C&F Financial Corporation — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2023. C&F Financial is a Virginia bank holding company with community banking, mortgage banking, and consumer finance businesses. Unless otherwise noted, amounts below are in U.S. dollars; financial-statement amounts are in millions.
Financial performance and condition
| Metric | Q1 2023 | Comparable period / date |
|---|---|---|
| Net interest income (GAAP) | $25.0 million | $20.5 million in Q1 2022 |
| Net interest margin | 4.52% | 3.93% in Q1 2022; 4.65% in Q4 2022 |
| Provision for credit losses | $2.05 million | $0.33 million recovery in Q1 2022 |
| Noninterest income | $7.44 million | $6.73 million in Q1 2022 |
| Noninterest expense | $22.40 million | $20.21 million in Q1 2022 |
| Net income | $6.50 million; $6.44 million attributable to C&F | $5.74 million; $5.63 million attributable to C&F |
| Diluted earnings per share | $1.86 | $1.59 in Q1 2022 |
| Annualized return on average assets / equity | 1.10% / 12.87% | 1.01% / 10.99% in Q1 2022 |
- Total assets were $2.44 billion at March 31, up $108.0 million from year-end. Loans held for investment were $1.67 billion gross ($1.63 billion net), versus $1.64 billion gross at December 31.
- Deposits were $2.00 billion, down $8.1 million from year-end. Short-term borrowings rose to $145.6 million from $36.6 million; long-term borrowings were $30.0 million and trust preferred capital notes were $25.4 million.
- Cash and cash equivalents totaled $84.2 million, up from $26.7 million at year-end. Cash flows were $0.2 million from operations, negative $39.5 million from investing, and positive $96.9 million from financing. Financing included a $109.0 million increase in short-term borrowings.
- The loan allowance for credit losses was $40.8 million, or 2.44% of total loans. Nonaccrual loans were $0.9 million, or 0.05% of total loans. Consumer finance net charge-offs were at an annualized 1.77% of average loans.
- Available-for-sale securities had a fair value of $513.6 million against $551.5 million amortized cost, a net unrealized loss of approximately $37.9 million. The company reported no credit loss in the portfolio and attributed unrealized losses primarily to interest rates.
- Total equity was $203.2 million. The Bank’s total risk-based capital ratio was 14.0%, Common Equity Tier 1 ratio 12.8%, and Tier 1 leverage ratio 10.0%; the filing states the Bank met applicable capital requirements.
Material changes versus the prior comparable period
- Net income rose $0.76 million, or about 13%, as higher community banking earnings more than offset lower mortgage banking and consumer finance earnings.
- Net interest income increased $4.5 million on a fully taxable-equivalent basis. Higher asset yields and average earning assets contributed, while interest expense increased $2.6 million as deposit and borrowing costs rose.
- Noninterest income increased 10.6%, partly reflecting a swing in deferred-compensation-related unrealized results: a $0.77 million gain in Q1 2023 versus a $1.3 million loss in Q1 2022. These gains and losses were offset by changes in deferred compensation expense.
- Noninterest expense increased 10.8%, chiefly from salaries and employee benefits. Mortgage originations fell 39.0% year over year to $115.8 million, reducing mortgage gains and fees.
- Consumer finance earnings declined to $0.51 million from $2.06 million. Higher funding costs, credit-loss provision, and auto-loan losses pressured results despite portfolio growth.
- Effective January 1, 2023, the company adopted CECL, reducing opening retained earnings by $1.1 million and recording a $1.5 million reserve for unfunded commitments. The adoption changed the credit-loss estimation basis, so some credit comparisons across periods are not directly like-for-like.
Outlook, risks, and unusual items
- Outlook: Management expects deposit costs to continue rising and some funding to remain borrowing-dependent. It expects funding costs to increase faster than earning-asset yields, reducing net interest margin for the rest of 2023. It also notes that falling rates could pressure margin because assets generally reprice faster than deposits and borrowings. No specific earnings or revenue guidance is provided.
- Liquidity and deposit risk: Available borrowing capacity was $658.3 million, including $437.0 million available at the Federal Reserve Bank and $111.3 million at the FHLB. Uninsured deposits were approximately $584.1 million (29.3% of deposits), or $418.8 million (21.0%) after excluding intercompany cash and secured public deposits. The filing highlights industry uncertainty and the potential for deposit outflows, higher funding costs, and increased competition for liquidity.
- Credit risk: Management cites higher consumer-auto delinquencies and charge-offs, lower used-vehicle wholesale values, and difficulty repossessing vehicles. Further deterioration or lower collateral values could increase provisions. Commercial real estate, construction, and consumer lending also carry collateral and borrower-performance risks.
- Commitments and contingencies: Loan commitments were $413.8 million and standby letters of credit were $15.1 million at March 31. Mortgage-sale representations and warranties remain subject to recourse claims; the indemnification allowance was $2.39 million, with no provision or indemnification payments in Q1 2023.
- Capital and shareholder returns: The company declared a $0.44-per-share dividend and repurchased 35,984 shares for approximately $2.1 million under its $10 million program, with $7.5 million remaining at quarter-end. A $4 million repayment of subordinated notes occurred on April 1, 2023.
- Management reported disclosure controls were effective as of March 31, 2023. The filing reports no material change in interest-rate risk profile from year-end and no other material change in risk factors beyond the added financial-industry liquidity risk.
Important facts for investors to verify
- Whether rising deposit rates, time-deposit repricing, and borrowing reliance cause net interest margin to contract as management expects.
- Trends in auto-loan delinquencies, repossession capacity, used-vehicle collateral values, charge-offs, and the adequacy of the CECL allowance.
- Deposit stability and the practical availability of pledged-collateral borrowing capacity, particularly in a stressed market.
- Exposure and performance in commercial real estate and construction lending, including changes in criticized or substandard loans.
- Mortgage origination volumes, gain-on-sale income, and the sufficiency of the mortgage indemnification reserve.
- The effects of CECL adoption on future provision expense and comparability with prior-period credit metrics.