Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023
or
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number 000-23423
C&F FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
54-1680165
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
3600 La Grange Parkway Toano, VA
23168
(Address of principal executive offices)
(Zip Code)
(804) 843-2360
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
CFFI
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At August 4, 2023, the latest practicable date for determination, 3,393,962 shares of common stock, $1.00 par value, of the registrant were outstanding.
TABLE OF CONTENTS
PART I - Financial Information
Page
Item 1.
Financial Statements
3
Consolidated Balance Sheets (Unaudited) – June 30, 2023 and December 31, 2022
Consolidated Statements of Income (Unaudited) – Three and six months ended June 30, 2023 and 2022
4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and six months ended June 30, 2023 and 2022
5
Consolidated Statements of Equity (Unaudited) – Three and six months ended June 30, 2023 and 2022
6
Consolidated Statements of Cash Flows (Unaudited) – Six months ended June 30, 2023 and 2022
8
Notes to Consolidated Interim Financial Statements (Unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
72
Item 4.
Controls and Procedures
74
PART II - Other Information
Item 1A.
Risk Factors
75
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
77
Signatures
78
2
Part I – FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
C&F FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
June 30,
December 31,
2023
2022
Assets
Cash and due from banks
$
16,837
19,610
Interest-bearing deposits in other banks
42,068
7,051
Total cash and cash equivalents
58,905
26,661
Securities—available for sale at fair value, amortized cost of $533,460 and $557,128, respectively
490,884
512,591
Loans held for sale, at fair value
36,317
14,259
Loans, net of allowance for credit losses of $40,528 and $40,518, respectively
1,646,462
1,595,200
Restricted stock, at cost
5,173
1,120
Corporate premises and equipment, net
42,774
43,849
Accrued interest receivable
9,266
8,982
Goodwill
25,191
Other intangible assets, net
1,543
1,679
Bank-owned life insurance
21,130
20,909
Net deferred tax asset
21,932
22,014
Other assets
59,878
59,862
Total assets
2,419,455
2,332,317
Liabilities
Deposits
Noninterest-bearing demand deposits
586,521
605,210
Savings and interest-bearing demand deposits
864,627
1,017,356
Time deposits
546,323
381,294
Total deposits
1,997,471
2,003,860
Short-term borrowings
124,180
36,592
Long-term borrowings
26,000
30,106
Trust preferred capital notes
25,404
25,386
Accrued interest payable
2,405
950
Other liabilities
41,467
39,190
Total liabilities
2,216,927
2,136,084
Commitments and contingent liabilities (Note 11)
Equity
Common stock ($1.00 par value, 8,000,000 shares authorized, 3,403,838 and 3,476,614 shares issued and outstanding, respectively, includes 134,729 and 145,677 of unvested shares, respectively)
3,269
3,331
Additional paid-in capital
8,168
12,047
Retained earnings
225,867
217,214
Accumulated other comprehensive loss, net
(35,406)
(36,958)
Equity attributable to C&F Financial Corporation
201,898
195,634
Noncontrolling interest
630
599
Total equity
202,528
196,233
Total liabilities and equity
See notes to consolidated interim financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30,
Six Months Ended June 30,
Interest income
Interest and fees on loans
27,416
21,923
53,476
42,407
Interest on interest-bearing deposits and federal funds sold
281
394
457
500
Interest and dividends on securities
U.S. treasury, government agencies and corporations
955
546
1,990
839
Mortgage-backed securities
933
778
1,880
1,446
Tax-exempt obligations of states and political subdivisions
682
337
1,300
687
Taxable obligations of states and political subdivisions
183
174
367
287
Corporate and other
288
240
573
Total interest income
30,738
24,392
60,043
46,623
Interest expense
Savings and interest-bearing deposits
1,265
471
2,474
858
3,311
5,131
1,348
Borrowings
1,521
371
2,546
737
296
289
589
Total interest expense
6,393
1,761
10,740
3,516
Net interest income
24,345
22,631
49,303
43,107
Provision for credit losses
1,700
530
3,750
202
Net interest income after provision for credit losses
22,645
22,101
45,553
42,905
Noninterest income
Gains on sales of loans
1,916
2,198
3,710
4,893
Interchange income
1,580
1,559
3,100
2,989
Service charges on deposit accounts
1,071
2,119
2,117
Investment income in other equity interests
156
92
269
230
Mortgage banking fee income
643
924
1,137
1,777
Wealth management services income, net
611
625
1,225
1,272
Mortgage lender services income
579
438
1,030
862
Other service charges and fees
379
402
770
776
Net losses on sales, maturities and calls of available for sale securities
—
(5)
Other income (loss), net
828
(1,646)
1,851
(2,524)
Total noninterest income
7,763
5,663
15,206
12,392
Noninterest expenses
Salaries and employee benefits
14,022
10,642
27,920
22,498
Occupancy
1,987
2,116
4,031
4,325
Other
6,482
6,341
12,941
12,487
Total noninterest expenses
22,491
19,099
44,892
39,310
Income before income taxes
7,917
8,665
15,867
15,987
Income tax expense
1,533
1,882
2,986
3,469
Net income
6,384
6,783
12,881
12,518
Less net income attributable to noncontrolling interest
41
134
147
Net income attributable to C&F Financial Corporation
6,306
6,742
12,747
12,371
Net income per share - basic and diluted
1.84
1.91
3.70
3.49
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Other comprehensive income (loss), net of tax:
Securities available for sale
(3,732)
(10,080)
1,549
(24,770)
Defined benefit plan
24
(12)
Cash flow hedges
225
424
(38)
1,344
Other comprehensive income (loss), net of tax
(3,483)
(9,661)
1,552
(23,438)
Comprehensive income (loss)
2,901
(2,878)
14,433
(10,920)
Less comprehensive income attributable to noncontrolling interest
Comprehensive income (loss) attributable to C&F Financial Corporation
2,823
(2,919)
14,299
(11,067)
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2023 AND 2022
Attributable to C&F Financial Corporation
Accumulated
Additional
Common
Paid - In
Retained
Comprehensive
Noncontrolling
Total
Stock
Capital
Earnings
Loss, Net
Interest
Balance March 31, 2023
3,309
10,135
221,062
(31,923)
601
203,184
Comprehensive income:
Other comprehensive loss
Share-based compensation
453
Restricted stock vested
7
(7)
Common stock issued
49
Common stock purchased
(47)
(2,462)
(2,509)
Cash dividends declared ($0.44 per share)
(1,501)
Distributions to noncontrolling interest
(49)
Balance June 30, 2023
Balance March 31, 2022
3,406
15,022
198,020
(15,864)
694
201,278
Comprehensive loss:
497
1
43
44
(22)
(1,098)
(1,120)
Cash dividends declared ($0.40 per share)
(1,411)
(127)
Balance June 30, 2022
3,385
14,464
203,351
(25,525)
608
196,283
FOR THE SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Loss) Income, Net
Balance December 31, 2022
Adoption of new accounting standard (Note 1)
(1,072)
Other comprehensive income
927
26
(26)
95
96
(89)
(4,875)
(4,964)
Cash dividends declared ($0.88 per share)
(3,022)
(103)
Balance December 31, 2021
3,405
15,189
193,811
(2,087)
706
211,024
1,008
14
(14)
88
90
(36)
(1,807)
(1,843)
Cash dividends declared ($0.80 per share)
(2,831)
(245)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Accretion of certain acquisition-related discounts, net
(444)
(927)
Depreciation and amortization
1,963
2,222
Amortization of premiums and accretion of discounts on securities, net
600
1,494
(Reversal of) provision for indemnifications
(235)
(869)
Income from bank-owned life insurance
(190)
(188)
Pension expense
462
320
Proceeds from sales of loans held for sale
252,170
443,660
Origination of loans held for sale
(270,713)
(402,568)
Gains on sales of loans held for sale
(3,710)
(4,893)
Other gains, net
(96)
Change in other assets and liabilities:
(284)
(891)
325
695
1,455
(55)
(45)
(2,236)
Net cash (used in) provided by operating activities
(807)
49,396
Investing activities:
Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities
44,841
30,981
Purchases of securities available for sale
(21,779)
(192,741)
Purchases of time deposits, net
(252)
493
Repayments on loans held for investment by non-bank affiliates
80,945
92,107
Purchases of loans held for investment by non-bank affiliates
(85,471)
(160,701)
Net increase in community banking loans held for investment
(49,686)
(39,372)
Purchases of corporate premises and equipment
(610)
(1,396)
Proceeds from sales of other real estate owned
915
Changes in collateral posted with other financial institutions, net
3,880
Other investing activities, net
(4,037)
(1,079)
Net cash used in investing activities
(36,049)
(266,913)
Financing activities:
Net (decrease) increase in demand and savings deposits
(171,418)
136,696
Net increase (decrease) in time deposits
165,029
(45,293)
Net increase in short-term borrowings
87,588
2,201
Repayments of long-term borrowings
(4,000)
Repurchases of common stock
Cash dividends paid
Other financing activities, net
(113)
(256)
Net cash provided by financing activities
69,100
88,674
Net increase (decrease) in cash and cash equivalents
32,244
(128,843)
Cash and cash equivalents at beginning of period
267,745
Cash and cash equivalents at end of period
138,902
Supplemental cash flow disclosures:
Interest paid
9,274
3,593
Income taxes paid
2,292
3,086
Supplemental disclosure of noncash investing and financing activities:
Transfers from corporate premises and equipment to other real estate owned
423
1,072
Liabilities assumed to acquire right of use assets under operating leases
838
Transfers from loans held for sale to loans held for investment
1,191
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1: Summary of Significant Accounting Policies
Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report). The accounting and reporting policies of the Corporation conform to U.S. GAAP and to predominant practices within the banking industry and are primarily disclosed in the 2022 Annual Report, except as described below related to the adoption of new accounting standards.
The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation), its direct wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank) and indirect subsidiaries that are wholly-owned or controlled. Subsidiaries that are less than wholly owned are fully consolidated if they are controlled by the Corporation or one of its subsidiaries, and the portion of any subsidiary not owned by the Corporation is reported as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns all of the common stock of C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation.
Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, C&F Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.
C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. (C&F Insurance) and CVB Title Services, Inc. (CVB Title), all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, originates and sells residential mortgages, provides mortgage loan origination services to third-party lenders and, through its subsidiary Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January 2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a comprehensive range of wealth management services and insurance products through third-party service providers. C&F Insurance and CVB Title were organized for the primary purpose of owning equity interests in an independent insurance agency and a full service title and settlement agency, respectively. Business segment data is presented in Note 10.
Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and evaluation of goodwill for impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. None of these reclassifications are considered material and did not affect net income or total equity.
Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income (loss), net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported as noninterest income. The Corporation’s derivative financial instruments are described more fully in Note 12.
Recently Adopted Accounting Standard: On January 1, 2023, the Corporation adopted Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842),” ASU 2020-03, “Codification Improvements to Financial Instruments” and ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures” (collectively, ASC 326).
ASC 326 introduced an approach based on current expected credit losses (CECL) to estimate credit losses on certain types of financial instruments, replacing the incurred loss methodology from prior GAAP. It also applies to unfunded commitments to extend credit, including loan commitments, standby letters of credit, and other similar instruments. It modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. It also modified the measurement principles for modifications of loans to borrowers experiencing financial difficulty, including how the allowance for credit losses (ACL) is measured for such loans.
The amendments of ASC 326, upon adoption, were applied on a modified retrospective basis, recording an increase in the reported balance of loans and the allowance for credit losses on loans, recognizing a liability for credit losses on commitments to extend credit, and reducing total equity of both the Corporation and of C&F Bank, which resulted in a reduction of regulatory capital of C&F Bank. As a result of adopting ASC 326, the Corporation recorded a decrease to opening retained earnings of $1.1 million.
ASC 326 also replaced the Corporation’s previous accounting policies for purchased credit-impaired (PCI) loans and troubled-debt restructurings (TDRs). With the adoption of ASC 326, loans previously designated as PCI loans were designated as purchased loans with credit deterioration (PCD loans). The Corporation adopted ASC 326 using the prospective transition approach for PCD loans that were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2023, the Corporation’s PCD loans were adjusted to reflect the addition of $604,000 of expected credit losses to the amortized cost basis of the loans and a corresponding increase to the ACL. The remaining noncredit discount, the difference between the adjusted amortized cost basis and the outstanding principal balance on PCD loans, will be accreted into interest income over the estimated remaining lives of the loans using the effective interest rate method. The evaluation of the ACL will include PCD loans together with other loans that share similar risk characteristics, rather than using the separate pools that were used under PCI accounting. The adoption of ASC 326 also replaced previous TDR accounting guidance, and the evaluation of the ACL will include loans previously designated as TDRs together with other loans that share similar risk characteristics.
The adoption of ASC 326 did not affect the carrying value of debt securities or the amount of unrealized gains and losses recorded in accumulated other comprehensive loss. Upon adoption of ASC 326, the Corporation did not have any securities included in its portfolio where other-than-temporary-impairments had previously been recognized or that required an ACL.
The following table illustrates the impact of adopting ASC 326.
10
December 31, 2022
January 1, 2023
As Previously
As Reported
Reported
Impact of
Under
(Incurred Loss)
ASC 326
Assets:
Loans, gross
1,635,718
604
1,636,322
Allowance for credit losses:
Commercial
11,219
11,197
Consumer
3,330
107
3,437
Consumer finance
25,969
406
26,375
Allowance for credit losses
40,518
491
41,009
Loans, net
113
1,595,313
316
22,330
Liabilities:
Reserve for credit losses on unfunded commitments
1,501
Total equity:
195,161
The following accounting policies have been updated in connection with the adoption of ASC 326 and apply to periods beginning after December 31, 2022. Accounting policies applying to prior periods are described in the 2022 Annual Report, as discussed above.
Securities: Investments in debt securities are classified as either held to maturity, available for sale, or trading, based on management’s intent. Currently all of the Corporation’s debt securities are classified as available for sale. Available for sale debt securities are carried at estimated fair value with the corresponding unrealized gains and losses recognized in other comprehensive income (loss). Gains or losses are recognized in net income on the trade date using the amortized cost of the specific security sold. Purchase premiums are recognized in interest income using the effective interest rate method over the period from purchase to maturity or, for callable securities, the earliest call date, and purchase discounts are recognized in the same manner from purchase to maturity.
Impairment of debt securities occurs when the fair value of a security is less than its amortized cost. The Corporation has elected to exclude accrued interest receivable from the amortized cost basis. For debt securities available for sale, impairment is recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more-likely-than-not that we will be required to sell the security before recovery of its amortized cost basis. If, however, the Corporation does not intend to sell the security and it is not more-likely-than-not that the Corporation will be required to sell the security before recovery, the Corporation evaluates unrealized losses to determine whether a decline in fair value below amortized cost basis is a result of a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security, or other factors such as changes in market interest rates. If a credit loss exists, an allowance for credit losses is recorded that reflects the amount of the impairment related to credit losses, limited by the amount by which the security’s amortized cost basis exceeds its fair value. Changes in the allowance for credit losses are recorded in net income in the period of change and are included in provision for credit losses. Changes in the fair value of debt securities available for sale not resulting from credit losses are recorded in other comprehensive income (loss). The Corporation regularly reviews unrealized losses in its investments in securities and cash flows expected to be collected from impaired securities based on criteria including the extent to which market value is below amortized
11
cost, the financial health of and specific prospects for the issuer, the Corporation’s intention with regard to holding the security to maturity and the likelihood that the Corporation would be required to sell the security before recovery.
Loans Held for Investment: The Corporation makes mortgage, commercial and consumer loans to customers. The Corporation’s recorded investment in loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally is reported at the unpaid principal balances adjusted for charges-offs, unearned discounts, any deferred fees or costs on originated loans, and the allowance for credit losses. The Corporation has elected to exclude accrued interest receivable from the amortized cost basis. Interest on loans is credited to operations based on the principal amount outstanding. Loan fees and origination costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield using the level-yield method. The Corporation is amortizing these amounts over the estimated life of the related loans.
Loans acquired in a business combination are recorded at estimated fair value on the date of acquisition. In the case of loans that have experienced more than insignificant deterioration in credit quality since origination as of the acquisition date, the loan’s amortized cost basis is increased above estimated fair value by the amount of expected credit losses as of the acquisition date, and a corresponding allowance for credit losses is also recorded. Any remaining non-credit discount or premium for such purchased loans with credit deterioration (or PCD loans) and any fair value discount or premium for non-PCD loans is accreted or amortized as an adjustment to yield over the estimated lives of the loans using the level-yield method. There is no allowance for credit losses established at the acquisition date for non-PCD loans.
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. Any accrued interest receivable on loans placed on nonaccrual status is reversed by an adjustment to interest income. 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.
In the ordinary course of business, the Corporation has entered into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the Consolidated Balance Sheets when they are funded.
Allowance for Credit Losses on Loans: The allowance for credit losses on loans is established through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. No allowance for credit loss is recorded on accrued interest receivable and amounts written-off are reversed by an adjustment to interest income. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans except for overdraft balances, which are evaluated using a loss rate approach. The discounted cash flow approach used by the Corporation utilizes loan-level cash flow projections and pool-level assumptions.
For commercial (except for loans to states and political subdivisions) and consumer loans, cash flow projections and estimated expected losses are based in part on twelve-month forecasts of the national unemployment rate that are reasonable and supportable and external observations of historical loan losses. Forecasts of the national unemployment rate are derived from the Federal Open Markets Committee of the Federal Reserve Board and incorporated into the estimate of expected credit losses using a statistical regression analysis. For periods beyond those for which reasonable and
12
supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following six months. Cash flow projections and estimated expected losses for loans to states and political subdivisions are based on external loss observations for state and municipal debt obligations. For consumer finance loans, cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans.
Management’s estimate of the allowance for credit losses on loans that are collectively evaluated also includes a qualitative assessment of available information relevant to assessing collectability that is not captured in the loss estimation process. Factors considered by management include changes and expected changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The evaluation also considers the following risk characteristics that are inherent in the loan portfolio:
Loans that do not share common risk characteristics with other loans are evaluated individually and are not included in the collective analysis. The allowance for credit losses on loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell.
Reserve for Unfunded Commitments: The Corporation records a reserve, reported in other liabilities, for expected credit losses on commitments to extend credit that are not unconditionally cancelable by the Corporation. The reserve for unfunded commitments is measured based on the principles utilized in estimating the allowance for credit losses on loans and an estimate of the amount of unfunded commitments expected to be advanced. Changes in the reserve for unfunded commitments are recorded through the provision for credit losses.
Recent Significant Accounting Pronouncements: In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” Subsequently, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This guidance provides temporary, optional expedients and exceptions to ease the potential burden in accounting for modifications of loan contracts, borrowings, hedging relationships and other transactions related to reference rate reform associated with the LIBOR transition if certain criteria are met. The amendments are effective as of March 12, 2020 through December 31, 2024 and can be adopted at an instrument level. The Corporation has utilized certain optional expedients and exceptions
13
under Topic 848 in the case of modifications to certain loans, borrowings and cash flow hedges during 2022 and 2023. These modifications have not had and are not expected to have a material impact on the consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Corporation’s financial position, results of operations or cash flows.
NOTE 2: Securities
On January 1, 2023, the Corporation adopted ASC 326, which made changes to accounting for available for sale debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost to measure an expected credit loss under the CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. All securities information presented as of June 30, 2023 is in accordance with ASC 326. All securities information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update refer to Note 1.
The Corporation’s debt securities, all of which are classified as available for sale, are summarized as follows:
June 30, 2023
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
U.S. Treasury securities
53,670
(1,652)
52,018
U.S. government agencies and corporations
125,789
(11,531)
114,258
191,877
64
(19,545)
172,396
Obligations of states and political subdivisions
136,892
425
(6,411)
130,906
Corporate and other debt securities
25,232
(3,926)
21,306
533,460
489
(43,065)
60,886
(2,053)
58,833
143,241
(12,967)
130,274
200,393
65
(20,540)
179,918
127,317
300
(6,790)
120,827
25,291
(2,552)
22,739
557,128
365
(44,902)
The amortized cost and estimated fair value of securities at June 30, 2023, by the earlier of contractual maturity or expected maturity, are shown below. The Corporation has elected to exclude accrued interest receivable, totaling $2.5 million at
June 30, 2023, from the amortized cost basis of securities. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without call or prepayment penalties.
Due in one year or less
105,361
103,859
Due after one year through five years
202,614
187,011
Due after five years through ten years
200,929
178,749
Due after ten years
24,556
21,265
The following table presents the gross realized gains and losses on and the proceeds from the sales, maturities and calls of securities. During the three and six months ended June 30, 2023 and 2022 there were no sales of securities.
Realized gains from sales, maturities and calls of securities:
Gross realized gains
Gross realized losses
Net realized losses
Proceeds from sales, maturities, calls and paydowns of securities
25,111
16,352
The Corporation pledges securities primarily to secure public deposits, repurchase agreements and lines of credit that provide liquidity to the Corporation and C&F Bank. Securities with an aggregate amortized cost of $222.05 million and an aggregate fair value of $200.42 million were pledged at June 30, 2023. Securities with an aggregate amortized cost of $237.15 million and an aggregate fair value of $213.58 million were pledged at December 31, 2022.
Securities in an unrealized loss position at June 30, 2023, by duration of the period of the unrealized loss, are shown below.
Less Than 12 Months
12 Months or More
Fair
Value
Loss
1,652
7,367
106,891
11,529
11,531
13,295
452
155,560
19,093
168,855
19,545
37,749
483
63,862
5,928
101,611
6,411
1,808
212
18,498
3,714
20,306
3,926
Total temporarily impaired securities
60,219
1,149
396,829
41,916
457,048
43,065
There were 574 debt securities with a fair value below the amortized cost basis, totaling $457.05 million of aggregate fair value as of June 30, 2023. The Corporation concluded that a credit loss does not exist in its securities portfolio at June 30, 2023, and no impairment loss has been recognized based on the fact that (1) changes in fair value were caused primarily by fluctuations in interest rates, (2) securities with unrealized losses had generally high credit quality, (3) the Corporation intends to hold these investments in debt securities to maturity and it is more-likely-than-not that the Corporation will not be required to sell these investments before a recovery of its investment, and (4) issuers have continued to make timely payments of principal and interest. Additionally, the Corporation’s mortgage-backed securities are entirely issued by either U.S. government agencies or U.S. government-sponsored enterprises. Collectively, these entities provide a guarantee, which is either explicitly or implicitly supported by the full faith and credit of the U.S. government, that investors in such mortgage-backed securities will receive timely principal and interest payments.
15
Securities in an unrealized loss position at December 31, 2022, by duration of the period of the unrealized loss, are shown below.
50,556
1,368
8,277
685
2,053
71,948
1,578
58,326
11,389
12,967
73,301
5,441
104,563
15,099
177,864
20,540
60,838
2,434
32,120
4,356
92,958
6,790
15,049
1,702
6,681
850
21,730
2,552
271,692
12,523
209,967
32,379
481,659
44,902
The Corporation’s investment in restricted stock totaled $5.17 million at June 30, 2023 and $1.12 million at December 31, 2022 and consisted of Federal Home Loan Bank of Atlanta (FHLB) stock. Restricted stock is generally viewed as a long-term investment, which is carried at cost because there is no market for the stock other than the FHLBs. Therefore, when evaluating restricted stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing any temporary decline in value. The Corporation did not consider its investment in restricted stock to be impaired at June 30, 2023 and no impairment has been recognized.
NOTE 3: Loans
On January 1, 2023, the Corporation adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update see Note 1. All loan information presented as of June 30, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.
The Corporation’s loans are stated at their face amount, net of deferred fees and costs and discounts, and consist of the classes of loans included in the table below. The Corporation has elected to exclude accrued interest receivable, totaling $6.8 million at June 30, 2023, from the recorded balance of loans.
Commercial real estate
630,018
592,301
Commercial business
117,505
118,605
Construction - commercial real estate
53,620
49,136
Land acquisition and development
33,107
37,537
Builder lines
29,857
34,538
Construction - consumer real estate
11,542
10,539
Residential mortgage
282,111
266,267
Equity lines
45,410
43,300
Other consumer
8,792
8,938
Consumer finance - automobiles
408,010
411,112
Consumer finance - marine and recreational vehicles
67,018
63,445
Subtotal
1,686,990
Less allowance for credit losses
(40,528)
(40,518)
Other consumer loans included $307,000 and $284,000 of demand deposit overdrafts at June 30, 2023 and December 31, 2022, respectively.
16
The following table shows the aging of the Corporation’s loan portfolio, by class, at June 30, 2023:
30-59
60-89
90+
90+ Days
Days
Past Due and
Past Due
Current1
Total Loans
Accruing
264
629,754
794
307
1,341
280,770
146
192
98
436
44,974
30
8,762
10,842
2,002
610
13,454
394,556
152
54
39
245
66,773
11,964
2,555
1,251
15,770
1,671,220
The table above includes nonaccrual loans that are current of $36,000, 30-59 days past due of $122,000 and 90+ days past due of $1.0 million.
The following table shows the Corporation’s recorded balance of loans on nonaccrual status as of June 30, 2023 and December 31, 2022. The Corporation recognized $2,000 of interest income on loans on nonaccrual status as of June 30, 2023 and had $14,000 of reversals of interest income upon placing loans on nonaccrual status during the three and six months ended June 30, 2023. All nonaccrual loans at June 30, 2023 had an allowance for credit loss.
149
108
842
83
1,169
1,189
Occasionally, the Corporation modifies loans to borrowers experiencing financial difficulties by providing principal forgiveness, term extensions, interest rate reductions or other-than-insignificant payment delays. As the effect of most modifications is already included in the allowance for credit losses due to the measurement methodologies used in its estimate, the allowance for credit losses is typically not adjusted upon modification. When principal forgiveness is provided at modification, the amount forgiven is charged against the allowance for credit losses. In some cases, the Corporation may provide multiple types of modifications on one loan and when multiple types of modifications occur within the same period, the combination of modifications is separately reported.
Loan modifications to borrowers experiencing financial difficulty (or modified loans) during the six months ended June 30, 2023 included a combination of term extensions and interest rate reductions of commercial real estate loans with a recorded investment of $47,000, or less than one percent of all commercial real estate loans, at June 30, 2023. The modified loans’ weighted-average interest rate was reduced from 8.75 percent to 8.0 percent and the weighted-average term extension was 4.9 years.
The Corporation closely monitors the performance of modified loans to understand the effectiveness of its modification efforts. Upon the determination that all or a portion of a modified loan is uncollectible, that amount is charged against the allowance for credit losses. There were no payment defaults during the three and six months ended June 30, 2023 of modified loans that were modified during the previous twelve months and all were current as of June 30, 2023.
17
Prior to the adoption of ASC 326
Loans acquired in business combinations are recorded in the Consolidated Balance Sheets at fair value at the acquisition date under the acquisition method of accounting. The outstanding principal balance and the carrying amount at December 31, 2022 of loans acquired in business combinations were as follows:
Acquired Loans -
Purchased
Credit Impaired
Performing
Outstanding principal balance
4,522
38,157
42,679
Carrying amount
Real estate – residential mortgage
8,587
8,887
Real estate – construction
Commercial, financial and agricultural1
1,114
23,023
24,137
5,047
5,062
755
781
Total acquired loans
37,412
38,867
The following table presents a summary of the change in the accretable yield of loans classified as PCI:
Six Months Ended
June 30, 2022
Accretable yield, balance at beginning of period
3,111
Accretion
(1,019)
Reclassification of nonaccretable difference due to improvement in expected cash flows
616
Other changes, net
(271)
Accretable yield, balance at end of period
2,437
The past due status of loans as of December 31, 2022 was as follows:
30 - 59 Days
60 - 89 Days
PCI
1,649
20
2,121
263,846
Real estate – construction:
Commercial, financial and agricultural:
591,187
118,604
43,246
191
200
8,712
Consumer finance:
Automobiles
10,557
1,570
12,969
398,143
Marine and recreational vehicles
114
35
232
63,213
12,329
2,097
1,136
15,562
1,618,701
The table above includes nonaccrual loans that are current of $244,000 and 90+ days past due of $945,000.
18
There were no loan modifications during the three and six months ended June 30, 2022 that were classified as TDRs. There were no TDR payment defaults during the three and six months ended June 30, 2022.
Impaired loans, which included TDRs of $823,000, and the related allowance at December 31, 2022 were as follows:
Recorded
Investment
Average
Unpaid
in Loans
Balance-
Principal
without
with
Related
Impaired
Income
Balance
Specific Reserve
Allowance
Loans
Recognized
797
36
761
51
806
28
823
62
834
37
NOTE 4: Allowance for Credit Losses
On January 1, 2023, the Corporation adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. For further discussion on the Corporation’s accounting policies and policy elections related to the accounting standard update see Note 1. All allowance for credit loss information presented as of June 30, 2023 is in accordance with ASC 326. All allowance for credit loss information presented as of December 31, 2022 or a prior date is presented in accordance with previously applicable GAAP.
The following table shows the allowance for credit losses activity by loan portfolio for the six months ended June 30, 2023:
Finance
Balance at December 31, 2022
Impact of ASC 326 adoption on non-PCD loans
(617)
Impact of ASC 326 adoption on PCD loans
595
Provision charged to operations
432
219
2,700
3,351
Loans charged off
(16)
(157)
(5,934)
(6,107)
Recoveries of loans previously charged off
125
104
2,046
2,275
Balance at June 30, 2023
11,738
3,603
25,187
40,528
The following table presents a breakdown of the provision for credit losses for the periods indicated.
Provision for credit losses:
Provision for loans
1,401
Provision for unfunded commitments
299
399
Commercial and consumer loans are assigned loan classification ratings based on their credit quality and risk of loss. These loan ratings are reviewed on a quarterly basis and updated as new information becomes available. The characteristics of these loan ratings are as follows:
19
The table below details the recorded balance of the classes of loans within the commercial and consumer loan portfolios by loan rating and year of origination as of June 30, 2023:
Revolving
Term Loans Recorded Balance by Origination Year
Converted
2021
2020
2019
Prior
to Term
Commercial real estate:
Loan Rating
Pass
52,621
125,117
151,434
102,745
39,879
151,039
122
622,957
Special Mention
1,014
Substandard
5,783
Substandard Nonaccrual
157,217
152,317
Commercial business:
11,826
19,822
19,342
14,198
15,861
15,002
18,580
89
114,720
369
2,348
2,717
68
11,894
15,371
Construction - commercial real estate:
11,722
19,456
7,179
15,263
Land acquisition and development:
13,107
9,306
9,991
703
Builder lines:
10,906
13,183
5,217
404
Construction - consumer real estate:
2,798
7,254
1,490
Residential mortgage:
32,483
95,925
46,248
43,763
12,240
50,495
281,154
117
587
691
43,867
51,348
Equity lines:
71
904
44,072
216
45,298
1,011
Other consumer:
2,966
3,504
820
445
298
713
Total:
125,322
297,368
241,071
186,476
68,682
218,856
62,842
430
1,201,047
1,500
3,848
6,547
520
125,390
246,854
186,580
68,687
221,463
2,778
1,211,962
21
For consumer finance loans, the Corporation utilizes credit scores based on the methods developed and defined by the Fair Isaac Corporation (FICO) as a key indicator of the risk of loss to manage the portfolio and estimate the allowance for credit losses. A FICO Score is a three-digit number based on the information in an applicant’s credit reports. It helps lenders determine how likely an applicant is to repay a loan. This, in turn, affects the loan amount that may be approved, repayment terms, and interest rate. Consumer finance loans are assigned a credit rating based on borrowers’ credit scores at the time of origination and are categorized within ranges of credit ratings used internally that parallel FICO Score rating bands. The Corporation monitors the consumer finance loan portfolio by past due status (refer to Note 3) and by credit rating at the time of origination, which the Corporation believes serves as a relevant indicator of aggregate credit quality and risk of loan defaults in the portfolio based upon the use of FICO Scores over time for loan approval decisions and through experience analyzing loss patterns. The characteristics of these credit ratings are as follows:
The table below details the recorded balance of the classes of loans within the consumer finance loan portfolio by credit rating and year of origination as of June 30, 2023:
Consumer finance - automobiles:
Credit rating
Very good
4,412
15,021
5,475
1,370
429
50
26,757
Good
19,020
50,982
19,170
4,450
1,669
603
95,894
Fairly good
25,949
65,156
32,484
8,148
5,768
2,802
140,307
18,049
44,159
26,862
9,189
6,950
3,658
108,867
Marginal
4,091
10,673
9,824
4,205
4,122
3,270
36,185
71,521
185,991
93,815
27,362
18,938
10,383
Consumer finance - marine and recreational vehicles:
3,653
16,490
10,832
11,005
2,799
2,821
47,600
5,702
8,683
1,782
1,595
460
511
18,733
270
38
32
9,662
25,443
12,652
12,632
3,259
3,370
8,065
31,511
16,307
12,375
3,228
2,871
74,357
24,722
59,665
20,952
6,045
2,129
114,627
26,256
65,426
32,522
8,180
2,840
140,992
81,183
211,434
106,467
39,994
22,197
13,753
475,028
22
The following table details the current period gross charge-offs of loans by year of origination for the six months ended June 30, 2023:
Current Period Gross Charge-offs by Origination Year
Other consumer1
140
2,789
1,739
312
5,813
56
121
223
2,868
479
482
6,107
Gross charge-offs increased for the six months ended June 30, 2023 compared to the same period in 2022 due primarily to higher charge-offs within the consumer finance-automobile portfolio segment as a result of an increase in the number of delinquent loans following a period of historically low delinquencies during the COVID-19 pandemic, a decline in wholesale values of used automobiles from a recent peak during the COVID-19 pandemic and continued recent challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when the automobile cannot be repossessed.
As of June 30, 2023, the Corporation had no collateral dependent loans for which repayment was expected to be derived substantially through the operation or sale of the collateral and where the borrower is experiencing financial difficulty.
The following table presents the changes in the allowance for loan losses by major classification during the six months ended June 30, 2022:
Real Estate
Commercial,
Residential
Financial &
Mortgage
Construction
Agricultural
Lines
Allowance for loan losses:
Balance at December 31, 2021
2,660
856
11,085
593
172
24,791
40,157
Provision (credited) charged to operations
(118)
116
(657)
(71)
870
(11)
(116)
(2,322)
(2,449)
2,529
2,609
Balance at June 30, 2022
2,553
972
10,422
524
180
25,868
40,519
23
The following table presents, as of December 31, 2022, the balance of the allowance for loan losses, the allowance by impairment methodology, total loans and loans by impairment methodology.
Allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
2,571
788
10,431
211
40,467
Acquired loans - PCI
Total allowance
2,622
Loans:
265,170
59,675
781,867
43,259
8,912
474,557
1,633,440
Total loans
782,981
Loans by credit quality indicators as of December 31, 2022 were as follows:
Special
Mention
Nonaccrual
Total1
264,891
518
702
585,707
738
5,856
43,147
8,747
1,152,847
1,487
6,563
1,161,161
Non-
410,270
63,362
473,632
925
NOTE 5: Goodwill and Other Intangible Assets
The carrying amount of goodwill was $25.19 million at June 30, 2023 and December 31, 2022. There were no changes in the recorded balance of goodwill during the three and six months ended June 30, 2023 or 2022.
The Corporation had $1.54 million and $1.68 million of other intangible assets as of June 30, 2023 and December 31, 2022, respectively. Other intangible assets were recognized in connection with the core deposits acquired from Peoples Bankshares, Incorporated in 2020 and customer relationships acquired by C&F Wealth Management in 2016. The following table summarizes the gross carrying amounts and accumulated amortization of other intangible assets:
Carrying
Amount
Amortization
Amortizable intangible assets:
Core deposit intangibles
1,711
(526)
(464)
Other amortizable intangibles
1,405
(1,047)
(973)
3,116
(1,573)
(1,437)
Amortization expense was $68,000 and $75,000 for the three months ended June 30, 2023 and 2022, respectively, and $136,000 and $149,000 for the six months ended June 30, 2023 and 2022, respectively.
NOTE 6: Equity, Other Comprehensive Income (Loss) and Earnings Per Share
Equity and Noncontrolling Interest
The Board of Directors authorized a program, effective December 1, 2022, to repurchase up to $10.00 million of the Corporation’s common stock through December 31, 2023 (the 2022 Repurchase Program). During the three and six months ended June 30, 2023, the Corporation repurchased $2.48 million and $4.54 million, respectively, of its common stock under the 2022 Repurchase Program. As of June 30, 2023, there was $5.00 million remaining available for repurchases of the Corporation’s common stock under the 2022 Repurchase Program.
The Corporation’s previous share repurchase program, which was authorized by the Board of Directors in November 2021, expired on November 30, 2022. There were 22,164 shares and 31,881 shares, respectively, repurchased under the previous share repurchase program during the three and six months ended June 30, 2022 for an aggregate cost of $1.12 million and $1.61 million, respectively.
Additionally during the six months ended June 30, 2023 and 2022, the Corporation withheld 6,352 shares and 4,503 shares of its common stock, respectively, from employees to satisfy tax withholding obligations upon vesting of restricted stock.
Noncontrolling interest represents an ownership interest in C&F Select LLC, a subsidiary of C&F Mortgage, held by an unrelated investor.
25
Accumulated Other Comprehensive Income (Loss), Net
Changes in each component of accumulated other comprehensive loss were as follows for the three months ended June 30, 2023 and 2022:
Securities
Defined
Cash
Available
Benefit
Flow
For Sale
Plan
Hedges
Accumulated other comprehensive (loss) income at March 31, 2023
(29,903)
(3,219)
1,199
Other comprehensive income (loss) arising during the period
(4,724)
305
(4,419)
Related income tax effects
992
(78)
914
227
(3,505)
Reclassifications into net income
31
(2)
29
Accumulated other comprehensive (loss) income at June 30, 2023
(33,635)
(3,195)
1,424
Accumulated other comprehensive income (loss) at March 31, 2022
(14,253)
(2,062)
451
(12,760)
(12,187)
2,680
(147)
2,533
426
(9,654)
(9)
Other comprehensive (loss) income, net of tax
Accumulated other comprehensive (loss) income at June 30, 2022
(24,333)
(2,067)
875
Changes in each component of accumulated other comprehensive loss were as follows for the six months ended June 30, 2023 and 2022:
Accumulated other comprehensive (loss) income at December 31, 2022
(35,184)
(3,236)
1,462
1,956
(48)
1,908
(411)
(398)
1,545
(35)
1,510
52
(4)
53
(1)
(3)
42
Accumulated other comprehensive income (loss) at December 31, 2021
437
(2,055)
(469)
(31,355)
1,813
(29,542)
6,585
(466)
6,119
1,347
(23,423)
(15)
(19)
Accumulated other comprehensive income (loss) at June 30, 2022
27
The following table provides information regarding reclassifications from accumulated other comprehensive loss into net income for the three and six months ended June 30, 2023 and 2022:
Line Item In the Consolidated
Statements of Income
Securities available for sale:
Reclassification of net realized losses into net income
Net of tax
Defined benefit plan:1
Reclassification of recognized net actuarial losses into net income
(10)
(86)
Noninterest expenses - Other
Amortization of prior service credit into net income
34
(24)
(41)
Cash flow hedges:
Amortization of hedging gains into net income
Interest expense - Trust preferred capital notes
Total reclassifications into net income
(42)
Earnings Per Share (EPS)
The components of the Corporation’s EPS calculations are as follows:
Weighted average shares outstanding—basic and diluted
3,424,820
3,534,489
3,444,746
3,541,098
The Corporation has applied the two-class method of computing basic and diluted EPS for each period presented because the Corporation’s unvested restricted shares outstanding contain rights to nonforfeitable dividends equal to dividends on the Corporation’s common stock. Accordingly, the weighted average number of shares used in the calculation of basic and diluted EPS includes both vested and unvested shares outstanding.
NOTE 7: Share-Based Plans
As permitted under the 2022 Stock and Incentive Compensation Plan, and previously under the 2013 Stock and Incentive Compensation Plan until April 19, 2022, the Corporation awards shares of restricted stock to certain key employees, non-employee directors and consultants. Restricted shares awarded to employees generally vest over periods up to five years, and restricted shares awarded to non-employee directors generally vest over periods up to three years. A summary of the activity for restricted stock awards for the periods indicated is presented below:
Weighted-
Grant Date
Shares
Unvested, December 31, 2022
145,677
48.88
Granted
18,255
57.39
Vested
(25,763)
51.88
Forfeited
(3,440)
49.13
Unvested, June 30, 2023
134,729
49.45
Unvested, December 31, 2021
140,577
48.57
16,130
50.58
(14,465)
51.18
(2,710)
47.94
Unvested, June 30, 2022
139,532
48.55
Share-based compensation expense, net of forfeitures, for the three and six months ended June 30, 2023 was $453,000 ($316,000 after tax) and $927,000 ($612,000 after tax), respectively, for restricted stock granted during 2018 through 2023. Share-based compensation expense, net of forfeitures, for the three and six months ended June 30, 2022 was $497,000 ($355,000 after tax) and $1.01 million ($719,000 after tax), respectively, for restricted stock granted during 2017 through 2022. As of June 30, 2023, there was $3.47 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.
NOTE 8: Employee Benefit Plans
The following table summarizes the components of net periodic benefit cost for the Bank’s non-contributory cash balance pension plan.
Components of net periodic benefit cost:
Service cost, included in salaries and employee benefits
330
440
688
919
Other components of net periodic benefit cost:
Interest cost
182
364
246
Expected return on plan assets
(317)
(412)
(642)
(830)
Amortization of prior service credit
(17)
(34)
Recognized net actuarial losses
48
86
Other components of net periodic benefit cost, included in other noninterest expense
(104)
(297)
(226)
(599)
Net periodic benefit cost
226
143
NOTE 9: Fair Value of Assets and Liabilities
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Corporation has elected to use fair value accounting for its entire portfolio of loans held for sale (LHFS).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a recurring basis in the financial statements.
Securities available for sale. The Corporation primarily values its investment portfolio using Level 2 fair value measurements, but may also use Level 1 or Level 3 measurements if required by the composition of the portfolio. At
June 30, 2023 and December 31, 2022, the Corporation’s entire securities portfolio was comprised of investments in debt securities classified as available for sale, which were valued using Level 2 fair value measurements. The Corporation has contracted with third party portfolio accounting service vendors for valuation of its securities portfolio. The vendors’ sources for security valuation are ICE Data Services (ICE), Refinitiv, and Bloomberg Valuation Service (BVAL). Each source provides opinions, known as evaluated prices, as to the value of individual securities based on model-based pricing techniques that are partially based on available market data, including prices for similar instruments in active markets and prices for identical assets in markets that are not active. ICE provides evaluated prices for the Corporation’s obligations of states and political subdivisions category of securities. ICE uses proprietary pricing models and pricing systems, mathematical tools and judgment to determine an evaluated price for a security based upon a hierarchy of market information regarding that security or securities with similar characteristics. Refinitiv and BVAL provide evaluated prices for the Corporation’s U.S. treasury, government agencies and corporations, mortgage-backed, and corporate categories of securities. U.S. treasury securities and fixed-rate callable securities of U.S. government agencies and corporations are individually evaluated on an option adjusted spread basis for callable issues or on a nominal spread basis incorporating the term structure of agency market spreads and the appropriate risk free benchmark curve for non-callable issues. Pass-through mortgage-backed securities (MBS) in the mortgage-backed category are grouped into aggregate categories defined by issuer program, weighted average coupon, and weighted average maturity. Each aggregate is benchmarked to relative to-be-announced mortgage-backed securities (TBA securities) or other benchmark prices. TBA securities prices are obtained from market makers and live trading systems. Collateralized mortgage obligations in the mortgage-backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics. Each evaluation is determined using an option adjusted spread and prepayment model based on volatility-driven, multi-dimensional spread tables. Fixed-rate securities issued by the Small Business Association in the mortgage backed category are individually evaluated based upon a hierarchy of security specific information and market data regarding that security or securities with similar characteristics.
Other investments. The Corporation holds equity investments in funds that provide debt and equity financing to small businesses. These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets. Changes in fair value are recognized in net income. The funds are managed by investment companies, and the net asset value of each fund is reported regularly by the investment companies. At June 30, 2023 and December 31, 2022, the combined fair value of these investments was $2.23 million and $2.16 million, respectively. These investments, measured at net asset value, are not presented in the tables below related to fair value measurements. Changes in fair value of these investments resulted in the recognition of unrealized gains of $31,000 and $145,000 for the three and six months ended June 30, 2023, respectively, and unrealized losses of $5,000 and unrealized gains of $19,000 for the three and six months ended June 30, 2022, respectively.
The Corporation also holds certain equity investments consisting of equity interests in an independent insurance agency and a full service title and settlement agency (collectively, the agencies). These investments are subject to contractual sale restrictions that only permit the sale of the investments back to the agencies themselves. These investments are recorded at fair value and included in other assets in the Consolidated Balance Sheets. At June 30, 2023 and December 31, 2022, the fair value of these investments was $3.51 million and $3.65 million, respectively. These investments are recorded at fair value based on the contractual redemption value of Corporation’s proportionate share of the agencies’ equity. Changes in fair value are recognized in net income and resulted in the recognition of unrealized gains of $83,000 and unrealized losses of $140,000 for the three and six months ended June 30, 2023, respectively. The Corporation’s investments in these agencies are classified as Level 2.
Loans held for sale. Fair value of the Corporation’s LHFS is based on observable market prices for similar instruments traded in the secondary mortgage loan markets in which the Corporation conducts business. The Corporation’s portfolio of LHFS is classified as Level 2.
Derivative asset - IRLCs. The Corporation recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Corporation’s IRLCs are classified as Level 2.
Derivative asset/liability – interest rate swaps on loans. The Corporation recognizes interest rate swaps at fair value. The Corporation has contracted with a third party vendor to provide valuations for these interest rate swaps using the discounted cash flow method. All of the Corporation’s interest rate swaps on loans are classified as Level 2.
Derivative asset/liability – cash flow hedges. The Corporation recognizes cash flow hedges at fair value. The Corporation has contracted with a third party vendor to provide valuations for these cash flow hedges using the discounted cash flow method. All of the Corporation’s cash flow hedges are classified as Level 2.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis. The fair value of forward sales of mortgage loans were not material to the consolidated financial statements of the Corporation at June 30, 2023 or December 31, 2022.
Fair Value Measurements Classified as
Assets/Liabilities at
Level 1
Level 2
Level 3
Total securities available for sale
Loans held for sale
Other investments
3,509
Derivatives
IRLC
775
Interest rate swaps on loans
5,900
1,893
539,278
3,649
391
6,328
1,941
539,159
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Corporation may be required, from time to time, to measure and recognize certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. The following describes the valuation techniques and inputs used by the Corporation in determining the fair value of certain assets recorded at fair value on a nonrecurring basis in the financial statements.
Other Real Estate Owned (OREO). Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. Initial fair value is based upon appraisals the Corporation obtains from independent licensed appraisers. Subsequent to foreclosure, management periodically performs valuations of the foreclosed assets based on updated appraisals, general market conditions, recent sales of similar properties, length of time the properties have been held, and our ability and intent with regard to continued ownership of the properties. The Corporation may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. As such, the Corporation records OREO as a nonrecurring fair value measurement classified as Level 3.
At June 30, 2023 and December 31, 2022 there was no OREO that was measured at fair value.
Fair Value of Financial Instruments
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation. The Corporation uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.
33
The following tables reflect the carrying amounts and estimated fair values of the Corporation’s financial instruments whether or not recognized on the Consolidated Balance Sheets at fair value.
Fair Value Measurements at June 30, 2023 Classified as
Total Fair
Financial assets:
Cash and short-term investments
61,393
2,444
61,349
1,597,086
Financial liabilities:
Demand and savings deposits
1,451,148
541,112
169,550
155,877
Fair Value Measurements at December 31, 2022 Classified as
28,898
2,189
28,850
1,538,062
1,622,566
374,267
85,943
71,906
NOTE 10: Business Segments
The Corporation operates in a decentralized fashion in three business segments: community banking, mortgage banking and consumer finance. The community banking segment comprises C&F Bank, C&F Wealth Management, C&F Insurance and CVB Title. Revenues from community banking operations consist primarily of net interest income related to investments in loans and securities and outstanding deposits and borrowings, fees earned on deposit accounts, debit card
interchange activity, and net revenues from offering wealth management services and insurance products through third-party service providers. Through C&F Mortgage, mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, mortgage banking fee income related to loan originations, fees earned by providing mortgage loan origination functions to third-party lenders, and net interest income on mortgage loans held for sale. Revenues from consumer finance operations through C&F Finance consist primarily of net interest income earned on purchased retail installment sales contracts.
The standalone Corporation’s revenues and expenses are comprised primarily of interest expense associated with the Corporation’s trust preferred capital notes and subordinated debt, general corporate expenses, and changes in the value of the rabbi trust and deferred compensation liability related to its nonqualified deferred compensation plan. The results of the Corporation, which includes funding and operating costs that are not allocated to the business segments, are included in the column labeled “Other” in the tables below.
Three Months Ended June 30, 2023
Community
Banking
Eliminations
Consolidated
24,334
499
11,785
(5,880)
5,850
5,705
545
(5,926)
18,484
280
6,080
(545)
46
Gain on sales of loans
1,928
Other noninterest income
4,042
1,268
5,847
Net revenue
22,526
3,476
6,085
(13)
32,108
1,100
Noninterest expense
14,999
3,030
3,514
961
Income (loss) before taxes
6,927
446
1,471
Income tax expense (benefit)
1,288
100
401
(257)
Net income (loss)
5,639
346
1,070
(670)
Other data:
Capital expenditures
975
Three Months Ended June 30, 2022
16,808
10,222
(3,268)
1,174
194
3,091
(3,285)
15,634
7,131
(587)
2,639
(441)
4,135
1,400
(2,088)
(31)
3,465
19,769
4,475
7,180
(2,675)
(455)
28,294
Provision for loan losses
13,812
3,421
3,645
(1,766)
5,957
1,044
3,015
(909)
(442)
1,141
262
(248)
(93)
4,816
782
2,195
(661)
(349)
158
60
103
1,087
Six Months Ended June 30, 2023
47,465
795
23,293
(11,510)
9,593
11,312
1,148
(11,594)
37,872
514
11,981
(1,148)
84
3,785
(75)
7,952
2,269
1,336
(105)
11,496
45,824
6,568
12,025
188
64,509
1,050
29,934
5,828
7,148
2,011
(29)
14,840
740
2,177
(1,823)
(67)
2,783
167
598
(544)
(18)
12,057
1,579
(1,279)
1,720
Six Months Ended June 30, 2022
31,846
1,118
19,800
(6,141)
2,347
314
5,859
(6,173)
29,499
804
13,941
(1,169)
5,347
(454)
8,059
2,721
115
(3,348)
7,499
37,558
8,872
14,056
(4,517)
(470)
55,499
(700)
27,984
6,647
7,339
(2,633)
(27)
10,274
2,193
(1,884)
(443)
1,590
(514)
8,333
1,648
4,257
(1,370)
(350)
1,271
1,350
123
206
Total assets at June 30, 2023
2,298,101
45,795
481,135
36,910
(442,486)
Total assets at December 31, 2022
2,206,299
24,500
479,864
43,241
(421,587)
The community banking segment extends two warehouse lines of credit to the mortgage banking segment, providing a portion of the funds needed to originate mortgage loans. The community banking segment charges the mortgage banking segment interest at the daily FHLB advance rate plus a spread ranging from 50 basis points to 175 basis points. The community banking segment also provides the consumer finance segment with a portion of the funds needed to purchase loan contracts by means of variable rate notes that carry interest at one-month term SOFR plus 211.5 basis points, with a floor of 3.5 percent and a ceiling of 6.0 percent, and fixed rate notes that carry interest at rates ranging from 2.9 percent to 5.1 percent. The community banking segment acquires certain residential real estate loans from the mortgage banking segment at prices similar to those paid by third-party investors. These transactions are eliminated to reach consolidated totals. In addition to unallocated expenses recorded by the holding company, certain overhead costs are incurred by the community banking segment and are not allocated to the mortgage banking and consumer finance segments.
NOTE 11: Commitments and Contingent Liabilities
The Corporation enters into commitments to extend credit in the normal course of business to meet the financing needs of its customers, including loan commitments and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amounts recorded on the Consolidated Balance Sheets. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral is obtained based on management’s credit assessment of the customer.
Loan commitments are agreements to extend credit to a customer provided that there are no violations of the terms of the contract prior to funding. Commitments have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of loan commitments at the Bank was $444.22 million at June 30, 2023 and $394.75 million at December 31, 2022, which does not include IRLCs at the mortgage banking segment, which are discussed in Note 12.
Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The total contract amount of standby letters of credit, whose contract amounts represent credit risk, was $14.29 million at June 30, 2023 and $16.26 million at December 31, 2022.
The mortgage banking segment sells the majority of the residential mortgage loans it originates to third-party investors. Additionally, the community banking segment purchases residential mortgage loans from the mortgage banking segment under terms and conditions similar 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 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. For both the three and six months ended June 30, 2023, the Corporation recorded a reversal of provision for indemnifications of $235,000, and recorded a reversal of provision for indemnifications for the three and six months ended June 30, 2022 of $286,000 and $869,000, respectively, which is included in “Noninterest Expenses – Other” on the Consolidated Statements of Income. No indemnification payments were made during the three and six months ended June 30, 2023 or 2022. The allowance for indemnifications was $2.16 million and $2.39 million at June 30, 2023 and December 31, 2022, respectively.
NOTE 12: Derivative Financial Instruments
The Corporation uses derivative financial instruments primarily to manage risks to the Corporation associated with changing interest rates, and to assist customers with their risk management objectives. The Corporation designates certain interest rate swaps as hedging instruments in qualifying cash flow hedges. The changes in fair value of these designated hedging instruments is reported as a component of other comprehensive income (loss). Derivative contracts that are not designated in a qualifying hedging relationship include customer accommodation loan swaps and contracts related to mortgage banking activities.
Cash flow hedges. The Corporation designates interest rate swaps as cash flow hedges when they are used to manage exposure to variability in cash flows on variable rate borrowings such as the Corporation’s trust preferred capital notes.
These interest rate swaps are derivative financial instruments that manage the risk of variability in cash flows by exchanging variable-rate interest payments on a notional amount of the Corporation’s borrowings for fixed-rate interest payments. Interest rate swaps designated as cash flow hedges are expected to be highly effective in offsetting the effect of changes in interest rates on the amount of variable-rate interest payments, and the Corporation assesses the effectiveness of each hedging relationship quarterly. If the Corporation determines that a cash flow hedge is no longer highly effective, future changes in the fair value of the hedging instrument would be reported in earnings. As of June 30, 2023, the Corporation has designated cash flow hedges to manage its exposure to variability in cash flows on certain variable rate borrowings for periods that end between June 2024 and June 2029.
All interest rate swaps were entered into with counterparties that met the Corporation’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in these derivative contracts is not significant.
Unrealized gains or losses recorded in other comprehensive income (loss) related to cash flow hedges are reclassified into earnings in the same period(s) during which the hedged interest payments affect earnings. When a designated hedging instrument is terminated and the hedged interest payments remain probable of occurring, any remaining unrecognized gain or loss in other comprehensive income (loss) is reclassified into earnings in the period(s) during which the forecasted interest payments affect earnings. Amounts reclassified into earnings and interest receivable or payable under designated interest rate swaps are reported in interest expense. The Corporation does not expect any unrealized losses related to cash flow hedges to be reclassified into earnings in the next twelve months.
Loan swaps. The Bank also enters into interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. The Bank simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and offsetting terms. The net result of these interest rate swaps is that the customer pays a fixed rate of interest and the Corporation receives a floating rate. These back-to-back loan swaps are derivative financial instruments and are reported at fair value in “other assets” and “other liabilities” in the Consolidated Balance Sheets. Changes in the fair value of loan swaps are recorded in other noninterest income and sum to zero because of the offsetting terms of swaps with borrowers and swaps with dealer counterparties.
Mortgage banking. The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined (or “locked”) prior to funding. The mortgage banking segment is exposed to interest rate risk through fixed-rate IRLCs and mortgage loans from the time that interest rates are locked until the loans are sold in the secondary market. The mortgage banking segment mitigates this interest rate risk by entering into forward sales contracts with investors, which at times includes the community banking segment, at the time that interest rates are locked for mortgage loans to be delivered on a best efforts basis. IRLCs are derivative financial instruments and are reported at fair value in other assets and other liabilities in the Consolidated Balance Sheets, along with the changes in fair value of the related forward sales of loans. Changes in the fair value of mortgage banking derivatives are recorded as a component of gains on sales of loans.
At June 30, 2023, the mortgage banking segment had $58.08 million of IRLCs and $37.09 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $95.17 million in mortgage loans.
At December 31, 2022, the mortgage banking segment had $42.28 million of IRLCs and $16.41 million of unpaid principal on mortgage loans held for sale for which it managed interest rate risk using best-efforts forward sales contracts for $58.69 million in mortgage loans.
The following tables summarize key elements of the Corporation’s derivative instruments.
Notional
Interest rate swap contracts
25,000
Not designated as hedges:
Customer-related interest rate swap contracts:
Matched interest rate swaps with borrower
72,711
Matched interest rate swaps with counterparty
Mortgage banking contracts:
IRLCs
58,080
85,856
42,284
The Corporation and the Bank are required to maintain cash collateral with dealer counterparties for interest rate swap relationships in a loss position. At both June 30, 2023 and December 31, 2022, there was no cash collateral maintained with dealer counterparties.
NOTE 13: Other Noninterest Expenses
The following table presents the significant components in the Consolidated Statements of Income line “Noninterest Expenses-Other.”
Data processing fees
2,614
2,645
5,296
5,246
Professional fees
743
1,389
1,495
Marketing and advertising expenses
410
506
811
974
Insurance expense
393
790
474
Mortgage banking loan processing expenses
324
582
1,001
Travel and educational expenses
303
653
745
Telecommunication expenses
351
626
697
Provision for indemnifications
(286)
All other noninterest expenses
1,526
1,356
3,029
2,724
Total other noninterest expenses
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion supplements and provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Corporation. This discussion and analysis should be read in conjunction with the accompanying consolidated financial statements. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Cautionary Statement About Forward-Looking Statements” at the end of this discussion and analysis.
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity (ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three business segments: community banking, mortgage banking, and consumer finance. We also actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a strong capital position.
The following table presents selected financial performance highlights for the periods indicated:
TABLE 1: Financial Performance Highlights
(Dollars in thousands, except for per share data)
Net Income (Loss):
Community Banking
Mortgage Banking
Consumer Finance
(671)
(1,010)
(1,328)
(1,720)
Consolidated net income
Earnings per share - basic and diluted
Annualized return on average equity
12.51
%
13.80
12.69
12.36
Annualized return on average assets
1.06
1.16
1.08
1.09
Annualized return on average tangible common equity1
14.43
16.15
14.68
14.33
Return on average tangible common equity (ROTCE), which excludes the effect of intangible assets, is a non-GAAP financial measure. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for information about these non-GAAP financial measures, including a quantitative reconciliation to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Consolidated net income decreased $399,000 for the second quarter of 2023 compared to the same period in 2022 due primarily to lower net income of the mortgage banking segment and the consumer finance segment, partially offset by higher net income of the community banking segment. Consolidated net income increased $363,000 for the first six months of 2023 compared to the same period in 2022 due primarily to higher net income of the community banking segment, partially offset by lower net income of the mortgage banking segment and the consumer finance segment.
A discussion of the performance of our business segments is included under the heading “Business Segments” in the “Results of Operations” section of this discussion and analysis.
Key highlights for the three and six months ended June 30, 2023 are as follows.
Capital Management and Dividends
Total equity was $202.5 million at June 30, 2023, compared to $196.2 million at December 31, 2022. Under regulatory capital standards, the Corporation’s tier 1 capital and total capital ratios at June 30, 2023 were 12.6 percent and 14.9 percent, respectively, compared to 12.8 percent and 15.4 percent, respectively, at December 31, 2022. At June 30, 2023, the book value per share of the Corporation’s common stock was $59.31, and tangible book value per share, which is a non-GAAP financial measure, was $51.46, compared to $56.27 and $48.54, respectively, at December 31, 2022.
Total equity increased $6.3 million at June 30, 2023 compared to December 31, 2022, due primarily to net income and lower unrealized losses in the market value of securities available for sale, which are recognized as a component of other comprehensive loss, partially offset by share repurchases, dividends paid on the Corporation’s common stock, and the Corporation’s adoption of the Current Expected Credit Loss (CECL) methodology for estimating credit losses, which resulted in a decrease to opening retained earnings of $1.1 million. The Corporation’s securities available for sale are fixed income debt securities, and their unrealized loss position is a result of rising market interest rates since they were purchased. 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 accumulated other comprehensive loss related to the Corporation’s securities available for sale decreased to $33.6 million at June 30, 2023, compared to $35.2 million at December 31, 2022.
The Corporation declared a quarterly cash dividend of 44 cents per share during the second quarter of 2023, which was paid on July 1, 2023. This dividend represents a payout ratio of 23.9 percent of earnings per share for the second quarter of 2023. The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.
The Corporation has a share repurchase program that was authorized by the Board of Directors in November 2022 to repurchase up to $10.0 million of the Corporation’s common stock through December 31, 2023. During the second quarter and first six months of 2023, the Corporation repurchased 47,024 shares, or $2.5 million, and 83,008 shares, or $4.5 million, of its common stock under this share repurchase program, respectively.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require management’s most difficult, subjective or complex judgments affecting the application of these policies, and the greatest likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.
Allowance for Credit Losses: We establish the allowance for credit losses through charges to earnings in the form of a provision for credit losses. Loan losses are charged against the allowance for credit losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent, when management believes that the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected. Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. The measurement of the allowance for credit losses on commercial and consumer loans is based in part on forecasts of the national unemployment rate, which we believe to be indicative of risk factors related to the collectability of commercial and consumer loans. In addition, management’s estimate of expected credit losses is based on the remaining life of loans held for investment, and changes in expected prepayment behavior may result in changes in the remaining life of loans and expected credit losses. Management also assesses the risk of credit losses arising from changes in general market, economic and business conditions; the nature and volume of the loan portfolio; the volume and severity of delinquencies and adversely classified loan balances and the value of underlying collateral in determining the recorded balance of the allowance for credit 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. The level of the allowance is particularly sensitive to changes in the actual and forecasted national unemployment rate and changes in current conditions or reasonably expected future conditions affecting the collectability of loans.
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” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for the three and six months ended June 30, 2023 and 2022. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented. Average balances of securities available for sale are included at amortized cost. Loans include loans held for sale. Loans placed on a nonaccrual status are included in the balances and are included in the computation of yields, but had no material effect.
Accretion and amortization of fair value purchase adjustments related to business combinations are included in the computation of yields on loans and investments and on the costs of deposits and borrowings. The accretion contributed approximately 7 basis points and 5 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2023, and 4 basis points and 3 basis points to the yield on total earning assets and net interest margin for the second quarter of 2023, respectively, compared to approximately 25 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, for the second quarter of 2022, and 12 basis points to both the yield on total earning assets and net interest margin, for the second quarter of 2022. The accretion contributed approximately 8 basis points and 5 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2023, and 4 basis points to both the yield on total earning assets and net interest margin for the first six months of 2023, compared to approximately 20 basis points and 14 basis points to the yields on community banking segment loans and total loans, respectively, for the first six months of 2022, and 10 basis points to both the yield on total earning assets and net interest margin, for the first six months of 2022.
TABLE 2: Average Balances, Income and Expense, Yields and Rates
Income/
Yield/
Expense
Rate
Securities:
Taxable
447,906
2,359
2.11
400,469
1,738
1.74
Tax-exempt
104,488
864
3.31
69,077
428
2.48
Total securities
552,394
3,223
2.33
469,546
2,166
1.85
Community banking segment
1,201,145
15,186
5.07
1,057,527
11,113
4.21
Mortgage banking segment
30,734
6.51
57,393
4.40
Consumer finance segment
476,203
11,784
9.93
417,503
10,223
9.82
1,708,082
27,469
6.45
1,532,423
21,966
5.75
34,661
3.25
215,240
0.73
Total earning assets
2,295,137
30,973
5.41
2,217,209
24,526
4.44
(41,519)
(40,300)
Total non-earning assets
146,459
168,658
2,400,077
2,345,567
Liabilities and Equity
Interest-bearing deposits:
Interest-bearing demand deposits
351,743
490
0.56
364,224
0.21
Money market deposit accounts
318,541
747
0.94
404,365
253
0.25
Savings accounts
212,602
0.05
230,300
Certificates of deposit
520,470
2.55
385,094
0.66
Total interest-bearing deposits
1,403,356
4,576
1.31
1,383,983
1,101
0.32
Borrowings:
Repurchase agreements
31,507
97
1.23
36,527
0.45
Other borrowings
141,098
4.88
55,645
619
4.45
Total borrowings
172,605
1,817
92,172
660
2.86
Total interest-bearing liabilities
1,575,961
1.63
1,476,155
0.48
578,784
630,154
41,242
42,718
2,195,987
2,149,027
204,090
196,540
24,580
22,765
Interest rate spread
3.78
3.96
Interest expense to average earning assets
1.12
Net interest margin
4.29
4.12
455,014
4,810
368,316
1.64
101,686
1,645
3.24
70,134
556,700
6,455
2.32
438,450
3,899
1.78
1,186,734
29,488
5.01
1,040,557
21,557
4.18
24,936
6.43
58,660
3.84
475,717
9.87
399,409
19,801
10.00
1,687,387
53,576
6.40
1,498,626
42,476
5.72
30,310
3.04
235,023
0.43
2,274,397
60,488
5.36
2,172,099
46,875
4.35
Allowance for loan losses
(41,283)
(40,538)
150,703
172,865
2,383,817
2,304,426
368,028
1,073
0.59
350,245
328
0.19
333,449
1,339
0.81
383,224
218,971
0.06
226,723
59
477,872
2.17
400,426
0.68
1,398,320
7,605
1.10
1,360,618
2,206
0.33
33,373
178
1.07
34,636
123,358
2,957
4.79
55,676
1,232
4.43
156,731
3,135
4.00
90,312
1,310
2.90
1,555,051
1.39
1,450,930
0.49
585,211
608,160
40,576
42,722
2,180,838
2,101,812
202,979
49,748
43,359
3.97
3.86
0.95
4.41
4.02
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the period-to-period changes in the components of net interest income on a taxable-equivalent basis. The Corporation calculates the rate and volume variances using a formula prescribed by the SEC. Rate/volume variances, the third element in the calculation, are not shown separately in the table, but are allocated to the rate and volume variances in proportion to the absolute dollar amounts of each.
45
TABLE 3: Rate-Volume Recap
Three Months Ended June 30, 2023 from 2022
Increase (Decrease)
Due to
Increase
Volume
(Decrease)
Interest income:
2,447
1,626
4,073
(361)
(131)
1,561
222
621
(551)
3,801
2,646
6,447
Interest expense:
309
302
558
(64)
494
2,388
293
2,681
3,255
220
3,475
63
66
1,035
3,384
1,248
4,632
Change in net interest income
417
1,398
1,815
Six Months Ended June 30, 2023 from 2022
4,645
3,286
7,931
519
(842)
(323)
(259)
3,751
3,492
978
803
1,781
461
727
(770)
(43)
6,924
6,689
13,613
937
(69)
868
3,783
5,146
5,399
1,617
1,725
5,357
1,867
7,224
1,567
4,822
6,389
Net interest income, on a taxable-equivalent basis, for the second quarter of 2023 increased to $24.6 million, compared to $22.8 million for the second quarter of 2022. Net interest income, on a taxable-equivalent basis, for the first six months of 2023 increased to $49.7 million, compared to $43.4 million for the first six months of 2022. The increases in net interest income for both the second quarter and first six months of 2023 as compared to the same periods in 2022 were due primarily to an increase in net interest margin and higher average balances of earning assets, partially offset by higher average balances of borrowings and interest-bearing deposits. Annualized net interest margin increased 17 basis points to 4.29 percent for the second quarter of 2023, relative to the second quarter of 2022. Annualized net interest margin increased 39
basis points to 4.41 percent for the first six months of 2023, relative to the first six months of 2022. The increases in annualized net interest margin were due primarily to the effect of rising interest rates on yields of earning assets, partially offset by rising costs associated with deposits and a shift to higher cost deposits and borrowings. The Federal Reserve Bank increased the target federal funds interest rate from 0.25 percent at December 31, 2021 to 4.50 percent by the end of 2022 and to 5.25 percent by the end of the second quarter of 2023. The yield on interest-earning assets increased by 97 basis points and 101 basis points for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. The cost of interest-bearing liabilities increased by 115 basis points and 90 basis points for the second quarter and first six months of 2023, respectively, compared to the same periods of 2022. Average earning assets increased $77.9 million and $102.3 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. Average interest-bearing liabilities increased $99.8 million and $104.1 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.
Average loans, which includes both loans held for investment and loans held for sale, increased $175.7 million to $1.71 billion for the second quarter of 2023 and increased $188.8 million to $1.69 billion for the first six months of 2023, compared to the same periods in 2022. Average loans at the community banking segment increased $143.6 million, or 13.6 percent, for the second quarter of 2023 and increased $146.2 million, or 14.1 percent, for the first six months of 2023, compared to the same periods in 2022. The increase in average loans at the community banking segment for the second quarter and first six months of 2023 compared to the same periods in 2022 resulted primarily from growth in the commercial real estate and residential mortgage segments of the loan portfolio. Average loans at the consumer finance segment increased $58.7 million, or 14.1 percent, for the second quarter of 2023 and increased $76.3 million, or 19.1 percent, for the first six months of 2023 compared to the same periods in 2022 due primarily to growth in the automobile segment of the loan portfolio. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $26.7 million, or 46.4 percent, for the second quarter of 2023 and decreased $33.7 million, or 57.5 percent, for the first six months of 2023 compared to the same periods in 2022, due primarily to lower mortgage loan production volume as a result of conditions in the housing markets and rising interest rates on mortgage loans.
The community banking segment average loan yield increased 86 basis points to 5.07 percent for the second quarter of 2023 and increased 83 basis points to 5.01 percent for the first six months of 2023, compared to the same periods in 2022 due primarily to the effects of rising interest rates. The consumer finance segment average loan yield increased 11 basis points to 9.93 percent for the second quarter of 2023, compared to the second quarter of 2022, due to the effects of rising interest rates which offset the effects of higher credit quality loan contracts purchased by the segment. The consumer finance segment average loan yield decreased 13 basis points to 9.87 percent for the first six months of 2023, compared to the first six months of 2022, due to the consumer finance segment continuing to pursue loan contracts of higher credit quality and lower average yields. On a linked quarter basis, the trend of falling yields on consumer finance loans reversed in the first quarter of 2023 and continued to rise in the second quarter of 2023 as new loan originations were brought on at higher interest rates, due to current higher market interest rates. Average consumer finance segment loan yield increased by 11 basis points for the second quarter of 2023 from 9.82 basis points in the first quarter of 2023. The mortgage banking segment average loan yield increased 211 basis points to 6.51 percent for the second quarter of 2023 and increased 259 basis points to 6.43 percent for the first six months of 2023, compared to the same periods in 2022, due the effects of rising interest rates.
Average securities available for sale increased $82.8 million and $118.3 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due primarily to purchases of government agencies and obligations of states and political subdivisions during 2022. The average yield on the securities portfolio on a taxable-equivalent basis increased 48 basis points to 2.33 percent for the second quarter of 2023 and increased 54 basis points to 2.32 percent for the first six months of 2023, compared to the same periods in 2022, due primarily to rising interest rates during 2022 and the first half of 2023, which allowed for purchases of securities at higher yields.
Average interest-bearing deposits in other banks, consisting primarily of excess cash reserves maintained at the Federal Reserve Bank, decreased $180.6 million and $204.7 million for the second quarter and first six months of 2023, respectively, compared to the same periods of 2022, due primarily to utilizing cash to fund growth in loans and securities. The average yield on interest-bearing deposits in other banks increased 252 basis points for the second quarter of 2023 and increased 261 basis points for the first six months of 2023, compared to the same periods in 2022 due to rising interest rates during 2022 and the first half of 2023.
47
Average money market, savings and interest-bearing demand deposits decreased $116.0 million and $39.7 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due primarily to decreases in business checking, money market and savings accounts. Average noninterest-bearing demand deposits decreased $51.4 million and $22.9 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. The decreases in non-time deposits is due primarily to customers seeking higher yielding opportunities as a result of rising interest rates paid on time deposits. Average time deposits increased $135.4 million and $77.4 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. The average cost of interest-bearing deposits increased 99 basis points and 77 basis points for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due primarily to higher rates on deposits.
Average borrowings increased $80.4 million and $66.4 million for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due primarily to increases in short-term Federal Home Loan Bank of Atlanta (FHLB) borrowings to support lending activities. The average cost of borrowings increased 135 basis points and 110 basis points for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due primarily to the effects of rising interest rates and a shift in the mix of borrowings from lower cost repurchase agreements to FHLB borrowings.
The Corporation believes that higher interest rates will continue to have a positive effect on yields of variable rate loans, new loan originations and purchases of securities available for sale. The Corporation also expects the cost of deposits to continue to rise amid competition for deposits and due to repricing of time deposits upon maturity, and that a portion of the Corporation’s funding will continue to be drawn from borrowings in the near term, resulting in a higher cost of funds. The rate of increase in the cost of funds in the near-term is expected to exceed the increase in interest-earning asset yields, decreasing net interest margin for the remainder of the 2023, as liabilities generally reprice on a delay compared to assets and are currently rising at a faster pace. The effect of these factors on the Corporation’s net interest margin will depend on a number of factors, including the Corporation’s ability to continue to grow loans at the community banking segment and consumer finance segment, to compete for deposits, and to the extent of its reliance on borrowings. 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. The Federal Reserve Bank has subsequently increased the target federal funds interest rate by 0.25 percent to 5.50 percent at their July 2023 meeting. Although there are indications the Federal Reserve Bank appears to be nearing the end of the consistent rate increases as seen in 2022 and the first half of 2023, if market interest rates were to continue to rise further, net interest margin would be positively impacted as the Corporation generally expects its assets to reprice more quickly that its deposits and borrowings. Alternatively, if market interest rates begin to decline, the Corporation’s net interest margin would therefore be adversely affected as its assets reprice downward more quickly than its deposits and borrowings.
Noninterest Income
TABLE 4: Noninterest Income
Total noninterest income increased $2.1 million, or 37.1 percent, for the second quarter of 2023 and increased $2.8 million, or 22.7 percent, for the first six months of 2023, compared to the same periods in 2022. The increases were due primarily to fluctuations in unrealized gains and losses related to the Corporation’s nonqualified deferred compensation plan, included in other income (loss), higher mortgage lender services income, and higher debit card interchange fees, partially offset by lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income.
The Corporation recognized unrealized gains related to its nonqualified deferred compensation plan of $586,000 and $1.4 million for the second quarter and first six months of 2023, respectively, compared to unrealized losses of $2.1 million and $3.4 million for the same periods in 2022, respectively. Unrealized gains and losses in the Corporation’s nonqualified deferred compensation plan are offset by changes in deferred compensation, recorded in salaries and employee benefits expense.
Noninterest Expense
TABLE 5: Noninterest Expense
Occupancy expense
Other expenses:
Data processing
Other real estate loss and expense, net
Other expenses
2,984
2,739
5,908
5,613
Total other expenses
Total noninterest expense
Total noninterest expenses increased $3.4 million, or 17.8 percent, in the second quarter of 2023 and increased $5.6 million, or 14.2 percent, in the first six months of 2023 compared to the same periods in 2022. The increases were due primarily to changes in deferred compensation liabilities, included in salaries and employee benefits, and increases in salaries and employee benefits at the community banking segment, which have generally increased in line with employment market
conditions, partially offset by lower expenses tied to mortgage loan production volume at the mortgage banking segment, reported in salaries and benefits and mortgage banking loan processing expenses, and lower reversals of provision for indemnifications at the mortgage banking segment in 2023 as compared to 2022.
Changes in deferred compensation liabilities increased salaries and employee benefits expense by $586,000 and $1.4 million in the second quarter and first six months of 2023, respectively, and decreased salaries and employee benefits expense by $2.1 million and $3.4 million in the second quarter and first six months of 2022, and were offset in both periods by unrealized gains and losses, respectively, recorded in noninterest income.
Income Taxes
The Corporation’s consolidated effective income tax rate was 18.8 percent and 21.7 percent for the first six months of 2023 and 2022, respectively. The Corporation’s consolidated effective tax rate for the first six months of 2023 was lower compared to the same period in 2022 primarily as a result of a lower share of income at the consumer finance and mortgage banking segments, which are subject to state income taxes.
Business Segments
The Corporation operates in a decentralized manner in three business segments: community banking, mortgage banking and consumer finance. An overview of the financial results for each of the Corporation’s business segments is presented below.
Community Banking: The community banking segment comprises C&F Bank, C&F Wealth Management, C&F Insurance and CVB Title. The following table presents the community banking segment operating results for the periods indicated.
TABLE 6: Community Banking Segment Operating Results
17,884
36,822
30,199
Noninterest income:
1,086
1,085
2,148
2,145
Other income, net
609
774
1,210
1,423
Noninterest expense:
8,920
8,165
17,846
16,652
1,613
3,200
2,069
1,944
4,188
3,881
2,430
2,089
4,699
4,119
The community banking segment reported net income of $5.6 million and $12.1 million for the second quarter and first six months of 2023, respectively, compared to $4.8 million and $8.3 million for the same periods in 2022. The increases of $823,000 and $3.7 million for the second quarter and first six months of 2023, compared to the same periods in 2022, were due primarily to higher net interest income, partially offset by an increase in provision for credit losses and higher noninterest expense.
Net interest income for the community banking segment increased by $2.9 million to $18.5 million for the second quarter of 2023 and increased by $8.4 million to $37.9 million for the first six months of 2023, respectively, compared to the same periods in 2022. Included in net interest income is interest income on variable rate loans to the consumer finance and mortgage banking segments. Average loan yields were higher for the second quarter and first six months of 2023 compared to the same periods of 2022, due primarily to the effects of rising interest rates as market interest rates rose in 2022 and the first half of 2023. Average costs of interest-bearing liabilities were higher for the second quarter and first six months of 2023 compared to the same periods of 2022, due primarily to the effects of rising interest rates and a shift in the mix from lower cost deposits to time deposits and borrowings. While the community banking segment expects loan yields to continue to rise, the impact on net interest margin is expected to be outpaced by the effect of rising deposit costs for the remainder of 2023.
The community banking segment recorded $600,000 in provision for credit losses for the second quarter of 2023 and recorded $1.1 million provision for credit losses for the first six months of 2023 due primarily to growth in the loan portfolio and unfunded commitments. The community banking segment recorded no provision for credit losses for the second quarter of 2022 and recorded a net reversal of provision for credit losses of $700,000 for the first six months of 2022 due primarily to the resolution of certain impaired loans, which resulted in the reversal of specific reserves with no losses being realized. Noninterest income decreased for the second quarter and first six months of 2023 compared to the
same periods in 2022 as a result of lower wealth management services income and lower other income, net, partially offset by higher debit card interchange income and higher investment income in other equity investments. Noninterest expenses increased during the second quarter and first six months of 2023 compared to the same periods in 2022, driven primarily by higher salaries and employee benefits and higher other expenses due primarily to increased FDIC assessments from statutory increases applicable to all insured depository institutions.
Mortgage Banking: The following table presents the mortgage banking operating results for the periods indicated.
TABLE 7: Mortgage Banking Segment Operating Results
772
Gains of sales of loans
675
941
1,213
1,797
Mortgage lender services fee income
Other income
3,196
4,039
6,054
8,068
2,108
2,128
4,240
256
338
517
263
304
505
614
403
651
958
1,133
The mortgage banking segment reported net income of $346,000 and $573,000 for the second quarter and first six months of 2023 compared to $782,000 and $1.6 million for the same periods in 2022. The decrease in net income of the mortgage banking segment for the second quarter and first six months of 2023 compared to the same periods in 2022 was due primarily to lower volume of mortgage loan originations and lower reversals of provision for indemnifications in 2023, which is included in other expenses, partially offset by lower expenses tied to mortgage loan origination volume such as salaries and benefits, loan processing and data processing.
The following table presents mortgage loan originations and mortgage loans sold for the periods indicated.
TABLE 8: Mortgage Loan Originations
Mortgage loan originations:
Purchases
140,720
185,659
242,558
327,209
Refinancings
14,366
25,413
28,343
73,767
Total mortgage loan originations1
155,086
211,072
270,901
400,976
Lock-adjusted originations2
144,121
215,876
284,802
423,466
The rapid rise in mortgage interest rates during 2022 and first half of 2023, combined with higher home prices, has led to a substantial decline in mortgage loan originations for the mortgage industry so far in 2023 as compared to the same period in 2022. Mortgage loan originations for the mortgage banking segment decreased 26.5 percent and 32.4 percent for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022. 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 33.2 percent and 32.7 percent for the second quarter and first six months of 2023 compared to the same periods in 2022. Locked loan commitments were $58.1 million at June 30, 2023, compared to $42.3 million at December 31, 2022 and $109.0 million at June 30, 2022. Mortgage lender services fee income is derived from providing mortgage origination functions to third-party mortgage lenders for a fee. Mortgage lender services fee income increased for the second quarter and first six months of 2023 compared to the same periods in 2022 as a result of an increase in the number of institutional customers and the types of services provided, partially offset by the negative impacts of reduced mortgage loan volume in the industry.
The mortgage banking segment recorded a reversal of provision for indemnification losses of $235,000 for both the second quarter and first six months of 2023 compared to a reversal of provision for indemnification losses of $286,000 and $869,000 for the same periods in 2022. The release of indemnification reserves in the second quarter and first six months of 2022 and 2023 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. Management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.
Consumer Finance: The following table presents the consumer finance operating results for the periods indicated.
TABLE 9: Consumer Finance Segment Operating Results
4,980
6,611
9,281
13,071
2,242
4,451
4,566
154
164
315
333
389
641
733
1,741
1,707
The consumer finance segment reported net income of $1.1 million and $1.6 million for the second quarter and first six months of 2023 compared to $2.2 million and $4.3 million for the same periods in 2022. The decreases in consumer finance segment net income for the second quarter and first six months of 2023, as compared to the same periods in 2022, were due primarily to higher interest expense on variable rate borrowings from the community banking segment as a result of increased market rates and higher provision for credit losses as a result of increased net charge-offs, partially offset by higher interest income resulting from higher average balances of loans. Average loans outstanding increased $58.7 million, or 14.1 percent, for the second quarter of 2023 and increased $76.3 million, or 19.1 percent, for the first six months of 2023 compared to the same periods in 2022.
Provision for credit losses increased as a result of increased net charge-offs due primarily to an increase in the number of delinquent loans following a period of historically low delinquencies during the COVID-19 pandemic, a decline in wholesale values of used automobiles from a recent peak during the COVID-19 pandemic and continued recent challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when the automobile cannot be repossessed. If loan performance deteriorates, resulting in further elevated delinquencies or net charge-offs, or if values of used vehicles decline, provision for credit losses may increase in future periods.
ASSET QUALITY
Allowance and Provision for Credit Losses
We conduct an analysis of the collectability of the loan portfolio on a regular basis. We use this analysis to assess the sufficiency of the allowance for credit losses on loans and to determine the necessary provision for credit losses.
Upon adoption of ASC 326 on January 1, 2023, the Corporation segmented the loan portfolio into three loan portfolios based on common risk characteristics. The allowance for credit losses represents management’s current estimate of expected credit losses over the contractual term of loans held for investment, and is recorded at an amount that, in management’s judgment, reduces the recorded investment in loans to the net amount expected to be collected.
Management’s judgment in determining the level of the allowance is based on evaluations of historical loan losses, current conditions and reasonable and supportable forecasts relevant to the collectability of loans. Loans that share common risk characteristics are evaluated collectively using a discounted cash flow approach for all loans except for overdraft balances, which are evaluated using a loss rate approach. The discounted cash flow approach used by the Corporation utilizes loan-level cash flow projections and pool-level assumptions.
For commercial (except for loans to states and political subdivisions) and consumer loans, cash flow projections and estimated expected losses are based in part on forecasts of the national unemployment rate that are reasonable and supportable and external observations of historical loan losses. Forecasts of the national unemployment rate are derived from the Federal Open Markets Committee of the Federal Reserve Board. For periods beyond those for which reasonable and supportable forecasts are available, projections are based on a reversion of the national unemployment rate from the last forecast to a historical average level over the following six months. Cash flow projections and estimated expected losses for loans to states and political subdivisions are based on external loss observations for state and municipal debt obligations. For consumer finance loans, cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans.
Allowance for Credit Losses Methodology – Commercial and Consumer. The review process generally begins with management assigning loan ratings to individual loans and identifying problem loans to be reviewed on an individual basis. This review of individual loans is limited to those loans that have specific risk characteristics not shared by other loans 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 collectively in pools that share common risk characteristics. The allowance for loans that are individually evaluated may be estimated based on their expected cash flows, or, in the case of loans for which repayment is expected substantially through the operation or sale of collateral when the borrower is experiencing financial difficulty, may be measured based on the fair value of the collateral less estimated costs to sell. For these collateral dependent loans, we obtain an updated appraisal if we do not have a current one on file. Appraisals
55
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.
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 Credit Losses Methodology – Consumer Finance. Cash flow projections and estimated expected losses reflect historical average loss experience based on internal observations for auto loans and based on external loss observations for marine and recreational vehicle loans. Automobile loans are evaluated in pools of loans that share the same internal credit rating based on borrowers’ credit scores at origination. The Corporation utilizes credit scores based on the methods developed and defined by the Fair Isaac Corporation (FICO) as a key indicator of the risk of loss to manage the portfolio and estimate the allowance for credit losses. A FICO Score is a three-digit number based on the information in an applicant’s credit reports. It helps lenders determine how likely an applicant is to repay a loan. This, in turn, affects the loan amount that may be approved, repayment terms, and interest rate. The Corporation obtains FICO Scores in the credit reports provided by the car dealers that accept the consumer auto loan application, which may have been generated by any of the three major credit reporting bureaus, and also independently obtains a credit report on the borrower directly from Experian or Transunion. The Corporation utilizes an industry-specific FICO Score which is optimized for automobile credit products. Consumer finance loans are assigned a credit rating based on borrowers’ credit scores at the time of origination and are categorized within ranges of credit ratings used internally that parallel FICO Score rating bands. The Corporation monitors the consumer finance loan portfolio by past due status and by credit rating at the time of origination, which the Corporation believes serves as a relevant indicator of aggregate credit quality and risk of loan defaults in the portfolio based upon the use of FICO Scores over time for loan approval decisions and through experience analyzing loss patterns. The characteristics of these credit ratings are as follows:
In accordance with its policies and guidelines and consistent with industry practices, the consumer finance segment, 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 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 credit losses and related provision for credit losses.
The allowance for credit losses represents an amount that, in our judgment, reduces the recorded investment in loans to the net amount expected to be collected. The provision for credit losses increases the allowance, and loans charged off, net of recoveries, reduce the allowance. Balances and ratios presented as of June 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.
The following tables present the Corporation’s credit loss experience for the periods indicated.
TABLE 10: Allowance for Credit Losses
Consumer1
For the three months ended June 30, 2023:
Balance at March 31, 2023
11,449
3,510
25,875
40,834
199
102
(68)
(2,826)
(2,894)
1,038
1,187
Average loans
870,158
333,548
1,679,909
Ratio of annualized net (recoveries) charge-offs to average loans
(0.04)
0.01
1.50
0.41
57
For the six months ended June 30, 2023:
862,397
326,682
1,664,796
(0.03)
0.02
0.46
For the three months ended June 30, 2022:
Balance at beginning of period
2,628
893
10,440
544
25,099
39,768
(80)
79
(21)
(1,009)
(1,077)
1,258
1,298
Balance at end of period
218,318
86,630
713,753
40,633
8,041
1,484,878
(0.01)
(0.00)
(0.02)
1.89
(0.24)
(0.06)
For the six months ended June 30, 2022:
216,776
81,928
702,950
40,587
8,114
1,449,764
0.00
1.33
(0.10)
For further information regarding the adequacy of our allowance for credit losses, refer to “Table 15: Nonperforming Assets” and the accompanying disclosure below.
The allocation of the allowance for credit losses and the ratio of corresponding outstanding loan balances to total loans are as follows as of the dates indicated. Balances and ratios presented as of June 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.
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TABLE 11: Allocation of Allowance for Credit Losses
Allocation of allowance for credit losses:
Total allowance for credit losses
Ratio of loans to total period-end loans:
Allocation of allowance for loan losses:
Real estate—residential mortgage
Real estate—construction
Commercial, financial and agricultural
Total allowance for loan losses
Loans are required to be measured at amortized cost and to be presented at the net amount expected to be collected. Off balance sheet credit exposures, including loan commitments, are not recorded on balance sheet, but expected credit losses arising from off balance sheet credit exposures are recorded as a reserve for unfunded commitments and reported in Other Liabilities. Credit losses on available for sale debt securities are accounted for as an allowance for credit losses, which is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value and the amount expected to be collected on the financial asset. The allowance for credit losses on loans and available for sale debt securities and the reserve for unfunded commitments are established through a provision for credit losses charged against earnings. Amounts reported for the three and six months ended June 30, 2023 are in accordance with ASC 326, whereas amounts reported for periods prior to January 1, 2023 are presented in accordance with the previously applicable GAAP.
The following table presents a breakdown of the provision for credit losses for the periods indicated:
TABLE 12: Provision for Credit Losses
Loans by credit quality indicators are presented in Table 13 below. Balances presented as of June 30, 2023 are in accordance with ASC 326, whereas balances presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.
TABLE 13: Credit Quality Indicators
Loans by credit quality indicators as of June 30, 2023 were as follows:
114,719
69
1,201,046
6,548
Very Good
Fairly Good
Real estate – construction 2
Commercial, financial and agricultural 3
776,387
Consumer finance4
Table 14 summarizes the Corporation’s credit ratios on a consolidated basis and Table 15 summarizes nonperforming assets by principal business segment as of June 30, 2023 and December 31, 2022. Balances and ratios presented as of June 30, 2023 are in accordance with ASC 326, whereas balances and ratios presented as of December 31, 2022 or a prior date are presented in accordance with the previously applicable GAAP.
TABLE 14: Consolidated Credit Ratios
Total loans1
Nonaccrual loans
ACL
Nonaccrual loans to total loans
0.07
ACL to total loans
2.40
ACL to nonaccrual loans
3,466.89
3,407.74
TABLE 15: Nonperforming Assets
Community Banking Segment
1,160,454
Impaired loans1
n/a
15,341
14,513
0.04
1.27
1.25
2,950.19
12,620.00
Annualized year-to-date net (recoveries) charge-offs to average total loans
61
Mortgage Banking Segment
707
21.07
5.09
24.16
Annualized year-to-date net charge-offs to average total loans
Consumer Finance Segment
649
Repossessed assets
352
0.14
5.30
5.47
3,880.89
2,807.46
The community banking segment’s nonaccrual loans were $520,000 at June 30, 2023 compared to $115,000 at December 31, 2022. The community banking segment recorded $600,000 and $1.1 million in provision for credit losses for the second quarter and first six months of 2023, respectively, compared to no provision for credit losses and a net reversal of provision for credit losses of $700,000, respectively, for the same periods in 2022. The increases in provision for credit losses are due primarily to growth in the loan portfolio, an increase in unfunded commitments, and the resolution of certain impaired loans in 2022, which resulted in the reversal of specific reserves with no losses being realized. At June 30, 2023, the allowance for credit losses increased to $15.3 million, compared to an allowance for loan losses of $14.5 million at December 31, 2022, due primarily to growth in the loan portfolio and the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $85,000. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected.
Nonaccrual loans at the consumer finance segment were $649,000 at June 30, 2023, compared to $925,000 at December 31, 2022. Nonaccrual consumer finance loans remain low relative to the allowance for credit losses and the total consumer finance loan portfolio because the consumer finance segment generally initiates repossession of loan collateral once a loan becomes more than 60 days delinquent. 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 credit losses. At June 30, 2023, repossessed vehicles available for sale totaled $519,000, compared to $352,000 at December 31, 2022.
The consumer finance segment experienced net charge-offs at an annualized rate of 1.63 percent of average total loans for the first six months of 2023, compared to net recoveries at an annualized rate of 0.10 percent for the first six months of 2022, due primarily to an increase in the number of delinquent loans, a steady decline in wholesale values of used automobiles from a peak during the COVID-19 pandemic and continued challenges in repossessing automobiles due to a decline in the number of repossession agencies, which results in a fully charged-off loan when an automobile cannot be repossessed. At June 30, 2023, total delinquent loans as a percentage of total loans was 2.88 percent, compared to 2.78 percent at December 31, 2022 and 2.07 percent at June 30, 2022. Delinquent loans have begun increasing towards pre-
pandemic levels following a period of historically low delinquencies during the COVID-19 pandemic. The allowance for credit losses was $25.2 million at June 30, 2023, compared to an allowance for loan losses of $26.0 million at December 31, 2022. The allowance for credit losses as a percentage of total loans decreased to 5.30 percent at June 30, 2023, compared to an allowance for loan losses as a percentage of total loans of 5.47 percent at December 31, 2022, primarily as a result of growth in loans with stronger credit quality while balances of loans with lower credit quality declined, partially offset by the adoption of CECL, which resulted in an implementation adjustment on January 1, 2023 of $406,000.
As discussed above, the consumer finance segment at times offers payment deferrals to borrowers as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. Average amounts of payment deferrals on a monthly basis, which are not included in delinquent loans, were 1.70 percent and 1.46 percent as a percentage of average automobile loans outstanding for the second quarter of 2023 and 2022, respectively, and were 1.65 percent and 1.48 percent as a percentage of average automobile loans outstanding for the first six months of 2023 and 2022, respectively.
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 credit losses is adequate to reflect the net amount expected to be collected 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 credit losses through additional provisions for credit losses, which could negatively affect future earnings of the consumer finance segment.
FINANCIAL CONDITION
At June 30, 2023, the Corporation had total assets of $2.4 billion, which was an increase of $87.1 million since December 31, 2022. The increase was attributable primarily to growth in loans held for investment and loans held for sale, funded in part by accessing brokered deposits and short-term borrowings. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.
Loan Portfolio
Tables 16 and 17 present information pertaining to the composition of loans held for investment and the maturity/repricing of certain loans held for investment, respectively.
TABLE 16: Summary of Loans Held for Investment
Percent
The increase in total loans from December 31, 2022 to June 30, 2023 was due primarily to growth in commercial real estate and residential mortgage lending at the community banking segment.
TABLE 17: Maturity/Repricing Schedule of Loans Held for Investment
Variable Rate:
Within 1 year
214,269
46,478
260,747
1 to 5 years
75,902
1,278
77,180
5 to 15 years
18,610
18,667
After 15 years
Fixed Rate:
36,420
17,127
5,236
58,783
232,345
37,881
202,811
473,037
274,173
204,751
266,981
745,905
12,388
40,283
52,671
864,107
347,855
The investment portfolio plays a primary role in the management of the Corporation’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. At June 30, 2023 and December 31, 2022, all securities in the Corporation’s investment portfolio were classified as available for sale.
Table 18 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 18: Securities Available for Sale
Total available for sale securities at fair value
Securities available for sale decreased by $21.7 million to $490.9 million at June 30, 2023, compared to $512.6 million at December 31, 2022, due primarily to maturities, calls and paydowns of securities. Net unrealized losses in the market value of securities available for sale were $42.6 million at June 30, 2023 and net unrealized losses in the market value of securities available for sale were $44.5 million at December 31, 2022.
For more information about the Corporation's securities available for sale, including information about securities in an unrealized loss position at June 30, 2023 and December 31, 2022, see Part I, Item 1, “Financial Statements” under the heading “Note 2: Securities” in this Quarterly Report on Form 10-Q.
Table 19 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 19: Maturity of Securities
Weighted
Yield 1
U.S. Treasury securities:
Maturing within 1 year
40,741
2.20
Maturing after 1 year, but within 5 years
12,929
1.72
Total U.S. Treasury securities
2.08
U.S. government agencies and corporations:
48,638
2.57
37,819
1.32
Maturing after 5 years, but within 10 years
31,148
1.53
Maturing after 10 years
8,184
2.09
Total U.S. government agencies and corporations
Mortgage-backed securities:
359
2.02
101,598
1.88
87,813
2,107
4.56
Total mortgage-backed securities
States and municipals:1
15,623
3.61
48,268
59,236
3.59
13,765
3.10
Total states and municipals
3.18
Corporate and other debt securities:
2,000
5.69
22,732
3.48
4.50
Total corporate and other debt securities
3.67
Total securities:
2.58
1.97
2.51
2.82
The Corporation’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings and money market accounts and time deposits. The Corporation’s deposits are principally provided by individuals and businesses located within the communities served.
During the first six months of 2023, deposits decreased $6.4 million to $2.00 billion at June 30, 2023. Noninterest bearing demand deposits decreased $18.7 million, savings and interest-bearing demand deposits decreased $152.7 million, and time deposits increased $165.0 million during the same period. The Corporation continuously monitors deposit fluctuations and there have been no significant outflows with total deposits decreasing less than 1 percent over the first six months of 2023. The decrease in non-time deposits was due in part to a shift in balances toward time deposits as interest rates increased and to seasonal factors related to municipal deposits, which tend to increase with tax collections primarily in the fourth quarter of each year and decline with spending thereafter. The Corporation had $130.3 million in municipal deposits at June 30, 2023 compared to $178.9 million at December 31, 2022.
The Corporation had $25.0 million in brokered money market and time deposits outstanding at June 30, 2023 compared to $5,000 at December 31, 2022. While traditional deposits declined during the first six months of 2023, the Corporation may rely on brokered deposits on a limited basis as a means of maintaining and diversifying liquidity and funding sources.
Borrowings increased to $175.6 million at June 30, 2023 from $92.1 million at December 31, 2022 due primarily to increased short-term borrowings from the FHLB to support lending activities.
Liquidity
The objective of the Corporation’s liquidity management is to ensure the continuous availability of funds to satisfy the credit needs of our customers and the demands of our depositors, creditors and investors. Stable core deposits and a strong capital position are the components of a solid foundation for the Corporation’s liquidity position. Additional sources of liquidity available to the Corporation include cash flows from operations, loan payments and payoffs, deposit growth, maturities, calls and sales of securities, the issuance of brokered certificates of deposit and the capacity to borrow additional funds.
Liquid assets, which include cash and due from banks, interest-bearing deposits at other banks and nonpledged securities available for sale, totaled $349.4 million at June 30, 2023, compared to $325.7 million at December 31, 2022. The Corporation’s funding sources, including capacity, amount outstanding and amount available at June 30, 2023 are presented in Table 20. The Corporation’s capacity and amount available increased $190.6 million and $98.3 million, respectively, from December 31, 2022 as a result of pledging additional loans in order to increase funding capacity under secured funding arrangements with the FHLB and Federal Reserve Bank.
TABLE 20: Funding Sources
Capacity
Outstanding
Unsecured federal funds agreements
95,000
Repurchase lines of credit
35,000
Borrowings from FHLB
260,512
94,500
166,012
Borrowings from Federal Reserve Bank
234,854
625,366
530,866
We have no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the FHLB and Federal Reserve Bank 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.
Uninsured deposits represent amounts above the FDIC insurance coverage limit. As of June 30, 2023, the Corporation’s uninsured deposits were approximately $565.9 million, or 28.3 percent of total deposits. Excluding intercompany cash holdings and municipal deposits which are secured with pledged securities, amounts uninsured were approximately $382.7 million, or 19.2 percent of total deposits as of June 30, 2023, compared to 21.0 percent of total deposits as of March 31, 2023. The Corporation’s borrowing availability as of June 30, 2023 was $530.9 million, exceeding uninsured deposits, excluding intercompany cash holdings and secured municipal deposits, by $148.2 million.
The Corporation’s internal policy limits brokered deposits to 20 percent of total deposits, representing approximately $374.5 million of additional net availability for additional brokered deposits as of June 30, 2023.
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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
The disclosure below presents the Corporation’s and the Bank’s actual capital amounts and ratios under currently applicable regulatory capital standards. Under the small bank holding company policy statement of the Federal Reserve Board, which applies to certain bank holding companies with consolidated total assets of less than $3 billion, the Corporation is not subject to regulatory capital requirements. The table below reflects the Corporation’s consolidated capital as determined under regulations that apply to bank holding companies that are not small bank holding companies and minimum capital requirements that would apply to the Corporation if it were not a small bank holding company. Although the minimum regulatory capital requirements are not applicable to the Corporation, the Corporation calculates these ratios for its own planning and monitoring purposes. Total risk-weighted assets at June 30, 2023 for the Corporation were $1.90 billion and for the Bank were $1.87 billion. Total risk-weighted assets at December 31, 2022 for the Corporation were $1.82 billion and for the Bank were $1.80 billion. As of June 30, 2023, the Corporation and the Bank met all capital adequacy requirements to which it is subject.
TABLE 21: Regulatory Capital
Minimum Capital
Well Capitalized
Actual
Requirements
Ratio
The Corporation
Total risk-based capital ratio
282,347
14.9
151,643
8.0
Tier 1 risk-based capital ratio
238,429
12.6
113,732
6.0
Common Equity Tier 1 capital ratio
213,429
11.3
85,299
4.5
Tier 1 leverage ratio
9.9
96,809
4.0
The Bank
263,080
14.1
149,618
187,023
10.0
239,474
12.8
112,214
84,160
121,565
6.5
96,058
120,072
5.0
280,606
15.4
145,958
233,581
109,468
208,581
11.4
82,101
94,562
255,719
14.2
144,074
180,093
232,985
12.9
108,056
81,042
117,060
93,856
117,320
The regulatory risk-based capital amounts presented above include: (1) common equity tier 1 capital (CET1) which consists principally of common stock (including surplus) and retained earnings with adjustments for goodwill and intangible assets; (2) Tier 1 capital which consists principally of CET1 plus the Corporation’s “grandfathered” trust preferred securities; and (3) Tier 2 capital which consists principally of Tier 1 capital plus a limited amount of the allowance for credit losses and $20.0 million of outstanding subordinated notes of the Corporation. The Corporation repaid $4.0 million of subordinated notes during the three months ended June 30, 2023. The Total Capital ratio, Tier 1 Capital ratio and CET1 ratio are calculated as a percentage of risk-weighted assets. The Tier 1 Leverage ratio is calculated as a percentage of average tangible assets. In addition, the Corporation has made the one-time irrevocable election to continue treating accumulated other comprehensive income (AOCI) under regulatory standards that were in place prior to the Basel III Final Rule in order to eliminate volatility of regulatory capital that can result from fluctuations in AOCI and the inclusion of AOCI in regulatory capital, as would otherwise be required under the Basel III Capital Rule. As a result of this election, changes in AOCI, including unrealized losses on securities available for sale, do not affect regulatory capital amounts shown in the table above for the Corporation or the Bank. For additional information about the Basel III Final Rules, see “Item 1. Business” under the heading “Regulation and Supervision” and “Item 8. Financial Statements and Supplementary Data,” under the heading “Note 17: Regulatory Requirements and Restrictions” in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022.
The Basel III rules established a “capital conservation buffer” of 2.5 percent above the regulatory minimum risk-based capital ratios, which is not included in the table above. Including the capital conservation buffer, the minimum ratios are a common equity Tier I risk-based capital ratio of 7.0 percent, a Tier I risk-based capital ratio of 8.5 percent, and a total risk-based capital ratio of 10.5 percent. The Corporation and the Bank exceeded these ratios at June 30, 2023 and December 31, 2022.
The Corporation’s capital resources are impacted by its share repurchase programs. 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 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. 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 shares under the 2022 Repurchase Program. The 2022 Repurchase Program is authorized through December 31, 2023, and, as of June 30, 2023, there was $5.0 million remaining available for repurchases of the Corporation’s common stock under the 2022 Repurchase Program.
On January 1, 2023, the Corporation adopted ASC 326. Regulatory capital rules permitted C&F Bank to phase-in the day-one effects of adopting ASC 326 over a 3-year transition period. C&F Bank elected 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 amount of $1.1 million.
USE OF CERTAIN NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Corporation conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation’s performance. These include net tangible income attributable to the Corporation, ROTCE, tangible book value per share, and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE. Interest on tax-exempt loans and securities is presented on a taxable-equivalent basis (which converts the income on loans and investments for which no income taxes are paid to the equivalent yield as if income taxes were paid) using the federal corporate income tax rate of 21 percent that was applicable for all periods presented.
Management believes that the use of these non-GAAP measures provides meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of balances of intangible assets, including goodwill, that vary significantly between institutions, and tax benefits that are not consistent across different opportunities for investment. These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation’s performance to the most directly comparable GAAP financial measures is presented below.
TABLE 22: Non-GAAP Table
For The Three Months Ended
For The Six Months Ended
(Dollars in thousands except for per share data)
Reconciliation of Certain Non-GAAP Financial Measures
Return on Average Tangible Common Equity
Average total equity, as reported
Average goodwill
(25,191)
Average other intangible assets
(1,569)
(1,856)
(1,604)
(1,896)
Average noncontrolling interest
(623)
(628)
(706)
(754)
Average tangible common equity
176,707
168,865
175,478
174,773
Amortization of intangibles
136
Net income attributable to noncontrolling interest
(134)
Net tangible income attributable to C&F Financial Corporation
6,374
6,816
12,883
12,520
Annualized return on average tangible common equity
Fully Taxable Equivalent Net Interest Income1
Interest income on loans
FTE adjustment
FTE interest income on loans
Interest income on securities
3,041
2,075
6,110
3,716
91
345
FTE interest income on securities
235
252
FTE interest income
FTE net interest income
_____________________
Tangible Book Value Per Share
Other intangible assets
(1,543)
(1,679)
Tangible equity attributable to C&F Financial Corporation
175,164
168,764
Shares outstanding
3,403,838
3,476,614
Book value per share
59.31
56.27
Tangible book value per share
51.46
48.54
70
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This report contains statements concerning the Corporation’s expectations, plans, objectives or beliefs regarding future financial performance and other statements that are not historical facts, which may constitute “forward-looking statements” as defined by federal securities laws. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions, are not statements of historical fact, and are based on management’s beliefs, assumptions and expectations regarding future events or performance as of the date of this report, taking into account all information currently available. These statements may include, but are not limited to: statements regarding expected future operations and financial performance; expected trends in yields on loans; expected future recovery of investments in debt securities; expected impact of unrealized losses on earnings and regulatory capital of the Corporation or the Bank; future dividend payments; competition, our loan portfolio; our digital services; deposits; improving operational efficiencies; retention of qualified loan officers; higher quality automobile loan contracts, marine and RV lending; charge-offs; changes in net interest margin and items affecting net interest margin; strategic business initiatives and the anticipated effects thereof on mortgage loan originations; technology initiatives; our diversified business strategy; asset quality; credit quality; adequacy of allowances for credit losses and the level of future charge-offs; adequacy of the reserve for indemnification losses related to loans sold in the secondary market; capital levels; the effect of future market and industry trends; changes in interest rates and the effects of future interest rate levels and fluctuations; cybersecurity risks and inflation. These forward-looking statements are subject to significant risks and uncertainties due to factors that could have a material adverse effect on the operations and future prospects of the Corporation including, but not limited to, changes in:
These risks and uncertainties, and the risks discussed in more detail in Item 1A. “Risk Factors,” of Part I of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022 and in Item 1A. “Risk Factors,” of Part II of this Quarterly Report on Form 10-Q should be considered in evaluating the forward-looking statements contained herein.
Readers should not place undue reliance on any forward-looking statement. There can be no assurance that actual results will not differ materially from historical results or those expressed in or implied by such forward-looking statements, or that the beliefs, assumptions and expectations underlying such forward-looking statements will be proven to be accurate. Forward-looking statements are made as of the date of this report and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances arising after the date on which the statement was made, except as otherwise required by law.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will affect the amount of interest income and expense the Corporation receives or pays on a significant portion of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. The Corporation does not subject itself to foreign currency exchange rate risk or commodity price risk due to the current nature of its operations.
The Corporation’s Asset/Liability Committee meets at least quarterly with the primary objective of maximizing current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent and appropriate. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.
The Corporation assumes interest rate risk in the normal course of operations. The fair values of most of the Corporation’s financial instruments will change when interest rates change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities and repricing dates of assets and liabilities to the extent believed necessary to balance minimizing interest rate risk and increasing net interest income in current market conditions. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates, maturities and repricing dates of assets and liabilities and attempts to manage interest rate risk by adjusting terms of new loans, deposits and borrowings, by investing in securities with terms that manage the Corporation’s overall
interest rate risk, and in some cases by using derivative contracts to reduce the Corporation’s overall exposure to changes in interest rates. The Corporation does not enter into interest rate-sensitive instruments for trading purposes.
We use simulation analysis to assess earnings at risk and economic value of equity (EVE) analysis to assess economic value at risk. These methods allow management to regularly monitor both the direction and magnitude of the Corporation’s interest rate risk exposure. These modeling techniques involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of both assets and liabilities, prepayments on amortizing assets, other embedded options, non-maturity deposit sensitivity and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of the Corporation’s interest rate risk position over time.
Simulation analysis evaluates the potential effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Corporation’s shorter-term interest rate risk. The analysis utilizes a “static” balance sheet approach, which assumes changes in interest rates without any management response to change the composition of the balance sheet. The measurement date balance sheet composition is maintained over the simulation time period with maturing and repayment dollars being rolled back into like instruments for new terms at current market rates. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These assumptions include loan prepayments, time deposit early withdrawals, the sensitivity of deposit repricing to changes in market rates, withdrawal behavior of non-maturing deposits, and other factors that management deems significant.
The simulation analysis results are presented in the table below. These results, based on a measurement date balance sheet as of June 30, 2023, indicate that the Corporation would expect net interest income to decrease over the next twelve months 4.56 percent assuming an immediate downward shift in market interest rates of 200 basis points (BP) and to increase 1.49 percent if rates shifted upward to the same degree.
One-Year Net Interest Income Simulation (dollars in thousands)
Hypothetical Change in Net
Interest Income
Over the Next Twelve Months
as of
Assumed Market Interest Rate Shift
Dollars
Percentage
-200 BP shock
(5,078)
(4.56)
(6,143)
(5.31)
+200 BP shock
1,656
1.49
2,747
2.37
The EVE analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the shorter time horizon used in that analysis. The EVE of the balance sheet is defined as the discounted present value of expected asset cash flows minus the discounted present value of the expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.
The EVE analysis results are presented in the table below. These results as of June 30, 2023 indicate that the EVE would decrease 7.29 percent assuming an immediate downward shift in market interest rates of 200 BP and would increase 2.13 percent if rates shifted upward to the same degree.
73
Static EVE Change (dollars in thousands)
Hypothetical Change in EVE
(30,154)
(7.29)
(42,156)
(9.79)
8,795
2.13
18,038
4.19
As of June 30, 2023, in both the simulation analysis and the EVE analysis, net interest income over the next twelve months and EVE, respectively, increase in the event of an immediate upward shift in interest rates, and decrease in the event of an immediate downward shift in interest rates. As a result of modeled changes in interest rates, the Corporation’s assets would reprice more quickly than the Corporation’s borrowings and deposits primarily due to the shorter maturity or repricing dates of its interest-bearing deposits in other banks and its loan portfolio. In a falling rate environment, the analyses assume that rate-sensitive assets are repriced downward, subject to floors on certain loans, while certain deposit rates are not allowed to decrease below zero.
Certain shortcomings are inherent in the methodology used in the above interest rate risk analyses. Modeling changes in forecasted cash flows and EVE requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates, and certain assumed scenarios may be impractical to model under different economic circumstances.
The Corporation uses interest rate swaps to manage select exposures to interest rate risk. Interest rate swaps involve the exchange of fixed and variable rate interest payments between two parties, based on a common notional principal amount and maturity date with no exchange of underlying principal amounts. The Corporation has interest rate swaps that qualify as cash flow hedges. The cash flow hedges effectively modify the Corporation’s exposure to interest rate risk associated with the Corporation’s trust preferred capital notes by converting variable rates of interest on the trust preferred capital notes to fixed rates of interest for periods ending between June 2024 and June 2029. Also, as part of the Corporation’s overall strategy for maximizing net interest income while managing interest rate risk, the Corporation enters into interest rate swaps in connection with originating loans to certain commercial borrowers as a means to offer a fixed-rate instrument to the borrower while effectively retaining a variable-rate exposure.
The mortgage banking segment enters into IRLCs with customers to originate loans for which the interest rates are determined prior to funding. The mortgage banking segment then mitigates interest rate risk on these IRLCs and loans held for sale by (1) entering into forward sales contracts with investors at the time that interest rates are locked for loans to be delivered on a best efforts basis or (2) entering into forward sales contracts for unspecified mortgage backed securities (TBA securities) until it can enter into forward sales contracts with investors for loans to be delivered on a mandatory basis. IRLCs, forward sales of loans and forward sales of TBA securities are derivative financial instruments.
We believe that our current interest rate exposure is manageable and does not indicate any significant exposure to interest rate changes.
ITEM 4.CONTROLS AND PROCEDURES
The Corporation’s management, including the Corporation’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2023 to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation or its subsidiary to disclose material information required to be set forth in the Corporation’s periodic reports.
There were no changes in the Corporation’s internal control over financial reporting during the three months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1A.RISK FACTORS
There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 and on Form 10-Q for the three months ended March 31, 2023, except as set forth below.
Our business, financial condition, and results of operations could be adversely affected by developments impacting the financial services industry, such as bank failures or concerns involving liquidity.
Events in the financial services industry, including bank closures, cause general uncertainty and concern regarding the adequacy of liquidity of the financial services industry generally. While we rely on different sources of funding to meet potential liquidity needs, our business strategies are largely based on access to funding from customer deposits and supplemental funding provided by wholesale or other secondary liquidity sources. Deposit levels may be affected by various industry factors, including interest rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, conditions in the financial services industry specifically and general economic conditions that impact the amount of liquidity in the economy and savings levels, and also by factors that impact customers’ perception of our financial condition and capital and liquidity levels. The response to bank closures by the U.S. Government, including the U.S. Department of the Treasury, the FDIC, and the Federal Reserve, cannot be predicted and the policies and regulations implemented in response to past bank closures cannot be expected to be extended or repeated in response to a future bank closure. The Corporation cannot predict to what extent any such steps taken by the banking regulators will be effective in calming the financial markets and financial services industry generally, preventing further bank closures, or reducing the risk of deposit outflows, and particularly sudden deposit outflows, from banks. As a result of this uncertainty, we face the potential for deposit outflows, increased borrowing and funding costs, and increased competition for liquidity, any of which could have a material adverse impact on our financial performance or financial condition.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The Corporation’s Board of Directors authorized a program, effective December 1, 2022, to repurchase up to $10.0 million of the Corporation’s common stock through December 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 Exchange Act and shares repurchased will be returned to the status of authorized and unissued shares of common stock. There were 47,024 shares repurchased under the 2022 Repurchase Program during the second quarter of 2023. As of June 30, 2023, the Corporation has made aggregate common stock repurchases of 90,971 shares for an aggregate cost of $5.0 million under the 2022 Repurchase Program.
The following table summarizes repurchases of the Corporation’s common stock that occurred during the three months ended June 30, 2023.
Maximum Number
(or Approximate
Total Number of
Dollar Value) of
Shares Purchased as
Shares that May Yet
Part of Publicly
Be Purchased
Average Price Paid
Announced Plans or
Under the Plans or
Shares Purchased1
per Share
Programs
April 1, 2023 - April 30, 2023
15,537
54.47
15,442
6,643,908
May 1, 2023 - May 31, 2023
20,834
50.55
5,590,797
June 1, 2023 - June 30, 2023
10,748
54.51
5,004,956
47,119
52.74
47,024
76
ITEM 6.EXHIBITS
3.1
Amended and Restated Articles of Incorporation of C&F Financial Corporation, effective March 7, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-Q filed November 8, 2017)
3.1.1
Amendment to Articles of Incorporation of C&F Financial Corporation, effective January 8, 2009 (incorporated by reference to Exhibit 3.1.1 to Form 8-K filed January 14, 2009)
3.2
Amended and Restated Bylaws of C&F Financial Corporation, as adopted December 15, 2020 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 17, 2020)
31.1
Certification of CEO pursuant to Rule 13a-14(a)
31.2
Certification of CFO pursuant to Rule 13a-14(a)
Certification of CEO/CFO pursuant to 18 U.S.C. Section 1350
101
The following financial statements from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL, filed herewith: (i) the Consolidated Balance Sheets (unaudited), (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (Loss) (unaudited), (iv) the Consolidated Statements of Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited)
The cover page from the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL (included within Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date:
August 8, 2023
By:
/s/ Thomas F. Cherry
Thomas F. Cherry
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jason E. Long
Jason E. Long
Executive Vice President, Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)