C&F Financial Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. C&F is a Virginia-based bank holding company operating community banking, mortgage banking and consumer finance businesses. Comparisons below are primarily with 2021.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $29.4 million | $29.1 million |
| Basic and diluted EPS | $8.29 | $7.95 |
| Adjusted net income (non-GAAP) | $27.0 million | $30.0 million |
| Net interest income | $93.5 million | $85.4 million |
| Net interest margin | 4.27% | 4.26% |
| Noninterest income | $28.5 million | $49.2 million |
| Noninterest expense | $81.8 million | $95.9 million |
| Provision for loan losses | $3.2 million | $0.6 million |
| Total assets at year-end | $2.33 billion | $2.26 billion |
| Total loans held for investment | $1.64 billion | $1.41 billion |
| Total deposits | $2.00 billion | $1.91 billion |
| Total equity at year-end | $196.2 million | $211.0 million |
Net income increased less than 1%, while adjusted net income declined 10.1% and adjusted EPS fell 7.2%. Reported EPS rose 4.3%, helped by fewer shares outstanding following repurchases. Return on average assets was 1.27% (1.34% in 2021); return on average equity was 14.84% (14.77%). The effective tax rate was 20.6%, versus 23.5% in 2021.
Cash flow: Operating activities provided $90.6 million, compared with $157.4 million in 2021. Investing activities used $411.3 million, primarily reflecting securities purchases and loan growth; financing activities provided $79.6 million. Cash and cash equivalents declined $241.1 million to $26.7 million. Management reported $325.7 million of liquid assets, including cash and nonpledged available-for-sale securities, and $432.6 million of available borrowing capacity.
Debt and capital: Year-end borrowings were approximately $92.1 million, including short-term borrowings, subordinated notes and trust preferred capital notes. The Bank was categorized as well capitalized; its total risk-based capital ratio was 14.2%, Tier 1 ratio 12.9%, CET1 ratio 12.9%, and Tier 1 leverage ratio 9.9%. The Corporation’s total equity fell largely because of securities-related accumulated other comprehensive losses. The Corporation declared $1.64 per share in dividends during 2022 and repurchased $5.0 million of stock across its programs.
Material changes versus 2021
- Community banking net income rose to $24.4 million from $14.1 million, supported by higher net interest income, loan growth, a $0.6 million loan-loss provision reversal, and a one-time equity-investment valuation benefit.
- Mortgage banking net income fell to $1.2 million from $7.7 million. Mortgage originations declined 52.2% as mortgage rates rose and industry volume weakened; gains on loan sales and mortgage-related fee income also fell.
- Consumer finance net income decreased to $6.8 million from $10.0 million. Provision for loan losses increased to $3.7 million from $0.8 million, while net charge-offs rose to 0.59% of average loans from net recoveries of 0.14%.
- Net interest income increased, but noninterest income declined 42.1%, principally due to lower mortgage production and loan-sale gains. Lower noninterest expenses partly offset those declines.
- Available-for-sale securities had $44.9 million of gross unrealized losses at year-end, mainly from rising interest rates. The related net-of-tax decline recorded in other comprehensive income was $35.6 million; management stated it did not expect these unrealized losses to affect earnings or regulatory capital absent a sale or credit impairment.
- Deposits increased $89.2 million year over year, although they fell $15.8 million from September 30, 2022. Estimated uninsured deposits were $636.5 million.
Outlook, risks and unusual items
Management described its 2023 outlook as cautiously positive, while highlighting rising interest rates, inflation, economic uncertainty, cybersecurity and competition. The Bank expects to prioritize commercial loan growth, invest in technology and compete for deposits; deposit pricing pressure and technology spending could weigh on margins and expenses. Mortgage production remains uncertain amid the higher-rate housing market, though management cited purchase lending and mortgage lender services as opportunities. C&F Finance plans responsible portfolio growth but expects elevated funding costs, competition and pressure on loan growth and margins; management warned that consumer debt and declining used-car values could increase delinquencies and charge-offs.
- Credit concentration: Commercial, financial and agricultural loans were 47.9% of the loan portfolio; consumer finance loans were 25.1%. Management noted rising auto delinquencies and charge-offs, lower used-vehicle values and repossession constraints.
- Interest-rate and securities risk: A modeled 200-basis-point rate decline reduced projected one-year net interest income by 5.31% and economic value of equity by 9.79%; a comparable increase produced modeled gains of 2.37% and 4.19%, respectively. Results depend on assumptions and are not forecasts.
- Accounting change: The company adopted CECL on January 1, 2023. It estimated the opening retained-earnings reduction at $1 million to $3 million; the final transition adjustment was not yet complete in this filing.
- One-time item: A change in accounting policy for certain equity investments produced a $2.7 million pretax fair-value gain ($2.2 million after tax) in 2022; adjusted results exclude it.
- Contingencies: Mortgage loan-sale agreements carry repurchase and indemnification obligations for specified deficiencies. The related reserve was $2.4 million at year-end, with no indemnification payments in 2022. The company reported ordinary-course litigation but did not expect its resolution to have a material adverse effect based on then-current knowledge.
- Liquidity commitments: Unused Bank loan commitments were $394.8 million and standby letters of credit were $16.3 million; actual funding needs may differ from these contractual amounts.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan losses’ qualitative factors were identified as a critical audit matter.
Important facts for investors to verify
- Whether deposit competition, deposit costs and deposit balances alter net interest margin or liquidity in 2023; review the uninsured-deposit composition and funding contingency plans.
- Whether auto delinquencies, charge-offs, repossession activity and used-car collateral values worsen, and whether the allowance remains adequate.
- Whether mortgage origination volumes and mortgage-related revenue stabilize, and whether the indemnification reserve remains sufficient.
- The actual CECL adoption adjustment and its effects on the allowance, retained earnings and Bank regulatory capital.
- How much of the securities portfolio’s unrealized losses are recovered through scheduled cash flows versus realized through sales or credit impairment.
- Progress against management’s segment outlook, including loan growth, deposit pricing, technology costs and consumer-finance funding margins.