C&F Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period. Virginia-based bank holding company operating community banking, mortgage banking and consumer finance businesses. This unaudited filing covers the three months ended March 31, 2021; income and cash-flow comparisons are with Q1 2020, and balance-sheet comparisons are with December 31, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $20.7 | $20.6 in Q1 2020 |
| Net interest margin, annualized | 4.33% | 4.92% in Q1 2020 |
| Net income / diluted EPS | $7.2 / $1.92 | $3.6 / $0.98 in Q1 2020 |
| Net income attributable to C&F Financial Corporation | $7.1 | $3.6 in Q1 2020 |
| Noninterest income / expense | $14.4 / $25.3 | $6.7 / $20.1 in Q1 2020 |
| Annualized ROA / ROE | 1.36% / 15.16% | 0.79% / 8.27% in Q1 2020 |
| Total assets | $2,168.6 | $2,086.3 at Dec. 31, 2020 |
| Loans, net of allowance | $1,346.0 | $1,313.3 at Dec. 31, 2020 |
| Deposits | $1,832.0 | $1,752.2 at Dec. 31, 2020 |
| Total equity | $198.7 | $194.5 at Dec. 31, 2020 |
- Margins, income and expenses: Net interest income was nearly flat year over year despite a 59-basis-point margin decline, as asset growth and lower deposit costs largely offset lower asset yields. Noninterest income more than doubled, driven largely by mortgage banking, while noninterest expense rose 26%, including higher mortgage-production costs and occupancy costs for two financial centers opened in 2020.
- Cash flow: Operating activities provided $41.1, compared with $21.8 used in Q1 2020. Investing activities used $61.8 and financing activities provided $81.4. Cash and cash equivalents increased $60.8 during the quarter to $147.4.
- Debt and liquidity: Deposits were the principal funding source. Short-term borrowings were $23.9, long-term borrowings $30.5 and trust preferred capital notes $25.3. Liquid assets, including cash and nonpledged available-for-sale securities, totaled $330.6. The company reported $544.0 of available borrowing capacity across listed facilities, with none outstanding under those facilities at quarter-end.
- Capital and shareholder returns: C&F Bank’s total capital and Tier 1 capital ratios were 14.2% and 13.0%, respectively; its common equity Tier 1 ratio was 13.0%. The company declared a $0.38-per-share dividend. No shares were repurchased under the current program during Q1.
Material changes and business drivers
- Consolidated net income nearly doubled year over year. Management attributed the improvement primarily to lower loan-loss provision, stronger mortgage banking results, and higher interchange and wealth-management income. Adjusted net income, a non-GAAP measure, was $7.2 versus $4.4 in Q1 2020; the prior-year figure excludes merger expenses.
- Mortgage originations increased to $422.5 from $260.4, and mortgage banking net income rose to $2.5 from $1.5. Higher resale margins and production drove gains on loan sales, which increased to $7.1 from $3.7.
- Consumer finance net income increased to $2.5 from $1.9. Its annualized net charge-off ratio declined to 0.51% from 2.81%, while its average loan yield fell amid competition and a shift toward higher-quality, lower-yielding loans.
- The allowance for loan losses was $39.0, compared with $39.2 at year-end. Provision expense declined to $0.3 from $2.7; net charge-offs were $0.4 versus $2.2. Nonaccrual loans were $3.2, down from $3.4 at year-end.
- Available-for-sale securities rose to $321.3 from $286.4. The quarter’s other comprehensive loss was $1.6, principally reflecting a decline in unrealized securities gains; accumulated other comprehensive loss increased to $3.6 from $2.0.
Outlook, risks and notable items
- No numerical earnings or revenue guidance was provided. Management said pandemic-related uncertainty could affect credit losses, loan demand and net interest margin, and it could not determine the pandemic’s ultimate financial impact.
- The company retained COVID-related qualitative reserves added in 2020 and considered the allowance adequate, but warned that renewed infections, weaker consumer spending or reduced government support could require additional provision. Management also cautioned that government stimulus may be masking emerging credit deterioration.
- At March 31, 2021, the company had originated more than 1,800 PPP loans totaling nearly $135.0; outstanding PPP principal was $106.3. Net deferred PPP fees of $3.7 were expected to be recognized primarily in 2021 and 2022. About $23.5 of loans remained within COVID-related modification periods and were performing under modified terms.
- Credit exposure to identified pandemic-sensitive industries totaled $232.9 in loan balances, excluding PPP loans, and $275.9 including available credit. Loan commitments were $319.0; standby letters of credit totaled $15.6. These are contractual exposures, not necessarily expected cash outflows.
- Mortgage loan sales carry investor representations and warranties; the related indemnification allowance was $3.4. Future claims are inherently uncertain. The filing also identifies interest-rate, economic, competitive, real-estate, used-vehicle, cyber and regulatory risks.
- Management expects the consumer finance headquarters relocation to reduce occupancy expense beginning in Q2 2021. The expected savings were not quantified. The company is preparing for CECL, scheduled to take effect January 1, 2023; the effect on the allowance, equity and regulatory capital had not yet been estimated.
- Q1 2020 included $0.96 of merger-related expenses associated with the Peoples acquisition; none were reported in Q1 2021. Q1 2021 earnings also included $0.51 of unrealized gains in the nonqualified deferred-compensation plan, offset by corresponding compensation expense changes.
Important facts for investors to verify
- Whether mortgage production, resale margins and associated income remain durable as interest rates and refinancing demand change.
- How PPP forgiveness, deferred fees and government support affect reported loan growth and the timing of credit deterioration.
- Whether COVID-related reserves remain adequate, particularly for consumer finance and sensitive commercial real-estate exposures.
- How the lower net interest margin, higher operating costs and interest-rate movements affect future earnings.
- The company’s liquidity and capital position, including actual availability and terms of borrowing facilities, alongside dividend and repurchase decisions.
- Management’s forthcoming CECL implementation estimate and any expected effects on the allowance, retained earnings and regulatory capital.