C&F Financial Corporation — Q3 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2020. C&F is a Virginia bank holding company with community banking, mortgage banking and consumer finance businesses. It completed the acquisition of Peoples Bankshares on January 1, 2020; the acquisition expands the business and affects comparability with 2019.
Financial results and condition
- Earnings: Q3 net income was $6.9 million ($1.86 per diluted share), versus $4.9 million ($1.42) a year earlier. Nine-month net income was $14.3 million ($3.87 per share), versus $14.5 million ($4.19). Net income attributable to C&F was $6.8 million and $14.1 million, respectively.
- Revenue and margin: Net interest income plus noninterest income was $37.8 million in Q3, up from $28.5 million; for nine months it was $97.2 million, up from $84.0 million. Annualized net interest margin fell to 4.54% in Q3 from 5.50%, and to 4.68% for nine months from 5.63%. Lower asset yields were partly offset by lower funding costs and balance-sheet growth.
- Credit costs and asset quality: Provision for loan losses was $3.3 million in Q3 and $9.6 million for nine months, compared with $1.8 million and $6.0 million. The allowance was $38.9 million at quarter-end, up from $32.9 million at year-end 2019. Community banking nonperforming assets were $2.4 million, down from $2.6 million at year-end. Management said pandemic effects, deferrals and stimulus may delay visible deterioration, and further deterioration could require additional provisions.
- Cash flow and liquidity: Nine-month operating cash flow was negative $137.3 million and investing cash flow negative $180.0 million; financing provided $177.7 million. Cash and cash equivalents declined to $25.8 million from $165.4 million at year-end. Management reported $181.3 million in liquid assets and $467.9 million of available borrowing capacity, and said liquidity was sufficient for operational needs and obligations.
- Loans, deposits and debt: Total assets were $2.08 billion, up $423.4 million from year-end; net loans were $1.32 billion versus $1.08 billion. Deposits increased to $1.66 billion from $1.29 billion. Borrowings totaled $153.3 million versus $161.2 million, including $60.5 million short-term and $67.5 million long-term borrowings and $25.3 million of trust preferred notes. The company issued $20 million of 2030 subordinated notes at an initial fixed rate of 4.875% for five years, then three-month SOFR plus 475.5 basis points.
- Capital: Total equity was $189.1 million, up from $165.3 million at year-end. C&F Bank reported total risk-based capital of 13.2%, Tier 1 capital of 12.0%, and CET1 of 12.0%. The filing says the bank exceeded required capital conservation buffers.
Material changes and management commentary
- Mortgage banking was the main driver of stronger Q3 earnings: segment net income was $4.5 million versus $1.2 million, with record mortgage production. Originations were $534.7 million in Q3 and $1.24 billion for nine months.
- Community banking net income declined to $1.1 million in Q3 from $2.4 million, and to $1.8 million for nine months from $7.8 million, reflecting higher credit provisions and expenses, lower yields and other factors. Consumer finance earned $1.6 million in Q3 versus $1.9 million and $5.2 million for nine months versus $5.1 million.
- COVID-19 response included 1,257 PPP loans totaling $89.8 million. Modifications were offered on loans totaling $103.6 million; 73% had resumed regular payments or paid off by September 30. Loans with modifications still active or extended totaled $28.3 million.
- Management cited pandemic-related risks including elevated credit losses, net interest margin compression, reduced loan demand, and possible securities or goodwill impairment. The duration and ultimate financial effects were not predictable. No quantitative earnings guidance was provided. Management expected to continue the regular quarterly dividend, subject to ongoing review.
- Unusual items included $1.4 million of merger expenses for the first nine months, a $281,000 branch-consolidation asset write-down, and $326,000 of tax benefits related to prior Peoples tax years. No merger expenses were recorded in Q3. Management expected further merger expenses to be insignificant and most Peoples integration savings to be realized by year-end 2020; it also expected about $220,000 in annualized savings from the West Point office consolidation by Q2 2021.
Important facts for investors to verify
- Whether credit quality and the allowance remain adequate as pandemic-related deferrals, stimulus and PPP effects unwind; monitor delinquency, charge-off and provision trends.
- Whether mortgage banking’s unusually strong production and gains are sustainable, and how lower rates and loan yields affect net interest margin and earnings.
- Deposit stability, cash usage and reliance on borrowing capacity, including the composition and cost of short-term funding.
- Integration progress and realization of expected Peoples and branch-consolidation cost savings, alongside acquisition-related goodwill and intangible assets.
- Future dividend decisions and capital levels, particularly given economic uncertainty and the planned adoption of the expected-credit-loss accounting standard in 2023.