C&F Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. C&F is a Virginia bank holding company operating retail banking, mortgage banking and consumer finance businesses. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net income attributable to C&F | $4.9 | $5.1 | $14.5 | $14.1 |
| Diluted earnings per share | $1.42 | $1.46 | $4.19 | $4.02 |
| Net interest income | $20.2 | $20.9 | $60.5 | $61.0 |
| Provision for loan losses | $1.8 | $2.4 | $6.0 | $7.7 |
| Noninterest income | $8.2 | $6.6 | $23.5 | $20.3 |
| Noninterest expense | $20.3 | $18.7 | $59.5 | $56.0 |
- Q3 annualized return on average assets (ROA) was 1.25% and return on average equity (ROE) 12.28%, versus 1.35% and 13.81%, respectively, in Q3 2018. For the nine months, ROA was 1.25% versus 1.24%, and ROE was 12.45% versus 13.02%.
- Taxable-equivalent net interest margin declined to 5.50% in Q3 from 5.88%; for the first nine months it was 5.63% versus 5.81%. Rising deposit and borrowing costs outweighed loan growth.
- At September 30, total assets were $1.619 billion, loans net of allowance were $1.055 billion, deposits were $1.249 billion and total equity was $162.1 million. Total borrowings, including trust preferred capital notes, were $161.7 million.
- Cash and cash equivalents were $145.8 million. Management reported $240.8 million of liquid assets and $358.8 million of available capacity across listed funding sources. The filing states management believes liquidity is sufficient for operating needs and contractual obligations.
- For the first nine months, operating cash flow was negative $24.2 million, compared with positive $36.2 million in 2018. Mortgage loan originations and sales were large, with originations exceeding sale proceeds; financing activities provided $61.1 million. Cash increased $30.8 million to $145.8 million.
- Annualized net charge-offs at consumer finance fell to 2.91% for the first nine months from 3.84% a year earlier. Consumer finance delinquency was 3.48% at September 30, down from 4.76% at December 31, 2018. Total allowance for loan losses was $33.2 million; nonperforming assets were $2.1 million, including $1.1 million of other real estate owned.
Material changes versus comparable periods
- Q3 net income fell about 4% year over year, while nine-month net income rose about 3%. Q3 net interest income decreased and expenses increased; stronger noninterest income and a lower loan-loss provision partly offset these pressures.
- Mortgage banking improved: loan-sale gains rose to $3.2 million in Q3 from $1.8 million, and mortgage originations increased to $286.9 million from $191.1 million. Management said Q3 production was the segment’s highest quarter since Q2 2009, supported by lower mortgage rates.
- Consumer finance net income was $1.9 million in Q3 versus $1.8 million; nine-month income was $5.1 million versus $5.4 million. Lower credit losses helped, while competitive pressure and higher funding costs weighed on results.
- Deposits increased $66.9 million from year-end 2018, principally from time deposits and noninterest-bearing demand deposits. Loans held for investment increased $26.4 million and loans held for sale increased $56.5 million.
- Available-for-sale securities declined to $190.9 million from $214.9 million at year-end 2018. Accumulated other comprehensive loss improved to $2.2 million from $4.7 million, primarily reflecting securities valuation changes.
Outlook, commentary and risks
- No specific earnings or revenue guidance was provided. Management cautioned that maintaining current net interest margin may be challenging due to an inverted yield curve, lower short-term rates, competitive pressure on consumer finance yields, declining accretion of acquired-loan discounts, potentially lower mortgage production after unusually strong results, and the proposed acquisition’s lower margin. Management expects retail and consumer-finance loan growth to help offset these factors.
- On August 13, 2019, C&F agreed to acquire Peoples Bankshares, with the bank subsidiary expected to merge into C&F Bank. Closing was expected in early 2020, subject to shareholder and regulatory approvals. Consideration was 0.5366 C&F shares plus $27 cash per Peoples share; the filing estimated approximately $10.6 million cash consideration and approximately $21.3 million total value using C&F’s November 6 share price. C&F had incurred $409,000 of merger costs and estimated aggregate after-tax costs of approximately $2.0 million. The acquisition could reduce bank regulatory capital ratios; management expected C&F Bank to remain well capitalized.
- Key acquisition risks include failure or delay in obtaining approvals, integration difficulties, customer or employee losses, disruption to operations, and benefits or cost savings not being realized. If the agreement terminates in specified circumstances, Peoples may owe a $900,000 termination fee.
- The company repurchased $4.4 million of shares in the first nine months under its repurchase programs and declared dividends of $1.11 per share. The May 2019 program authorized up to $5.0 million through May 31, 2020; $3.3 million remained available at quarter-end.
- The allowance for indemnifications related to mortgage-loan representations and warranties was $2.47 million. Loan commitments were $254.2 million and standby letters of credit $18.5 million at September 30; these are contingent exposures, not equivalent to funded loans.
- Management anticipated adoption of the expected-credit-loss standard (ASC 326) beginning January 1, 2023, based on the proposed effective-date deferral. The company had not estimated the impact and warned of possible changes to the allowance, equity, regulatory capital and controls.
- Management identified risks from interest-rate movements, economic and real-estate conditions, credit quality, competition in non-prime auto lending, mortgage demand, deposit flows, cybersecurity and reliance on third-party services. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Whether the Peoples transaction receives all required approvals, closes on schedule and achieves anticipated integration benefits without material customer, employee or capital effects.
- Whether mortgage production and loan-sale gains remain sustainable after the exceptional 2019 volume, and how a production slowdown would affect earnings.
- Whether deposit pricing and funding costs continue to pressure net interest margin, and whether loan growth can offset that pressure.
- Whether consumer-finance credit trends and charge-offs remain improved as the portfolio mix and competitive environment change.
- The eventual ASC 326 adoption date and its quantified effect on reserves, retained earnings and regulatory capital; the filing provided no clear estimate.
- How the negative operating cash flow trend, liquidity levels and contingent credit commitments evolve in subsequent periods.