C & F FINANCIAL CORP quarterly report, Q2 FY2023

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C&F Financial Corporation — Q2 2023 Form 10-Q

Business context and reporting period

Virginia-based bank holding company with community banking, mortgage banking and consumer finance segments. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are to 2022 unless noted. Dollar amounts below are in millions except per-share data.

Financial results and key metrics

  • Q2 earnings: Net income was $6.4 million, down 5.9%; net income attributable to C&F was $6.3 million versus $6.7 million. Diluted EPS was $1.84 versus $1.91.
  • Six-month earnings: Net income was $12.9 million, up from $12.5 million; attributable income was $12.7 million versus $12.4 million. EPS was $3.70 versus $3.49.
  • Net interest: Q2 net interest income was $24.3 million, up from $22.6 million; fully taxable-equivalent NIM was 4.29% versus 4.12%. For six months, net interest income was $49.3 million versus $43.1 million and NIM was 4.41% versus 4.02%.
  • Other income and expenses: Q2 noninterest income increased to $7.8 million from $5.7 million, while noninterest expense rose to $22.5 million from $19.1 million. Q2 provision for credit losses was $1.7 million versus $0.5 million. Six-month provision was $3.8 million versus $0.2 million.
  • Returns: Annualized Q2 ROA was 1.06% and ROE 12.51%, compared with 1.16% and 13.80%. Six-month ROA was 1.08% and ROE 12.69%, compared with 1.09% and 12.36%.
  • Balance sheet at June 30: Assets totaled $2.42 billion, up $87.1 million from year-end; net loans were $1.65 billion, up $51.3 million. Deposits were $2.00 billion, down $6.4 million. Total equity was $202.5 million versus $196.2 million at year-end.
  • Credit quality: Allowance for credit losses was $40.5 million, or 2.40% of loans. Nonaccrual loans were $1.2 million, 0.07% of loans. Consumer finance net charge-offs were 1.63% annualized for the first half, compared with net recoveries of 0.10% in the prior-year period.
  • Cash flow and liquidity: Six-month operating cash flow was negative $0.8 million versus positive $49.4 million; investing cash outflow was $36.0 million versus $266.9 million. Financing provided $69.1 million. Cash and cash equivalents ended at $58.9 million, up from $26.7 million at year-end. Liquid assets were $349.4 million.
  • Funding and capital: Borrowings increased to $175.6 million from $92.1 million at year-end, primarily from short-term FHLB funding. Available borrowing capacity was $530.9 million. Bank total risk-based capital was 14.1%, tier 1 12.8%, and CET1 12.8%; all exceeded applicable well-capitalized thresholds. Corporation total risk-based and tier 1 ratios were 14.9% and 12.6%.

Material changes versus comparable periods

  • Higher asset yields and loan growth lifted net interest income and NIM, but funding costs rose sharply: Q2 interest expense was $6.4 million versus $1.8 million, including higher deposit and borrowing costs.
  • Community banking earnings improved, while mortgage banking and consumer finance earnings declined. Q2 mortgage originations fell 26.5%; first-half originations fell 32.4%. Consumer finance faced higher credit provisions and funding expense.
  • Consumer finance charge-offs increased as delinquencies moved up from unusually low pandemic-era levels, used-car values fell from their peak and repossession capacity remained constrained.
  • Deposits shifted from demand and savings accounts toward time deposits: first-half demand and savings deposits fell $171.4 million while time deposits rose $165.0 million. Brokered deposits were $25.0 million at June 30 versus $5,000 at year-end.
  • Unrealized losses on available-for-sale securities remained substantial. Fair value was $490.9 million against $533.5 million amortized cost, with $43.1 million gross unrealized losses; management attributed losses primarily to interest rates and reported no credit loss allowance.

Outlook, commentary, risks and unusual items

  • Management expects deposit costs and overall funding costs to continue rising; near-term funding-cost increases may outpace asset-yield increases and reduce NIM for the remainder of 2023. Further rate increases could support NIM, while falling rates could pressure it because assets are expected to reprice faster than deposits and borrowings. The Fed raised its target rate to 5.50% in July 2023.
  • Key risks include deposit outflows and competition for funding, reliance on borrowings, interest-rate changes, commercial and residential real estate conditions, credit deterioration, and consumer auto delinquencies, collateral values and repossession challenges. Uninsured deposits were approximately $565.9 million (28.3% of deposits); excluding intercompany cash and secured municipal deposits, approximately $382.7 million (19.2%).
  • CECL was adopted January 1, 2023, reducing opening retained earnings by $1.1 million and establishing a reserve for unfunded commitments. This affects comparability of credit-loss measures with 2022.
  • Q2 noninterest income included $586,000 of deferred-compensation-plan unrealized gains, offset by increased employee-benefit expense; first-half gains were $1.4 million. Management reported the paired effects offset each other. A $235,000 reversal of mortgage indemnification provision also reduced expense.
  • The company declared a $0.44-per-share quarterly dividend and repurchased $4.5 million of stock in the first half under a $10 million program, with $5.0 million remaining at June 30. Management stated liquidity was adequate; disclosure controls were effective and no material control changes were reported.

Most important facts for investors to verify

  • Whether deposit retention, time-deposit repricing and borrowing dependence affect funding costs and NIM as management anticipates.
  • Whether consumer finance delinquencies, charge-offs, used-vehicle values and repossession capacity worsen, and whether the allowance remains adequate.
  • Whether commercial real estate and other loan portfolio credit indicators change, including classified loans and unfunded commitments.
  • How available-for-sale securities losses, liquidity sources and uninsured deposit levels evolve; management’s no-forced-sale and no-credit-loss assessment is an important assumption.
  • Whether lower mortgage activity and the segment mix continue to constrain earnings, and whether unusual deferred-compensation gains and indemnification reversals recur.