Executive Summary / Key Takeaways

• C&F Financial Corporation is demonstrating strong earnings momentum, with consolidated net income increasing 31.2% in Q3 2025 and 46.0% for the first nine months of 2025 year-over-year, primarily fueled by its community banking and mortgage banking segments.
• The company's diversified business model, encompassing community banking, mortgage banking, and consumer finance, provides resilience and targeted growth opportunities within its Virginia market.
• Disciplined asset quality management, evidenced by net reversals of provision for credit losses in community banking and a robust allowance for credit losses, underpins financial stability despite higher charge-offs in the consumer finance segment.
• CFFI maintains a strong capital position and ample liquidity, with liquid assets and borrowing availability significantly exceeding uninsured deposits, supporting future growth initiatives and shareholder returns through dividends and an active share repurchase program.
• Strategic expansion into Southwest Virginia and a focus on higher-yielding loans are key drivers for future growth, while the company prudently manages interest rate sensitivity and competitive pressures in its consumer finance segment.

A Regional Powerhouse Forges Ahead

C&F Financial Corporation, a bank holding company founded in 1927 and based in Toano, Virginia, has cultivated a robust regional presence through its Citizens and Farmers Bank (CF Bank) and a diversified portfolio of financial services. The company's overarching strategy centers on maximizing earnings and enhancing long-term shareholder value by deploying capital into profitable growth initiatives. This strategy is executed through three distinct business segments: community banking, mortgage banking, and consumer finance, each contributing uniquely to the company’s financial health and market positioning.

The company's history is marked by strategic expansions and adaptations. The establishment of CF Wealth Management in 1995 and CF Mortgage Corporation in 1995 laid the groundwork for its diversified offerings. Further growth came with the acquisition of CF Finance in 2002, entering the automobile loan market, and the 2020 acquisition of core deposits from Peoples Bankshares, Incorporated. A recent strategic move in July 2025 saw the company expand its commercial banking operations into Southwest Virginia with a new loan production office in Roanoke, targeting key markets like Lynchburg and Blacksburg. This expansion underscores a commitment to deepening its regional footprint and leveraging local market expertise.

In the competitive landscape, CFFI operates alongside larger national and regional banks such as Truist Financial Corporation (TFC), PNC Financial Services Group (PNC), and Regions Financial Corporation (RF). While these larger institutions benefit from extensive scale and broader product offerings, CFFI differentiates itself through a strong local branch network and personalized, community-focused banking services. This localized approach fosters deeper customer relationships and allows for tailored financial solutions, potentially leading to stronger customer loyalty and more efficient operations within its specific geographic focus.

CFFI's technological approach is geared towards operational effectiveness and risk management rather than proprietary, disruptive innovation. The company leverages digital services and technology initiatives to enhance customer experience and streamline operations. For instance, its consumer finance segment utilizes a scorecard model for purchasing loan contracts, which has demonstrably improved the creditworthiness of borrowers at origination and reduced credit losses relative to historical averages. Furthermore, CFFI employs derivative financial instruments, such as interest rate swaps and interest rate lock commitments (IRLCs), to manage interest rate risk across its balance sheet, a critical application of financial technology in a volatile rate environment. While not a "core differentiated technology" in the manufacturing sense, these applications contribute to its competitive moat by enhancing efficiency, managing risk, and improving asset quality.

Financial Performance and Operational Strength

C&F Financial Corporation delivered a compelling financial performance for the third quarter and first nine months of 2025, reflecting the effectiveness of its diversified strategy. Consolidated net income for the third quarter of 2025 rose to $7.1 million, a significant 31.2% increase from $5.4 million in the same period of 2024. For the first nine months of 2025, consolidated net income reached $20.3 million, up 46.0% from $13.9 million in the prior year. This robust growth was primarily driven by strong contributions from the community banking and mortgage banking segments.

The community banking segment, the cornerstone of CFFI's operations, reported net income of $7.4 million for the third quarter of 2025, a 38.25% increase year-over-year, and $19.9 million for the first nine months, up 43.24%. This segment's performance was bolstered by higher interest income, stemming from increased average balances of loans and cash reserves, a strategic shift in the loan portfolio towards higher-yielding assets, and improved average interest rates on securities. Notably, the segment recorded net reversals of provision for credit losses of $100,000 and $300,000 for the third quarter and first nine months of 2025, respectively, a stark improvement from provisions in the prior year, reflecting a healthier loan mix and the resolution of a nonperforming commercial real estate loan.

The mortgage banking segment also demonstrated impressive growth, with net income soaring 82.62% to $641,000 in the third quarter of 2025 and more than doubling to $2.1 million for the first nine months. This surge was primarily attributable to higher gains on sales of loans and increased mortgage banking fee income, driven by a 6.40% rise in mortgage loan originations to $167 million in Q3 2025 and a 24.40% increase to $494.3 million for the first nine months compared to 2024. The segment also benefited from higher mortgage lender services fee income, reflecting increased industry loan volume and expanded service offerings.

Conversely, the consumer finance segment experienced a decline in net income, falling 25.80% to $231,000 in Q3 2025 and 12.87% to $996,000 for the first nine months. This was largely due to higher provision for credit losses, which reached $3 million in Q3 2025 and $8.3 million for the first nine months, driven by increased net charge-offs. The segment also faced lower average loan balances, although partially offset by higher loan yields. A strategic decision to cease future purchases of marine and RV loans in Q3 2025, due to reduced third-party administrator sales, is expected to lead to a gradual runoff of this portfolio over several years.

Overall, the consolidated annualized net interest margin expanded to 4.24% in the third quarter of 2025, up from 4.13% in the prior year, reflecting a favorable shift in the mix of earning assets and lower average interest rates on deposits. Total noninterest income increased, driven by mortgage loan production and fluctuations in rabbi trust investments, while total noninterest expenses also rose due to higher compensation and marketing costs, particularly in the community banking and mortgage banking segments.

Capital Strength and Liquidity Management

CFFI maintains a robust financial position, characterized by strong capital resources and ample liquidity. Total equity increased to $253.9 million at September 30, 2025, from $227 million at December 31, 2024. This growth was primarily a result of solid net income generation and a reduction in net unrealized losses on available-for-sale securities, which decreased to $16.4 million from $30 million over the same period. The company's decision to elect pre-Basel III regulatory standards for accumulated other comprehensive income (AOCI) effectively insulates its regulatory capital from market interest rate fluctuations impacting its securities portfolio.

The company's capital ratios remain well above regulatory minimums, with the Corporation's Tier 1 risk-based capital and total risk-based capital ratios at 12.20% and 15.30%, respectively, at September 30, 2025. The Board of Directors declared a quarterly cash dividend of 46 cents per share for Q3 2025, representing a payout ratio of 21.10% of earnings per share, demonstrating a commitment to shareholder returns. Additionally, a $5 million share repurchase program remains active, providing a further avenue for capital management and shareholder value enhancement.

Liquidity is a key focus for CFFI, ensuring continuous availability of funds. Liquid assets, including cash and interest-bearing deposits, significantly increased to $441.4 million at September 30, 2025, from $288.1 million at December 31, 2024. Total liquid assets and borrowing availability reached $1.05 billion, comfortably exceeding uninsured deposits by $496.3 million. The company also maintains flexibility with brokered deposits, with approximately $449.6 million in additional net availability, further diversifying its funding sources.

Outlook, Risks, and Competitive Dynamics

CFFI's outlook is shaped by its strategic initiatives and the broader economic environment. The company anticipates further declines in the cost of deposits due to recent market interest rate decreases in late 2025. Management believes that any short-term adverse effects on net interest margin from declining rates could be mitigated by renewals of fixed-rate loans at higher rates and strategic purchases of higher-yielding securities. The expansion into Southwest Virginia is expected to contribute to continued loan growth in the community banking segment.

However, the company acknowledges several risks. Interest rate volatility remains a primary market risk, with potential impacts on net interest income and the fair value of financial instruments. While the company uses simulation analysis and derivative instruments to manage this exposure, the inherent subjectivity of modeling and market unpredictability persist. The consumer finance segment faces ongoing competitive pressures in the automobile loan market and the inherent higher risk associated with non-prime borrowers. This segment's net charge-off ratio could increase in future periods if loan performance deteriorates, potentially requiring higher provisions for credit losses and negatively impacting earnings.

Compared to larger competitors like Truist and PNC, CFFI's regional focus provides a competitive advantage in personalized service and local market understanding. However, these larger banks often possess superior technological infrastructure and broader product suites, potentially offering greater convenience and faster innovation in digital banking. CFFI's "scorecard model" for consumer finance loans and its prudent use of derivatives for risk management are operational strengths that help it compete effectively within its chosen niches. The company's ability to maintain strong customer relationships through its branch network remains a critical differentiator against the scale of national players.

Conclusion

C&F Financial Corporation's recent financial performance underscores the effectiveness of its diversified regional banking strategy. Robust earnings growth in its community banking and mortgage banking segments, coupled with a strong capital base and disciplined liquidity management, positions the company favorably for continued success. While the consumer finance segment presents ongoing challenges related to asset quality and competition, CFFI's strategic adjustments, such as the cessation of marine and RV loan purchases, demonstrate a proactive approach to portfolio management.

The company's commitment to its Virginia markets, evidenced by its recent expansion, and its prudent management of interest rate risk and credit quality, form the bedrock of its investment thesis. For discerning investors, CFFI represents a compelling opportunity in the regional banking sector, offering a blend of consistent profitability, sound financial health, and a clear strategic roadmap for sustained shareholder value creation, even amidst evolving market dynamics and competitive pressures.