C&F Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; balance sheet comparisons are to December 31, 2021. C&F is a Virginia bank holding company with community banking, mortgage banking, and consumer finance businesses. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 / Sept. 30, 2022 | Comparable / prior date |
|---|---|---|
| Net interest income | $24.4 Q3; $67.5 nine months | $21.6 Q3; $64.0 nine months in 2021 |
| Noninterest income | $6.1 Q3; $18.5 nine months | $11.8 Q3; $38.7 nine months in 2021 |
| Net income attributable to C&F | $6.5 Q3; $18.9 nine months | $7.7 Q3; $22.7 nine months in 2021 |
| Diluted EPS | $1.85 Q3; $5.34 nine months | $2.16 Q3; $6.27 nine months in 2021 |
| Net interest margin | 4.37% Q3; 4.15% nine months | 4.25% Q3; 4.31% nine months in 2021 |
| Total assets | $2,339 | $2,265 at Dec. 31, 2021 |
| Loans, net of allowance | $1,526 | $1,370 at Dec. 31, 2021 |
| Deposits | $2,020 | $1,915 at Dec. 31, 2021 |
| Cash and cash equivalents | $99.4 | $267.7 at Dec. 31, 2021 |
| Total equity | $185.4 | $211.0 at Dec. 31, 2021 |
For the first nine months, operating cash flow was $69.0, investing cash flow was negative $337.2, and financing cash flow was $99.9; cash declined $168.3. Total borrowings, including trust preferred notes, were approximately $93.2 at quarter-end. The allowance for loan losses was $40.9, or 2.61% of loans; nonaccrual loans were $2.3, or 0.15% of loans. Q3 annualized ROA was 1.12% and ROE was 13.20%.
Material changes and business drivers
- Net income attributable to C&F fell about 16% in Q3 and 17% for the first nine months versus 2021. Net interest income increased, but lower mortgage-related fees and gains were the principal offset.
- Mortgage originations declined 48.6% in Q3 and 49.6% year to date, amid rising mortgage rates and lower industry volume. Mortgage banking earned $24,000 in Q3 and $1.7 million year to date, down from $2.1 million and $6.6 million, respectively.
- Community banking net income increased to $5.4 million in Q3 and $13.8 million year to date. Consumer finance net income declined to $1.8 million and $6.0 million, respectively, as higher loan-loss provision and funding costs offset loan growth.
- Loans grew about $157 million from year-end, including substantial consumer finance growth. Deposits rose about $105 million, with demand and savings deposits up and time deposits down.
- Available-for-sale securities rose to $499.6 million, but had $50.4 million of gross unrealized losses at quarter-end, primarily from higher market interest rates. After-tax securities losses drove accumulated other comprehensive loss to $40.3 million and contributed to the decline in equity. Management reported no other-than-temporary impairment and expects recovery through scheduled principal and interest; it stated unrealized losses do not affect regulatory capital under the company’s AOCI election.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. Management expects rising rates to support asset yields and believes net interest margin may continue to expand as yields outpace deposit-cost increases, but gives no assurance. Outcomes depend on loan growth, deposit competition, consumer loan yields, acquired-loan discount accretion, and mortgage production.
- Management identified increased mortgage rates and reduced mortgage demand, changing interest rates, economic conditions and inflation, loan quality and collateral values, used-car prices, deposit flows, competition, and cybersecurity among forward-looking risks. It said interest-rate risk exposure had not changed materially from year-end 2021.
- The consumer finance segment recorded $1.2 million of Q3 loan-loss provision; its Q3 annualized net charge-off rate was 0.71%, versus net recoveries in Q3 2021. Management noted used-car values had helped limit losses and cautioned that deterioration in borrower performance or vehicle values could increase future provision.
- At September 30, loan commitments were $362.8 million and standby letters of credit were $13.8 million; amounts drawn may be lower. Mortgage loan-sale agreements include representation and warranty recourse. The indemnification allowance was $2.4 million; no indemnification payments were made in the periods presented.
- The company expected to adopt CECL on January 1, 2023. The impact was not yet estimated; management anticipated significant accounting and control changes, potentially including lower equity and regulatory capital.
- The company declared a $0.42 per-share Q3 dividend and repurchased 34,262 shares for $1.7 million in the quarter. The $10 million repurchase authorization was due to expire November 30, 2022, with $6.6 million remaining at September 30.
Important facts for investors to verify
- Whether net interest margin expansion offsets higher deposit costs and changing loan yields.
- Whether mortgage originations and related gains recover, and how mortgage banking performs in a higher-rate environment.
- Consumer finance delinquency, charge-off, allowance, and used-vehicle collateral trends as loan balances grow.
- The eventual CECL adoption adjustment to retained earnings, equity, and regulatory capital.
- How available-for-sale securities losses, liquidity, and capital evolve; verify management’s stated ability to hold securities and recover principal and interest.
- Changes in funding and liquidity: liquid assets were $387.0 million, and the filing reported $446.5 million of available borrowing capacity at quarter-end.