C&F Financial Corporation — Q3 2021 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2021, compared with the same 2020 periods. C&F is a Virginia bank holding company operating community banking, mortgage banking and consumer finance businesses.
Financial results and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $21.6 million | $20.8 million | $64.0 million | $61.7 million |
| Noninterest income | $12.0 million | $16.9 million | $39.5 million | $35.5 million |
| Net income | $7.8 million | $6.9 million | $23.1 million | $14.3 million |
| Net income attributable to C&F | $7.7 million | $6.8 million | $22.7 million | $14.1 million |
| Diluted EPS | $2.16 | $1.86 | $6.27 | $3.87 |
| Annualized net interest margin | 4.25% | 4.54% | 4.31% | 4.68% |
- Q3 total revenue, measured as net interest income plus noninterest income, was $33.7 million versus $37.8 million. Nine-month total was $103.5 million versus $97.2 million.
- Q3 annualized return on average assets and equity were 1.44% and 15.66%; nine-month figures were 1.43% and 15.77%.
- At September 30, total assets were $2.21 billion, loans net of allowance were $1.35 billion, deposits were $1.85 billion and total equity was $205.2 million. The allowance for loan losses was $39.4 million.
- Cash and cash equivalents were $201.5 million. Management reported $405.0 million in liquid assets and $520.5 million of available borrowing capacity. Reported borrowings totaled approximately $92.8 million, including short-term and long-term borrowings and trust preferred notes.
- For the first nine months, operating cash flow was $119.8 million, investing cash flow was negative $110.4 million and financing cash flow was $105.5 million. Cash increased $114.8 million to $201.5 million.
Material changes versus comparable periods
- Net income rose 13.1% in Q3 and 61.4% for the first nine months. Management cited stronger community banking and consumer finance results, partly offset by weaker mortgage banking.
- Net interest income increased, supported by lower deposit costs and higher balances, but net interest margin compressed year over year as yields on loans, securities and cash declined.
- Provision for loan losses fell to $0.4 million in Q3 and $0.1 million for the first nine months, from $3.3 million and $9.6 million, respectively, in 2020. Recoveries exceeded charge-offs in the first nine months of 2021.
- Mortgage banking net income declined 53% in Q3 and 20% for the first nine months. Originations fell 33% in Q3 and 7% year to date from unusually high 2020 levels.
- Consumer finance net income increased as lower credit-loss provisioning outweighed lower net interest income. Community banking net income also increased substantially.
- Loans held for investment grew to $1.39 billion from $1.35 billion at year-end 2020, with growth in commercial and consumer finance loans. Deposits increased $100.9 million; time deposits declined $28.5 million.
Outlook, commentary and risks
- The filing provides no quantified earnings or revenue guidance. Management said maintaining the current net interest margin may be challenging, citing competitive loan pricing, lower yields, excess lower-yielding liquidity, reduced purchase-discount accretion and mortgage production trends.
- Management reported improving credit performance and released a portion of pandemic-related reserves, while cautioning that COVID-19, variants, inflation, labor constraints and supply-chain disruption could weaken recovery and require future loan-loss provisions.
- Consumer finance credit results benefited from government stimulus, improved loan quality and elevated used-vehicle values; management cautioned these supports may not persist.
- Other material exposures include mortgage-loan repurchase and indemnification claims, $314.7 million of loan commitments, $19.2 million of standby letters of credit and interest-rate sensitivity. Mortgage production and margins remain sensitive to market rates and housing demand.
- The company repurchased $7.2 million of stock in the first nine months and declared dividends of $1.18 per share. Its repurchase authorization was scheduled to run through November 30, 2021.
- The company stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. It reported no material changes to risk factors from its 2020 Form 10-K.
Important facts for investors to verify
- Whether margin pressure continues and whether deposit-cost reductions can offset lower asset yields.
- Whether pandemic-era reserve releases remain appropriate as stimulus, employment conditions and used-vehicle prices change; review credit quality and charge-offs by segment.
- Mortgage banking production, gain-on-sale margins, staffing costs and indemnification allowance as activity normalizes.
- Composition and concentration of commercial real estate exposure, including loans to industries management identified as pandemic-sensitive.
- Capital, liquidity and borrowing capacity, as well as subsequent dividend and share-repurchase decisions.
- Expected effects of adopting the current expected credit losses standard (ASC 326), planned for January 1, 2023; management had not yet estimated the impact and anticipated potential effects on allowance, equity and regulatory capital.