C&F Financial Corporation — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it is not a standalone fourth-quarter filing. C&F is a Virginia bank holding company with three principal businesses: retail banking, residential mortgage banking, and non-prime auto finance.
Financial performance and condition
| Metric | FY2017 / Dec. 31, 2017 | Comparable period |
|---|---|---|
| Total assets | $1.509 billion | $1.452 billion at year-end 2016 |
| Loans, net | $992.1 million | $962.7 million at year-end 2016 |
| Deposits | $1.171 billion | $1.120 billion at year-end 2016 |
| Net interest income (GAAP) | $80.0 million | $80.5 million in 2016 |
| Net interest margin | 5.99% taxable-equivalent | 6.30% in 2016 |
| Provision for loan losses | $16.4 million | $18.0 million in 2016 |
| Noninterest income / expense | $26.7 million / $72.3 million | $25.6 million / $70.1 million in 2016 |
| Income before taxes | $18.0 million | $17.9 million in 2016 |
| Net income / diluted EPS | $6.6 million / $1.88 | $13.5 million / $3.89 in 2016 |
| Net cash from operating activities | $26.6 million | $27.2 million in 2016 |
| Cash and cash equivalents | $119.4 million | $103.2 million at year-end 2016 |
| Shareholders’ equity | $141.7 million | $139.2 million at year-end 2016 |
Debt and liquidity. At year-end, short-term borrowings were $20.6 million, long-term borrowings $122.0 million, and trust preferred capital notes $25.2 million. The company reported $219.1 million of liquid assets and $270.4 million of available borrowing capacity. Management stated liquidity was sufficient for operating needs and contractual obligations.
Capital and credit. The Corporation’s CET1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 11.1%, 13.2%, 14.4%, and 10.5%, respectively; the Bank was categorized as well capitalized. Total allowance for loan losses was $35.7 million, against $22.4 million in charge-offs and $4.6 million in recoveries. Commercial, financial and agricultural loans were 42.6% of the portfolio; non-prime auto loans were 28.4%.
Changes versus 2016
- Reported net income fell by about half, primarily because the Tax Cuts and Jobs Act required a $6.6 million one-time reduction in the value of the net deferred tax asset, recorded as tax expense in Q4. Excluding that item, management reported adjusted net income of $13.2 million and diluted EPS of $3.79, versus reported 2016 net income of $13.5 million and diluted EPS of $3.89.
- Net interest margin declined 31 basis points as asset yields fell and funding costs rose. Average loans grew, driven mainly by retail commercial lending; consumer finance loans declined.
- Noninterest income increased 4.3%, supported by mortgage production and wealth management. Noninterest expense increased 3.1%, reflecting personnel, technology, and expansion costs.
- Mortgage originations rose 10.4% to $744.8 million. Consumer Finance net income declined to $2.3 million from $4.5 million; its net charge-off ratio rose to 5.82% from 5.55%.
- Retail Banking nonperforming assets increased to $5.4 million from $4.4 million, including a restructured commercial relationship. Total TDRs rose to $10.9 million from $5.8 million.
Outlook, commentary, risks, and unusual items
Management expects the lower 21% federal corporate tax rate to benefit results beginning in 2018. It also anticipates lower accretion from the CVB acquisition, continued loan growth focus in retail banking, and pressure on margins from deposit repricing and funding costs. Mortgage results depend on rates, housing activity, and loan demand; rising mortgage rates could reduce originations. Consumer Finance faces intense competition, lower yields, and higher variable borrowing costs; management expects growth to remain difficult and plans to expand into prime boat and recreational-vehicle lending.
Key risks include interest-rate sensitivity, commercial real estate and construction exposures, non-prime auto credit and used-car collateral values, competition for loans and deposits, mortgage investor repurchase or indemnification claims, changing regulation, cybersecurity and third-party service-provider risks, and local economic conditions. The company disclosed $227.5 million of unused loan commitments and $15.5 million of standby letters of credit. Mortgage loan sale agreements include representations and warranties; no indemnification payments were made in 2017, and the reserve was $2.5 million at year-end. Ordinary-course litigation was not expected by management to have a material adverse effect.
The 2017 Q4 unaudited results showed a net loss of $3.3 million, or $0.95 per diluted share, despite $4.1 million of pretax income, reflecting the tax-related deferred asset revaluation. Auditors issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Investor verification points
- Review the $6.6 million tax remeasurement, the adjusted earnings reconciliation, and the expected timing and amount of future tax-rate benefits.
- Track net interest margin and the pace at which deposits and variable-rate borrowings reprice relative to loans and securities.
- Assess the $3.8 million restructured commercial relationship, growth in TDRs, criticized commercial credits, and allowance adequacy.
- Monitor consumer auto charge-offs, delinquency and deferral trends, repossession values, and the performance of the scorecard-based underwriting strategy.
- Verify mortgage production, gain-on-sale economics, fixed-cost leverage, and any developments in investor repurchase or indemnification claims.
- Confirm liquidity availability, capital-buffer headroom, and execution and returns from planned lending, digital, and market-expansion initiatives.