C & F FINANCIAL CORP quarterly report, Q2 FY2021

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C&F Financial Corporation — Q2 2021 Form 10-Q

Business context and reporting period. Virginia-based bank holding company with community banking, mortgage banking and consumer finance segments. This unaudited report covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020.

Financial performance and condition

  • Profitability: Q2 consolidated net income was $8.1 million, versus $3.7 million a year earlier; diluted EPS was $2.19 versus $1.03. First-half net income was $15.3 million versus $7.4 million; EPS was $4.11 versus $2.01. Annualized Q2 ROE and ROA were 16.49% and 1.50%, respectively.
  • Revenue and expenses: Q2 net interest income was $21.7 million, up from $20.3 million; noninterest income was $13.1 million, up from $11.8 million. Noninterest expense rose to $24.9 million from $23.8 million. For the first half, net interest income was $42.4 million, noninterest income $27.5 million, and noninterest expense $50.2 million.
  • Credit provision and margin: The company recorded a $600,000 net reversal of provision for loan losses in Q2, compared with a $3.6 million provision in Q2 2020. First-half provision was a $320,000 reversal versus a $6.25 million provision. Annualized net interest margin was 4.37% for Q2, down from 4.61% a year earlier, but up from 4.33% in Q1; first-half margin was 4.35%, versus 4.76%.
  • Balance sheet and funding: Total assets were $2.17 billion, up $82.3 million from year-end. Net loans were $1.35 billion, up $35.0 million; deposits were $1.83 billion, up $79.4 million. Cash and cash equivalents rose to $169.5 million from $86.7 million. Borrowings, including trust preferred capital notes, totaled approximately $79.4 million, versus $76.2 million at year-end.
  • Liquidity and capital: Liquid assets, including cash and nonpledged available-for-sale securities, were $373.0 million, versus $227.9 million at year-end. The company reported $483.2 million of available borrowing capacity and no outstanding amount against the listed facilities. C&F Bank’s total risk-based capital ratio was 14.6% and its tier 1 leverage ratio was 9.8%; both exceeded stated well-capitalized thresholds. Total equity was $201.8 million.
  • Cash flow: First-half operating cash flow was $105.7 million, compared with an outflow of $66.5 million in 2020; investing used $97.5 million and financing provided $74.6 million. Cash increased by $82.8 million to $169.5 million. Operating cash flow was materially affected by mortgage-loan originations and sales.

Material changes versus comparable periods

  • Higher earnings reflected substantially lower credit-loss provisions, lower deposit costs, growth in earning assets and higher gains on mortgage-loan sales. First-half net interest income increased despite margin compression.
  • Q2 mortgage banking net income declined to $2.0 million from $2.3 million; first-half mortgage banking net income rose to $4.5 million from $3.9 million. Q2 originations fell 14.9% year over year, while first-half originations rose 13.4%.
  • Consumer finance net income increased to $2.9 million in Q2 and $5.4 million in the first half, primarily on lower credit provisions. Consumer finance loans increased $20.6 million from year-end.
  • Noninterest expense growth reflected higher mortgage production-related staffing and processing costs, partly offset by the absence of 2020 merger and branch-consolidation costs. The company repurchased $4.7 million of stock and declared dividends of $0.78 per share in the first half.

Outlook, risks and unusual items

  • Management gave no specific earnings or revenue guidance. It cautioned that maintaining current net interest margins may be challenging due to loan-yield pressure, low interest rates, PPP fee timing, possible weaker loan demand, reduced acquisition discount accretion and mortgage production variability.
  • Management cited COVID-19 uncertainty, including variants, labor and supply-chain constraints, inflation and the possible end of stimulus support. The company said credit deterioration had not emerged to the extent previously anticipated and released some pandemic-related reserves, but retained pandemic-related reserves and warned that renewed economic stress could require future provisions.
  • Consumer finance credit results benefited from government stimulus, improved purchased-loan quality and elevated used-auto values. Management cautioned that stimulus and used-car prices may not persist. The consumer finance segment reported net recoveries at an annualized 0.07% of average loans for the first half, versus net charge-offs of 1.99% in the prior-year period.
  • At June 30, $23.6 million of loans remained within COVID-related modification periods; management said they were performing under modified terms. The company also reported $321.7 million of loan commitments and $17.6 million of standby letters of credit.
  • PPP loans outstanding were $64.7 million in principal, with $2.6 million of unrecognized net deferred fees expected to be recognized primarily in 2021 and 2022. The allowance for loan losses was $39.0 million; management said estimates remain uncertain and depend on economic conditions.
  • The company is preparing for CECL adoption on January 1, 2023; it had not yet estimated the impact and warned adoption could affect allowance levels, retained earnings and regulatory capital. Mortgage-loan sale agreements include representation-and-warranty recourse; the related indemnification allowance was $3.4 million.

Important facts for investors to verify

  1. Whether reserve releases and favorable consumer credit conditions are sustainable as stimulus programs and elevated used-auto prices recede.
  2. How PPP fee recognition, loan yields, deposit costs and asset mix affect net interest margin in coming quarters.
  3. Mortgage origination volume, gain-on-sale margins, staffing costs and the trajectory of mortgage banking earnings.
  4. Credit quality in commercial real estate and other pandemic-sensitive exposures, and the adequacy of the allowance under changing economic conditions.
  5. The eventual CECL transition impact on the allowance, equity and C&F Bank regulatory capital.
  6. Execution of the share repurchase program and dividend policy, alongside capital and liquidity needs.