C&F Financial Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2018; comparative results are for the three and nine months ended September 30, 2017. C&F is a Virginia bank holding company with Retail Banking, Mortgage Banking, and Consumer Finance segments. Dollar amounts below are in millions unless otherwise indicated.
Financial results and position
- Third-quarter earnings: Net income was $5.10 million, or $1.46 per diluted share, versus $3.02 million, or $0.87 per share, a year earlier. For the first nine months, net income was $14.06 million, or $4.02 per share, versus $9.89 million, or $2.84 per share.
- Income and expenses: Third-quarter net interest income was $20.89 million, up 3.3%; noninterest income was $6.63 million, down 3.1%. Total noninterest expense increased 1.6% to $18.67 million, while provision for loan losses declined to $2.40 million from $4.44 million. Nine-month net interest income was $61.04 million, up 1.7%; noninterest income was $20.31 million, down 1.1%; expenses were $55.97 million, up 2.2%; and loan-loss provision was $7.70 million, down from $11.94 million.
- Profitability and margins: Annualized return on equity and assets were 13.81% and 1.35% for Q3, compared with 8.26% and 0.82%. For the first nine months, they were 13.02% and 1.24%, versus 9.25% and 0.91%. Taxable-equivalent net interest margin narrowed to 5.88% from 5.98% for Q3 and to 5.81% from 6.05% for nine months.
- Balance sheet and funding: Total assets were $1.50 billion, down $9.5 million from year-end 2017. Loans held for investment were $1.04 billion, up $9.6 million; deposits were $1.16 billion, down $13.0 million. Borrowings totaled $159.8 million, down from $167.9 million. Shareholders’ equity was $149.7 million, up from $141.7 million.
- Liquidity and cash flow: Cash and cash equivalents were $109.1 million at quarter-end, down $10.3 million from year-end. For the first nine months, operating cash flow was $36.2 million, investing cash flow was negative $21.7 million, and financing cash flow was negative $24.7 million. Management reported $234.4 million of liquid assets and $290.9 million of available capacity under listed funding arrangements.
- Credit and capital: Retail Banking nonperforming assets were $2.9 million, down from $5.4 million at year-end, largely following a partial repayment on one commercial relationship. Consumer Finance’s nine-month annualized net charge-off ratio improved to 3.84% from 5.49%; delinquent loans were 4.30% of loans versus 5.17% at year-end. Its allowance was $23.6 million, or 7.86% of segment loans. At September 30, the Bank’s total capital ratio was 15.2%, Tier 1 ratio 13.9%, and common equity Tier 1 ratio 13.9%.
Material changes and management commentary
- Earnings improved across all three principal segments. Consumer Finance benefited from lower provision expense, fewer charge-offs, improved portfolio credit quality, and lower operating costs. Retail Banking benefited from higher loan income, yields on variable-rate loans, and cash yields.
- Mortgage Banking net income rose modestly, but mortgage production declined 7.7% in Q3 and 3.3% for the first nine months year over year; gains on loan sales also fell.
- Income recognized on acquired purchased-credit-impaired loans increased to $1.5 million in Q3 and $2.9 million for nine months, compared with $0.5 million and $2.2 million, respectively, in 2017. Management attributed this to improved expected timing and amount of collections.
- Management cautioned that maintaining current net interest margin may be challenging, citing potential deposit repricing, higher short-term borrowing costs, competition and lower yields in consumer finance, and the possibility that acquired-loan accretion may not persist at current levels.
- Consumer Finance began buying prime boat and RV loan contracts in 2018. Management expects these loans to have lower credit costs than non-prime auto loans, while acknowledging they may contribute to margin compression.
- Available-for-sale securities had $4.50 million of gross unrealized losses at September 30, versus $1.36 million at year-end 2017. The filing attributes the increased losses primarily to rising interest rates and states that no other-than-temporary impairment was recognized.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management describes expected loan growth but highlights pressure on net interest margin and uncertainty around future interest rates, deposits, and acquired-loan accretion.
- Key risks include credit deterioration—particularly in consumer finance and commercial real estate—interest-rate and securities-value changes, deposit outflows or higher funding costs, mortgage-market competition and loan-sale indemnification claims, regulatory changes, cyber threats, and reliance on third-party service providers.
- Off-balance-sheet exposures included $244.5 million of loan commitments and $15.4 million of standby letters of credit. These are contractual amounts and do not necessarily represent expected funding or losses. Mortgage loan-sale representations and warranties remain a contingency; the indemnification reserve was $2.54 million.
- The corporation had $25 million of cash-flow hedges on trust preferred notes, with maturities extending to 2019 and 2020. The filing says the corporation expected to qualify as a small bank holding company under an interim rule, which would remove its holding-company regulatory capital requirements; this depended on the applicable rule and status.
- The board had authorized up to $5 million in share repurchases through May 31, 2019; none had been made through September 30. The company declared $1.04 per share in dividends during the first nine months. A roughly $3 million lease liability was estimated on adoption of the new lease standard in January 2019. The impact of the forthcoming expected-credit-loss standard had not yet been determined.
Important facts for investors to verify
- Whether consumer-finance charge-offs and delinquencies continue improving, and whether the allowance remains adequate as the boat and RV portfolio grows.
- Whether deposit costs and borrowing rates further compress net interest margin, and how much earnings depend on acquired-loan accretion.
- Whether the increase in securities unrealized losses affects capital, liquidity, or the ability to hold securities until recovery.
- Mortgage production trends and any future repurchase or indemnification claims under loan-sale warranties.
- The company’s final regulatory treatment as a small bank holding company and the eventual balance-sheet effect of lease and expected-credit-loss accounting standards.