C&F Financial Corporation — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, with balance-sheet comparisons to December 31, 2021. C&F is a Virginia bank holding company with community banking, mortgage banking and consumer finance businesses.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income attributable to C&F | $5.63 million; $1.59 per diluted share | $7.06 million; $1.92 per share in Q1 2021 |
| Net interest income | $20.48 million; net interest margin 3.93% | $20.68 million; margin 4.33% in Q1 2021 |
| Noninterest income | $6.73 million | $14.08 million in Q1 2021 |
| Noninterest expense | $20.21 million | $25.02 million in Q1 2021 |
| Total assets | $2.30 billion | $2.26 billion at Dec. 31, 2021 |
| Loans, net of allowance | $1.40 billion | $1.37 billion at Dec. 31, 2021 |
| Deposits | $1.97 billion | $1.91 billion at Dec. 31, 2021 |
| Total equity | $201.3 million | $211.0 million at Dec. 31, 2021 |
| Cash and cash equivalents | $268.9 million | $267.7 million at Dec. 31, 2021 |
- Q1 cash flow: operating activities provided $41.2 million; investing activities used $90.5 million; financing activities provided $50.5 million. Cash increased $1.2 million during the quarter.
- Borrowings totaled approximately $88.1 million at March 31 (short-term $32.4 million, long-term $30.3 million and trust preferred notes $25.4 million). Management reported $454.8 million of available borrowing capacity and $507.1 million in liquid assets, including nonpledged available-for-sale securities.
- Regulatory capital ratios for the Bank were 14.5% total risk-based capital, 13.3% Tier 1 and 13.3% common equity Tier 1. The Bank exceeded applicable “well-capitalized” thresholds.
Material changes versus comparable periods
- Net income fell 20% year over year; annualized return on average assets declined to 1.01% from 1.36%, and return on average equity to 10.99% from 15.16%.
- Noninterest income dropped 52%, chiefly because of lower mortgage production, mortgage-sale gains and lender-services activity, plus a swing in deferred-compensation-related investment results. Mortgage originations declined 55.1% to $189.9 million.
- Net interest margin declined 40 basis points year over year. Lower asset yields and the mix shift toward cash and securities weighed on margin, partly offset by lower funding costs. Average earning assets rose $177.8 million.
- Noninterest expenses fell 19%, reflecting lower mortgage-related costs, deferred-compensation expense and a $583,000 reversal of mortgage indemnification provision.
- Loans grew $31.5 million from year-end, driven mainly by consumer finance and community banking growth, partly offset by PPP repayments. Deposits increased $55.0 million. Total equity fell primarily because of $14.7 million in after-tax unrealized available-for-sale securities losses.
- Credit indicators improved in several areas: nonaccrual loans were $765,000 versus $2.9 million at year-end; the allowance for loan losses was $39.8 million, or 2.76% of loans, versus $40.2 million, or 2.85%. The quarter included a $328,000 net reversal of loan-loss provision.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial guidance is provided. Management expects rising rates may benefit near-term net interest margin through higher yields on cash and variable-rate loans, but gives no assurance; deposit costs, loan growth, consumer-finance yields, purchase-discount accretion and mortgage volumes affect the outcome.
- Management described mortgage activity as returning toward more normalized levels after elevated 2020–2021 volumes. It cited industry-wide declines and rising mortgage rates as pressures on mortgage banking.
- Management attributed substantial securities unrealized losses to higher market interest rates, said it intends to hold the securities and expects to recover principal and interest. It reported no other-than-temporary impairment. Because the company elected to exclude accumulated other comprehensive income from regulatory capital, these unrealized losses did not affect reported regulatory capital ratios.
- Consumer-finance credit performance is exposed to potential increases in delinquencies and charge-offs and declines in used-vehicle values. Management noted that a strong used-car market had helped mitigate losses.
- Off-balance-sheet commitments included $303.1 million of loan commitments and $14.4 million of standby letters of credit. Mortgage loan-sale representations and warranties create potential indemnification exposure; the related allowance was $2.67 million.
- The expected-credit-loss standard (ASC 326) is scheduled for adoption January 1, 2023. Management had not estimated its effect and warned it may change the allowance, retained earnings and regulatory capital, as well as internal controls.
- Other notable items: the quarter included an $80,000 pre-tax branch-consolidation gain and a $583,000 indemnification-provision reversal. The company declared a $0.40-per-share dividend and repurchased $493,000 of shares under its $10 million repurchase authorization.
- Management identified interest-rate and economic conditions, securities valuations, loan quality, used-car prices, mortgage-market demand, deposit flows, competition, cybersecurity and the Russia-Ukraine conflict among forward-looking risks. It reported no material change in risk factors and no material change in internal control over financial reporting; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the decline in mortgage volumes and gains is temporary or continues, and how mortgage banking earnings respond to rates and housing-market conditions.
- Whether net interest margin improves as rates rise, considering deposit repricing, loan growth and asset mix.
- Credit trends in consumer finance, including delinquencies, charge-offs and used-vehicle collateral values; also monitor the adequacy of the $39.8 million allowance.
- The impact of ASC 326 adoption on the allowance, retained earnings and Bank regulatory capital.
- Whether the available-for-sale securities portfolio recovers as management expects and whether liquidity and capital remain resilient under changing rates and deposit conditions.
- Potential claims under mortgage representations and warranties, and the adequacy of the indemnification reserve.