C&F Financial Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The Virginia-based bank holding company operates community banking, mortgage banking and consumer finance businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $22.6 | $21.7 | $43.1 | $42.4 |
| Noninterest income | $5.7 | $12.8 | $12.4 | $26.9 |
| Net income | $6.8 | $8.1 | $12.5 | $15.3 |
| EPS, basic and diluted | $1.91 | $2.19 | $3.49 | $4.11 |
| Net interest margin, annualized | 4.12% | 4.37% | 4.02% | 4.35% |
| Annualized return on average assets | 1.16% | 1.50% | 1.09% | 1.43% |
| Annualized return on average equity | 13.80% | 16.49% | 12.36% | 15.83% |
Income before taxes was $8.7 million in Q2 and $16.0 million for the first half. Noninterest expenses were $19.1 million and $39.3 million, respectively.
- Balance sheet at June 30: Assets $2.334 billion; gross loans $1.520 billion ($1.480 billion net of allowance); deposits $2.006 billion; total equity $196.3 million.
- Credit reserve and asset quality: Allowance for loan losses was $40.5 million, or 2.67% of total loans. Nonaccrual loans were $0.9 million, down from $2.9 million at year-end 2021.
- Funding and liquidity: Cash and cash equivalents were $138.9 million. Management reported $428.0 million in liquid assets and $455.4 million of available borrowing capacity. Demand and savings deposits rose $136.7 million during the first half, while time deposits declined $45.3 million.
- Borrowings: Short-term borrowings were $36.9 million, long-term borrowings $30.2 million and trust preferred capital notes $25.4 million.
- Cash flows, first half: Operating activities provided $49.4 million; investing activities used $266.9 million; financing activities provided $88.7 million. Cash and cash equivalents decreased $128.8 million.
- Capital: Bank total risk-based capital ratio was 14.2%, Tier 1 risk-based capital ratio 12.9%, CET1 ratio 12.9% and Tier 1 leverage ratio 9.5%. The Bank exceeded applicable well-capitalized thresholds. The Corporation is exempt from regulatory capital requirements under the small bank holding company policy, though it reports ratios for monitoring.
Material changes versus comparable periods
- Net income declined $1.3 million in Q2 and $2.7 million in the first half year over year. Management attributed the decline primarily to lower mortgage banking and consumer finance earnings, partly offset by improvement in community banking.
- Noninterest income fell 55.9% in Q2 and 53.9% in the first half. Mortgage loan-sale gains declined to $2.2 million from $5.9 million in Q2 and to $4.9 million from $13.0 million in the first half. Mortgage originations fell 44.6% in Q2 and 50.1% in the first half.
- Mortgage banking net income fell to $0.8 million in Q2 and $1.6 million in the first half. Consumer finance net income fell to $2.2 million and $4.3 million, respectively; loan growth was offset by lower yields and higher loan-loss provision.
- Community banking net income increased to $4.8 million in Q2 and $8.3 million in the first half, supported by earning-asset growth and lower first-half loan-loss provision.
- Net interest income increased, but net interest margin contracted year over year. Management cited lower consumer finance loan yields and reduced PPP fee and acquired-loan discount accretion; lower funding costs and higher earning-asset balances partly offset these factors.
- Total equity fell $14.7 million from year-end 2021, mainly due to a $24.8 million after-tax unrealized loss on available-for-sale securities as market interest rates rose. Accumulated other comprehensive loss reached $25.5 million.
- Total loans increased $110.3 million from year-end, with growth in consumer finance, commercial real estate and construction lending partly offset by PPP loan repayments. Total deposits grew $91.4 million.
Outlook, commentary and risks
- Management expects net interest margin to expand in the near term as higher asset yields outweigh increasing deposit costs, but gives no assurance about the extent or duration. Outcomes depend on loan growth and competition, deposit funding costs, consumer loan yields, acquired-loan discount accretion and mortgage production.
- Management said securities unrealized losses were primarily rate-driven, expects to recover principal and interest through scheduled payments, and does not expect the losses to affect earnings or regulatory capital. The Corporation elected to exclude AOCI fluctuations from regulatory capital calculations.
- Consumer finance credit performance remained stronger than pre-pandemic levels, with used-vehicle values helping mitigate losses. Management cautioned that deteriorating delinquencies or charge-offs, or falling used-car values, could increase future provisions.
- The Corporation expects to adopt CECL (ASC 326) on January 1, 2023. It anticipates significant financial statement and control changes, potentially including lower equity and regulatory capital, but had not determined the adoption impact.
- Commitments included $314.7 million of loan commitments and $14.5 million of standby letters of credit. Mortgage loan-sale representations and warranties carry contingent repurchase or indemnification exposure; the indemnification allowance was $2.38 million, and no indemnification payments were made in the periods presented.
- The filing lists interest rates, economic conditions and inflation, mortgage and used-auto markets, credit quality, deposit flows, competition, cybersecurity, third-party reliance, and geopolitical events among forward-looking risks. It reports no material change in risk factors from the 2021 Form 10-K.
- The Board’s repurchase program authorized up to $10 million through November 30, 2022; $8.3 million remained available at June 30. The quarterly dividend was $0.40 per share. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether management’s anticipated near-term margin expansion materializes as deposit costs reprice and rates change.
- How mortgage production and loan-sale margins evolve after the sharp year-over-year decline in originations and gains.
- Whether consumer finance growth sustains returns without weakening credit performance, particularly if used-vehicle prices decline.
- The adequacy of the $40.5 million loan-loss allowance and the effect of CECL adoption on reserves, equity and regulatory capital.
- The duration and capital, liquidity or earnings implications of the securities portfolio’s unrealized losses, including any need to sell securities.
- Progress on deposit growth, available liquidity and the use of the remaining share repurchase authorization.