C&F Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019, unless otherwise stated. Unaudited consolidated results. C&F is a Virginia bank holding company operating retail banking, mortgage banking and consumer finance businesses.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $3.77 million | $3.89 million in Q1 2018 |
| Diluted EPS | $1.08 | $1.11 in Q1 2018 |
| Total operating income | $30.05 million | $29.19 million in Q1 2018 |
| Net interest income | $19.65 million; taxable-equivalent $19.81 million | $20.17 million; taxable-equivalent $20.37 million in Q1 2018 |
| Net interest margin | 5.66% annualized | 5.85% in Q1 2018 |
| Return on average assets / equity | 1.00% / 9.96% annualized | 1.04% / 11.05% in Q1 2018 |
| Loans, net of allowance | $1.042 billion | $1.028 billion at Dec. 31, 2018 |
| Deposits | $1.202 billion | $1.182 billion at Dec. 31, 2018 |
| Total borrowings | $161.8 million | $159.7 million at Dec. 31, 2018 |
| Total assets / equity | $1.549 billion / $154.9 million | $1.521 billion / $152.0 million at Dec. 31, 2018 |
| Cash flows | Operating +$11.8 million; investing −$9.4 million; financing +$20.1 million | Q1 2018: +$22.1 million; −$6.0 million; +$12.5 million, respectively |
Noninterest income was $7.10 million, up 10.2%, while noninterest expense rose 6.1% to $19.68 million. The provision for loan losses was $2.40 million, down from $3.30 million. The allowance was $33.59 million, or about 3.12% of total loans. Liquid assets were $243.1 million; reported available funding capacity was $294.4 million. C&F Bank’s total capital ratio was 14.7%, and its common equity tier 1 ratio was 13.4%.
Material changes and management commentary
- Net income declined about 3%, and EPS fell from $1.11 to $1.08. Net interest income fell as funding costs rose faster than asset yields: the cost of interest-bearing liabilities increased 29 basis points and net interest margin contracted 19 basis points year over year.
- Loans grew $13.5 million from year-end, led by construction lending and consumer finance. Deposits increased $20.5 million, principally due to $31.6 million of additional time deposits; savings and interest-bearing demand deposits declined $16.0 million.
- Consumer finance net income declined to $1.3 million from $1.5 million, with competitive pressure and a higher-quality, lower-yielding loan mix weighing on yields. Credit indicators improved: consumer finance net charge-offs were 3.79% annualized versus 4.69% a year earlier, and delinquencies fell to 2.66% from 4.76% at year-end.
- Mortgage banking net income increased to $567,000 from $435,000, mainly due to lower expenses; mortgage originations and loan-sale gains were lower year over year. Retail banking net income was approximately $2.3 million in both periods.
- Q1 noninterest income included approximately $1.0 million of unrealized gains related to the nonqualified deferred compensation plan, offset by additional compensation expense of approximately the same amount. This supported reported income lines but was substantially offset in expenses.
- Management cautioned that maintaining the current margin may be challenging because of time-deposit repricing, competition and lower-yield consumer finance growth, and declining accretion from acquired-loan purchase discounts. The filing gives no specific earnings or margin guidance.
Outlook, risks and contingencies
- Management cited sensitivity to interest rates, deposit costs and flows, economic conditions, loan demand and credit quality, real estate markets, competition—especially non-prime auto lending—and mortgage secondary-market demand. Cyber threats and reliance on third-party services were also identified as risks. No material changes to the risk factors in the 2018 Form 10-K were reported.
- The company expected adoption of the current expected credit loss standard (ASC 326) in 2020 to significantly affect financial reporting and potentially reduce retained earnings and regulatory capital; the effect had not been estimated.
- Loan commitments totaled $254.0 million and standby letters of credit $19.6 million. These are contingent exposures, not stated expected cash outflows. Mortgage loan-sale representations and warranties may also result in indemnification or repurchase claims; the filing does not provide a clear current reserve amount in the supplied text.
- The Corporation declared a $0.37 per-share dividend and repurchased 32,407 shares for $1.67 million in Q1. Its $5.0 million buyback authorization was scheduled to run through May 31, 2019, with approximately $2.2 million remaining at quarter-end.
- Leases recognized under the new accounting standard included $3.68 million of lease liabilities at quarter-end. The filing also disclosed $4.94 million of future payments for two executed property leases not yet recognized because control of the properties had not transferred.
Investor verification points
- Track deposit pricing and mix, funding costs, and whether net interest margin continues to compress.
- Review consumer finance loan yields, marine/RV growth, delinquencies, charge-offs and allowance adequacy.
- Assess the sustainability of noninterest income and expenses, including deferred-compensation valuation effects and mortgage production.
- Confirm the eventual ASC 326 allowance, retained-earnings and regulatory-capital impact when quantified.
- Monitor the buyback authorization’s expiration and remaining capacity, capital ratios, and contingent mortgage repurchase or indemnification exposure.