cash flows
available to repay or otherwise satisfy the loan.
The remaining non-impaired loans are grouped by loan type (e.g., commercial real
estate, commercial, residential mortgage, consumer). We assign each loan type an
allowance factor based on the historical loss rate for that type of loan and an
evaluation of the qualitative factors mentioned above to determine a general
allowance. We assign classified loans (i.e., special mention, substandard,
doubtful, loss) a higher allowance factor than non-classified loans within a
particular loan type based on our concerns regarding collectability. Our
allowance factors increase with the severity of classification. Allowance
factors used for unclassified loans are based on our analysis of charge-off
history for relevant periods of time which can vary depending on economic
conditions, and our judgment based on the overall analysis of the lending
environment including the general economic conditions. Our analysis of
charge-off history also considers economic cycles and the trends during those
cycles. We may occasionally determine that certain groups of loans require no
allowance for losses based on characteristics of those loans as a group, such as
purchased loans that are initially recorded at fair value or loans that are
guaranteed by U.S. government agencies. Purchased loans other than PCI loans
are evaluated in the manner described above, and an allowance is recorded to the
extent that the recorded investment in such loans exceeds their outstanding
principal net of the required allowance for loan losses. PPP loans require no
allowance based on the explicit guarantee of the SBA. The allowance for loan
losses is the aggregate of specific allowances and the general allowance for
each portfolio type.
As discussed above we segregate loans meeting the criteria for special mention,
substandard, doubtful and loss from non-classified, or pass rated, loans. We
review the characteristics of each rating at least annually, generally during
the first quarter. 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
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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.
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.
Allowance for Loan Losses Methodology - PCI Loans - As previously described, on a quarterly basis we evaluate our estimate of cash flows expected to be collected on PCI loans. These evaluations require the continued assessment of key assumptions and estimates similar to the initial estimate of fair value, such as the effect of collateral value changes, changing loss severities, estimated and experienced prepayment speeds and other relevant factors. Subsequent decreases to the expected cash flows to be collected on a PCI loan will generally result in a provision for loan losses resulting in an increase to the allowance for loan losses. For a more detailed description, see "Critical Accounting Estimates" in this Item 7. Allowance for Loan Losses Methodology - Consumer Finance. The consumer finance segment's loans consist of automobile loans and marine and RV loans. These loans carry risks associated with (1) the continued credit-worthiness of borrowers and (2) the value of rapidly-depreciating collateral. These loans do not lend themselves to a classification process because of the short duration of time between default, repossession and charge-off. Therefore, the loan loss allowance review process generally focuses on an analysis of charge-off history for relevant periods of time, which can vary depending on economic conditions.
Further consideration is given to the following factors:
? Changes in lending policies and procedures, including underwriting, collection,
charge-off and recovery;
Changes in international, national, regional and local economic and business
? conditions and developments that affect the collectability of the portfolio,
including the condition of various market segments;
? Changes in the volume and severity of past due loans;
? Changes in the value of the underlying collateral;
? The existence and effect of any concentrations of credit and changes in the
level of such concentrations;
? The effect of other external factors, such as competition;
? An overall analysis of the lending environment;
? Historical trends of actual loan losses based on volume and types of loans; and
? Significant one-time transactions affecting the allowance for loan losses.
Loans are grouped by loan type (e.g., automobile loans and marine and RV loans).
We assign each loan type an allowance factor based on the historical loss rate
for that type of loan and an evaluation of the qualitative factors mentioned
above to determine a general allowance. Loans are further segregated between
performing and nonperforming loans. Performing loans are those that have made
timely payments in accordance with the terms of the loan agreement and that are
not past due 90 days or more. Nonperforming loans are those that do not accrue
interest and are greater than 90 days past due.
In accordance with its policies and guidelines and consistent with industry
practices, C&F Finance, at times, offers payment deferrals, whereby the borrower
is allowed to move up to two payments within a twelve-month rolling period to
the end of the loan. A fee will be collected for extensions only in states that
permit it. An account for which all delinquent payments are deferred is
classified as current at the time the deferment is granted and therefore is not
included as a delinquent account. Thereafter, such an account is aged based on
the timely payment of future installments in the same
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manner as any other account. We evaluate the results of this deferment strategy
based upon the amount of cash installments that are collected on accounts after
they have been deferred versus the extent to which the collateral underlying the
deferred accounts has depreciated over the same period of time. Based on this
evaluation, we believe that payment deferrals granted according to our policies
and guidelines are an effective portfolio management technique and result in
higher ultimate cash collections. Payment deferrals may affect the ultimate
timing of when an account is charged off. Increased use of deferrals may result
in a lengthening of the loss confirmation period, which would increase
expectations of credit losses inherent in the portfolio and therefore increase
the allowance for loan losses and related provision for loan losses.
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:
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 year ended December
31, 2020:
Balance at beginning of year $ 2,080 $ 681 $ 7,121 $ 733 $ 465 $ 21,793 $ 32,873
Provision charged to
operations 808 294 3,589 (47) (34) 6,470 11,080
Loans charged off (62) - (18) - (231) (9,331) (9,642)
Recoveries of loans
previously charged off 88 - 4 1 171 4,581 4,845
Balance at end of year $ 2,914 $ 975 $ 10,696 $ 687 $ 371 $ 23,513 $ 39,156
Average loans $ 211,179 $ 62,572 $
658,768
- % 0.01 % (0.01) % 0.39 % 1.54 % 0.37 %
For the year endedDecember 31, 2021 : Balance at beginning of year$ 2,914 $ 975 $ 10,696 $ 687 $ 371 $ 23,513 $ 39,156 Provision charged to operations (279) (119) 385 (95) (137) 820 575 Loans charged off - - - - (184) (4,381) (4,565) Recoveries of loans previously charged off 25 - 4 1 122 4,839 4,991 Balance at end of year$ 2,660 $ 856 $ 11,085 $ 593 $ 172 $ 24,791 $ 40,157 Average loans$ 215,745 $ 60,951 $
717,717
- % (0.01) % (0.01) % 0.70 % (0.14) % (0.03) %
For the year endedDecember 31, 2022 : Balance at beginning of year$ 2,660 $ 856 $ 11,085 $ 593 $ 172 $ 24,791 $ 40,157 Provision charged to operations (54) (68) (534) (98) 186 3,740 3,172 Loans charged off (2) -
(140) - (260) (7,016) (7,418) Recoveries of loans previously charged off
18 - 20 2 113 4,454 4,607
Balance at end of year $ 2,622 $ 788 $ 10,431 $ 497 $ 211 $ 25,969 $ 40,518
Average loans $ 230,895 $ 75,605 $
730,291
- % 0.02 % - % 1.79 % 0.59 % 0.19 %
1 Consumer loans includes provision, charge-offs and recoveries related to demand
deposit overdrafts.
For further information regarding the adequacy of our allowance for loan losses,
refer to "Nonperforming Assets" and the accompanying disclosure below within
this Item 7.
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The allocation of the allowance for loan losses at
TABLE 11: Allocation of Allowance for Loan Losses
December 31, December 31,
(Dollars in thousands) 2022 2021
Allocation of allowance for loan losses:
Real estate-residential mortgage $ 2,622 $ 2,660
Real estate-construction 1 788
856
Commercial, financial and agricultural 2 10,431
11,085 Equity lines 497 593 Consumer 211 172 Consumer finance3 25,969 24,791
Total allowance for loan losses$ 40,518 $
40,157
Ratio of loans to total period-end loans: Real estate-residential mortgage 16 % 15 % Real estate-construction 1 4
4
Commercial, financial and agricultural 2 48
51
Equity lines 2 3
Consumer 1 1
Consumer finance3 29 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.
3 Includes the Corporation's automobile lending and marine and recreational
vehicle lending.
Loans by credit quality indicators as of
TABLE 12: Credit Quality Indicators
Special Substandard
(Dollars in thousands) Pass Mention Substandard Nonaccrual Total1Real estate - residential mortgage$ 264,891 $ 518 $ 702 $ 156$ 266,267 Real estate - construction 2 59,675 - - - 59,675 Commercial, financial and agricultural 3 776,387 738
5,856 - 782,981
Equity lines 43,147 40 5 108 43,300
Consumer 8,747 191 - - 8,938
$ 1,152,847 $ 1,487 $ 6,563 $ 264 $ 1,161,161
Non-
(Dollars in thousands) Performing Performing Total
Consumer finance4 $ 473,632 $ 925 $ 474,557 1 At
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.
4 Includes the Corporation's automobile lending and marine and recreational
vehicle lending.
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Loans by credit quality indicators as of
Special Substandard
(Dollars in thousands) Pass Mention Substandard Nonaccrual Total1Real 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 finance4
1 At
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.
4 Includes the Corporation's automobile lending and marine and recreational
vehicle lending.
The decrease in non-pass rated loans at
Nonperforming Assets
A loan's past due status is based on the contractual due date of the most
delinquent payment due. Loans are generally placed on nonaccrual status when the
collection of principal or interest is 90 days or more past due, or earlier, if
collection is uncertain based on an evaluation of the net realizable value of
the collateral and the financial strength of the borrower. Loans greater than 90
days past due may remain on accrual status if management determines it has
adequate collateral to cover the principal and interest. For those loans that
are carried on nonaccrual status, payments are first applied to principal
outstanding. A loan may be returned to accrual status if the borrower has
demonstrated a sustained period of repayment performance in accordance with the
contractual terms of the loan and there is reasonable assurance the borrower
will continue to make payments as agreed. These policies are applied
consistently across our loan portfolio.
Assets acquired through, or in lieu of, foreclosure are held for sale and are
initially recorded at fair value less estimated costs to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations of the foreclosed assets based on
updated appraisals, general market conditions, recent sales of like properties,
length of time the properties have been held, and our ability and intention with
regard to continued ownership of the properties. We may incur additional
write-downs of foreclosed assets to fair value less estimated costs to sell if
valuations indicate a further deterioration in market conditions. Revenue and
expenses from operations and changes in the property valuations are included in
net expenses from foreclosed assets and improvements are capitalized.
At the consumer finance segment, the repossession process is generally initiated
after a loan becomes more than 60 days delinquent. Borrowers have an opportunity
to redeem their repossessed vehicles by paying all outstanding balances,
including finance charges and fees. Vehicles that are not redeemed within the
prescribed waiting period before C&F Finance has the legal right to sell the
repossessed vehicle then become available-for-sale at the end of that period and
are reclassified from loans to other assets and are recorded initially at fair
value less estimated costs to sell. The difference between the carrying amount
of each loan and the fair value of the vehicle (i.e. the deficiency) is charged
against the allowance for loan losses. Accounts still in process of collection
or for which the Corporation does not have the legal right to sell continue to
be classified as loans until such legal authority is obtained. After the
vehicles have been sold in third-party auctions, we credit the proceeds from the
sale of the vehicles, and any other recoveries, to the carrying value of the
repossessed vehicles. C&F Finance pursues collection of deficiencies, as allowed
by state law, when it deems such action to be appropriate.
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Table 13 summarizes the Corporation's credit ratios on a consolidated basis as
of
TABLE 13: Consolidated Credit Ratios
December 31,
(Dollars in thousands) 2022 2021
Total loans1 $ 1,635,718 $ 1,410,060
Nonaccrual loans $ 1,189 $ 2,924 Allowance for loan losses (ALL)
0.07 % 0.21 %
ALL to total loans 2.48 % 2.85 %
ALL to nonaccrual loans 3,407.74 % 1,373.36 %
1 Total loans does not include loans held for sale at the mortgage banking
segment.
Table 14 summarizes nonperforming assets by principal business segment as of the dates indicated.
TABLE 14: Nonperforming Assets
Community Banking Segment
December 31,
(Dollars in thousands) 2022 2021
Loans, excluding purchased loans and PPP loans
37,412 56,798
Purchased credit impaired loans1 1,455
3,655 PPP loans2 463 17,762 Total loans$ 1,160,454 $ 1,032,477 Nonaccrual loans$ 115 $ 2,359 OREO $ -$ 835 Impaired loans3$ 823 $ 5,058 ALL$ 14,513 $ 14,803
Nonaccrual loans to total loans 0.01 %
0.23 % ALL to total loans 1.25 % 1.43 % ALL to nonaccrual loans 12,620.00 % 627.51 % ALL to total loans, excluding purchased credit impaired loans4 1.25 % 1.44 % ALL to total loans, excluding purchased loans and PPP loans 1.29 % 1.55 % Net charge-offs to average total loans 0.02 %
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
31, 2021. The remaining discount for the purchased credit impaired loans was
$3.1 million atDecember 31, 2022 and$4.7 million atDecember 31, 2021 .
2 The principal amount of outstanding PPP loans was
and
3 Impaired loans includes no loans on nonaccrual at
million of loans on nonaccrual at
includes
respectively, of which
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.
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Mortgage Banking Segment
December 31,
(Dollars in thousands) 2022 2021
Total loans1 $ 707 $ 9,389
Nonaccrual loans $ 149 $ 185
Impaired loans $ - $ 150
ALL $ 36 $ 563
Nonaccrual loans to total loans 21.07 % 1.97 %
ALL to total loans 5.09 % 6.00 %
ALL to nonaccrual loans 24.16 % 304.32 %
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
December 31,
(Dollars in thousands) 2022 2021
Total loans $ 474,557 $ 368,194
Nonaccrual loans $ 925 $ 380
Repossessed assets $ 352 $ 190
ALL $ 25,969 $ 24,791 Nonaccrual loans to total loans 0.19 %
0.10 % ALL to total loans 5.47 % 6.73 % ALL to nonaccrual loans 2,807.46 %
6,523.95 % Net charge-offs (recoveries) to average total loans 0.59 % (0.14) %
Table 15 presents the changes in the OREO balance for 2022 and 2021.
TABLE 15: OREO Changes
Year Ended December 31,
(Dollars in thousands) 2022 2021
Balance at the beginning of year, gross $ 835 $ 1,114
Additions 423 -
Charge-offs - (54)
Sales proceeds (1,547) (462)
Gain on disposition 289 237
Balance at the end of year, gross - 835
Less valuation allowance - - Balance at the end of year, net $ - $
835
Nonperforming assets of the community banking segment totaled$115,000 atDecember 31, 2022 , compared to$3.2 million atDecember 31, 2021 . Nonperforming assets included$115,000 in nonaccrual loans atDecember 31, 2022 compared to$2.4 million atDecember 31, 2021 , and included no other real estate owned atDecember 31, 2022 , compared to$835,000 atDecember 31, 2021 . The decrease in nonaccrual loans atDecember 31, 2022 as compared toDecember 31, 2021 was primarily due to the resolution of certain impaired loans during 2022. If interest on loans on nonaccrual atDecember 31, 2022 had been recognized throughout the year, the community banking segment would have recorded additional gross interest income in 2022 of$19,000 . 56
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The allowance for loan losses as a percentage of total loans at the community banking segment, excluding PCI loans, decreased to 1.25 percent atDecember 31, 2022 , compared to 1.44 percent atDecember 31, 2021 . The allowance for loan losses as a percentage of total loans excluding all purchased loans and loans originated under the PPP was 1.29 percent atDecember 31, 2022 , compared to 1.55 percent atDecember 31, 2021 . The community banking segment recorded a net reversal of provision for loan losses of$600,000 in 2022 as compared to a net reversal of provision for loan losses of$200,000 in 2021. AtDecember 31, 2022 , the allowance for loan losses decreased to$14.5 million , compared to$14.8 million atDecember 31, 2021 . Decreases in the allowance for loan losses during 2022 related to the resolution of certain impaired loans and continued strong credit quality of the loan portfolio, which were partially offset by provision related to growth in the loan portfolio. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. Nonaccrual loans at the consumer finance segment increased to$925,000 atDecember 31, 2022 from$380,000 atDecember 31, 2021 . Nonaccrual consumer finance loans remain low relative to the allowance for loan losses and the total consumer finance loan portfolio as the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. 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. AtDecember 31, 2022 , repossessed vehicles at fair value less estimated costs to sell included in other assets totaled$352,000 , compared to$190,000 atDecember 31, 2021 . If interest on loans on nonaccrual atDecember 31, 2022 had been recognized throughout the year, the consumer finance segment would have recorded additional gross interest income in 2022 of$10,000 . The consumer finance segment's allowance for loan losses increased by$1.2 million to$26.0 million atDecember 31, 2022 from$24.8 million atDecember 31, 2021 . The allowance for loan losses as a percentage of loans decreased to 5.47 percent atDecember 31, 2022 , compared to 6.73 percent atDecember 31, 2021 due primarily to a continued composition shift in the portfolio towards loans with higher credit quality at origination and improved economic conditions. Total delinquent loans, which does not include loans that have been granted a payment deferral, as a percentage of total loans increased to 2.78 percent atDecember 31, 2022 compared to 2.16 percent atDecember 31, 2021 . The consumer finance segment experienced net charge-offs for the year endedDecember 31, 2022 of 0.59 percent of average total loans, compared to net recoveries for the year endedDecember 31, 2021 of 0.14 percent of average total loans, as government stimulus measures in response to the pandemic that benefitted borrowers had a decreased effect in 2022, the wholesale value of used automobiles declined from a recent peak during the COVID-19 pandemic, and challenges in repossessing automobiles increased due to a decline in the number of repossession agencies. Although charge-offs began to rise during 2022, charge-offs in both 2022 and 2021 were lower than historical levels for the consumer finance segment, due to strong loan performance and a strong market for used automobiles, which helped drive higher sales prices on repossessed automobiles and mitigated losses on defaulted auto loans. Despite some weakening in 2022, the consumer finance segment has experienced loan performance since 2020 that has been consistently stronger than periods prior to the onset of the COVID-19 pandemic, resulting in part from the consumer finance segment's strategic decision to purchase higher quality loans, and in part from the impact of government stimulus measures.
The
consumer finance segment recorded provision for loan losses of$3.7 million for the year endedDecember 31, 2022 and$820,000 for the year endedDecember 31, 2021 , as a result of significant loan growth in 2022, partially offset by lower required reserves resulting from strong loan performance. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. If loan performance deteriorates resulting in elevated delinquencies or net charge-offs, provision for loan losses may increase in future periods. In addition, provision for loan losses may be higher in future periods if net charge-offs increase, including due to lower recoveries from sales of used automobiles if prices decline. As previously described, the consumer finance segment, at times, offers payment deferrals as a management technique to achieve higher ultimate cash collections on select loan accounts. Payment deferrals may affect the ultimate timing of when an account is charged off. A significant reliance on deferrals as a means of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio. The average amounts deferred on a monthly basis during 2022 were 1.63 percent of average automobile loans outstanding, compared to 1.24 percent during 2021 and 2.93 percent during 2020. Payment deferrals increased for 2020 57 Table of Contents
as the COVID-19 pandemic affected the ability of some borrowers to make timely payment but were lower in 2021 and 2022.
The consumer finance segment is an indirect lender that provides automobile financing through lending programs that are designed to serve customers in both the prime and "non-prime" markets, including those who may have limited access to traditional automobile financing due to having experienced prior credit difficulties. The preferred automobile is a later model, low mileage used vehicle because the value of new vehicles typically depreciates rapidly. In addition to automobile financing, marine and RV loan contracts are also purchased on an indirect basis through a referral program administered by a third party. The marine and RV loan contracts are for prime loans averaging less than$50,000 made to individuals with higher credit scores. The consumer finance segment's focus has included non-prime borrowers and, therefore, the anticipated rates of delinquencies, defaults, repossessions and losses on the consumer finance loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by changes in general economic conditions. Changes in economic conditions may also affect consumer demand for used automobiles and values of automobiles securing outstanding loans, due to changes in demand or changes in levels of inventory of used automobiles, which may directly affect the amount of a loss incurred by the consumer finance segment in the event of default. While we manage the higher risk inherent in loans made to non-prime borrowers through the underwriting criteria, portfolio management and collection methods employed by the consumer finance segment, we cannot guarantee that these criteria or methods will afford adequate protection against these risks. Beginning in 2016 with the consumer finance segment's implementation of a scorecard model for purchasing loan contracts, the credit-worthiness of borrowers at origination has improved for automobile loans purchased and the level of credit losses experienced has decreased. We cannot provide any assurance that the consumer finance segment's net charge-off ratio will not increase in future periods. However, we believe that the current allowance for loan losses is adequate to absorb probable losses that have been incurred on existing consumer finance segment loans that may become uncollectible. If factors influencing the consumer finance segment result in higher net charge-off ratios in future periods, the consumer finance segment may need to increase the level of its allowance for loan losses through additional provisions for loan losses, which could negatively affect future earnings of the consumer finance segment. As discussed above, 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.
Impaired loans, which included TDRs of
TABLE 16: Impaired Loans
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
36 $ 761$ 51 $ 806 $ 35 Equity lines 26 26 - - 28 2 Total$ 823 $ 62 $ 761$ 51 $ 834 $ 37 58 Table of Contents
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
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
TDRs at
TABLE 17: Troubled Debt Restructurings
December 31, December 31,
(Dollars in thousands) 2022 2021
Accruing TDRs $ 823 $ 2,575
Nonaccrual TDRs1 - 115
Total TDRs2 $ 823 $ 2,690 1 Included in nonaccrual loans in Table 14: Nonperforming Assets.
2 Included in impaired loans in Table 14: Nonperforming Assets and Table 16:
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 SUMMARY A financial institution's primary sources of revenue are generated by its earning assets and sales of financial assets, while its major expenses are produced by the funding of those assets with interest-bearing liabilities, provisions for loan losses and compensation to employees. Effective management of these sources and uses of funds is essential in attaining a financial institution's maximum profitability while maintaining an acceptable level of risk. AtDecember 31, 2022 , the Corporation had total assets of$2.33 billion compared to$2.26 billion atDecember 31, 2021 . The increase was attributable primarily to increases in loans held for investment and available for sale securities, partially offset by a decrease in interest-bearing deposits in other banks and 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. 59 Table of Contents LOAN PORTFOLIO General
Through the community banking segment, we engage in a wide range of lending activities, which include the origination, primarily in the community banking segment's market area, of (1) one-to-four family and multi-family residential mortgage loans, (2) commercial real estate loans, (3) construction loans, (4) land acquisition and development loans, (5) consumer loans and (6) commercial business loans. We engage in automobile and marine and RV lending through the consumer finance segment and in residential mortgage lending through the mortgage banking segment with the majority of the loans originated through the mortgage banking segment sold to third-party investors. AtDecember 31, 2022 , the Corporation's loans held for investment in all categories, net of the allowance for loan losses, totaled$1.60 billion and loans held for sale had a fair value of$14.3 million . Tables 18 and 19 present information pertaining to the composition of loans held for investment and the maturity/repricing of certain loans held for investment, respectively. TABLE 18: Summary of Loans Held for Investment December 31, 2022 December 31, 2021 (Dollars in thousands) Amount Percent Amount Percent Real estate-residential mortgage$ 266,267 16 %$ 217,016 15 Real estate-construction 1 59,675 4 57,495 4 Commercial, financial, and agricultural 2 782,981 48
717,730 51 Equity lines 43,300 2 41,345 3 Consumer 8,938 1 8,280 1 Consumer finance3 474,557 29 368,194 26 Total loans 1,635,718 100 % 1,410,060 100 %
Less allowance for loan losses (40,518)
(40,157) Total loans, net$ 1,595,200 $ 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
agricultural loans were
and 2021, respectively.
3 Includes the Corporation's automobile lending and marine and recreational
vehicle lending.
The increase in total loans fromDecember 31, 2021 toDecember 31, 2022 was due primarily to growth in automobile loans and marine and recreational vehicle loans at the consumer finance segment and commercial real estate and residential mortgage lending at the community banking segment, partially offset by repayment of PPP loans. 60 Table of Contents TABLE 19: Maturity/Repricing Schedule of Loans Held for Investment December 31, 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 $ 762$ 32,623 $ 214,327 $ 43,300 $ 54 $ -$ 291,066 1 to 5 years 1,766 - 69,845 - - - 71,611 5 to 15 years 64 - 23,053 - - - 23,117 After 15 years - - - - - - - Fixed Rate: Within 1 year$ 5,208 $ 19,546 $ 29,528 $ -$ 1,971 $ 5,678 $ 61,931 1 to 5 years 31,184 3,992 195,990 - 5,381 178,011 414,558 5 to 15 years 183,087 3,514 239,877 - 1,532 290,868 718,878 After 15 years 44,196 - 10,361 - - - 54,557$ 266,267 $ 59,675 $ 782,981 $ 43,300 $ 8,938 $ 474,557 $ 1,635,718 Beginning inApril 2020 , the community banking segment originated loans under the PPP which are guaranteed by the SBA. 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 20 presents the outstanding principal of loans originated under the PPP as ofDecember 31 ,
2022
and 2021.
TABLE 20: Paycheck Protection Program Loans
December 31, December 31,
(Dollars in thousands) 2022 2021
Outstanding principal $ 463 $ 18,441
Unrecognized deferred fees, net - (679)
$ 463 $ 17,762
Total loans at December 31, 2022 and 2021 included loans purchased in connection
with the Corporation's acquisitions. These loans were recorded at estimated fair
value on the date of acquisition without the carryover of the related allowance
for loan losses. The following tables present the outstanding principal balance
and the carrying amount of purchased loans that are included in the
Corporation's Consolidated Balance Sheets at December 31, 2022 and 2021.
61
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TABLE 21: PCI and Purchased Performing Loans
December 31, 2022
Purchased
Credit Purchased
(Dollars in thousands) Impaired Performing Total
Outstanding principal balance $ 4,522 $ 38,157 $ 42,679
Carrying amountReal estate - residential mortgage$ 300 $ 8,587 $
8,887
Real estate - construction - -
-
Commercial, financial and agricultural 1,114 23,023
24,137 Equity lines 15 5,047 5,062 Consumer 26 755 781 Total acquired loans$ 1,455 $ 37,412 $ 38,867 December 31, 2021 Purchased Credit Purchased (Dollars in thousands) Impaired Performing Total Outstanding principal balance$ 8,350 $ 57,862 $ 66,212 Carrying amount
Real estate - residential mortgage$ 817 $ 9,997 $
10,814
Real estate - construction - 1,356
1,356
Commercial, financial and agricultural 2,753 37,313
40,066 Equity lines 38 6,919 6,957 Consumer 47 1,213 1,260 Total acquired loans$ 3,655 $ 56,798 $ 60,453
For a description of the Corporation's accounting for purchased performing and PCI loans, see "Critical Accounting Estimates" in this Item 7.
Credit Policy
The Corporation's credit policy establishes minimum requirements and provides for appropriate limitations on overall concentration of credit within the Corporation. The policy provides guidance in general credit policies, underwriting policies and risk management, credit approval, and administrative and problem asset management policies. The overall goal of the Corporation's credit policy is to ensure that loan growth is accompanied by acceptable asset quality with uniform and consistently applied approval, administration, and documentation practices and standards.
Residential Mortgage Lending - Held for Sale
The mortgage banking segment's guidelines for underwriting conventional conforming loans comply with the underwriting criteria established by Fannie Mae, Freddie Mac and/or the applicable third party investor. The guidelines for non-conforming conventional loans are based on the requirements of private investors and information provided by third-party investors. The guidelines used byC&F Mortgage to originate FHA-insured,USDA -guaranteed andVA -guaranteed loans comply with the criteria established by HUD, theUSDA , theVA and/or the applicable third party investor. The conventional loans thatC&F Mortgage originates that have loan-to-value ratios greater than 80 percent at origination are generally insured by private mortgage insurance. 62
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Residential Mortgage Lending - Held for Investment
The community banking segment originates residential mortgage loans secured by first and second liens on properties located in its primary market areas in eastern and centralVirginia . The Bank offers various types of residential first mortgage loans in addition to traditional long-term, fixed-rate loans. The majority of such loans include 10, 15 and 30 year amortizing mortgage loans with fixed rates of interest. Second mortgage loans are offered with fixed and adjustable rates. Second mortgage loans are granted for a fixed period of time, usually between 5 and 15 years. Additionally, the community banking segment purchases residential mortgage loans from the mortgage banking segment under terms and conditions similar to third-party investors.
Loans associated with residential mortgage lending are included in the real estate-residential mortgage category in Table 18: Summary of Loans Held for Investment.
Construction Lending
The community banking segment has a real estate construction lending program. We make loans primarily for the construction of one-to-four family residences and, to a lesser extent, multi-family dwellings. The Bank also makes construction loans for office and warehouse facilities and other nonresidential projects, generally limited to borrowers that present other business opportunities for the community banking segment. The amounts, interest rates and terms for construction loans vary, depending upon market conditions, the size and complexity of the project, and the financial strength of the borrower and any guarantors of the loan. The term for a typical construction loan ranges from 12 months to 15 months for the construction of an individual residence and from 15 months to a maximum of 3 years for larger residential or commercial projects. We do not typically amortize construction loans, and the borrower pays interest monthly on the outstanding principal balance of the loan. The Bank offers fixed and variable interest rates on construction loans. We do not generally finance the construction of commercial real estate projects built on a speculative basis. For residential builder loans, we limit the number of models and/or speculative units allowed depending on market conditions, the builder's financial strength and track record and other factors. Generally, the maximum loan-to-value ratio for one-to-four family residential construction loans is 80 percent of the property's fair market value, or 90 percent of the property's fair market value if the property will be the borrower's primary residence. The fair market value of a project is determined on the basis of an appraisal of the project conducted by an appraiser approved by the Bank. For larger projects where unit absorption or leasing is a concern, we may also obtain a feasibility study or other acceptable information from the borrower or other sources about the likely disposition of the property following the completion of construction. Construction loans for nonresidential projects and multi-unit residential projects are generally larger and involve a greater degree of risk to the Bank than residential mortgage loans. We attempt to minimize such risks (1) by making construction loans in accordance with our underwriting standards and to established customers in our primary market area and (2) by monitoring the quality, progress and cost of construction. Generally, our maximum loan-to-value ratio for non-residential projects and multi-unit residential projects is 80 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis.
Loans associated with construction lending are included in the real estate-construction category in Table 18: Summary of Loans Held for Investment.
Consumer Lot Lending
The community banking segment's consumer lot loans are made to individuals for
the purpose of acquiring an unimproved building site for the construction of a
residence that generally will be occupied by the borrower. Consumer lot loans
are made only to individual borrowers. These loans typically have a maximum term
of either three or five years with a balloon payment of the entire balance of
the loan being due in full at the end of the initial term. The interest rate for
these loans is fixed at a rate that is slightly higher than prevailing rates for
one-to-four family residential mortgage loans. We do not believe consumer lot
loans bear as much risk as land acquisition and development loans because such
loans are
63
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not made for the construction of residences for immediate resale, are not made
to developers and builders, and are not concentrated in any one subdivision or
community.
Loans associated with consumer lot lending are included in the real estate-construction category in Table 18: Summary of Loans Held for Investment.
Commercial Real Estate Lending
The community banking segment's commercial real estate loans are primarily secured by the value of real property. The proceeds of commercial real estate loans are generally used by the borrower to finance or refinance the cost of acquiring and/or improving a commercial property. The properties that typically secure these loans are office and warehouse facilities, hotels, apartment complexes, retail facilities, restaurants and other commercial properties. Commercial real estate loans may be made to borrowers who will occupy or use the financed property in connection with their normal business operations or to borrowers who will use the subject property to generate rental income. Loans secured by non-owner-occupied properties are made when: (1) the borrower is in strong financial condition and presents a substantial business opportunity for the Corporation and (2) the borrower has substantially pre-leased the property to high-caliber tenants. Our commercial real estate loans are usually amortized over a period of time ranging from 15 years to 30 years and usually have a term to maturity ranging from 5 years to 15 years, with fixed rates of interest typically for periods of up to ten years. The maximum loan-to-value ratio for a commercial real estate loan is 80 percent; however, this maximum can be waived for particularly strong borrowers on an exception basis. Most commercial real estate loans are further secured by one or more personal guarantees. We believe these loan terms provide some protection from changes in the borrower's business and income as well as changes in general economic conditions. In the case of fixed-rate commercial real estate loans, shorter maturities also provide an opportunity to adjust the interest rate on this type of interest-earning asset in accordance with our asset and liability management strategies. Certain commercial customers qualify for participation in an interest rate swap program. This program provides flexible pricing structures for our larger borrowers who wish to pay a fixed rate of interest, while preserving a floating rate for the Bank, which protectsC&F Bank from exposure to rising interest rates. Loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate are usually dependent on successful operation or management of the properties securing such loans, repayment of such loans is subject to changes in both general and local economic conditions and the borrower's business and income. As a result, events beyond our control, such as a downturn in the local economy, could adversely affect the performance of the commercial real estate loan portfolio. We seek to minimize these risks by lending to established customers and generally restricting our commercial real estate loans to our primary market area. Emphasis is placed on the income producing characteristics and quality of the collateral.
Loans associated with commercial real estate lending are included in the commercial, financial and agricultural category in Table 18: Summary of Loans Held for Investment.
Land Acquisition and Development Lending
The community banking segment makes land acquisition and development loans to
builders and developers for the purpose of acquiring unimproved land to be
developed for residential building sites, residential housing subdivisions,
multi-family dwellings and a variety of commercial uses. Our policy is to make
land acquisition loans to borrowers for the purpose of acquiring developed lots
for single-family, townhouse or condominium construction. We will make both land
acquisition and development loans to residential builders, experienced
developers and others in strong financial condition to provide additional
construction and mortgage lending opportunities for the Bank.
We underwrite and process land acquisition and development loans in much the
same manner as commercial construction loans and commercial real estate loans.
For land acquisition and development loans, we use lower loan-to-
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value ratios, which are a maximum of 65 percent for raw land, 75 percent for land development and improved lots and 80 percent of the discounted appraised value of the property as determined in accordance with the appraisal policies for developed lots for single-family or townhouse construction. We can waive the maximum loan-to-value ratio for particularly strong borrowers on an exception basis. The term of land acquisition and development loans ranges from a maximum of two years for loans relating to the acquisition of unimproved land to, generally, a maximum of three years for other types of projects. All land acquisition and development loans generally are further secured by one or more personal guarantees. Because these loans are usually larger in amount and involve more risk than consumer lot loans, we carefully evaluate the borrower's assumptions and projections about market conditions and absorption rates in the community in which the property is located and the borrower's ability to carry the loan if the borrower's assumptions prove inaccurate.
Loans associated with land acquisition and development lending are included in the commercial, financial and agricultural category in Table 18: Summary of Loans Held for Investment.
Builder
The community banking segment offers builder lines of credit to residential home builders to support their land and lot inventory needs. A construction loan facility for a builder will typically have an expiration of 24 months or less. Each loan that is made under the master loan facility will have a stated maturity that allows time for the residential unit to be constructed and sold to a homebuyer under prevailing market conditions. Specific terms vary based on the purpose of the loan (e.g., lot inventory, spec or non pre-sold units, pre-sold units) and previous sales activity to new homebuyers in the particular development. Repayment relies upon the successful performance of the underlying residential real estate project. This type of lending carries a higher level of risk related to residential real estate market conditions, a functioning first and secondary market in which to sell residential properties, and the borrower's ability to manage inventory and run projects. We manage this risk by lending to experienced builders and by using specific underwriting policies and procedures for these types of loans.
Loans associated with builder line lending are included in the commercial, financial and agricultural category in Table 18: Summary of Loans Held for Investment.
Commercial Business Lending
The community banking segment's commercial business loan products include revolving lines of credit to provide working capital, term loans to finance the purchase of vehicles and equipment, letters of credit to guarantee payment and performance, and other commercial loans. In general, these credit facilities carry the unconditional guaranty of the owners and/or stockholders. Revolving and operating lines of credit are typically secured by all current assets of the borrower, provide for the acceleration of repayment upon any event of default, are monitored to ensure compliance with loan covenants, and are re-underwritten or renewed annually. Interest rates generally will float at a spread tied to the Bank's prime lending rate. Term loans are generally advanced for the purchase of, and are secured by, vehicles and equipment and are normally fully amortized over a term of two to seven years, on either a fixed or floating rate basis.
Loans associated with commercial business lending are included in the commercial, financial and agricultural category in Table 18: Summary of Loans Held for Investment.
EquityLine Lending The community banking segment offers its customers home equity lines of credit that enable customers to borrow funds secured by the equity in their homes. Currently, home equity lines of credit are offered with adjustable rates of interest that are generally priced at a spread to the prime lending rate. Home equity lines of credit are made on an open-end, revolving basis. Home equity lines of credit generally do not present as much risk to the Bank as other
types
of
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consumer loans. These lines of credit must satisfy our underwriting criteria, including loan-to-value and credit score guidelines.
Loans associated with equity line lending are included in the equity lines category in Table 18: Summary of Loans Held for Investment.
Consumer Lending
The community banking segment offers a variety of consumer loans, including
automobile, personal secured and unsecured, and loans secured by savings
accounts or certificates of deposit. The shorter terms and generally higher
interest rates on consumer loans help the Bank maintain a profitable spread
between its average loan yield and its cost of funds. Consumer loans secured by
collateral other than a personal residence generally involve more credit risk
than residential mortgage loans because of the type and nature of the collateral
or, in certain cases, the absence of collateral. However, we believe the higher
yields generally earned on such loans compensate for the increased credit risk
associated with such loans. These loans must satisfy our underwriting criteria,
including loan-to-value, debt ratio and credit score guidelines.
Loans associated with consumer lending are included in the consumer category in
Table 18: Summary of Loans Held for Investment. This loan category also includes
demand deposit overdrafts.
Indirect Automobile Lending
The consumer finance segment has an extensive automobile dealer network through
which it purchases installment contracts throughout its markets. Credit approval
is centralized, which along with the application processing system, ensures that
contract purchase decisions comply with the consumer finance segment's
underwriting policies and procedures.
Finance contract application packages completed by prospective borrowers are
submitted by the automobile dealers electronically through a third-party online
automotive sales and finance platform to the consumer finance segment's
automated origination and application system, which processes the credit bureau
report, generates all relevant loan calculations and displays the requested
contract structure. Consumer finance segment personnel with credit authority
review the transaction and determine whether to approve or deny the purchase of
the contract. The purchase decision is based primarily on the applicant's credit
history with emphasis on prior auto loan history, current employment status,
income, collateral type and mileage, and the loan-to-value ratio.
The consumer finance segment's underwriting and collateral guidelines form the
basis for the purchase decision. Exceptions to credit policies and authorities
must be approved by a designated credit officer. The consumer finance segment's
automobile customers may have experienced prior credit difficulties. Because the
consumer finance segment serves customers who are unable to meet the credit
standards imposed by most traditional automobile financing sources, we expect
the consumer finance segment to sustain a higher level of credit losses in the
automobile portfolio than traditional financing sources. However, the consumer
finance segment generally purchases these contracts with interest at higher
rates than those charged by traditional financing sources. These higher rates
should more than offset the increase in the provision for loan losses for this
segment of the Corporation's loan portfolio. In limited circumstances, the
consumer finance segment purchases loans that include third-party credit
enhancements that limit the consumer finance segment's exposure to credit losses
on those loans. Beginning in 2016 with the consumer finance segment's
implementation of a scorecard model for purchasing loan contracts, the
credit-worthiness of borrowers at origination has improved for automobile loans
purchased by the consumer finance segment and both the interest rates charged
and level of credit losses experienced have decreased.
Certain automobile loans are purchased simultaneously with entering into a
contract that provides partial protection against loan losses through an
embedded credit enhancement. For these loans, C&F Finance recognizes the cost of
the credit enhancement as an adjustment of yield on loans, and, in the event of
default, any claims against the credit protection reduce the amount of loss
recognized by C&F Finance. The allowance for loan losses includes an estimate
of losses
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incurred on loans subject to these credit enhancements, but does not include the portion of the loss that would be borne by C&F Finance's credit protection counterparty
Loans associated with indirect automobile lending are included in the consumer finance category in Table 18: Summary of Loans Held for Investment.
Indirect Marine and Recreational Vehicle Lending
In addition to purchasing automobile contracts through a dealer network, the consumer finance segment began purchasing marine and RV contracts, also on an indirect basis, through a third party provider in 2018. While the approval process is generally the same as the indirect automobile approval process described above, borrowers on marine and RV contracts purchased by the consumer finance segment have typically not had prior credit issues and these contracts are considered prime. The rates charged on these loans are significantly less than the automobile portfolio with a much lower expected level of credit losses.
Loans associated with indirect marine and recreational vehicle lending are included in the consumer finance category in Table 18: Summary of Loans Held for Investment.
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. AtDecember 31, 2022 and 2021, all securities in the Corporation's investment portfolio were classified as available for sale.
Table 22 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 22: Securities Available for Sale
December 31, 2022 December 31, 2021
(Dollars in thousands) Amount Percent Amount Percent
U.S. Treasury securities $ 58,833 11 % $ - - %U.S. government agencies and corporations 130,274 26 68,285 18 Mortgage-backed securities 179,918 35 190,349 51 Obligations of states and political subdivisions 120,827 24 92,666 25 Corporate and other debt securities 22,739 4 21,773 6 Total available for sale securities at fair value$ 512,591 100 %
Securities available for sale increased by$139.5 million to$512.6 million atDecember 31, 2022 , compared to$373.1 million atDecember 31, 2021 , due primarily to purchases ofU.S. Treasury ,U.S. government agencies and corporations and obligations of states and political subdivisions, in order to utilize excess liquidity by investing in debt securities rather than holding excess cash reserves. Net unrealized losses on the market value of securities available for sale were$44.5 million atDecember 31, 2022 and net unrealized gains on the market value of securities available for sale were$553,000 atDecember 31, 2021 . The decline in market value of securities available for sale during 2022 was primarily a result of increases in market interest rates. The Corporation seeks to diversify its portfolio to minimize risk, including by purchasing (1) shorter-duration mortgage-backed securities to reduce interest rate risk and for cash flow and reinvestment opportunities and (2) securities issued by states and political subdivisions due to the tax benefits and the higher tax-adjusted yield obtained from these securities. All of the Corporation's mortgage-backed securities are direct issues ofUnited States government agencies or government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly 67
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supported by the full faith and credit of theU.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments. The Corporation also invests in the debt securities of corporate issuers, primarily financial institutions, that the Corporation views as having a strong financial position and earnings potential. Table 23 presents additional information pertaining to the composition of the securities portfolio at amortized cost, by the earlier of contractual maturity or expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties. TABLE 23: Maturity of Securities December 31, 2022 Weighted Amortized Average (Dollars in thousands) Cost Yield 1U.S. Treasury securities: Maturing within 1 year$ 15,351 2.32 % Maturing after 1 year, but within 5 years 45,535 2.09 Total U.S. Treasury securities 60,886 2.15U.S. government agencies and corporations: Maturing within 1 year 82,190 2.23 Maturing after 1 year, but within 5 years 43,512 1.93 Maturing after 5 years, but within 10 years 17,539 1.49
Total
367 1.90
Maturing after 1 year, but within 5 years 110,039 1.86
Maturing after 5 years, but within 10 years 86,875 1.64
Maturing after 10 years 3,112 4.77
Total mortgage-backed securities 200,393 1.81
States and municipals:1
Maturing within 1 year 20,661 3.35
Maturing after 1 year, but within 5 years 56,266 2.53
Maturing after 5 years, but within 10 years 45,600 3.21
Maturing after 10 years 4,789 4.11
Total states and municipals 127,317 2.97
Corporate and other debt securities:
Maturing within 1 year 2,020 2.67
Maturing after 1 year, but within 5 years 21,271 3.45
Maturing after 5 years, but within 10 years 2,000 4.03
Total corporate and other debt securities 25,291 3.43
Total securities:
Maturing within 1 year 120,590 2.44
Maturing after 1 year, but within 5 years 276,622 2.17
Maturing after 5 years, but within 10 years 152,015 2.12
Maturing after 10 years 7,901 4.37
Total securities $ 557,128 2.25
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.
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During the year endedDecember 31, 2022 , deposits increased$89.2 million to$2.00 billion atDecember 31, 2022 , compared to$1.91 billion atDecember 31, 2021 . Demand and savings deposits increased$133.7 million and time deposits decreased$44.4 million during the same period. This increase in demand and savings deposits was due in part to a shift in balances from time deposits toward lower-cost savings, money market and demand deposits. Deposits as ofDecember 31, 2022 decreased$15.8 million compared toSeptember 30, 2022 , which is consistent with changes in deposit balances experienced by many regional and community banks in the latter part of 2022. The Corporation had$5,000 in brokered money market deposits outstanding at bothDecember 31, 2022 andDecember 31, 2021 . The source of these brokered deposits is uninvested cash balances held in third-party brokerage sweep accounts. The Corporation can access brokered deposits as a means of diversifying liquidity sources, if needed.
Table 24 presents the average deposit balances and average rates paid for the years 2022, 2021 and 2020.
TABLE 24: Average Deposits and Rates Paid
Year Ended December 31,
2022 2021 2020
Average Average Average Average Average Average
(Dollars in thousands) Balance Rate Balance Rate Balance RateNoninterest-bearing demand deposits$ 624,581 $ 556,801 $ 431,789 Interest-bearing transaction accounts 350,996 0.30 % 303,368 0.16 % 260,478 0.21 % Money market deposit accounts 390,235 0.27 318,537
0.25 260,342 0.37 Savings accounts 231,317 0.05 208,506 0.06 163,763 0.07 Certificates of deposit 392,579 0.76 448,922 0.90 490,301 1.64 Total interest-bearing deposits 1,365,127 0.38 1,279,333 0.42 1,174,884 0.82 Total deposits$ 1,989,708 $ 1,836,134 $ 1,606,673
As ofDecember 31, 2022 and 2021, the estimated amounts of total uninsured deposits were$636.5 million and$573.5 million , respectively. Table 25 details maturities of the estimated amount of uninsured time deposits atDecember 31, 2022 . The estimate of uninsured deposits generally represents the portion of deposit accounts that exceed theFDIC insurance limit of$250,000 and is calculated based on the same methodologies and assumptions used for purposes of the Bank's regulatory reporting requirements. TABLE 25: Maturities of Uninsured Time Deposits (Dollars in thousands) December 31, 2022 3 months or less $ 15,233 3-6 months 8,697 6-12 months 43,037 Over 12 months 41,175 Total $ 108,142 BORROWINGS
In addition to deposits, the Corporation utilizes short-term and long-term borrowings as sources of funds. Short-term borrowings from theFederal Reserve Bank and the FHLB may be used to fund the Corporation's day-to-day operations. Short-term borrowings also include securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the day sold, as well as overnight unsecured fed funds lines with correspondent banks. Long-term borrowings consist of subordinated notes which rank junior to all future senior indebtedness of the Corporation and are structurally subordinated to all existing and future debt and liabilities of the Corporation and its subsidiaries. 69
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Trust I,Trust II and CVBK Trust I are wholly-owned non-operating subsidiaries of the Corporation, formed for the purpose of issuing trust preferred capital securities. Collectively, these trusts have issued$25.0 million of trust preferred capital securities to institutional investors through private placements and$775,000 in common equity that is held by the Corporation. Trust preferred capital securities of$5.0 million issued by CVBK Trust I,$10.0 million issued by Trust I, and$10.0 million issued by Trust II mature in 2033, 2035 and 2037, respectively, and are redeemable at the Corporation's option. The principal assets of CVBK Trust I, Trust I and Trust II are trust preferred capital notes of the Corporation of$5.2 million ,$10.3 million and$10.3 million , respectively, which have like maturities and like interest rates to the trust preferred capital securities. The interest payments by the Corporation on the notes will be used by the trusts to pay the quarterly distributions on the trust preferred capital securities.
Borrowings increased to
For further information concerning the Corporation's borrowings, refer to Item 8. "Financial Statements and Supplementary Data" under the heading "Note 11: Borrowings."
OFF-BALANCE-SHEET ARRANGEMENTS
To meet the financing needs of customers, the Corporation is a party, in the normal course of business, to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, commitments to sell loans and standby letters of credit. These instruments involve elements of credit and interest rate risk in addition to the amount on the balance sheet. 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. We use the same credit policies in making these commitments and conditional obligations as we do for on-balance-sheet instruments. We obtain collateral based on our credit assessment of the customer in each circumstance. 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. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The total amount of unused loan commitments at the Bank was$394.8 million atDecember 31, 2022 , and$305.4 million atDecember 31, 2021 . 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 was$16.3 million atDecember 31, 2022 and$15.1 million atDecember 31, 2021 . 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 90 days up to one year. Recourse periods for borrower misrepresentation or fraud, or underwriting error do not have a stated time limit. The mortgage banking segment maintains an allowance for indemnifications that represents management's estimate of losses that are probable of arising under these recourse provisions. As performance data for loans that have been sold is not made available to the mortgage banking segment by the investors, the estimate of potential losses is inherently subjective and is based on historical indemnification payments and management's assessment of current conditions that may contribute to indemnified losses on mortgage loans that have been sold in the secondary market, including the volume of loans sold, historical experience, current economic conditions, changes in operational and compliance processes, and information provided by investors. During the years endedDecember 31, 2022 and 2021, the Corporation reversed$858,000 and$104,000 , respectively, of provision for 70
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indemnifications, as economic conditions, and particularly values of residential real estate, have improved, and, during the year endedDecember 31, 2020 , the Corporation recorded provision for indemnifications of$881,000 due to a high volume of mortgage loan originations coupled with deterioration in economic conditions. The balance of the allowance atDecember 31, 2022 and 2021 was$2.4 million and$3.3 million , respectively. Actual indemnification payments may differ materially from management's estimates, which may result in additional provision for indemnification losses in future periods. There were no payments made in 2022, 2021 or 2020. Risks also arise from the possible inability of investors to meet the terms of their contracts. The mortgage banking segment has procedures in place to evaluate the credit risk of investors and does not expect any counterparty to fail to meet its obligations. 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. For further information concerning the Corporation's derivatives, refer to Item 8. "Financial Statements and Supplementary Data" under the heading "Note 21: Derivative Financial Instruments."
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, federal funds sold and nonpledged securities available for sale, totaled$325.7 million atDecember 31, 2022 . The Corporation's funding sources, including capacity, amount outstanding and amount available atDecember 31, 2022 are presented in Table 26. TABLE 26: Funding Sources December 31, 2022 (Dollars in thousands) Capacity Outstanding Available Unsecured federal funds agreements$ 95,000 $ -$ 95,000 Repurchase lines of credit 35,000 - 35,000 Borrowings from FHLB 203,039 - 203,039 Borrowings from Federal Reserve Bank 101,680 2,111 99,569 Total$ 434,719 $ 2,111 $ 432,608 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 theFederal 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.
Time deposits, maturing in less than a year, totaled
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In the ordinary course of business, the Corporation has entered into contractual
obligations and has made other commitments to make future payments. For further
information concerning the Corporation's expected timing of such payments as of
December 31, 2021 , refer to Item 8. "Financial Statements and Supplementary
Data" under the headings "Note 9: Leases," "Note 11: Borrowings," and "Note 18
Commitments and Contingent Liabilities."
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.
CAPITAL RESOURCES
Total equity was$196.2 million as ofDecember 31, 2022 , compared with$211.0 million as ofDecember 31, 2021 . During 2022, the Corporation declared common stock dividends of$1.64 per share, compared to$1.58 per share declared in 2021 and$1.52 per share declared in 2020. The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. We regularly review the adequacy of the Corporation's and the Bank's capital. We maintain a structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. While we will continue to look for opportunities to invest capital in profitable growth, share repurchases are another tool that facilitates improving shareholder return, as measured by ROE and earnings per share. Under the small bank holding company policy statement of theFederal 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 disclosure 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. AtDecember 31, 2022 and 2021, the Corporation's CET1 to total risk-weighted assets ratio was 11.4 percent and 11.5 percent, respectively; the Corporation's Tier 1 capital to risk-weighted assets ratio was 12.8 percent and 13.0 percent, respectively; the Corporation's total capital to risk-weighted assets ratio was 15.4 percent and 15.8 percent, respectively; and the Corporation's Tier 1 leverage ratio was 9.9 percent and 9.7 percent, respectively. These ratios include$25.0 million of trust preferred capital securities in tier 1 capital of the Corporation and$24.0 million of subordinated notes in Tier 2 capital. Additionally, all applicable regulatory capital ratios ofC&F Bank were in excess of mandated minimum requirements atDecember 31, 2022 and 2021. In addition to the regulatory risk-based capital requirements, the Bank must maintain a capital conservation buffer of additional capital of 2.5 percent of risk-weighted assets as required by the Basel III Final Rule. 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 atDecember 31, 2022 and 2021. The Corporation's capital resources are impacted by its share repurchase programs. During the year endedDecember 31, 2022 , the Corporation repurchased$4.5 million of its common stock under the 2021 Repurchase Program, which expiredNovember 30, 2022 . Under the 2022 Repurchase Program, which was authorized by the Corporation's Board of Directors during the fourth quarter of 2022, the Corporation is authorized to purchase up to$10.0 million of the Corporation's common stock. Repurchases under the 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 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 additional shares under the 2022 Repurchase Program. The 2022 72
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Repurchase Program is authorized through
OnJanuary 1, 2023 , we adopted Accounting Standards Codification (ASC) Topic 326, "Financial Instruments-Credit Losses" (ASC 326), which replaces existing accounting principles for the recognition of loan losses based on losses that have been incurred with a requirement to record an allowance for credit losses that represents expected credit losses over the lifetime of all loans in the Corporation's portfolio. The adoption of ASC 326 will result in significant changes to the Corporation's consolidated financial statements. Regulatory capital rules permitC&F Bank to phase-in the day-one effects of adopting ASC 326 over a 3-year transition period.C&F Bank expects not to take the phase-in but rather to reduce its regulatory capital in the first quarter of 2023 for the day-one effects of adopting ASC 326 in the reasonable range of$1 million to$3 million .
RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements affecting the Corporation are described in Item 8. "Financial Statements and Supplementary Data" under the heading "Note 1: Summary of Significant Accounting Policies-Recent Significant Accounting Pronouncements."
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Corporation conform to GAAP inthe 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 adjusted net income for the Corporation and for the community banking segment, net tangible income attributable to the Corporation, adjusted net tangible income attributable to the Corporation, adjusted earnings per share, adjusted ROE, adjusted ROA, ROTCE, adjusted 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 (1) items that do not reflect ongoing operating performance, (2) balances of intangible assets, including goodwill, that vary significantly between institutions, and (3) 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 27: Non-GAAP Table
For The Year Ended
December 31 ,(Dollars in thousands, except per share amounts) 2022 2021
2020
Adjusted Net Income and Adjusted Earnings Per Share Net income, as reported
$ 29,369 $ 29,123 $ 22,424 Change in accounting policy election1 (2,151)
- - Branch consolidation2 (228) (107) 222 Sale of PCI loans3 - - (2,756) Early repayment charges4 - - 1,735
Pension settlement accounting5 -
995 - Merger related expenses6 - - 1,132 Change in tax law - - (326) Adjusted net income$ 26,990 $ 30,011 $ 22,431 Weighted average shares - basic and diluted 3,517,114
3,604,119 3,648,696
Earnings per share - basic and diluted, as reported
(0.61) - -
Branch consolidation (0.07) (0.03) 0.06
Sale of PCI loans - - (0.76)
Early repayment charges - - 0.48
Pension settlement accounting - 0.28 -
Merger related expenses - - 0.31
Change in tax law -
- (0.09)
Adjusted earnings per share - basic and diluted
Adjusted Net Income, Community Banking Segment Net income, community banking segment, as reported$ 24,374 $ 14,085 $ 6,147 Change in accounting policy election1 (2,151)
- - Branch consolidation2 (228) (107) 222 Sale of PCI loans3 - - (2,756) Early repayment charges4 - - 1,735
Pension settlement accounting5 -
995 - Merger related expenses6 - - 1,032 Change in tax law -
- (326)
Adjusted net income, community banking segment
________________________
1 A change in accounting policy election for certain equity investments,
primarily consisting of equity interests in an independent insurance agency and
a full service title and settlement agency, resulted in fair value adjustments
in the fourth quarter of 2022, which resulted in the one-time recognition of
additional other income of
2 Branch consolidation are gains recognized on the sale of former bank branch
locations subsequent to consolidation into nearby branches and are net of
related income taxes of
consolidation charges consist of income tax benefits of
ended
taxes of
3 Sale of PCI loans is net of related income taxes of
4 Early repayment charges are net of related income tax benefits of
the year ended
5 Pension settlement expense is net of related income tax benefits of
for the year ended
6 Merger related expenses are net of related income tax benefits of
the year ended
banking segment are net of related income tax benefits of$264,000 for the year endedDecember 31, 2020 . 74 Table of Contents TABLE 27: Non-GAAP Table For The Year EndedDecember 31 ,
(Dollars in thousands, except per share amounts) 2022 2021 2020 Adjusted ROE Average total equity, as reported $
197,876$ 197,204 $ 178,862 ROE, as reported 14.84 % 14.77 % 12.54 % Adjusted ROE 13.64 % 15.22 % 12.54 % Adjusted ROA
Average total assets, as reported $
2,319,683
ROA, as reported 1.27 % 1.34 % 1.14 % Adjusted ROA 1.16 % 1.38 % 1.14 % Return on Average Tangible Common Equity and Adjusted Return on Average Tangible Common Equity Average total equity, as reported$ 197,876 $ 197,204 $ 178,862 Average goodwill (25,191) (25,191) (25,096) Average other intangible assets (1,820) (2,127) (2,442) Average noncontrolling interest (737) (907) (767) Average tangible common equity $
170,128$ 168,979 $ 150,557 Net income$ 29,369 $ 29,123 $ 22,424 Amortization of intangibles 298 314 331
Net income attributable to noncontrolling interest (210) (456) (307) Net tangible income attributable to C&F Financial Corporation $
29,457$ 28,981 $ 22,448 Adjusted net income$ 26,990 $ 30,011 $ 22,431 Amortization of intangibles 298 314 331
Net income attributable to noncontrolling interest (210) (456) (307) Adjusted net tangible income attributable to C&F Financial Corporation $
27,078
Return on average tangible common equity 17.31 % 17.15 % 14.91 % Adjusted return on average tangible common equity
15.92 % 17.68 % 14.91 %
For The Year Ended
(Dollars in thousands, except per share amounts) December 31,
Fully Taxable Equivalent Net Interest Income 2022 2021 2020
Interest income on loans $ 90,833 $ 88,118 $ 90,992
FTE adjustment 154 97 162
FTE interest income on loans $ 90,987 $ 88,215 $ 91,154
Interest income on securities $ 9,243 $ 5,356 $ 5,208
FTE adjustment 431 445 527FTE interest income on securities$ 9,674 $ 5,801 $
5,735 Total interest income$ 101,354 $ 93,728 $ 96,913 FTE adjustment 585 542 689 FTE interest income$ 101,939 $ 94,270 $ 97,602 Net interest income$ 93,464 $ 85,369 $ 83,531 FTE adjustment 585 542 689 FTE net interest income$ 94,049 $ 85,911 $ 84,220 75 Table of Contents TABLE 27: Non-GAAP Table
(Dollars in thousands, except per share amounts) December
31,
Tangible Book Value Per Share 2022
2021
Equity attributable to C&F Financial Corporation$ 195,634 $
210,318 Less goodwill 25,191 25,191 Less other intangible assets 1,679 1,977
Tangible equity attributable to
183,150 Shares outstanding 3,476,614 3,545,554 Book value per share$ 56.27 $ 59.32 Tangible book value per share$ 48.54 $ 51.66 76 Table of Contents
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