C&F Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Financial statements are unaudited. Amounts below are in millions unless stated otherwise.
Business context
C&F is a Virginia bank holding company operating through Retail Banking, Mortgage Banking and Consumer Finance, with smaller wealth-management and insurance activities. Its lending includes commercial and real-estate loans, residential mortgages and automobile finance.
Financial results and condition
| Metric | Q1 2016 | Q1 2015 or prior date |
|---|---|---|
| Interest income | $21.97 | $20.80 |
| Net interest income | $19.70 | $18.77 |
| Net interest margin, annualized, taxable-equivalent basis | 6.28% | 6.22% |
| Provision for loan losses | $4.60 | $3.52 |
| Noninterest income | $5.16 | $5.10 |
| Noninterest expense | $17.09 | $16.75 |
| Net income / diluted EPS | $2.42 / $0.70 | $2.65 / $0.77 |
| Annualized return on assets / equity | 0.69% / 7.33% | 0.79% / 8.52% |
| Total assets | $1,404.8 | $1,405.1 at Dec. 31, 2015 |
| Loans, net of allowance | $889.2 | $865.9 at Dec. 31, 2015 |
| Total deposits | $1,075.1 | $1,073.6 at Dec. 31, 2015 |
| Shareholders’ equity | $133.3 | $131.1 at Dec. 31, 2015 |
Cash and cash equivalents were $151.2 million at quarter-end, down $1.7 million since year-end. Operating cash flow was $25.1 million versus cash used of $6.7 million a year earlier; investing activities used $23.6 million and financing activities used $3.3 million. Management reported $273.5 million in liquid assets and $270.3 million of available borrowing capacity. Total borrowings, including trust preferred notes, were approximately $173.7 million, down from $177.3 million at year-end.
At March 31, the Corporation’s total capital ratio was 14.6%, Tier 1 risk-based ratio 13.3%, common equity Tier 1 ratio 10.9%, and Tier 1 leverage ratio 9.9%. The Bank’s corresponding ratios were 14.6%, 13.3%, 13.3% and 9.9%; both entities exceeded applicable minimum capital requirements.
Material changes and drivers
- Net income declined about 8% year over year. Higher net interest income and improved Mortgage Banking results were more than offset by the higher loan-loss provision, particularly in Consumer Finance.
- Loans grew $23.5 million from year-end, led by commercial and construction lending. Average loans were up $75.0 million year over year; loan growth helped net interest income, while average loan yield declined 26 basis points to 8.64%.
- Consumer Finance net income fell to $1.1 million from $1.7 million. Its provision rose to $4.6 million from $3.5 million, and its annualized net charge-off ratio increased to 6.19% from 5.05%. Management attributed pressure to purchased-portfolio losses and economic and competitive conditions affecting nonprime borrowers.
- Mortgage Banking net income improved to $322,000 from $47,000, supported by higher gains on loan sales and ancillary fees, despite originations declining to $104.0 million from $115.9 million.
- Retail Banking net income increased to $1.3 million from $1.2 million. Nonperforming assets were $6.8 million, down from $7.1 million at year-end; nonaccrual loans declined, while other real estate owned increased to $1.2 million. The newly constructed property primarily responsible for the increase was sold after quarter-end.
- The allowance for loan losses was $35.8 million, versus $35.6 million at year-end. Net charge-offs were $4.3 million, compared with $3.4 million in Q1 2015. Total past-due loans were 2.83% of loans at quarter-end, down from 6.22% at year-end.
- Available-for-sale securities were $216.3 million, down from $219.5 million at year-end. Unrealized gains on securities contributed to the increase in accumulated other comprehensive income and equity.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management’s stated priorities include profitable growth, increasing mortgage originations in existing markets, and deploying excess cash into earning assets.
- Management expects competition for loans and the low-rate environment to continue pressuring yields. It also cautioned that competition in automobile finance could constrain consumer-loan yields and growth. Higher future charge-offs could require increased provisions and reduce earnings; management considers the current allowance adequate.
- Key disclosed risks include interest-rate and securities-value changes, economic and real-estate conditions, loan demand and credit quality, used-car values, deposit flows, mortgage secondary-market demand and repurchase/indemnification claims, competition, regulation, and reliance on third-party services.
- Mortgage loan-sale agreements include representations and warranties that can result in loss claims or repurchase requests. The indemnification reserve was $2.4 million; no payments were made in the quarter. Mortgage forward sales contracts had a $101.2 million notional value and were used to hedge loans held for sale.
- Interest-rate swaps hedged $25.0 million of trust preferred notes; their fair value was a $713,000 liability. Securities with $90.2 million amortized cost were pledged at quarter-end.
- The $5.0 million share-repurchase authorization remained unused at March 31 and was authorized through May 2016. The quarter’s 3,525 shares purchased were employee tax-withholding shares, not program repurchases. A $0.32-per-share dividend was declared.
- On May 5, 2016, the Corporation entered a change-in-control agreement with CFO Jason E. Long. The filing describes potential severance and benefits upon specified qualifying termination after a change in control.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change in risk factors from the 2015 Form 10-K.
Important facts for investors to verify
- Whether Consumer Finance charge-offs and provision requirements stabilize, especially for the loan portfolio acquired in 2015.
- Credit migration and collateral quality in commercial real estate, construction and commercial business lending, alongside the adequacy of the allowance.
- Whether loan growth and deposit mix can sustain net interest income as rates, funding costs and competitive loan pricing change.
- Mortgage origination trends and potential repurchase or indemnification exposure under loan-sale agreements.
- Capital and liquidity capacity, including the status of the share-repurchase authorization after its May 2016 expiration and the impact of dividends or any future repurchases.