C&F Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless otherwise noted. Balance-sheet comparisons are with December 31, 2014. Amounts are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
The Virginia-based bank holding company operates retail banking, mortgage banking and consumer finance businesses. Its subsidiaries include C&F Bank, a mortgage lender and an indirect automobile finance company. Consumer finance focuses on non-prime auto lending.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Total operating income | $25.9 million | $25.9 million in Q1 2014 |
| Net interest income | $18.8 million reported; $19.3 million taxable-equivalent | $19.1 million reported; $19.7 million taxable-equivalent |
| Net interest margin | 6.22% annualized, taxable-equivalent | 6.53% |
| Provision for loan losses | $3.5 million | $3.5 million |
| Noninterest income | $5.1 million | $4.7 million |
| Noninterest expense | $16.8 million | $16.1 million |
| Net income | $2.6 million; diluted EPS $0.77 | $2.9 million; diluted EPS $0.83 |
| Annualized return on assets / equity | 0.79% / 8.52% | 0.88% / 9.96% |
| Assets | $1.364 billion | $1.338 billion at December 31, 2014 |
| Loans held for investment, gross | $843.9 million | $835.8 million |
| Deposits | $1.052 billion | $1.026 billion |
| Borrowings, including trust preferred notes | $165.7 million | $167.0 million |
| Shareholders’ equity | $124.3 million | $123.6 million |
Cash flow: Operating activities used $6.7 million, versus providing $12.1 million in Q1 2014; investing activities used $9.7 million, versus providing $10.7 million. Financing activities provided $22.2 million. Cash and cash equivalents increased $5.8 million to $173.4 million. The operating cash outflow included mortgage loan originations exceeding loan-sale proceeds during the quarter.
Liquidity and capital: Management reported $281.1 million in liquid assets and $281.4 million in available funding capacity at March 31. The corporation’s total risk-based capital ratio was 14.6%; the Bank’s was 14.8%. The Bank’s common equity tier 1 ratio was 13.5%. The company reported that it remained well capitalized under applicable standards.
Material changes and management commentary
- Net income declined about 9% year over year. Management attributed the decline principally to lower Consumer Finance earnings, partly offset by improved Retail Banking and Mortgage Banking results.
- Net interest margin fell 31 basis points. Lower loan and securities yields more than offset lower funding costs; management cited persistent low rates and competitive loan pricing.
- Consumer Finance net income fell to $1.7 million from $2.1 million. Its loan yield declined 57 basis points, while personnel and operating costs rose. Annualized net charge-offs were 5.05%, compared with 5.01%; its allowance was 8.67% of loans.
- Mortgage originations increased to $115.9 million from $91.4 million, lifting loan-sale gains to $1.6 million from $1.2 million. Management said profitability at current volumes remained challenging given the segment’s fixed infrastructure costs.
- Retail Banking net income increased to $1.2 million from $984,000, aided by lower deposit costs and integration-related expense savings. The company recorded $738,000 of pretax acquisition-accounting accretion, compared with $820,000.
- Gross loans past due 30 days or more totaled $12.3 million, down from $19.5 million at year-end. Nonaccrual loans were $5.6 million in the financial statements; management reported $4.9 million for Retail Banking, up from $4.7 million at year-end. Total nonperforming assets were $5.7 million, versus $5.5 million.
- The allowance for loan losses was $35.7 million. Net charge-offs were $3.4 million for the quarter; Consumer Finance accounted for most charge-offs. Management judged the allowance adequate but warned that higher future charge-offs could require additional provisions.
- Deposits grew $25.8 million, largely from a $27.9 million increase in noninterest-bearing demand deposits; time deposits declined $6.8 million. Total borrowings decreased $1.4 million.
- The company repurchased 38,759 shares under its authorized program for $1.4 million, at a weighted average price of $35.09. Approximately $3.5 million remained authorized through May 2015. It declared a $0.30-per-share dividend.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management expects competition for loans and the low-rate environment to continue to pressure Retail Banking yields; automobile-finance competition may constrain Consumer Finance growth and yields.
- Key risks include interest-rate and economic changes, credit quality and collateral values, consumer auto resale prices, deposit flows, mortgage-market demand and indemnification claims, regulatory changes, competition, and the ability to realize benefits from the CVB acquisition.
- C&F Mortgage had a $2.1 million indemnification reserve. Loan-sale agreements include representations and warranties; some recourse for fraud, borrower misrepresentation or underwriting errors has no stated time limit.
- Mortgage forward-sale contracts had a $104.4 million notional value; the filing says each mortgage loan held for sale was subject to a forward-sale agreement. Interest-rate swaps hedged $25.0 million of trust preferred notes.
- The company adopted affordable-housing investment accounting guidance retrospectively in Q1. Amortization is now included in income tax expense; the adoption was reported as not material. Affordable-housing investments had a $2.75 million carrying value and $1.26 million of additional capital commitments.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to risk factors or off-balance-sheet arrangements from the 2014 Form 10-K.
Important facts for investors to verify
- Whether Consumer Finance charge-offs, loan yields and competitive pressures improve or worsen, and whether its allowance remains adequate.
- Whether loan growth and asset yields can offset continued pressure on net interest margin and the deployment of excess cash.
- Trends in nonperforming assets, criticized commercial loans, TDRs and collateral values.
- Mortgage origination volumes, sale margins and potential repurchase or indemnification claims.
- Deposit retention, liquidity availability and capital ratios, including the impact of dividends and remaining share repurchases.
- How much of the quarter’s results reflects recurring business performance versus CVB acquisition accretion and other period-specific effects.