C&F Financial Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2020; filed May 8, 2020. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance operations. Results include Peoples Bankshares, acquired January 1, 2020.
Financial performance and condition
| Metric | Q1 2020 | Comparable / change |
|---|---|---|
| Net interest income | $20.6 million | $19.6 million in Q1 2019 |
| Noninterest income | $9.0 million | $7.1 million in Q1 2019 |
| Net income attributable to C&F | $3.6 million; $0.98 per share | $3.8 million; $1.08 per share |
| Annualized net interest margin | 4.92% | 5.66% in Q1 2019 |
| Total assets | $1.877 billion | Up $219.9 million from Dec. 31, 2019 |
| Loans, net | $1.204 billion | $1.082 billion at Dec. 31, 2019 |
| Deposits | $1.484 billion | $1.291 billion at Dec. 31, 2019 |
| Borrowings | $159.9 million | $161.2 million at Dec. 31, 2019 |
| Cash and cash equivalents | $148.0 million | Down $17.4 million during the quarter |
| Operating cash flow | $(21.8) million | $14.2 million provided in Q1 2019 |
| Total equity | $179.2 million | $165.3 million at Dec. 31, 2019 |
Revenue growth and net interest income benefited from the acquisition and higher mortgage activity, while net income declined 3.5% and diluted EPS declined 9.3% year over year. The allowance for loan losses was $33.3 million; Q1 provision was $2.65 million. Annualized consumer-finance net charge-offs improved to 2.81% from 3.79% in Q1 2019. The Bank’s March 31 regulatory capital ratios included total capital of 13.8%, Tier 1 capital of 12.6%, and common equity Tier 1 of 12.6%; it remained above applicable well-capitalized thresholds.
Management reported adjusted net income of $4.4 million and adjusted EPS of $1.20, excluding $957,000 of merger expenses after the filing’s tax adjustment. These are non-GAAP measures. The reported annualized ROA and ROE were 0.79% and 8.27%; adjusted figures were 0.96% and 10.06%.
Material changes versus the prior comparable period
- Net interest income increased about 4.9%, but the taxable-equivalent net interest margin fell 74 basis points. Lower asset yields and higher deposit costs weighed on margin.
- Noninterest income rose 27.1%, led by loan-sale gains and mortgage banking fees. Mortgage originations increased to $260.4 million from $138.7 million.
- Noninterest expense increased 13.7% to $22.4 million, reflecting merger and integration costs, acquired operating costs, growth investments and higher mortgage production expenses.
- The Peoples acquisition added $190.6 million of identifiable assets, $171.8 million of deposits, $10.7 million of goodwill and $1.7 million of core-deposit intangible assets. C&F paid $22.2 million in cash and stock.
- Cash flow from operations turned negative, substantially reflecting mortgage loan originations held for sale exceeding sale proceeds during the quarter.
Outlook, risks and unusual items
- Management expects COVID-19 to affect borrowers, loan losses, demand, margins and possibly securities and goodwill valuations; the ultimate impact and duration were undetermined. The company recorded $1.0 million of additional retail-bank provision and about $700,000 of consumer-finance provision related to expected pandemic effects, and warned further provisions may be needed.
- As of April 30, the Bank had granted payment deferrals or interest-only periods on over 130 loans totaling approximately $70 million. Separately, after April 3 it processed and funded more than 1,100 SBA Paycheck Protection Program loans totaling $85 million under the initial program appropriation.
- Management cautioned that near-zero rates, slower repricing of time deposits, weaker loan demand and reduced purchase-discount accretion could pressure net interest margin. The mortgage segment’s $245.2 million of locked borrower commitments might convert at a lower-than-usual rate amid the pandemic.
- Additional after-tax merger expenses of approximately $400,000 were expected in Q2 2020; anticipated Peoples cost savings were expected to begin after systems conversion and integration. Loan and deposit systems conversion was completed April 25.
- Management expected to continue the regular quarterly dividend, but said future decisions would consider economic conditions, capital needs and earnings. It did not expect further share repurchases before the then-current authorization expired May 31, 2020.
- Unusual market-related items included a $1.98 million unrealized loss on the nonqualified deferred compensation plan, with related compensation expense movements substantially offsetting it. Cash-flow hedge losses also reduced other comprehensive income.
- Other risks include acquired-loan valuation and credit quality, mortgage representations-and-warranties exposure, loan commitments and standby letters of credit, integration execution, cyber and remote-work risks, and possible impairment of municipal securities or goodwill.
Investor verification checklist
- Track COVID-related delinquencies, deferrals, charge-offs and allowance adequacy, especially across commercial real estate and consumer finance.
- Verify whether Peoples integration delivers expected cost savings and whether remaining merger costs stay near management’s estimate.
- Monitor net interest margin, deposit repricing, loan demand and the sustainability of mortgage production and gains on loan sales.
- Review the conversion of locked mortgage commitments into originations and the performance and repayment status of PPP loans.
- Assess liquidity and capital trends, including available borrowing capacity, deposit stability, dividends and the impact of future credit losses.
- Evaluate the filing’s non-GAAP adjusted earnings alongside GAAP results and reconcile the effects of merger and deferred-compensation items.