Company Overview

C&F Financial Corporation (CFFI) is a bank holding company that operates through its wholly-owned subsidiary, C&F Bank, providing a range of banking, mortgage, and wealth management services to individuals and businesses in Virginia. The company has a rich history dating back to 1927 when it was founded as Citizens and Farmers Bank. Over the past nine decades, C&F Financial has grown to become a respected community bank with a diversified business model and a strong focus on serving its local markets.

Historical Development

C&F Financial Corporation was incorporated in 1994 as the holding company for C&F Bank. The following year, in 1995, the company formed C&F Mortgage Corporation to originate and sell residential mortgages. This subsidiary has since become a significant contributor to the company's overall profitability, providing mortgage loan origination services to third-party lenders. Additionally, through its subsidiary Certified Appraisals LLC, C&F Mortgage offers ancillary mortgage loan production services for residential appraisals.

In 2002, C&F Financial further expanded its operations through the acquisition of C&F Finance Company, a finance company that purchases automobile, marine, and recreational vehicle loans through indirect lending programs. This acquisition allowed the company to diversify its revenue streams and capitalize on distinct market opportunities. The company's growth continued in 2016 with the acquisition of a customer relationship business, which enhanced its wealth management services offering.

Current Operations

Today, C&F Financial operates 32 banking offices and four commercial loan offices across eastern and central Virginia. The company's community banking segment, which includes the C&F Bank subsidiary, accounts for the majority of its business, generating over 60% of the corporation's total revenue. This segment provides a diverse array of commercial and consumer banking products and services, ranging from commercial real estate and business lending to residential mortgages, equity lines, and consumer finance.

Complementing its community banking operations, C&F Financial also derives revenue from its mortgage banking and consumer finance segments. The mortgage banking division originates and sells residential mortgages, while the consumer finance arm purchases automobile, marine, and recreational vehicle loans through indirect lending programs. These specialized business lines have allowed the company to diversify its revenue streams and capitalize on distinct market opportunities.

Financials

Financially, C&F Financial has demonstrated a solid track record of performance. As of the latest 10-Q filing in 2024, the company reported total assets of $2.55 billion, an increase of 4.5% compared to the end of 2023. The company's net income for the first nine months of 2024 was $13.9 million, a decrease from the $18.7 million reported in the same period of 2023. This decline was primarily attributable to higher interest expense and provision for credit losses, partially offset by increased noninterest income.

For the most recent fiscal year (2023), C&F Financial reported revenue of $126.27 million, net income of $23.60 million, operating cash flow of $38.81 million, and free cash flow of $37.35 million. In the most recent quarter (Q3 2024), the company reported revenue of $44.903 million, representing a 41.2% increase compared to Q3 2023. However, net income for Q3 2024 was $5.389 million, a 6.2% decrease from the same period in 2023. The increase in revenue was primarily due to higher gains on sales of loans and wealth management services income, partially offset by lower mortgage lender services income. The decrease in net income was primarily due to higher interest expense.

Despite the recent profit reduction, C&F Financial's balance sheet remains strong, with a total risk-based capital ratio of 13.80% as of September 30, 2024, well above the regulatory minimum requirement of 10.50%. The company's liquidity position is also robust, with $287.4 million in liquid assets, including cash and unencumbered securities, as of the same date.

Business Segments

C&F Financial Corporation operates in three primary business segments: community banking, mortgage banking, and consumer finance.

Community Banking Segment

The community banking segment comprises C&F Bank, C&F Wealth Management, C&F Insurance, and CVB Title. This segment generates the majority of the Corporation's net income, reporting $13.92 million in net income for the first nine months of 2024, compared to $17.74 million in the same period of 2023. The decrease in net income was due primarily to higher interest expense from higher deposit rates, partially offset by higher interest income from the effects of rising interest rates on asset yields and higher average loan balances. The community banking segment recorded $1.65 million in provision for credit losses for the first nine months of 2024, compared to $1.55 million in the same period of 2023, reflecting growth in the loan portfolio. Noninterest income increased due to higher wealth management services income and investment income from other equity interests, while noninterest expenses increased due to higher occupancy, data processing, and other costs.

Mortgage Banking Segment

The mortgage banking segment, which includes C&F Mortgage, reported net income of $1.02 million for the first nine months of 2024, compared to $568,000 in the same period of 2023. The increase was driven by higher gains on sales of loans due to higher mortgage loan origination volume, as well as lower variable expenses related to mortgage loan originations, such as commissions, bonuses, and loan processing costs. Mortgage loan originations for the segment increased 7.5% for the first nine months of 2024 compared to the same period in 2023, despite the challenging industry environment of elevated mortgage interest rates and lower inventory levels. The segment recorded a net reversal of provision for indemnification losses of $375,000 during the first nine months of 2024, compared to a net reversal of $435,000 in the same period of 2023, as the segment's assessment of expected losses on mortgage loans sold in the secondary market continued to improve.

Consumer Finance Segment

The consumer finance segment, which includes C&F Finance, reported net income of $1.14 million for the first nine months of 2024, compared to $2.26 million in the same period of 2023. The decrease was primarily due to higher provision for credit losses, which increased to $8.10 million from $4.25 million, as the segment experienced higher net charge-offs and loan growth. The higher net charge-offs were driven by an increase in delinquent loans and repossessions, as well as a higher average charge-off per unit, reflecting larger loan amounts due to higher automobile values in prior periods and a decline in wholesale used vehicle prices since then. Despite the higher provision, average consumer finance loans grew 2.5% on an annualized basis compared to year-end 2023. Interest income for the segment increased due to the higher interest rate environment, while noninterest expenses decreased due to reduced overhead costs.

Liquidity

C&F Financial's liquidity position remains strong, with $287.4 million in liquid assets, including cash and unencumbered securities, as of September 30, 2024. This robust liquidity position provides the company with flexibility to meet its financial obligations and pursue growth opportunities.

As of September 30, 2024, the company reported: - Debt/Equity ratio: 0.626 - Cash and cash equivalents: $49.19 million - Available credit lines: $583.83 million, including $75 million in unsecured federal funds agreements, $194.44 million in borrowing capacity from the FHLB, and $314.38 million in borrowing capacity from the FRB - Current ratio: 8.29 - Quick ratio: 8.29

These liquidity metrics demonstrate C&F Financial's strong financial position and ability to meet short-term obligations.

Future Outlook and Challenges

Looking ahead, C&F Financial continues to focus on prudent growth, operational efficiency, and risk management. The company has made strategic investments in technology to enhance its digital banking capabilities and improve the customer experience. Additionally, the corporation has navigated the challenges posed by the COVID-19 pandemic, demonstrating the resilience of its business model.

One area of concern for C&F Financial is the potential impact of rising interest rates on its net interest margin. The company's net interest margin decreased to 4.11% for the first nine months of 2024, down from 4.37% in the same period of 2023, as the cost of interest-bearing deposits increased at a faster pace than the yields on earning assets. Management has acknowledged this pressure and is actively managing the company's asset-liability composition to mitigate the effects of the changing interest rate environment.

Geographic Markets

C&F Financial operates primarily in the eastern and central Virginia markets. As a small cap company, C&F Financial does not have significant operations outside of its local markets. This focus on local communities allows the company to maintain strong relationships with its customers and understand the specific needs of the regions it serves.

Conclusion

Overall, C&F Financial Corporation has a strong history, a diversified business model, and a commitment to serving its local communities. While the company faces headwinds from the rising interest rate environment, its solid financial position, experienced management team, and strategic initiatives position it well to navigate the challenges and continue delivering value to its shareholders. The company's three primary business segments - community banking, mortgage banking, and consumer finance - provide a balanced approach to revenue generation and risk management. With a strong liquidity position and robust capital ratios, C&F Financial is well-equipped to pursue growth opportunities and weather potential economic uncertainties in its core Virginia markets.