C&F Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted. The Virginia-based bank holding company operates community banking, mortgage banking and consumer finance businesses.
Business context and reporting period
C&F completed its acquisition of Peoples Bankshares on January 1, 2020, for $22.2 million in cash and stock. The acquisition added $190.5 million in assets at fair value and $10.8 million of goodwill. Integration of legacy systems and processes was completed in Q2. COVID-19 disruption, lower interest rates and government relief programs materially influenced the quarter.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $20.3 | $20.6 | $40.9 | $40.3 |
| Provision for loan losses | $3.6 | $1.8 | $6.3 | $4.2 |
| Noninterest income | $11.8 | $8.2 | $18.6 | $15.3 |
| Noninterest expenses | $23.8 | $19.5 | $43.9 | $39.2 |
| Net income attributable to C&F | $3.7 | $5.8 | $7.3 | $9.6 |
| Diluted earnings per share | $1.03 | $1.69 | $2.01 | $2.77 |
- Reported net income declined 35.9% in Q2 and 23.2% for the first half year over year. Management’s adjusted net income, a non-GAAP measure excluding specified merger, branch consolidation and tax-law items, was $4.0 million in Q2 and $8.4 million for the first half; adjusted EPS was $1.11 and $2.30, respectively.
- Annualized return on average equity and assets were 8.41% and 0.77% in Q2, and 8.34% and 0.78% for the first half. The comparable 2019 figures were 15.07% and 1.51% for Q2, and 12.54% and 1.26% for the half year.
- Fully taxable-equivalent net interest margin was 4.61% in Q2 and 4.76% for the first half, down 114 and 95 basis points year over year. Lower asset yields, particularly on loans, outweighed lower funding costs.
- At June 30, total assets were $1.98 billion, loans held for investment were $1.33 billion gross ($1.29 billion net), and deposits were $1.65 billion. Total equity was $183.3 million. Compared with December 31, 2019, assets rose $325.8 million and deposits rose $354.5 million, largely reflecting the Peoples acquisition and deposit growth.
- Allowance for loan losses was $36.1 million, versus $32.9 million at year-end. Total borrowings were $91.3 million, down from $161.2 million; this excludes $25.3 million of trust preferred capital notes. Cash and cash equivalents were $80.3 million, down from $165.4 million at year-end.
- First-half cash flows were $(66.8) million from operations, $(121.8) million from investing and $103.4 million from financing. Management reported $204.9 million of liquid assets and $464.3 million of available borrowing capacity at June 30.
Material changes versus prior periods
- Higher loan-loss provisioning was a major earnings headwind: management attributed approximately $3.5 million of Q2 and $5.5 million of first-half additional provision to expected COVID-19-related deterioration and economic disruption.
- Mortgage banking strengthened: Q2 loan-sale gains rose to $4.6 million from $3.0 million, and mortgage originations reached a company record of $448.3 million for the quarter and $708.6 million for the first half. The segment reported net income of $2.3 million in Q2 and $3.9 million for the half year.
- Community banking reported $68,000 of Q2 net income, compared with $3.1 million a year earlier; first-half net income was $638,000 versus $5.4 million. Consumer finance reported Q2 net income of $1.6 million versus $1.9 million, while first-half income increased to $3.6 million from $3.2 million.
- Noninterest expenses increased 21.7% in Q2 and 11.9% for the first half, reflecting Peoples-related operating costs and merger expenses, higher compensation, technology investment and mortgage processing costs. Cumulative Peoples merger expenses were $2.1 million pretax through June 30.
- Net interest margin contracted amid lower rates. Average loan yields fell to 6.19% in Q2 from 7.87% a year earlier; larger average loan and securities balances partly offset the impact on interest income.
Outlook, risks, contingencies and unusual items
- Management expects the pandemic to continue affecting results and says additional loan-loss provisions may be required. Risks include borrower defaults and collateral declines, margin compression, weaker loan demand, and possible securities or goodwill impairment. The ultimate duration and financial impact were not determinable.
- At June 30, C&F had originated 1,210 PPP loans totaling $88.9 million. The loans are SBA-guaranteed; $3.8 million of net deferred fees was expected to be recognized over the loans’ lives, subject to repayment or forgiveness timing.
- The Bank had granted payment deferrals or interest-only periods on 200 loans totaling $94.9 million. Community banking loans to identified pandemic-sensitive industries totaled $236.9 million; related exposure, including available credit, was $284.9 million.
- Management said it expected to continue its regular quarterly dividend, while noting that future dividends depend on economic conditions, capital needs and earnings. The prior $5.0 million share-repurchase authorization expired May 31, 2020 and had not been renewed.
- The planned consolidation of the Bank’s West Point main office was expected in Q4 2020. Management estimated annual cost savings of about $220,000 by Q2 2021. A $281,000 after-tax-adjusted branch consolidation charge was included in Q2 results.
- Other notable items include a $303,000 tax benefit from a COVID-related change in tax law and a $124,000 unrealized loss on small business investment company funds. The filing also describes mortgage-loan sale representations and warranties; the related indemnification allowance was $2.64 million.
- Capital remained above applicable Bank minimums: C&F Bank’s total risk-based capital ratio was 13.5%, and its common equity Tier 1 ratio was 12.3%. Management reported adequate liquidity and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether loan deferrals convert to delinquency, default or charge-offs, and whether further allowance increases are needed as pandemic effects develop.
- Whether mortgage production, gains and margins remain strong, and how much earnings depend on refinancing activity and low interest rates.
- Actual Peoples integration savings and costs, including the timing and realization of projected cost reductions.
- Deposit stability, liquidity availability, loan growth and net interest margin trends as rates and PPP repayments or forgiveness evolve.
- Whether COVID-related conditions trigger goodwill or securities impairment, or affect dividends and capital levels.
- How PPP fee recognition, mortgage representations-and-warranties claims, and the $94.9 million of modified loans develop in subsequent filings.