C&F Financial Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Comparisons are to the corresponding 2015 periods unless otherwise noted. The company is a Virginia bank holding company operating retail banking, mortgage banking and consumer finance businesses. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial results and key metrics
- Third quarter: Net interest income was $20.45 million, noninterest income $6.73 million, provision for loan losses $4.93 million, and noninterest expense $17.93 million. Net income was $3.14 million, down from $3.48 million; diluted EPS was $0.91 versus $1.02.
- First nine months: Net interest income was $60.23 million, noninterest income $19.61 million, provision for loan losses $13.13 million, and noninterest expense $52.67 million. Net income was $10.31 million, up from $10.22 million; diluted EPS was $2.99 versus $3.01.
- Profitability and margin: Annualized ROE and ROA were 9.13% and 0.90% in Q3 (10.87% and 1.01% in Q3 2015); for nine months, 10.19% and 0.98% (10.84% and 1.00%). Taxable-equivalent net interest margin was 6.37% in Q3 versus 6.58%, and 6.34% for nine months versus 6.35%.
- Balance sheet at September 30: Assets were $1.425 billion, up $19.9 million from December 31, 2015. Loans held for investment were $972.7 million, up $71.2 million; loans held for sale were $66.7 million. Deposits were $1.089 billion, up $15.5 million. Shareholders’ equity was $139.7 million, compared with $131.1 million at year-end.
- Funding and liquidity: Cash and cash equivalents were $89.0 million, down $63.9 million from year-end. Liquid assets, including nonpledged available-for-sale securities, totaled $207.4 million versus $277.3 million. Management said excess liquidity was deployed to fund loan growth and believes liquidity is sufficient. Reported borrowing balances totaled $167.2 million, comprising short- and long-term borrowings; trust preferred capital notes were an additional $25.2 million.
- Cash flow, nine months: Operating activities provided $2.2 million, investing activities used $68.4 million, and financing activities provided $2.3 million. Cash and cash equivalents decreased $63.9 million to $89.0 million.
- Capital: At September 30, the Corporation’s total risk-based capital ratio was 13.9%, Tier 1 risk-based ratio 12.6%, CET1 ratio 10.5%, and Tier 1 leverage ratio 10.3%. The Bank’s corresponding ratios were 13.9%, 12.6%, 12.6%, and 10.3%. Both exceeded applicable well-capitalized thresholds. The company declared $0.96 per share in dividends for the first nine months and had $5 million authorized for repurchases through May 2017.
Changes versus comparable periods
- Q3 net income declined 9.6%, primarily reflecting lower Consumer Finance earnings; higher Retail Banking and Mortgage Banking earnings partly offset the decline. Nine-month net income rose slightly, but EPS declined as weighted-average shares increased.
- Reported Q3 net interest income edged down, while nine-month net interest income increased. Loan growth supported interest income, but lower loan and securities yields pressured margins. The taxable-equivalent Q3 margin fell 21 basis points year over year.
- Noninterest income rose 40.0% in Q3 and 27.2% for nine months, supported by mortgage loan-sale gains and fees. Noninterest expense rose 10.3% and 6.1%, respectively, including higher staffing and operating costs.
- Consumer Finance net income fell to $0.88 million in Q3 from $2.07 million, and to $3.65 million for nine months from $6.29 million. Higher provision expense and margin compression were key factors.
- Asset quality improved in parts of the portfolio: Retail Banking nonperforming assets declined to $4.8 million from $7.1 million at year-end. Total loans 30 or more days past due were $20.7 million at September 30, versus $24.7 million at year-end. Consumer Finance delinquencies improved, but its charge-off ratio increased.
Management commentary, outlook and risks
- Management highlighted continued Retail Banking loan growth, mortgage production expansion, and Consumer Finance use of a scorecard model and higher-credit-quality loan purchases. Mortgage operations were expanding in Chesapeake, Virginia, and establishing a branch in North Carolina’s Outer Banks. No quantified earnings or financial guidance was provided.
- Consumer Finance’s annualized net charge-off ratio increased to 6.05% in Q3 from 5.53%; for nine months it was 5.28% versus 4.66%. Its allowance was $25.4 million, or 8.35% of segment loans, versus 8.21% at year-end. Management considers the allowance adequate but cautioned that higher future charge-offs could require additional provisions and reduce earnings.
- Mortgage loan originations rose to $205.3 million in Q3 from $146.6 million and to $485.4 million for nine months from $424.0 million. Mortgage loan sales carry representations and warranties and potential repurchase or indemnification exposure. In Q3, the company settled known and unknown indemnification obligations with one counterparty for loans sold before August 2016; the indemnification allowance ended at $2.26 million.
- Nine-month earnings included identified second-quarter after-tax items: $237,000 from a debit-card contract amendment, $493,000 associated with the Bank’s BOLI program, and a $92,000 gain on sale of a Bank-owned property.
- Key stated risks include interest-rate and securities-value changes; economic and real-estate conditions; loan demand, credit quality and collateral values; used-auto values and nonprime auto finance competition; mortgage secondary-market demand and indemnification claims; regulation; deposit flows; and reliance on third-party service providers. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether higher Consumer Finance charge-offs persist and whether its allowance remains adequate as the portfolio grows.
- Whether loan and deposit growth can sustain earnings while margins remain under pressure from competitive pricing and lower yields.
- Whether mortgage origination volumes, gain-on-sale income and expansion plans are sustainable, and whether indemnification exposure changes.
- How the deployment of cash into loans affects liquidity, funding costs and capacity under available borrowing arrangements.
- The contribution and repeatability of the second-quarter one-time revenue items, and the effects of acquisition-related loan accretion on reported results.