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C&F Financial (CFFI) - 2023 Q4 - Annual Report
C&F Financial C&F Financial (US:CFFI)2024-02-26 16:00

PART I Business Overview C&F Financial Corporation operates three segments: Community Banking, Mortgage Banking, and Consumer Finance, providing diverse financial services - The Corporation operates through three principal business segments: community banking, mortgage banking, and consumer finance46 Segment Financial Highlights (Year Ended Dec 31, 2023) | Segment | Total Assets | Net Income | | :--- | :--- | :--- | | Community Banking | $2.3 billion | $22.9 million | | Mortgage Banking | $22.2 million | $465,000 | | Consumer Finance | $476.7 million | $2.9 million | Business Segments Community Banking offers full services in Virginia; Mortgage Banking originates diverse residential loans; Consumer Finance provides auto, marine, RV financing - The Community Banking segment offers a wide range of services including checking/savings accounts, various loans, and wealth management, primarily serving eastern and central Virginia23544 - The Mortgage Banking segment originates a variety of residential mortgage loans (Conventional, FHA, USDA, VA) through 14 locations across Virginia, Maryland, North Carolina, and West Virginia, which are then sold into the secondary market48 - The Consumer Finance segment is an indirect lender providing financing for automobiles, marine, and RVs across 21 states, serving both prime and non-prime borrowers569570 Human Capital Resources The Corporation employed 594 people as of December 31, 2023, focusing on talent acquisition, retention, and a diverse workforce - The company's strategic priorities include acquiring and retaining strong talent through competitive compensation, comprehensive wellness programs, and internal career development paths50 - As of December 31, 2023, the company had 594 employees, with 69% being women and 20% being racial and ethnic minorities571 Competition The Corporation faces intense competition across all segments, competing with diverse financial institutions by leveraging customer service, talent, and technology - The Community Banking segment competes against large national and regional banks, as well as non-bank entities, by focusing on customer service, long-term relationships, and tailored products27548549 - The Mortgage Banking segment operates in a highly competitive and regulated environment, competing by attracting top talent, expanding into strategic markets, and using technology to improve efficiency2853550 - The Consumer Finance segment competes with captive finance affiliates of major auto manufacturers and other financial institutions by focusing on strong dealer service, flexible terms, and quick funding5574551 Regulation and Supervision The Corporation and its subsidiaries are extensively regulated by federal and state authorities, adhering to capital adequacy and consumer protection laws, with the Bank rated 'well capitalized' - The Corporation is subject to extensive regulation from federal and state agencies, including the Federal Reserve Board and the FDIC, which impacts operations, capital, and dividends32553 - As a bank holding company with under $3 billion in assets, the Corporation is treated as a small bank holding company and is exempt from minimum consolidated regulatory capital ratios, though C&F Bank remains subject to these requirements63 - C&F Bank met all capital adequacy requirements under Basel III rules, including the capital conservation buffer, and was considered "well capitalized" as of December 31, 20236072 - The Consumer Financial Protection Bureau (CFPB) has significant rulemaking authority over consumer financial laws, which indirectly and directly affects the Corporation's products and services, particularly regarding overdraft products and mortgage lending rules68116 Risk Factors The Corporation faces significant risks from economic conditions, interest rate fluctuations, intense competition, cybersecurity threats, and evolving regulatory landscapes impacting operations - The business is highly sensitive to general economic conditions, Federal Reserve monetary policies, and local market health, which can impact loan demand, credit quality, and profitability98128129 - A significant portion of the loan portfolio is concentrated in commercial real estate (38.4%) and consumer finance automobile loans (23.0%), which carry higher credit risk, especially during economic downturns103134620 - The Corporation is subject to cybersecurity risks, including data breaches and system failures, and relies heavily on third-party vendors for key infrastructure like data processing, creating operational vulnerabilities627630 - Changes in laws and regulations, particularly from the CFPB, can significantly affect business operations, increase compliance costs, and limit revenue from certain consumer financial products144145 Unresolved Staff Comments The Corporation has no unresolved comments from the SEC staff - The Corporation has no unresolved comments from the SEC staff159 Cybersecurity Cybersecurity risk is managed through a comprehensive Information Security Program, overseen by the Board, with no material adverse incidents reported to date - Cybersecurity is managed through a comprehensive Information Security Program (ISP) based on FFIEC guidelines, with oversight from the Board of Directors and Audit Committee160217 - The Corporation uses third-party tools for penetration testing and vulnerability scanning to measure information security risks and evaluate its overall cybersecurity preparedness187 - To date, the Corporation has not experienced any cybersecurity incidents that have materially and adversely affected its business, financial condition, or results of operations162 Properties The Corporation and its subsidiaries own and lease various properties for operations, including 26 owned community banking branches and an owned consumer finance headquarters - The community banking segment operates from 32 locations, 26 of which are owned and 6 are leased219 - The mortgage banking segment has 16 loan production offices, with 12 being leased from nonaffiliates189 - The consumer finance segment's headquarters and administrative offices are located in a property owned by C&F Finance165 Legal Proceedings The Corporation is involved in ordinary course litigation, but management anticipates no material adverse effect on its financial condition - The Corporation is not currently involved in any legal proceedings that are expected to have a material adverse effect on its financial condition166 Mine Safety Disclosures This item is not applicable to the Corporation - Not applicable192 PART II Market for Common Equity and Related Matters The Corporation's common stock trades on NASDAQ (CFFI), with an active $10.0 million share repurchase program for 2024, and its shareholder return has outperformed peers - The Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "CFFI"195 - A new share repurchase program was authorized for 2024, allowing for the buyback of up to $10.0 million of common stock through December 31, 2024223 Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2023 | 10,500 | $55.19 | | Nov 2023 | 9,000 | $56.24 | | Dec 2023 | 5,274 | $58.78 | | Total | 24,774 | $56.34 | Cumulative Total Shareholder Return (Base $100 at 12/31/2018) | Index | 12/31/2022 | 12/31/2023 | | :--- | :--- | :--- | | C&F Financial Corporation | 125.40 | 151.34 | | NASDAQ Composite Index | 163.28 | 236.17 | | 2023 Peer Group | 123.28 | 122.19 | | 2022 Peer Group | 124.01 | 124.34 | Management's Discussion and Analysis (MD&A) In 2023, net income declined to $23.7 million due to lower segment earnings, despite net interest income growth and strong capital ratios, with assets reaching $2.44 billion Overview Consolidated net income for 2023 decreased to $23.7 million, primarily due to lower segment earnings, while total equity increased to $217.5 million Financial Performance Highlights | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Consolidated Net Income | $23,746 | $29,369 | $29,123 | | EPS (basic and diluted) | $6.92 | $8.29 | $7.95 | | Return on Average Equity | 11.68% | 14.84% | 14.77% | | Return on Average Assets | 0.99% | 1.27% | 1.34% | - The decrease in 2023 net income was primarily due to lower earnings at all three business segments: Community Banking, Mortgage Banking, and Consumer Finance209 - Key factors affecting 2023 results included 9.8% growth in community banking loans, a 28.5% decrease in mortgage banking originations, and the adoption of the CECL methodology for credit losses264 Results of Operations Net interest income increased to $98.7 million in 2023, driven by higher earning assets and margin, while noninterest expense rose due to compensation and FDIC costs - Taxable-equivalent net interest income increased to $98.7 million in 2023, up from $94.0 million in 2022, due to growth in average earning assets and a slight increase in net interest margin to 4.31%249 - Noninterest income increased slightly by 1.4% to $29.6 million in 2023, driven by higher mortgage lender services income and debit card interchange income, partially offset by lower gains on sales of loans257 - Noninterest expense increased by 8.9% to $89.9 million in 2023, primarily due to higher compensation at the community banking segment and increased FDIC insurance expenses288 Financial Condition Total assets grew to $2.44 billion in 2023, driven by loan growth and funded by increased deposits, with a shift towards higher-yielding time deposits - Total assets increased to $2.44 billion at December 31, 2023, from $2.33 billion at the end of 2022395 Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Loans, net | $1,702,488 | $1,595,200 | | Securities Available for Sale | $462,444 | $512,591 | | Total Deposits | $2,066,130 | $2,003,860 | | Total Borrowings | $109,539 | $92,084 | | Total Equity | $217,516 | $196,233 | - Total deposits grew by $62.3 million, with a significant shift from non-time deposits to time deposits as customers sought higher yields479 - Time deposits increased by $291.9 million, while noninterest-bearing demand deposits decreased by $55.8 million453 Liquidity and Capital Resources The Corporation maintains strong liquidity with $833.9 million in liquid assets, and both the Corporation and Bank exceed 'well capitalized' regulatory requirements - The Corporation's liquid assets and borrowing availability totaled $833.9 million at year-end 2023, which exceeded uninsured deposits (excluding secured municipal and intercompany deposits) by $429.8 million493512 - Total equity increased by $21.3 million to $217.5 million at December 31, 2023, driven by net income and a decrease in unrealized losses on securities235495 Consolidated Capital Ratios | Ratio | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | CET1 to Risk-Weighted Assets | 11.3% | 11.4% | | Tier 1 to Risk-Weighted Assets | 12.6% | 12.8% | | Total Capital to Risk-Weighted Assets | 14.8% | 15.4% | | Tier 1 Leverage Ratio | 10.1% | 9.9% | Quantitative and Qualitative Disclosures About Market Risk The Corporation's primary market risk is interest rate volatility, monitored via NII simulation and EVE analysis, with interest rate swaps used for risk management - The Corporation's primary market risk is interest rate volatility, which affects net interest income and the market value of its financial instruments40 One-Year Net Interest Income Simulation (as of Dec 31, 2023) | Rate Shift | Change in NII ($ thousands) | Change in NII (%) | | :--- | :--- | :--- | | +300 BP | $3,013 | 2.96% | | +200 BP | $2,094 | 2.06% | | +100 BP | $1,081 | 1.06% | | -100 BP | $(2,352) | (2.31)% | | -200 BP | $(5,137) | (5.04)% | | -300 BP | $(8,372) | (8.22)% | Static Economic Value of Equity (EVE) Change (as of Dec 31, 2023) | Rate Shift | Change in EVE ($ thousands) | Change in EVE (%) | | :--- | :--- | :--- | | +300 BP | $(11,062) | (2.89)% | | +200 BP | $(5,012) | (1.31)% | | +100 BP | $(1,945) | (0.51)% | | -100 BP | $(1,397) | (0.37)% | | -200 BP | $(10,881) | (2.85)% | | -300 BP | $(28,719) | (7.51)% | - The Corporation uses interest rate swaps to manage interest rate risk, including converting variable-rate trust preferred capital notes to fixed rates and offering fixed-rate options to commercial borrowers while retaining variable-rate exposure149 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for C&F Financial Corporation and its subsidiaries for 2021-2023, including balance sheets, income statements, and cash flows Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,438,498 | $2,332,317 | | Loans, net | $1,702,488 | $1,595,200 | | Total Deposits | $2,066,130 | $2,003,860 | | Total Liabilities | $2,220,982 | $2,136,084 | | Total Equity | $217,516 | $196,233 | Consolidated Income Statement Highlights (in thousands) | Account | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $97,707 | $93,464 | $85,369 | | Provision for Credit Losses | $8,275 | $3,172 | $575 | | Noninterest Income | $29,615 | $29,212 | $49,831 | | Noninterest Expenses | $89,883 | $82,540 | $96,543 | | Net Income | $23,746 | $29,369 | $29,123 | | EPS (basic & diluted) | $6.92 | $8.29 | $7.95 | Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with an unqualified auditor opinion - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2023798 - Based on the COSO framework, management assessed the Corporation's internal control over financial reporting as effective as of December 31, 2023800 - The independent auditor, Yount, Hyde & Barbour, P.C., provided an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2023801804 PART III Directors, Executive Compensation, and Corporate Governance This section incorporates by reference information from the 2024 Proxy Statement, covering directors, executive compensation, security ownership, and corporate governance - Information regarding directors, executive compensation, security ownership, and corporate governance is incorporated by reference from the company's 2024 Proxy Statement815820824 - The Corporation has adopted a Code of Business Conduct and Ethics applicable to all directors, executives, and employees, which is available on its website816 PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications - Lists all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications830831833 - Includes CEO and CFO certifications pursuant to Sarbanes-Oxley Act rules (Rule 13a-14(a) and 18 U.S.C. Section 1350)835