C&F Financial Corporation Announces Net Income Of $29.4M For 2022; Adj. EPS Of $2.30

C&F Financial Corporation (the Corporation) (NASDAQ:CFFI), the one-bank holding company for C&F Bank, today reported consolidated net income of $29.4 million for the year ended December 31, 2022, which represents an increase of $246,000, or less than one percent, as compared to the year ended December 31, 2021. Included in net income for the year ended December 31, 2022 were the effects of real estate disposal activity related to branch consolidation and a change in accounting policy election related to the fair value of certain equity investments. Included in net income for the year ended December 31, 2021 was pension settlement accounting expense. Adjusted net income, a non-GAAP financial measure, decreased $3.0 million, or 10.1 percent, for the year ended December 31, 2022 compared to the year ended December 31, 2021, which excludes the effects of the items mentioned above.
 

Reported (GAAP)						Adjusted (non-GAAP)1
For The Year Ended						For The Year Ended
Consolidated Financial Highlights (unaudited)	12/31/2022		12/31/2021		12/31/2022		12/31/2021
Net income (000's)	$	29,369	$	29,123	$	26,990	$	30,011
Earnings per share - basic and diluted	$	8.29	$	7.95	$	7.61	$	8.20
Return on average assets	1.27	%	1.34	%	1.16	%	1.38	%
Return on average equity	14.84	%	14.77	%	13.64	%	15.22	%
Return on average tangible common equity1	17.31	%	17.15	%	15.92	%	17.68	%

________________________

1The Corporation uses non-GAAP measures of financial performance, including adjusted net income, adjusted earnings per share, adjusted annualized return on average assets (ROA), adjusted annualized return on average equity (ROE), annualized return on average tangible common equity (ROTCE) and adjusted annualized ROTCE, to provide meaningful information about operating performance to investors by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income for the years ended December 31, 2022 and 2021 and for the fourth quarters of 2022 and 2021 exclude the effects of real estate disposal activity related to branch consolidation, a change in accounting policy election and pension settlement charges. For more information about these financial measures, which are not calculated in accordance with generally accepted accounting principles (GAAP), please see "Use of Certain Non-GAAP Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures," below.

The Corporation reported quarterly consolidated net income of $10.3 million for the fourth quarter of 2022, which represents an increase of $4.3 million, or 70.6 percent, compared to the fourth quarter of 2021. Adjusted net income increased $954,000, or 13.6 percent, for the fourth quarter of 2022 compared to the fourth quarter of 2021, which excludes the effects of the items mentioned above.

Reported (GAAP)						Adjusted (non-GAAP)1
For The Quarter Ended						For The Quarter Ended
Consolidated Financial Highlights (unaudited)	12/31/2022		12/31/2021		12/31/2022		12/31/2021
Net income (000's)	$	10,306	$	6,041	$	7,990	$	7,036
Earnings per share - basic and diluted	$	2.97	$	1.67	$	2.30	$	1.95
Annualized return on average assets	1.77	%	1.08	%	1.37	%	1.26	%
Annualized return on average equity	21.92	%	11.89	%	16.99	%	13.84	%
Annualized return on average tangible common equity	25.84	%	13.67	%	20.07	%	15.93	%

"Our solid results for 2022 were a product of the diversified business strategy we have built, along with responsible growth," commented Tom Cherry, President and Chief Executive Officer of C&F Financial Corporation. "While our mortgage banking segment's earnings were lower due to a substantial decline in volume of loans sold, consistent with the industry as a whole, and our consumer finance segment's earnings were negatively impacted by an increase in borrowing costs, our community banking segment's earnings grew significantly. With the impact of rising short term interest rates, coupled with earning-asset growth, the community banking segment performed extremely well this year with strong momentum heading into 2023, especially with the recent opening of our new financial center in downtown Fredericksburg. The consumer finance segment saw record loan growth, and delinquencies and net charge-offs remain below pre-pandemic levels, however increased borrowing costs compressed margins which had an adverse effect on earnings. We're excited about the position C&F is in and look forward to the opportunities this new year brings."

Key highlights for the fourth quarter of 2022 and the year ended December 31, 2022 are as follows.

• Community banking segment loans as of December 31, 2022 grew $65.1 million, or 23.8 percent annualized, compared to September 30, 2022, excluding the effect of Paycheck Protection Program (PPP) loans. Average community bank segment loans increased 13.4 percent and 9.9 percent for the fourth quarter and year ended December 31, 2022, respectively, compared to the same periods in 2021, excluding the effect of PPP loans;
• Consumer finance segment loans as of December 31, 2022 grew $8.9 million, or 7.6 percent annualized, compared to September 30, 2022. Average consumer finance segment loans increased 31.6 percent and 29.0 percent for the fourth quarter and year ended December 31, 2022, respectively, compared to the same periods in 2021;
• Deposits as of December 31, 2022 decreased $15.8 million, or 3.1 percent annualized, compared to September 30, 2022, which is consistent with industry trends of deposit outflows. Average deposits increased 6.8 percent and 8.4 percent for the fourth quarter and year ended December 31, 2022, respectively, compared to the same periods in 2021;
• The community banking segment recorded provision for loan losses of $100,000 for the fourth quarter of 2022 and recorded no provision for loan losses for the fourth quarter of 2021. For the years ended December 31, 2022 and 2021, the community banking segment recorded net reversals of provision for loan losses of $600,000 and $200,000, respectively;
• The consumer finance segment recorded provision for loan losses of $1.7 million and $600,000 for the fourth quarters of 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, the consumer finance segment recorded provision for loan losses of $3.7 million and $820,000, respectively;
• Consolidated annualized net interest margin was 4.65 percent for the fourth quarter of 2022, compared to 4.09 percent and 4.37 percent for the fourth quarter of 2021 and third quarter of 2022, respectively. The increase in the fourth quarter of 2022 compared to the third quarter of 2022 and fourth quarter of 2021 was due primarily to growth in consumer finance and community banking loans, as well as higher average yields on earning assets, including the effects of rising market interest rates. Consolidated net interest margin was 4.27 percent for the year ended December 31, 2022, compared to 4.26 percent for the year ended December 31, 2021. Accretion of net PPP origination fees contributed approximately zero basis points and 3 basis points to net interest margin for the fourth quarter of 2022 and the year ended December 31, 2022, respectively, compared to 13 basis points and 20 basis points for the same periods in 2021;
• The community banking segment recognized no net PPP origination fees in the fourth quarter of 2022 and $679,000 in the year ended December 31, 2022, compared to $692,000 and $4.1 million in the fourth quarter and year ended December 31, 2021, respectively. All net PPP origination fees received by C&F Bank had been recognized in income as of June 30, 2022;
• The consumer finance segment experienced net charge-offs at an annualized rate of 1.66 percent of average total loans for the fourth quarter of 2022, compared to net recoveries of 0.29 for the fourth quarter of 2021. Net charge-offs as a percentage of average total loans were 0.59 percent for the year ended December 31, 2022, compared to net recoveries of 0.14 for the year ended December 31, 2021. Charge-offs and delinquencies remain lower than pre-pandemic levels;
• The consumer finance segment's average loan yield declined as a result of pursuing growth in higher quality, lower yielding loans, partially offset by rising interest rates;
• The consumer finance segment's cost on variable rate borrowings from the community banking segment increased due to rising interest rates, which had a corresponding benefit to the community banking segment, and is eliminated upon consolidation;
• Mortgage banking segment loan originations decreased 62.3 percent and 52.2 percent for the fourth quarter and year ended December 31, 2022 amid rising mortgage interest rates and declines in mortgage industry volume; and
• The community banking segment opened the newest C&F Financial Center in Fredericksburg in December 2022. This office provides a one-stop experience for retail and business banking services as well as mortgage and wealth management solutions.

Community Banking Segment.  The community banking segment reported net income of $10.6 million and $24.4 million for the fourth quarter and year ended December 31, 2022, respectively, compared to $3.2 million and $14.1 million, respectively for the same periods in 2021.

Community banking segment net income increased $7.4 million for the fourth quarter of 2022 and $10.3 million for the year ended December 31, 2022, compared to the same periods in 2021 due primarily to:

• higher interest income resulting from higher average balances of interest-earning assets, including loans and securities, and the effects of rising interest rates on asset yields, including on variable rate loans to the consumer finance segment;
• the recognition of $2.8 million in other income from positive fair value adjustments of other investments in the fourth quarter of 2022, of which $2.7 million was recognized upon a change in accounting policy election for certain equity investments, primarily consisting of equity interests in an independent insurance agency and a full service title and settlement agency;
• higher revenue from overdraft fees and debit card interchange fees;
• the sale of two other real estate owned (OREO) properties in the first quarter of 2022 and fourth quarter of 2022, which resulted in gains of $80,000 and $209,000, respectively;
• a reversal of provision for loan losses of $600,000 for the year ended December 31, 2022, due primarily to the resolution of certain impaired loans and continued strong credit quality of the loan portfolio, compared to a reversal of provision for loan losses of $200,000 for the year ended December 31, 2021; and
• a $1.3 million pension settlement charge in the fourth quarter of 2021 in connection with certain lump sum benefit payments during the year ended December 31, 2021 that was not repeated during 2022;

partially offset by:

• lower recognition of net PPP origination fees and lower interest income on purchased credit impaired (PCI) loans;
• higher salaries and employee benefits expense, including adding new talent to the commercial lending team;
• the sale of an OREO property in the second quarter of 2021, which resulted in a gain of $399,000; and
• higher marketing and travel expense as typical programs and community and educational events return to normalized levels after reduced activity due to COVID-19 during 2021.

Adjusted net income for the community banking segment, which excludes the effects of real estate disposal activity related to branch consolidation, a change in accounting policy election and pension settlement charges, was $8.3 million for the fourth quarter of 2022, compared to $4.2 million for the same period in 2021, and was $22.0 million for the year ended December 31, 2022, compared to $15.0 million for the same period in 2021. Adjusted net income for the community banking segment increased $4.1 million and $7.0 million for the fourth quarter and year ended December 31, 2022, respectively, compared to the same periods in 2021 due primarily to the items discussed above.

Average loans increased $111.1 million, or 10.8 percent, for the fourth quarter of 2022 and increased $39.7 million, or 3.8 percent, for the year ended December 31, 2022, compared to the same periods in 2021. Excluding the impact of PPP loans, average loans increased $134.7 million, or 13.4 percent, for the fourth quarter of 2022, and increased $96.4 million, or 9.9 percent, for the year ended December 31, 2022, compared to the same periods in 2021. The increase in average loans outstanding for the fourth quarter and year ended December 31, 2022 compared to the same periods in 2021 resulted primarily from growth in the commercial real estate and residential mortgage segments of the loan portfolio. Average deposits increased $127.9 million, or 6.8 percent, for the fourth quarter of 2022 and increased $153.6 million, or 8.4 percent for the year ended December 31, 2022, compared to the same periods in 2021, and the mix of deposit balances shifted away from time deposits and toward lower cost savings, money market and demand deposits.

Average loan yields were higher for the fourth quarter of 2022 compared to the fourth quarter of 2021, due primarily to the effects of rising interest rates. Average loan yields were lower for the year ended December 31, 2022 compared to the year ended December 31, 2021, due primarily to lower recognition of net origination fees on PPP loans and lower interest income on PCI loans, partially offset by the effects of rising interest rates during 2022. PPP loans earn interest at a note rate of one percent as well as net origination fees that were amortized over the contractual term of the related loan or accelerated into interest income upon repayment of the loan. There were no net PPP origination fees recognized in the fourth quarter of 2022 and $679,000 recognized during the year ended December 31, 2022, compared to $692,000 and $4.1 million, respectively, for the same periods in 2021. All net PPP origination fees received by C&F Bank had been recognized in income as of June 30, 2022, totaling $6.3 million since the inception of the PPP in the second quarter of 2020. The recognition of interest income on PCI loans, which were acquired in connection with past mergers and acquisitions, is based on management's expectation of future payments of principal and interest, which are inherently uncertain. Earlier than expected repayments of certain PCI loans resulted in the recognition of additional interest income during the fourth quarters and years ended December 31, 2022 and 2021. Interest income recognized on PCI loans was $296,000 and $571,000 for the fourth quarter of 2022 and 2021, respectively, and $1.6 million and $2.5 million for the years ended December 31, 2022 and 2021, respectively. Market interest rates have risen during 2022, and short-term interest rates are expected to continue to rise moving into 2023, which the community banking segment expects to continue to result in increases in asset yields and ultimately in its cost of funds.

C&F Bank's total nonperforming assets were $115,000 at December 31, 2022 compared to $3.2 million at December 31, 2021. Nonperforming assets included $115,000 in nonaccrual loans and no OREO at December 31, 2022 and included $2.4 million in nonaccrual loans and $835,000 in OREO at December 31, 2021. The decrease in nonaccrual loans at December 31, 2022 as compared to December 31, 2021 was due primarily to the resolution of certain impaired loans during 2022. The community banking segment recorded provision for loan losses of $100,000 for the fourth quarter of 2022 and recorded a net reversal of provision for loan losses of $600,000 for the year ended December 31, 2022, compared to no provision for loan losses recorded for the fourth quarter of 2021 and a net reversal of provision for loan losses of $200,000 for the year ended December 31, 2021. At December 31, 2022, the allowance for loan losses decreased to $14.5 million, compared to $14.8 million at December 31, 2021. Decreases in the allowance for loan losses during 2022 related to the resolution of certain impaired loans and continued strong credit quality of the loan portfolio, which were partially offset by provision related to growth in the loan portfolio. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio.

Mortgage Banking Segment.  The mortgage banking segment reported a net loss of $462,000 and net income of $1.2 million for the fourth quarter and year ended December 31, 2022, respectively, compared to net income of $1.1 million and $7.7 million, respectively for the same periods in 2021.

The decrease in net income of the mortgage banking segment for the fourth quarter and year ended December 31, 2022 compared to the same periods in 2021 was due primarily to lower volume of mortgage loan originations and mortgage lender services, lower margins on sales of mortgage loans, and lower average balances of loans held for sale, partially offset by lower expenses tied to mortgage loan origination volume such as salaries and employee benefits, loan processing, and data processing and lower provision for indemnification reserves.

Following the elevated volume levels in the mortgage industry during 2020 and 2021 that accompanied historically low mortgage interest rates and a highly active residential real estate market, the rapid rise in mortgage interest rates during 2022, combined with higher home prices, has led to a substantial decline in mortgage loan originations. Mortgage loan originations for the mortgage banking segment were $112.1 million and $697.3 million for the fourth quarter and year ended December 31, 2022, respectively, compared to $296.9 million and $1.5 billion, respectively, for the same periods in 2021. Mortgage loan originations during the fourth quarter of 2022 for refinancings and home purchases were $13.4 million and $98.7 million, respectively, compared to $83.6 million and $213.3 million, respectively, during the fourth quarter of 2021. Mortgage loan originations during the year ended December 31, 2022 for refinancings and home purchases were $105.4 million and $591.9 million, respectively, compared to $522.1 million and $936.9 million, respectively, during the year ended December 31, 2021.

During the fourth quarter and year ended December 31, 2022, the mortgage banking segment recorded no provision for indemnification losses and a reversal of provision for indemnification losses of $858,000, respectively, compared to reversals of provision for indemnification losses of $155,000 and $104,000, respectively, in the same periods of 2021. The release of indemnification reserves in 2022 was due primarily to improvement in the mortgage banking segment's assessment of borrower payment performance and other factors affecting expected losses on mortgage loans sold in the secondary market. The mortgage banking segment increased reserves for indemnification losses during 2020 based on widespread forbearance on mortgage loans and economic uncertainty related to the COVID-19 pandemic. To date, the mortgage banking segment has not made any payments for indemnification losses since the onset of the COVID-19 pandemic, and management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.

Consumer Finance Segment.  The consumer finance segment reported net income of $795,000 and $6.8 million for the fourth quarter and year ended December 31, 2022, respectively, compared to net income of $2.4 million and $10.0 million, respectively for the same periods in 2021.

Net income for the consumer finance segment decreased $1.6 million and $3.1 million for the fourth quarter and year ended December 31, 2022, respectively, compared to the same periods in 2021 due to margin compression resulting from lower average yields on automobile loans and increased costs on variable rate borrowings from the community banking segment and higher provision for loan losses, partially offset by loan growth. Provision for loan losses increased as a result of significant loan growth in 2022, partially offset by lower required reserves resulting from strong loan performance. Average yields on loans decreased for the fourth quarter and year ended December 31, 2022 compared to the same periods in 2021 as a result of the consumer finance segment's pursuing growth in higher quality, lower yielding loans.

Average loans outstanding increased $113.6 million, or 31.6%, for the fourth quarter of 2022 compared to the same period in 2021 and increased $96.9 million, or 29.0%, for the year ended December 31, 2022 compared to the same period in 2021. The consumer finance segment experienced net charge-offs at an annualized rate of 1.66 percent of average total loans for the fourth quarter of 2022, compared to net recoveries of 0.29 for the fourth quarter of 2021. Net charge-offs for the year ended December 31, 2022 were 0.59 percent of average total loans, compared to net recoveries of 0.14 percent for the year ended December 31, 2021. The change in the net charge-off ratio for the fourth quarter and the year ended December 31, 2022 compared to the same periods in 2021 reflect a higher number of charge-offs during 2022 as government stimulus measures in response to the pandemic that benefitted borrowers had a decreased effect in 2022, the wholesale value of used automobiles declined, and there are challenges in repossessing automobiles. Although beginning to rise during 2022, charge-offs in both years were lower than historical levels for the consumer finance segment, due to strong loan performance and a strong market for used autos, which mitigates losses on defaulted auto loans. Despite some weakening in 2022, the consumer finance segment has experienced loan performance since 2020 that has been consistently stronger than periods prior to the onset of the COVID-19 pandemic, resulting in part from the consumer finance segment continuing to purchase higher quality loans, and in part from government stimulus measures. At December 31, 2022, total delinquent loans as a percentage of total loans was 2.78 percent, compared to 2.16 percent at December 31, 2021 and 2.31 percent at September 30, 2022. The allowance for loan losses was $26.0 million at December 31, 2022, compared to $24.8 million at December 31, 2021. The allowance for loan losses as a percentage of total loans decreased to 5.47 percent at December 31, 2022 from 6.73 percent and 5.64 percent at December 31, 2021 and September 30, 2022, respectively, primarily as a result of continued strong credit quality. Management believes that the level of the allowance for loan losses is sufficient to absorb losses inherent in the portfolio. If loan performance deteriorates resulting in elevated delinquencies or net charge-offs, provision for loan losses may increase in future periods.

Capital and Dividends. The Corporation declared cash dividends during the year ended December 31, 2022 totaling $1.64 per share. The Corporation declared a quarterly cash dividend of 42 cents per share during the fourth quarter of 2022, which was paid on January 1, 2023. These dividends represent a payout ratio of 14.1 percent of earnings per share for the fourth quarter of 2022 and 19.8 percent of earnings per share for the year ended December 31, 2022. 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 requirements, and expected future earnings.

Total consolidated equity decreased $14.8 million at December 31, 2022 compared to December 31, 2021, due primarily to unrealized losses in the market value of securities available for sale, which are recognized as a component of other comprehensive income. The Corporation's securities available for sale are fixed income debt securities, and their decline in market value during 2022 was a result of rising market interest rates. The Corporation expects to recover its investments in debt securities through scheduled payments of principal and interest, and unrealized losses are not expected to affect the earnings or regulatory capital of the Corporation or the Bank.

In November 2021, the Board of Directors authorized a program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation's common stock through November 2022. This share repurchase program expired on November 30, 2022 and as of December 31, 2022, the Corporation has made aggregate common stock repurchases of 89,373 shares for an aggregate amount repurchased of $4.6 million under this share repurchase program. On November 15, 2022, the 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. During the fourth quarter and the year ended December 31, 2022, the Corporation repurchased $1.7 million and $5.0 million, respectively, of its common stock under these share repurchase plans.

About C&F Financial Corporation. C&F Financial Corporation's common stock is listed for trading on The Nasdaq Stock Market under the symbol CFFI. The common stock closed at a price of $57.70 per share on January 23, 2023. At December 31, 2022, the book value of the Corporation was $56.27 per share and the tangible book value per share was $48.54. For more information about the Corporation's tangible book value per share, which is not calculated in accordance with GAAP, please see "Use of Certain Non-GAAP Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures," below.

C&F Bank operates 31 banking offices and four commercial loan offices located throughout eastern and central Virginia and offers full wealth management services through its subsidiary C&F Wealth Management, Inc. C&F Mortgage Corporation and its subsidiary C&F Select LLC provide mortgage loan origination services through offices located in Virginia, Maryland, North Carolina, South Carolina and West Virginia. C&F Finance Company provides automobile, marine and RV loans through indirect lending programs offered in Alabama, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and West Virginia from its headquarters in Henrico, Virginia.

Additional information regarding the Corporation's products and services, as well as access to its filings with the Securities and Exchange Commission (SEC), are available on the Corporation's website at http://www.cffc.com.

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 adjusted net income, adjusted earnings per share, adjusted ROE, adjusted ROA, ROTCE, adjusted ROTCE, tangible book value per share, and the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE.

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 items that do not reflect ongoing operating performance, 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.