C&F Financial Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
C&F Financial is a Virginia bank holding company operating through retail banking, mortgage banking and non-prime automobile consumer finance. Its 2015 results include the acquired Central Virginia Bank business; the merger was completed in March 2014. At year-end, the company had $1.405 billion in assets, 24 Virginia bank branches and 598 full-time-equivalent employees.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income (GAAP) | $78.4 million | $78.0 million |
| Net interest margin (taxable-equivalent) | 6.35% | 6.55% |
| Provision for loan losses | $15.5 million | $16.3 million |
| Noninterest income | $20.7 million | $19.4 million |
| Noninterest expense | $66.2 million | $63.6 million |
| Net income | $12.5 million | $12.3 million |
| Diluted EPS | $3.68 | $3.59 |
| Return on average assets / common equity | 0.92% / 9.87% | 0.93% / 10.32% |
| Total assets | $1.405 billion | $1.338 billion |
| Loans, net of allowance | $865.9 million | $800.2 million |
| Deposits | $1.074 billion | $1.026 billion |
| Shareholders’ equity | $131.1 million | $123.6 million |
Net interest income on a taxable-equivalent basis was $80.6 million, up from $80.3 million. Average earning assets grew, but the margin fell 20 basis points as loan and securities yields declined. The year-end allowance for loan losses was $35.6 million; net charge-offs were $15.5 million. Retail Banking nonperforming assets rose to $7.1 million from $5.5 million.
Operating cash flow was $15.3 million, compared with $34.2 million in 2014. Investing activities used $83.7 million, financing activities provided $53.7 million, and cash and cash equivalents declined $14.7 million to $152.9 million. Management reported $277.3 million of liquid assets and $265.0 million of available borrowing capacity. Deposits were the primary funding source; year-end borrowings, including trust preferred capital notes, totaled approximately $177.3 million.
Regulatory capital remained above minimums: consolidated CET1 was 11.2%, Tier 1 risk-based capital 13.7%, total risk-based capital 15.0%, and Tier 1 leverage 10.0%. The Bank was classified as well capitalized.
Material changes versus the prior comparable period
- Net income increased 1.5% and diluted EPS rose from $3.59 to $3.68, while ROA and ROE edged lower as average assets and equity grew faster than earnings.
- Loans increased $65.7 million, led by $49.2 million growth in commercial, financial and agricultural lending. Deposits increased $47.5 million, principally in non-term accounts.
- Mortgage originations rose to $549.3 million from $478.6 million; gains on loan sales increased to $6.3 million from $5.1 million. Mortgage Banking net income improved to $677,000 from $411,000.
- Consumer Finance net income increased to $7.2 million from $6.9 million, helped by income from a purchased loan portfolio and lower provision expense. Its net charge-off ratio nevertheless increased to 5.50% from 5.39%.
- Noninterest expense rose 4.1%, mainly due to personnel, compliance, collection and technology costs. The net accretion from CVB acquisition accounting declined to $2.0 million pretax from $3.0 million.
- Fourth-quarter net income was $2.3 million, or $0.68 per diluted share, versus $2.4 million, or $0.71, in fourth-quarter 2014.
Outlook, management commentary, risks and unusual items
- Management gave no numerical earnings or revenue guidance for 2016. It expects lower CVB-related accretion income, continued pressure on retail banking margins, and mortgage results sensitive to interest rates, housing activity and loan demand.
- Management plans to pursue retail loan growth and e-commerce investment. Mortgage Banking faces fixed infrastructure and rising compliance costs, including implementation of the CFPB’s integrated mortgage disclosure rules. Consumer Finance faces intense competition and could see elevated delinquencies and charge-offs; management noted record dealer loan purchases in fourth-quarter 2015 but difficult expected organic growth.
- Credit concentration is material: approximately 39% of loans were commercial, financial and agricultural, and 32% were non-prime automobile finance loans. Used-car values, borrower defaults, collateral values and the adequacy of reserves are key risks.
- Interest-rate exposure remains important. The filing’s 12-month simulation estimated net interest income would fall 3.51% under an immediate 200-basis-point rate decline and rise 1.89% under a 200-basis-point increase. Economic value of equity was estimated to fall 12.36% in the down-rate scenario and rise 3.91% in the up-rate scenario.
- Mortgage loan sales carry representation-and-warranty and indemnification exposure. The reserve was $2.36 million; no indemnification payments were made in 2015. Ordinary-course litigation was not expected by management to have a material adverse effect.
- A $19.6 million consumer loan portfolio was purchased for $16.3 million, creating a $3.3 million discount to be accreted into income. The 2015 adoption of affordable-housing investment accounting changed presentation of amortization within income taxes; the filing says the adoption did not materially affect the financial statements.
- Common dividends declared were $1.22 per share for 2015, up from $1.19. A $5 million repurchase authorization remained unused at year-end. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and financial reporting controls were effective.
Most important facts for investors to verify
- Whether loan growth, particularly commercial real estate and non-prime auto lending, is accompanied by stable credit quality and adequate loss reserves.
- Whether Consumer Finance charge-offs, delinquencies and used-vehicle collateral values worsen, and how the acquired portfolio’s discount accretion offsets losses.
- Whether core net interest margin can withstand lower acquisition accretion, deposit repricing and changes in market rates.
- Whether mortgage origination volume and gains can sustain profitability amid rate sensitivity, compliance costs and secondary-market repurchase claims.
- Whether liquidity, funding costs and capital remain adequate as loans grow and borrowing facilities mature or reprice.