C&F Financial Corporation — Q1 2018 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. The Virginia-based bank holding company operates retail banking, mortgage banking and consumer finance businesses. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total operating income | $29.19 | $28.29 |
| Net interest income, reported | $20.17 | $19.75 |
| Provision for loan losses | $3.30 | $4.40 |
| Noninterest income | $6.45 | $6.27 |
| Noninterest expense | $18.54 | $17.97 |
| Income before taxes | $4.78 | $3.65 |
| Net income | $3.89 | $2.73 |
| Diluted earnings per share | $1.11 | $0.78 |
| Annualized ROA / ROE | 1.04% / 11.05% | 0.76% / 7.86% |
| Net interest margin, annualized | 5.85% | 6.09% |
| Net cash provided by operating activities | $22.15 | $16.52 |
- Net income rose about 43%, reflecting lower loan-loss provision, higher net interest income and lower effective taxes. The effective tax rate was 18.5%, versus 25.2%, following the federal corporate tax-rate reduction.
- On a taxable-equivalent basis, net interest income was $20.37 million versus $20.21 million. Net interest margin fell 24 basis points: asset yields declined 18 basis points while funding costs rose 9 basis points. Average earning assets grew $66.7 million.
- Net interest margin is not the same as the simple reported net-interest-income comparison; the filing attributes the margin decline mainly to lower loan and securities yields and higher liability costs.
Financial position, liquidity and capital
- Total assets were $1.525 billion, up $15.9 million from year-end. Cash and cash equivalents were $148.0 million; loans held for investment totaled $1.028 billion gross ($992.5 million net of allowance); securities available for sale were $218.4 million.
- Deposits were $1.186 billion, up $14.7 million from year-end. Noninterest-bearing demand deposits rose $19.5 million and time deposits rose $6.4 million, partly offset by an $11.2 million decline in savings and interest-bearing demand deposits. Brokered money-market deposits were $3.1 million.
- Borrowings totaled $167.0 million: $19.7 million short-term, $122.0 million long-term and $25.2 million trust preferred capital notes. Total shareholders’ equity was $142.7 million, versus $141.7 million at year-end.
- Liquid assets were $256.7 million, up from $219.1 million at year-end. Reported borrowing capacity was $401.6 million, with $279.6 million available. Management said liquidity was sufficient for operating needs and contractual obligations.
- At March 31, the Corporation’s total risk-based capital ratio was 14.6%, CET1 was 11.2%, and Tier 1 leverage was 10.5%. The Bank’s respective ratios were 14.5%, 13.2% and 10.5%; both exceeded applicable capital conservation buffer requirements.
- Operating cash flow increased year over year to $22.1 million. Cash increased $28.6 million during the quarter, ending at $148.0 million.
Material changes and business performance
- Retail banking: Segment net income was $2.31 million, up from $1.82 million. Management cited loan growth, higher acquisition-accounting accretion, lower provision and the lower tax rate; technology, product and marketing costs partly offset improvement.
- Mortgage banking: Segment net income was $435,000, versus $297,000. Loan production rose 2.0% and sales margins improved; gains on loan sales were $2.24 million, compared with $1.94 million.
- Consumer finance: Segment net income was $1.50 million, versus $942,000, primarily due to a $1.0 million lower provision and lower operating costs. Average consumer finance loans declined 2.3% year over year amid competition.
- Total noninterest expense increased 3.2%, including higher technology, data-processing and marketing expenses, as well as costs associated with a new Charlottesville branch and commercial lending programs.
- Shareholders’ equity increased despite a $1.84 million other comprehensive loss, principally reflecting the decline in fair value of available-for-sale securities. The declared quarterly dividend was $0.34 per share, versus $0.33 in Q1 2017.
Asset quality, outlook and risks
- The allowance for loan losses was $35.6 million, down slightly from $35.7 million at year-end; the allowance was 1.48% of loans excluding purchased credit-impaired loans. Net charge-offs were $3.43 million, down from $4.73 million a year earlier.
- Retail-banking nonperforming assets were $3.9 million, down from $5.4 million at year-end, mainly after partial repayment of a commercial relationship. Total nonaccrual loans were $4.29 million, versus $6.08 million at year-end.
- Consumer finance annualized net charge-offs were 4.69%, compared with 6.07% in Q1 2017 and 6.87% in Q4 2017. Delinquent consumer finance loans declined to 3.31% of the portfolio from 5.17% at year-end. Management viewed the quarter’s credit indicators as improved but warned that higher future charge-offs or portfolio growth could require a larger allowance and reduce earnings.
- The company began expanding indirect lending to include prime boat and RV contracts. These lower-yielding loans may compress margins, though management expects lower credit risk and loss provisions than in non-prime auto lending.
- Management cautioned that maintaining the current net interest margin may be challenging due to potential increases in deposit and variable-rate borrowing costs, competition in consumer auto lending, and growth in lower-yielding, higher-credit-quality loans. No specific earnings or margin guidance was provided.
- Available-for-sale securities had $3.27 million of gross unrealized losses at quarter-end, versus $1.36 million at year-end; management attributed the increase chiefly to rising interest rates and did not recognize an other-than-temporary impairment. The securities portfolio’s fair value was $218.4 million against $220.1 million amortized cost.
- Mortgage loan sales carry representation-and-warranty and repurchase exposure. The indemnification reserve was $2.53 million; management said it adequately covered claims during the quarter, while noting the estimates are subjective. Interest-rate changes, credit quality, competition, real estate and auto markets, regulation, and reliance on third parties are among the disclosed risks.
- After quarter-end, on April 18, the company reauthorized a share repurchase program for up to $5.0 million through May 31, 2019. No shares were bought under the program in Q1; shares withheld for employee tax obligations were not program repurchases.
Most important facts for investors to verify
- Whether improved consumer-finance delinquency and charge-off trends persist, and whether the $35.6 million loan-loss allowance remains adequate.
- Whether net interest margin pressure accelerates as rates, deposit pricing and consumer-finance funding costs change.
- The extent to which loan growth and the new boat/RV program affect yields, credit losses and overall portfolio mix.
- Whether unrealized securities losses remain temporary and whether they affect reported equity or regulatory capital.
- Future mortgage production, sale margins and indemnification claims, alongside the impact of technology and expansion spending on expenses.
- Actual use of the reauthorized repurchase authority and the sustainability of the $0.34 quarterly dividend.