C&F Financial Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports fourth-quarter results. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses. The Peoples acquisition closed January 1, 2020, after the reporting period, so its results are not included in 2019 financial statements.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets, year-end | $1.657 billion | $1.521 billion |
| Total loans held for investment, gross | $1.115 billion | $1.062 billion |
| Total deposits, year-end | $1.291 billion | $1.182 billion |
| Interest income | $95.0 million | $92.5 million |
| Net interest income | $80.5 million | $81.5 million |
| Net interest margin | 5.52% | 5.80% |
| Provision for loan losses | $8.5 million | $11.0 million |
| Noninterest income | $32.0 million | $25.8 million |
| Noninterest expense | $80.0 million | $73.7 million |
| Net income | $18.9 million | $18.0 million |
| Diluted earnings per share | $5.47 | $5.15 |
Net income rose 4.6%; management’s adjusted net income, excluding merger costs and the 2017 tax remeasurement, was $19.5 million in 2019, up 8.2% from $18.0 million in 2018. Return on average assets was 1.20% and return on average equity was 12.02%. The effective tax rate was 21.2%.
Fourth-quarter 2019 net income was $4.35 million, or $1.27 per share, compared with $3.96 million, or $1.13 per share, in fourth-quarter 2018.
Cash flow, funding and capital
- Cash and cash equivalents increased to $165.4 million from $115.0 million. Cash flow from operating activities was negative $15.2 million, versus positive $47.1 million in 2018, reflecting the timing and volume of mortgage loans originated for sale; investing activities used $35.9 million, while financing activities provided $101.5 million.
- Management reported $227.7 million in liquid assets and $368.1 million in additional available borrowing capacity at year-end. It considered liquidity sufficient for operating requirements and contractual obligations.
- Year-end borrowings included $16.4 million short-term borrowings, $119.5 million long-term borrowings and $25.3 million trust preferred capital notes. The consumer finance subsidiary had $75.0 million outstanding on a revolving credit line maturing in 2022 and was in compliance with its covenants.
- Total equity was $165.3 million. The Bank was categorized as well capitalized; its total risk-based capital ratio was 14.0%, CET1 ratio 12.8% and Tier 1 leverage ratio 10.3%. The Corporation’s reported total risk-based capital ratio was 14.9%.
- Dividends declared were $1.49 per share, up from $1.41 in 2018. The company repurchased $4.4 million of shares during 2019 and had $3.3 million remaining under its $5 million repurchase authorization at year-end.
Material changes versus 2018
- Mortgage banking strengthened: originations increased 35.2% to $944.1 million, and segment net income rose to $3.8 million from $1.9 million. Gains on loan sales increased to $10.6 million from $7.8 million.
- Consumer finance segment net income increased to $6.9 million from $6.7 million. Its net charge-off ratio improved to 3.05% from 4.14%, and delinquent loans declined to 4.17% of loans from 4.76%.
- Retail banking segment net income decreased to $9.9 million from $10.6 million. Average retail loans grew 6.1%, but higher deposit costs, operating costs and lower income from certain acquired loans weighed on results.
- Net interest margin compressed 28 basis points, and net interest income declined on a taxable-equivalent basis to $81.1 million from $82.3 million. Higher funding costs outweighed growth in average earning assets.
- Nonperforming assets in retail banking rose to $2.6 million from $1.7 million, primarily because the former Bellgrade branch property was reclassified as other real estate owned.
Outlook, risks and unusual items
- Management provided qualitative, not numerical, 2020 guidance. It expects pressure on margins from the interest-rate environment, lower acquired-loan accretion, deposit costs adjusting more slowly than loan yields, and lower consumer-finance loan yields. Retail loan growth is expected to help offset these pressures; mortgage production and revenue are described as uncertain.
- The Peoples acquisition had aggregate consideration of approximately $22.2 million, including about $10.6 million cash and stock. C&F estimated total after-tax merger costs of about $1.9 million, with approximately $1.2 million expected in the first half of 2020. The filing anticipated systems conversion in April 2020 and expected the Bank to remain well capitalized after the transaction.
- The filing gives inconsistent share counts for the Peoples consideration: 210,052 shares in one section and 209,871 shares in the subsequent-event note. Acquisition accounting, including fair values and goodwill, was not complete when the statements were issued.
- Credit exposure is concentrated: 44.9% of the loan portfolio was commercial, financial and agricultural, and 25.9% was consumer finance, primarily non-prime automobile lending. A downturn could increase defaults, repossessions and losses, and reduce used-vehicle collateral values.
- Other key risks include margin sensitivity to interest rates, competition and deposit pricing, mortgage-market and loan-repurchase exposure, cybersecurity and third-party service risks, and integration challenges related to Peoples. The company said its current interest-rate exposure was manageable; its model estimated next-year net interest income would fall 8.83% in an immediate 200-basis-point rate decline and rise 7.43% in a 200-basis-point increase.
- The allowance for loan losses was $32.9 million, down from $34.0 million. The company had not yet estimated the impact of adopting the expected-credit-loss standard (ASC 326), scheduled for 2023, which it said could affect equity and Bank regulatory capital.
- 2019 included $709,000 of merger-related expenses. Noninterest income also included $2.1 million of unrealized gains related to the nonqualified deferred compensation plan, offset by compensation expense. No goodwill impairment was identified. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Track post-acquisition integration, realized cost savings, customer and deposit retention, final purchase accounting and the remaining merger costs.
- Assess whether loan growth can offset continuing net interest margin compression and lower yields in consumer finance.
- Monitor credit quality, especially commercial real estate and development exposure, non-prime auto charge-offs, delinquency trends, allowance adequacy and vehicle recovery values.
- Review mortgage origination volumes, gains on sales, indemnification reserves and any repurchase claims as market conditions change.
- Confirm post-merger Bank capital and liquidity, and the eventual estimated impact of ASC 326 on allowance, equity and regulatory capital.