C&F Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. C&F is a Virginia bank holding company with community banking, mortgage banking, and consumer finance businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
- Third-quarter earnings: Net income was $5.8 million, down 11.7% from $6.5 million a year earlier; diluted EPS was $1.71 versus $1.85. Net income attributable to C&F was $5.789 million.
- Nine-month earnings: Net income was $18.7 million versus $19.1 million; diluted EPS was $5.41 versus $5.34. Net income attributable to C&F was $18.536 million.
- Net interest income: GAAP net interest income was $24.5 million in Q3 versus $24.4 million, and $73.8 million for nine months versus $67.5 million. On a fully taxable-equivalent basis, net interest margin was 4.29% in Q3 (4.37% prior year) and 4.37% for nine months (4.15% prior year).
- Other income and expenses: Q3 noninterest income was $6.0 million versus $6.1 million; nine-month noninterest income rose to $21.2 million from $18.5 million. Noninterest expense was $21.3 million in Q3 versus $21.1 million and $66.2 million for nine months versus $60.4 million. The nine-month increase reflected, among other factors, compensation and FDIC assessment costs.
- Credit costs: Provision for credit losses was $2.1 million in Q3 versus $1.2 million and $5.8 million for nine months versus $1.4 million. The allowance for credit losses was $40.2 million, or 2.34% of loans, at quarter-end.
- Returns: Annualized Q3 ROA was 0.96% and ROE 11.28%, compared with 1.12% and 13.20%, respectively. Nine-month ROA was 1.04% and ROE 12.22%.
Financial position, cash flow, and capital
- Assets and loans: Total assets were $2.42 billion, up $89.4 million from December 31, 2022. Loans held for investment were $1.718 billion, up $82.0 million; growth was led by commercial real estate and residential mortgages. Net loans were $1.677 billion.
- Deposits and funding: Deposits were $2.028 billion, up $24.6 million since year-end. Noninterest-bearing and savings/interest-bearing demand deposits declined by a combined $191.4 million, while time deposits rose $216.0 million. Short-term borrowings were $95.7 million and long-term borrowings $26.0 million; trust preferred capital notes were $25.4 million.
- Liquidity: Liquid assets were $340.7 million. Available borrowing capacity under the listed funding sources was $560.8 million. Estimated uninsured deposits were $555.8 million (27.4% of deposits), or approximately $409.1 million after excluding intercompany cash and secured municipal deposits. Management stated liquidity was sufficient for operating needs and obligations.
- Cash flows, nine months: Operating cash flow was $21.8 million versus $69.0 million; investing activities used $46.7 million versus $337.2 million; financing provided $68.7 million versus $99.9 million. Cash and cash equivalents increased $43.9 million to $70.5 million.
- Capital and shareholder returns: Total equity was $200.4 million. C&F reported total and Tier 1 risk-based capital ratios of 14.8% and 12.5%; the Bank’s ratios were 14.0% and 12.7%. The Bank met applicable capital requirements. The company declared a $0.44 quarterly dividend and repurchased $5.8 million of shares during the first nine months; $3.7 million remained under its repurchase authorization at September 30.
Material changes and management commentary
- Higher asset yields and loan growth supported net interest income, but funding costs rose sharply: Q3 interest expense increased to $7.2 million from $1.9 million. Management expects deposit costs and borrowing costs to continue rising and anticipates funding-cost increases will outpace asset-yield increases in the near term, putting pressure on net interest margin for the remainder of 2023.
- Consumer finance earnings weakened: segment net income was $0.7 million in Q3 versus $1.8 million, and $2.3 million for nine months versus $6.0 million. Nine-month annualized net charge-offs in consumer finance were 1.75% versus 0.19% a year earlier. Management cited more delinquencies, lower used-vehicle values, and difficulty repossessing vehicles.
- Mortgage banking remained subdued: Q3 originations fell 29.6% year over year to $129.7 million; nine-month originations fell 31.6% to $400.6 million. Management attributed lower production to higher mortgage rates and housing-market conditions.
- Available-for-sale securities had $50.0 million of gross unrealized losses at September 30, primarily attributed to higher market interest rates. Management reported no credit loss impairment and stated it expects to recover investments through principal and interest payments. Accumulated other comprehensive loss was $41.1 million, including $39.5 million related to securities.
- C&F adopted the CECL credit-loss standard on January 1, 2023. Adoption reduced opening equity by $1.1 million and established a reserve for unfunded commitments; year-over-year credit comparisons therefore involve different accounting methodologies.
Outlook, risks, and contingencies
- No specific full-year earnings or revenue guidance is provided. Management’s near-term margin outlook is subject to the pace of deposit repricing, competition for deposits, borrowing needs, loan growth, and market interest rates. Its sensitivity analysis indicates net interest income would fall under modeled rate declines and rise under modeled rate increases, though the company is less asset-sensitive than at year-end 2022.
- Key disclosed risks include deposit outflows and higher funding costs amid banking-industry liquidity concerns; interest-rate and securities-value volatility; credit deterioration in consumer auto loans and commercial real estate; used-vehicle price declines and repossession constraints; and weak mortgage demand. Management cautioned that credit losses and delinquencies may increase.
- Outstanding customer loan commitments were $432.7 million and standby letters of credit were $10.4 million. Mortgage-loan representations and warranties create potential indemnification exposure; the related reserve was $2.0 million. The filing describes these as ordinary-course exposures and does not indicate a specific material loss event.
- Management reported effective disclosure controls as of September 30, 2023 and no material change in internal control over financial reporting during the quarter. The filing identifies an added risk concerning industry liquidity developments; it reports no other material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit migration toward time deposits and borrowings continues, and how it affects funding costs, liquidity, and net interest margin.
- Trends in consumer-finance delinquencies, charge-offs, repossessions, used-vehicle values, and the adequacy of the allowance.
- Commercial real estate exposure and any change in criticized or nonaccrual loans; quarter-end nonaccrual loans were $1.4 million overall.
- Unrealized securities losses, liquidity available without securities sales, and capital levels if interest rates or deposit conditions change.
- Mortgage originations and the sufficiency of the mortgage indemnification reserve as loan-sale claims develop.