C&F Financial Corporation (NASDAQ: CFFI) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. 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.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total operating income (interest income plus noninterest income) | $152.3 million | $127.0 million |
| Net interest income | $83.5 million | $80.5 million |
| Provision for loan losses | $11.1 million | $8.5 million |
| Net income | $22.4 million | $18.9 million |
| Diluted earnings per share | $6.06 | $5.47 |
| Net interest margin | 4.65% | 5.52% |
| Return on average assets / equity | 1.14% / 12.54% | 1.20% / 12.02% |
| Total assets at year-end | $2.09 billion | $1.66 billion |
| Loans, net of allowance, at year-end | $1.31 billion | $1.08 billion |
| Deposits at year-end | $1.75 billion | $1.29 billion |
| Total borrowings at year-end | $76.2 million | $161.2 million |
| Total equity at year-end | $194.5 million | $165.3 million |
- Net interest margin is reported on a fully taxable-equivalent basis in the margin discussion. Its 87-basis-point decline reflected lower yields on loans and other earning assets; asset growth helped lift net interest income despite the compression.
- Cash and cash equivalents ended the year at $86.7 million, down from $165.4 million. Reported operating, investing and financing cash flows were $(80.4) million, $(183.3) million and $184.9 million, respectively; cash decreased by $78.8 million. Mortgage-loan origination and sale activity materially affects operating cash flow.
- The allowance for loan losses was $39.2 million, versus $32.9 million a year earlier. The consumer finance net charge-off ratio improved to 1.54% from 3.05%; community banking nonperforming assets increased to $3.9 million from $2.6 million.
- Liquid assets were $222.9 million. The company reported $475.6 million of available borrowing capacity across listed facilities, with none outstanding on those facilities at year-end. The Bank was well capitalized and met applicable capital requirements.
- Segment net income: community banking $5.4 million (2019: $9.9 million); mortgage banking $10.7 million (2019: $3.8 million); consumer finance $7.6 million (2019: $6.9 million).
Material changes versus 2019
- Net income rose 19.0%, while total operating income increased about 19.9%. Noninterest income grew to $55.4 million from $32.0 million, driven chiefly by mortgage production and loan-sale gains.
- Mortgage originations reached a company record of $1.8 billion, compared with $944.1 million in 2019. Mortgage-segment net income increased to $10.7 million.
- Community banking loans grew, including acquired Peoples loans and $78.7 million of PPP loans outstanding at year-end. Peoples added approximately $190.5 million of assets; the purchase consideration was $22.2 million and the acquisition generated $10.8 million of goodwill.
- Noninterest expense increased 23.3% to $98.7 million, reflecting higher mortgage production costs, acquisition-related and integration costs, technology and branch costs, and $2.2 million of early debt repayment charges.
- The company repaid a $75.0 million revolving line and $44.5 million of FHLB advances, while issuing $20.0 million of subordinated notes. It declared $1.52 per share in dividends, up from $1.49, and authorized repurchases of up to 365,000 shares through November 30, 2021; 7,459 shares had been repurchased under that program by year-end.
Outlook, risks and unusual items
- Management described its 2021 outlook as relatively positive but uncertain. It prioritized community-bank loan growth, digital services, mortgage technology and lender services, and growth in prime marine and RV lending. No numerical earnings, revenue or margin guidance was provided.
- Management recorded approximately $8.0 million of additional 2020 loan-loss provision associated with expected COVID-19 effects. It warned that further deterioration could require additional provision; relief, PPP lending and payment deferrals may delay visible credit deterioration. COVID-related modifications outstanding at year-end totaled about $30.7 million.
- Low interest rates and competition may continue to pressure net interest margin. Mortgage results depend on rates, housing inventory and refinancing activity; consumer finance is exposed to non-prime borrower performance, used-vehicle values and competition.
- Commercial, financial and agricultural loans were 51.8% of the loan portfolio; the company also has material exposure to non-prime auto lending. Sensitive community-bank industries included retail commercial real estate, restaurants, fitness/recreation and hospitality.
- Notable nonrecurring items included a $3.5 million gain on sale of a pool of purchased credit-impaired loans, $2.2 million in early debt repayment charges, Peoples merger costs, branch-related charges and a $326,000 CARES Act tax benefit. Management’s adjusted earnings measures are non-GAAP.
- No goodwill impairment was recorded, but community banking goodwill fair value exceeded carrying value by only $8.8 million, approximately 6%. Management said worse-than-expected pandemic effects could reduce that cushion.
- The filing identifies interest-rate, credit, liquidity, cyber and third-party service, regulatory, and mortgage repurchase/indemnification risks. It reports no legal proceeding expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether post-pandemic borrower performance, expired deferrals and PPP forgiveness reveal additional credit deterioration or require higher loan-loss reserves.
- Whether the mortgage segment can sustain unusually high 2020 production and profitability as refinancing activity and interest rates change.
- How quickly net interest margin responds to low rates, deposit repricing and loan growth; the filing estimates a 3.38% decline in one-year net interest income under an immediate 200-basis-point rate decrease.
- The quality and concentration of commercial lending, non-prime auto credit, collateral values and exposure to pandemic-sensitive industries.
- Integration benefits and goodwill valuation following the Peoples acquisition, along with the eventual impact of the expected 2023 CECL accounting adoption; management had not yet quantified the CECL effect.
- Whether liquidity, capital and dividend capacity remain adequate after loan growth, debt issuance/repayment and any share repurchases.