ITEM 7.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 Regarding Forward-Looking Statements” prior to Part I, Item 1. “Business.”
OVERVIEW
Our primary financial goals are to maximize the Corporation’s earnings and to deploy capital in profitable growth initiatives that will enhance long-term shareholder value. We track three primary financial performance measures in order to assess the level of success in achieving these goals: (1) return on average assets (ROA), (2) return on average equity (ROE), and (3) growth in earnings. In addition to these financial performance measures, we track the performance of the Corporation’s three business segments: community banking, mortgage banking, and consumer finance. We balance these financial measures with acceptable levels of interest rate risk, while satisfying liquidity and capital requirements and monitoring asset quality. We also actively manage our capital through growth, dividends and share repurchases, while considering the need to maintain a strong capital position. The following table presents selected financial performance highlights for the periods indicated:
TABLE 1: Financial Performance Highlights
(Dollars in thousands, except for per share data) Year Ended December 31,
Net Income (Loss):
Earnings per share - basic and diluted $ 6.92 $ 8.29 $ 7.95
Adjusted earnings per share - basic and diluted1 $ 6.92 $ 7.61 $ 8.20
Adjusted return on average equity1 11.68 % 13.64 % 15.22 %
Return on average assets 0.99 % 1.27 % 1.34 %
Adjusted return on average assets1 0.99 % 1.16 % 1.38 %
The Corporation uses adjusted net income, which is a non-GAAP measure of financial performance, to provide meaningful information about operating performance by excluding the effects of certain items that management does not expect to have an ongoing impact on consolidated net income. Adjusted net income for 2022 and 2021 excludes the effects
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of asset disposal activity related to branch consolidation, a change in accounting policy election related to the fair value of certain equity investments and charges related to pension settlement accounting, as applicable. No such effects impacted the Corporation’s financial results for the year ended December 31, 2023. For further information regarding non-GAAP measures, including the impact of the above items on each year, refer to “Use of Certain Non-GAAP Financial Measures” and the accompanying disclosure below within this Item 7.
Consolidated net income and earnings per share were $23.7 million and $6.92, respectively, for the year ended December 31, 2023, compared to $29.4 million and $8.29, respectively, for the year ended December 31, 2022. Adjusted net income and adjusted earnings per share were $23.7 million and $6.92, respectively, for the year ended December 31, 2023, compared to $27.0 million and $7.61, respectively, for the year ended December 31, 2022. The decrease in consolidated net income for 2023 compared to 2022 was due primarily to lower net income at all three business segments. The decrease in earnings per share for 2023 compared to 2022 was due primarily to lower net income, partially offset by fewer shares outstanding, primarily as a result of share repurchases.
A discussion of the performance of our business segments is included under the heading “Business Segments” in the “Results of Operations” section of this discussion and analysis.
Key factors affecting comparisons for the years ended December 31, 2023 and 2022 are as follows.
● Community banking segment loans grew $113.2 million, or 9.8 percent;
● Consumer finance segment loans decreased $6.0 million, or 1.3 percent;
● Deposits increased $62.3 million, or 3.1 percent;
● Consolidated net interest margin was 4.31 percent, compared to 4.27 percent;
Discussion of consolidated net income and earnings per share for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Overview” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
Capital Management and Dividends
Total equity was $217.5 million at December 31, 2023, compared to $196.2 million at December 31, 2022. Under regulatory capital standards, the Corporation’s tier 1 risk-based capital and total risk-based capital ratios at December 31, 2023 were 12.6 percent and 14.8 percent, respectively, compared to 12.8 percent and 15.4 percent, respectively, at December 31, 2022.
Total consolidated equity increased $21.3 million at December 31, 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, net of related income taxes. The Corporation’s securities available for sale are fixed income debt securities, and their unrealized loss position is a result of increased 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
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Corporation’s securities available for sale decreased to $25.0 million, net of related income taxes, at December 31, 2023, compared to $35.2 million, net of related income taxes, at December 31, 2022, due primarily to a decrease in debt security market interest rates.
The Corporation’s Board of Directors continued its historical practice of paying dividends in 2023. For the year ended December 31, 2023, the Corporation declared dividends of $1.76 per share. Annual dividends per share increased 6.8 percent over dividends of $1.64 per share declared in 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 levels and requirements and expected future earnings. In making its decision on the payment of dividends on the Corporation’s common stock, the Corporation’s Board of Directors considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder returns, and other factors.
In November 2021, the Board of Directors of the Corporation authorized a program, effective December 1, 2021, to repurchase up to $10.0 million of the Corporation’s common stock through November 2022 (the 2021 Repurchase Program). During the year ended December 31, 2022, the Corporation repurchased $4.5 million of its common stock under the 2021 Repurchase Program. At the expiration of the 2021 Repurchase Program, the Corporation had made aggregate common stock repurchases of 89,373 shares for an aggregate cost of $4.6 million under that program.
In November 2022, the Board of Directors of the Corporation 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). During the years ended December 31, 2023 and 2022, the Corporation repurchased 127,364 shares, or $7.1 million, of its common stock and 7,963 shares, or $454,000, of its common stock under the 2022 Repurchase Program, respectively.
In December 2023, the Board of Directors authorized a program, effective January 1, 2024, to repurchase up to $10.0 million of the Corporation’s common stock through December 31, 2024 (the 2024 Repurchase Program). Repurchases under the 2024 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.
At December 31, 2023, the book value per share of the Corporation’s common stock was $64.28, and tangible book value per share, a non-GAAP measure, was $56.40, compared to $56.27 and $48.54, respectively, at December 31, 2022. Refer to “Use of Certain Non-GAAP Financial Measures,” below, for information about non-GAAP financial measures, including a reconciliation to the most directly comparable financial measures calculated in accordance with GAAP.
2024 Outlook
Management is cautious in its outlook for 2024. While we continue to see the benefits of our diversified business strategy and the initiatives underway at each of our business segments, we will continue to face challenges and uncertainty surrounding the economic environment in 2024, including changes in interest rates, economic uncertainty and inflation, cybersecurity risks and increased industry regulations. The following additional factors could influence our financial performance in 2024:
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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.
For further information concerning the Corporation’s adoption of ASC 326, effective January 1, 2023, refer to Item 8. “Financial Statements and Supplementary Data” under the heading “Note 2: Adoption of New Accounting Standards.”
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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 2023, the Corporation concluded that no impairment existed based on an assessment of qualitative factors.
For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data” under the heading “Note 1: Summary of Significant Accounting Policies.”
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table shows the average balance sheets, the amounts of interest earned on earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates, for each of the years ended December 31, 2023, 2022 and 2021. 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 8 basis points and 6 basis points to the yields on community banking segment loans and total loans, respectively, and 4 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2023, compared to approximately 15 basis points and 10 basis points to the yields on community banking segment loans and total loans, respectively, and 7 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2022, and approximately 26 basis points and 18 basis points to the yields on community banking segment loans and total loans, respectively, and 13 basis points to both the yield on interest earning assets and net interest margin for the year ended December 31, 2021.
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TABLE 2: Average Balances, Income and Expense, Yields and Rates
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Assets
Securities:
Loans:
Liabilities and Equity
Interest-bearing deposits:
Borrowings:
Other liabilities 42,954 40,854 50,929
Interest rate spread 3.79 % 4.09 % 4.06 %
Net interest margin 4.31 % 4.27 % 4.26 %
Interest income and expense are affected by fluctuations in interest rates, by changes in the volume of earning assets and interest-bearing liabilities, and by the interaction of rate and volume factors. The following table shows the direct causes of the year-to-year changes in the components of net interest income on a taxable-equivalent basis. The Corporation calculates the rate and volume variances using a formula prescribed by 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.
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TABLE 3: Rate-Volume Recap
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
(Dollars in thousands) Rate Volume (Decrease) Rate Volume (Decrease)
Interest income:
Loans:
Securities:
Interest expense:
Interest-bearing deposits:
Savings accounts 16 (14) 2 (13) 20 7
Borrowings:
Net interest income, on a taxable-equivalent basis, for 2023 increased to $98.7 million, compared to $94.0 million for 2022, due primarily to higher average balances of earning assets and an increase in net interest margin. Average earning assets grew $85.2 million, or 3.9 percent, to $2.29 billion for 2023 compared to $2.20 billion for 2022, and net interest margin increased 4 basis points to 4.31 percent in 2023, compared to 4.27 percent in 2022. Net interest margin increased 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 an upper limit of 0.25 percent at December 31, 2021 to 4.50 percent by the end of 2022 and to 5.50 percent by December 31, 2023. The yield on interest-earning assets and cost of interest-bearing liabilities increased by 84 basis points and 114 basis points, respectively, for 2023, compared to 2022.
Average loans, which includes both loans held for investment and loans held for sale, increased $159.0 million to $1.71 billion for 2023, compared to $1.55 billion for 2022. Average loans held for investment at the community banking segment increased $137.2 million, or 12.7 percent, to $1.21 billion for 2023, compared to $1.08 billion for 2022, due primarily to growth in the commercial real estate and residential mortgage segments of the loan portfolio. Average loans held for investment at the consumer finance segment increased $42.4 million, or 9.8 percent, to $473.9 million for 2023, compared to $431.5 million for 2022, due primarily to higher average balances of automobile loans. Average loans at the mortgage banking segment, which consist primarily of loans held for sale, decreased $20.6 million, or 44.6 percent, to $25.6 million for 2023, compared to $46.2 million for 2022, due primarily to lower mortgage loan production volume in 2023, compared to 2022, as a result of conditions in the housing markets and rising market interest rates on mortgage loans.
The community banking segment average loan yield increased 80 basis points to 5.12 percent for 2023, compared to 4.32 percent for 2022, due primarily to the effects of rising interest rates. The consumer finance segment average loan yield increased 13 basis points to 9.97 percent for 2023, compared to 9.84 percent for 2022, due primarily to the effects of rising interest rates, which were partially offset by the effects of purchasing higher credit quality loan contracts which have lower yields. The mortgage banking segment average loan yield increased 221 basis points to 6.62 percent for 2023, compared to 4.41 percent for 2022, due primarily to the effects of rising interest rates.
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Average securities available for sale increased $44.2 million to $536.9 million for 2023, compared to $492.7 million for 2022, due primarily purchases of obligations of states and political subdivisions and government agencies. The average yield on the securities portfolio on a taxable-equivalent basis increased 41 basis points to 2.37 percent for 2023, compared to 1.96 percent for 2022, due primarily to rising interest rates and the maturity of lower-yielding securities during the year, 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 $118.0 million to $35.4 million for 2023, compared to $153.4 million for 2022, due primarily to utilizing cash to fund growth in loans and securities purchases. The average yield on interest-bearing deposits in other banks increased 269 basis points to 3.52 percent for 2023, compared to 0.83 percent for 2022.
Average money market, savings and interest-bearing demand deposits decreased $91.2 million to $881.3 million for 2023, compared to $972.5 million for 2022, and average time deposits increased $148.7 million to $541.3 million for 2023, compared to $392.6 million for 2022. Average noninterest-bearing demand deposits decreased $49.1 million to $575.5 million for 2023, compared to $624.6 million for 2022. The decreases in non-time deposits and increase in time deposits are due primarily to customers seeking higher yielding opportunities as a result of rising interest rates paid on time deposits. The average cost of interest-bearing deposits increased 105 basis points to 1.43 percent for 2023, compared to 0.38 percent for 2022, due primarily to higher rates on deposits and a shift in composition towards time deposits amid rising interest rates and increased competition for deposits.
Average borrowings increased $58.0 million to $149.3 million for 2023, compared to $91.3 million for 2022, due primarily to increases in short-term Federal Home Loan Bank of Atlanta (FHLB) borrowings to support lending activities and securities purchases. The average cost of borrowings increased 113 basis points to 4.05 percent for 2023 compared to 2.92 percent for 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, albeit at a decelerating rate, 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. 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 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 changes in market interest rates or the impact of those changes or any other factor on the Corporation's net interest margin. If market interest rates begin to decline, the Corporation’s net interest margin could be adversely affected as its assets typically reprice downward more quickly than its deposits and borrowings. Alternatively, 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 than its deposits and borrowings.
Discussion of net interest income for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Net Interest Income” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
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NONINTEREST INCOME
TABLE 4: Noninterest Income
Year Ended December 31,
Service charges on deposit accounts 4,330 4,306 3,718
Wealth management services income, net 2,564 2,442 2,761
Mortgage lender services income 2,048 1,667 2,492
Investment income from other equity interests 677 3,138 456
Total noninterest income increased $403,000, or 1.4 percent, for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in noninterest income was due primarily to fluctuations in unrealized gains and losses on investments held in the rabbi trust, higher mortgage lender services income, as a result of an increase in the number of institutional customers and the types of services provided, and higher debit card interchange income, partially offset by lower investment income from other equity interests, lower volume of mortgage loan production, which resulted in lower gains on sales of loans and mortgage banking fee income, and lower gains on sale of assets, primarily related to the sale of former bank branch locations, included in other income (loss), net.
Investment income from other equity interests for the year ended December 31, 2022 included $2.7 million of net positive fair value adjustments recognized upon a change in accounting policy election for certain equity investments, primarily consisting of equity interests in an independent insurance agency and a full service title and settlement agency, which did not recur.
The Corporation uses a rabbi trust to fund liabilities under its nonqualified deferred compensation plan. Unrealized gains and losses on investments held in the Corporation’s rabbi trust are offset by changes in deferred compensation liabilities, recorded in salaries and employee benefits expense.
Discussion of noninterest income for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Noninterest Income” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
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NONINTEREST EXPENSE
TABLE 5: Noninterest Expense
Year Ended December 31,
Salaries and employee benefits:
Marketing and advertising expenses 1,548 1,805 1,523
Mortgage banking loan processing expenses 1,048 1,682 3,128
Other expenses:
Other real estate loss/(gain) and expense, net — 2 (379)
Other components of net periodic pension cost (453) (1,198) 161
Provision for indemnifications (585) (858) (104)
Total noninterest expense increased $7.3 million, or 8.9 percent, for the year ended December 31, 2023, compared to the year ended December 31, 2022. The increase in noninterest expenses was due primarily to changes in deferred compensation liabilities related to the Corporation’s nonqualified plan, increases in compensation, payroll taxes and employee benefits at the community banking segment, which have generally increased in line with employment market conditions, and higher Federal Deposit Insurance Corporation (FDIC) assessment expenses, included in insurance expense, due to statutory increases applicable to all insured depository institutions, partially offset by lower expenses tied to mortgage loan production volume at the mortgage banking segment, reported in compensation, payroll taxes and benefits, and mortgage banking loan processing expenses.
Changes in deferred compensation liabilities are offset by unrealized gains and losses on investments held in the Corporation’s rabbi trust, recorded in noninterest income.
Discussion of noninterest expense for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Noninterest Expense” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
INCOME TAXES
Income tax expense on 2023 earnings was $5.4 million, resulting in an effective tax rate of 18.6 percent, compared with $7.6 million, or 20.6 percent, in 2022. The Corporation’s consolidated effective tax rate for the year ended December 31, 2023 was lower compared to the year ended December 31, 2022 due primarily to lower state income taxes in 2023 as a greater share of income before taxes was earned at C&F Bank, which is not subject to state income tax but rather state franchise tax, which is included in noninterest expense, tax benefits of tax-exempt interest income that was higher as a percentage of pre-tax income in 2023 compared to 2022 and an increase in the tax benefit in 2023, compared to 2022, related to the appreciation of vested equity awards since the time they were granted.
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Discussion of income taxes for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Income Taxes” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
BUSINESS SEGMENTS
The Corporation operates in a decentralized manner in three business segments: community banking, mortgage banking and consumer finance. An overview of the financial results for each of the Corporation’s business segments is presented below.
Community Banking: The community banking segment comprises 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
Year Ended December 31,
Provision for credit losses 1,625 (600) (200)
Noninterest income:
Service charges on deposit accounts 4,390 4,366 3,740
Wealth management services income, net 2,564 2,442 2,761
Investment income from other equity interests 677 3,138 456
Noninterest expense:
Other real estate loss/(gain) and expense, net — 2 (379)
The decrease in community banking segment net income for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due primarily to:
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● higher costs related to the implementation of a new loan origination system;
● higher debit and credit card interchange processing expenses; and
partially offset by:
Net income for the community banking segment was $22.9 million for the year ended December 31, 2023, compared to $24.4 million for the year ended December 31, 2022. Adjusted net income for the community banking segment, which excludes 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, was $22.9 million for the year ended December 31, 2023, compared to $22.0 million for the year ended December 31, 2022.
Net interest income for the community banking segment increased $7.2 million for the year ended December 31, 2023, compared to the year ended December 31, 2022. This increase was due primarily to an increase in net interest margin and higher average balances of interest earning assets. Included in net interest income is interest income on variable rate loans to the consumer finance and mortgage banking segments.
The community banking segment recorded a provision for credit losses of $1.6 million for the year ended December 31, 2023, compared to a net reversal of provision for credit losses of $600,000 for the year ended December 31, 2022, due primarily to growth in the loan portfolio and the resolution of certain impaired loans in 2022, which resulted in the reversal of specific reserves with no losses being realized. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected.
Discussion of the community banking segment for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
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Mortgage Banking: The following table presents the mortgage banking operating results for the periods indicated.
TABLE 7: Mortgage Banking Segment Operating Results
Year Ended December 31,
Provision for credit losses — 32 (45)
Noninterest income:
Mortgage lender services fee income 2,048 1,667 2,492
Noninterest expense:
Provision for indemnifications (585) (858) (104)
The decrease in mortgage banking segment net income for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due primarily to lower volume of mortgage loan originations, which resulted in lower gains on sales of loans and mortgage banking fee income, and lower reversal of provision for indemnifications partially offset by lower variable expenses tied to mortgage loan origination volume such as commissions and bonuses, reported in salaries and employee benefits, as well as mortgage banking loan processing expenses and data processing expenses, higher mortgage lender services income due to an increase in the number of institutional customers served and the types of services provided and lower salaries and employee benefits, occupancy expense and other expenses due to an effort to reduce overhead costs as mortgage loan origination volume has decreased.
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The following table presents mortgage loan originations and mortgage loans sold for the periods indicated.
TABLE 8: Mortgage Loan Originations
Year Ended December 31,
Mortgage loan originations:
1 Total mortgage loan originations does not include mortgage lender services.
The rapid rise in mortgage interest rates during 2022 and 2023, combined with higher home prices and lower levels of inventory, has led to a substantial decline in mortgage loan originations for the mortgage industry during 2023 as compared to 2022. Mortgage loan originations for the mortgage banking segment decreased 28.5 percent for the year ended December 31, 2023, compared to the year ended December 31, 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 by 26.7 percent for the year ended December 31, 2023 compared to the year ended December 31, 2022. Locked loan commitments decreased by $16.1 million in the year ended December 31, 2023 and decreased by $41.1 million in the year ended December 31, 2022. Locked loan commitments were $26.2 million at December 31, 2023, compared to $42.3 million at December 31, 2022 and $83.4 million at December 31, 2021.
The mortgage banking segment recorded a net reversal of provision for indemnification losses of $585,000 for the year ended December 31, 2023 compared to a net reversal of provision for indemnification losses of $858,000 for the year ended December 31, 2022. 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. The release of indemnification reserves in 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, such as time since origination. Management believes that the indemnification reserve is sufficient to absorb losses related to loans that have been sold in the secondary market.
Discussion of the mortgage banking segment for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
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Consumer Finance: The following table presents the consumer finance operating results for the periods indicated.
TABLE 9: Consumer Finance Segment Operating Results
Year Ended December 31,
Noninterest expense:
The decrease in consumer finance segment net income for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due primarily higher interest expense on variable rate borrowings from the community banking segment as a result of increased market interest rates and higher provision for credit losses as a result of increased charge-offs, partially offset by higher interest income resulting from higher average balances of interest-earning assets and from the effects of rising market interest rates.
The consumer finance segment recorded provision for credit losses of $6.7 million for the year ended December 31, 2023, compared to $3.7 million for the year ended December 31, 2022, due primarily to increased net charge-offs. The consumer finance segment experienced a higher number of charge-offs during 2023, compared to 2022, due primarily to an increase in the number of delinquent loans, a decline in wholesale values of used automobiles from a peak during the COVID-19 pandemic and 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. Delinquency rates have increased to near pre-pandemic levels, due in part to the passage of time since the expiration of government stimulus and enhanced unemployment benefits that benefitted borrowers. Management believes that the level of the allowance for credit losses is adequate to reflect the net amount expected to be collected. If loan performance deteriorates resulting in elevated delinquencies or net charge-offs, the provision for credit losses may increase in future periods.
Discussion of the consumer finance segment for the year ended December 31, 2021 has been omitted as such discussion was provided in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Business Segments” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 28, 2023, and is incorporated herein by reference.
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.
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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 automobile loans and based on external loss observations for marine and recreational vehicle (RV) 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:
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
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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 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.
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:
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 RV 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
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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 December 31, 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
Consumer
(Dollars in thousands) Commercial Consumer1 Finance Total
Impact of ASC 326 adoption on non-PCD loans (617) 98 406 (113)
Impact of ASC 326 adoption on PCD loans 595 9 — 604
Recoveries of loans previously charged off 156 179 4,296 4,631
1Consumer loans includes provision, charge-offs and recoveries related to demand deposit overdrafts.
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Real Estate Commercial,
Residential Real Estate Financial & Equity Consumer
Loans charged off — — — — (184) (4,381) (4,565)
For further information regarding the adequacy of our allowance for credit losses, refer to “Nonperforming Assets” and the accompanying disclosure below within this Item 7.
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 December 31, 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 11: Allocation of Allowance for Credit Losses
December 31,
(Dollars in thousands) 2023
Allocation of allowance for credit losses:
Consumer Finance 23,578
Total allowance for credit losses $ 39,651
Ratio of loans to total period-end loans:
Commercial 52 %
Consumer 21
Consumer Finance 27
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December 31,
(Dollars in thousands) 2022
Allocation of allowance for loan losses:
Real estate—residential mortgage $ 2,622
Real estate—construction 788
Commercial, financial and agricultural 10,431
Equity lines 497
Consumer 211
Consumer finance 25,969
Total allowance for loan losses $ 40,518
Ratio of loans to total period-end loans:
Real estate—residential mortgage 16 %
Real estate—construction 4
Commercial, financial and agricultural 48
Equity lines 2
Consumer 1
Consumer finance 29
Loans are required to be measured at amortized cost and to be presented at the net amount expected to be collected. 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. 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. The following table presents the Corporation’s reserve for unfunded commitments for the periods indicated.
TABLE 12: Reserve for Unfunded Commitments
(Dollars in thousands) December 31, 2023
Balance at December 31, 2022 $ —
Provision charged to operations 149
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 year ended December 31, 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 13: Provision for Credit Losses
Year Ended December 31,
Provision for credit losses:
Provision for unfunded commitments 149 — —
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Loans by credit quality indicators are presented in the tables below. Balances presented as of December 31, 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 14: Credit Quality Indicators
Loans by credit quality indicators as of December 31, 2023 were as follows:
Special Substandard
(Dollars in thousands) Pass Mention Substandard Nonaccrual Total1
Construction - commercial real estate 69,768 — — — 69,768
Land acquisition and development 29,064 — — — 29,064
Builder lines 24,668 — — — 24,668
Construction - consumer real estate 11,223 — — — 11,223
Loans by credit quality indicators as of December 31, 2022 were as follows:
Special Substandard
(Dollars in thousands) Pass Mention Substandard Nonaccrual Total1
Real estate – construction 2 59,675 — — — 59,675
Non-
(Dollars in thousands) Performing Performing Total
4 Includes the Corporation’s automobile lending and marine and RV lending.
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Nonperforming Assets
A loan’s past due status is based on the contractual due date of the most delinquent payment due. Loans are generally placed on nonaccrual status when the collection of principal or interest is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. 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.
Assets acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at fair value less estimated costs to sell at the date of foreclosure. 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. We may incur additional write-downs of foreclosed assets to fair value less estimated costs to sell if valuations indicate a further deterioration in market conditions. Revenue and expenses from operations and changes in the property valuations are included in net expenses from foreclosed assets and improvements are capitalized.
At the consumer finance segment, the repossession process is generally initiated after a loan becomes more than 60 days delinquent. Borrowers have an opportunity to redeem their repossessed vehicles by paying all outstanding balances, including finance charges and fees. Vehicles that are not redeemed within the prescribed waiting period before C&F Finance has the legal right to sell the repossessed vehicle then become available-for-sale at the end of that period and are reclassified from loans to other assets and are recorded initially at fair value less estimated costs to sell. The difference between the carrying amount of each loan and the fair value of the vehicle (i.e. the deficiency) is charged against the allowance for credit losses. Accounts still in process of collection or for which the Corporation does not have the legal right to sell continue to be classified as loans until such legal authority is obtained. After the vehicles have been sold in third-party auctions, we credit the proceeds from the sale of the vehicles, and any other recoveries, to the carrying value of the repossessed vehicles. C&F Finance pursues collection of deficiencies, as allowed by state law, when it deems such action to be appropriate.
Table 15 summarizes the Corporation’s credit ratios on a consolidated basis and Table 16 summarizes nonperforming assets by principal business segment as of December 31, 2023 and 2022. Balances and ratios presented as of December 31, 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 15: Consolidated Credit Ratios
December 31,
Allowance for credit losses (ACL) $ 39,651 $ 40,518
Nonaccrual loans to total loans 0.07 % 0.07 %
ACL to total loans 2.28 % 2.48 %
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TABLE 16: Nonperforming Assets
Community Banking Segment
December 31,
Nonaccrual loans $ 406 $ 115
Impaired loans1 $ n/a $ 823
Nonaccrual loans to total loans 0.03 % 0.01 %
ACL to total loans 1.26 % 1.25 %
Net charge-offs to average total loans 0.01 % 0.02 %
Mortgage Banking Segment
December 31,
Total loans1 $ — $ 707
Nonaccrual loans $ — $ 149
ACL $ — $ 36
Nonaccrual loans to total loans — % 21.07 %
ACL to total loans — % 5.09 %
ACL to nonaccrual loans — % 24.16 %
Net charge-offs to average total loans — % — %
1All loans have been transferred to the community banking segment. Total loans does not include loans held for sale.
Consumer Finance Segment
December 31,
Nonaccrual loans $ 892 $ 925
Repossessed assets $ 646 $ 352
Nonaccrual loans to total loans 0.19 % 0.19 %
ACL to total loans 5.03 % 5.47 %
Net charge-offs to average total loans 1.99 % 0.59 %
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The following table presents the changes in the OREO balance for 2022. There was no OREO activity for the year ended December 31, 2023.
TABLE 17: OREO Changes
(Dollars in thousands) 2022
Balance at the beginning of year, gross $ 835
Additions 423
Sales proceeds (1,547)
Gain on disposition 289
Balance at the end of year, gross —
Less valuation allowance —
Balance at the end of year, net $ —
The community banking segment’s nonaccrual loans were $406,000 at December 31, 2023 compared to $115,000 at December 31, 2022. If interest on loans on nonaccrual at December 31, 2023 had been recognized throughout the year, the community banking segment would have recorded additional gross interest income in 2023 of $17,000. The community banking segment recorded $1.6 million in provision for credit losses for the year ended December 31, 2023, compared to a net reversal of provision for credit losses of $600,000 for the year ended December 31, 2022. The increase in provision for credit losses is due primarily to growth in the loan portfolio and the resolution of certain impaired loans in 2022, which resulted in the reversal of specific reserves with no losses being realized. At December 31, 2023, the allowance for credit losses increased to $16.1 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 increase to the allowance upon adoption 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 decreased to $892,000 at December 31, 2023 from $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 December 31, 2023, repossessed vehicles at fair value less estimated costs to sell included in other assets totaled $646,000, compared to $352,000 at December 31, 2022. If interest on loans on nonaccrual at December 31, 2023 had been recognized throughout the year, the consumer finance segment would have recorded additional gross interest income in 2023 of $8,000.
The consumer finance segment experienced net charge-offs at a rate of 1.99 percent of average total loans for the year ended December 31, 2023, compared to 0.59 percent for the year ended December 31, 2022, due primarily to an increase in the number of delinquent loans, a decline in wholesale values of used automobiles from a peak during the COVID-19 pandemic and 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 December 31, 2023, total delinquent loans as a percentage of total loans was 4.09 percent, compared to 2.78 percent at December 31, 2022. Delinquency rates have increased to near pre-pandemic levels, due in part to the passage of time since the expiration of government stimulus and enhanced unemployment benefits that benefitted borrowers. The increases in the rates of net charge-offs and delinquencies during 2023 were consistent with management’s evaluation of the allowance for loan losses as of December 31, 2022. The allowance for credit losses was $23.6 million at December 31, 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 5.03 percent at December 31, 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 increase to the allowance upon adoption on January 1, 2023 of $406,000.
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As previously described, the consumer finance segment, at times, offers payment deferrals as a portfolio management technique to achieve higher ultimate cash collections on select loan accounts. Payment deferrals may affect the ultimate timing of when an account is charged off. A significant reliance on deferrals as a means of managing collections may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio. The average amounts deferred on a monthly basis during 2023 were 1.87 percent of average automobile loans outstanding, compared to 1.47 percent during 2022 and 1.74 percent during 2021.
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. 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 relative to long-term historical averages. 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
SUMMARY
A financial institution’s primary sources of revenue are generated by its earning assets and sales of financial assets, while its major expenses are produced by the funding of those assets with interest-bearing liabilities, provisions for loan losses and compensation to employees. Effective management of these sources and uses of funds is essential in attaining a financial institution’s maximum profitability while maintaining an acceptable level of risk.
At December 31, 2023, the Corporation had total assets of $2.44 billion compared to $2.33 billion at December 31, 2022. The increase was attributable primarily to increases in loans held for investment and interest-bearing deposits in other banks, partially offset by a decrease in available for sale securities and was funded by growth in deposits and short-term borrowings. The significant components of the Corporation’s Consolidated Balance Sheets are discussed below.
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LOAN PORTFOLIO
General
Through the community banking segment, we engage in a wide range of lending activities, primarily in the community banking segment’s market area, which include the origination of commercial real estate loans, commercial business loans, commercial and consumer real estate construction loans, land acquisition and development loans, builder lines, residential mortgage loans, equity lines, and other consumer loans. We engage in automobile and marine and RV lending through the consumer finance segment and in residential mortgage lending through the mortgage banking segment with the majority of the loans originated through the mortgage banking segment sold to third-party investors. At December 31, 2023, the Corporation’s loans held for investment in all categories, net of the allowance for credit losses, totaled $1.70 billion and loans held for sale had a fair value of $14.2 million.
Tables 18, 19 and 20 present information pertaining to the composition of loans held for investment, the composition of commercial real estate loans and the maturity/repricing of certain loans held for investment, respectively.
TABLE 18: Summary of Loans Held for Investment
(Dollars in thousands) Amount Percent Amount Percent
Construction - commercial real estate 69,768 4 49,136 3
Construction - consumer real estate 11,223 1 10,539 1
Consumer finance - marine and recreational vehicles 67,234 4 63,445 4
Less allowance for credit losses (39,651) (40,518)
The increase in total loans from December 31, 2022 to December 31, 2023 was due primarily to growth in commercial real estate, residential mortgage lending and commercial real estate construction at the community banking segment.
TABLE 19: Commercial Real Estate Loans
(Dollars in thousands) Amount % of Commercial Real Estate % of Total
Industrial/warehouse 58,137 8.7 3.3
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TABLE 20: Maturity/Repricing Schedule of Loans Held for Investment
(Dollars in thousands) Commercial Consumer Consumer Finance Total
Variable Rate:
After 15 years — — — —
Fixed Rate:
Credit Policy
The Corporation’s credit policy establishes minimum requirements and provides for appropriate limitations on overall concentration of credit within the Corporation. The policy provides guidance in general credit policies, underwriting policies and risk management, credit approval, and administrative and problem asset management policies. The overall goal of the Corporation’s credit policy is to ensure that loan growth is accompanied by acceptable asset quality with uniform and consistently applied approval, administration, and documentation practices and standards.