C&F Financial Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The fourth-quarter figures below are unaudited. C&F is a Virginia bank holding company operating retail banking, mortgage banking and non-prime auto finance businesses. Results include Central Virginia Bankshares (CVBK) from its October 1, 2013 acquisition date.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net interest income | $71.6 million | $66.9 million |
| Provision for loan losses | $15.1 million | $12.4 million |
| Noninterest income | $22.2 million | $20.6 million |
| Noninterest expense | $57.6 million | $51.0 million |
| Net income | $14.4 million | $16.4 million |
| Diluted earnings per share | $4.18 | $4.86 |
| Return on average assets / common equity | 1.35% / 13.39% | 1.71% / 17.05% |
| Net interest margin, taxable-equivalent | 7.44% | 7.85% |
Fourth-quarter 2013 net income was $2.9 million and diluted EPS was $0.81, compared with $3.9 million and $1.17 in Q4 2012.
At year-end, total assets were $1.312 billion, loans net of allowance were $785.5 million, deposits were $1.008 billion and shareholders’ equity was $112.9 million. Total borrowings, including trust preferred capital notes, were approximately $169.8 million. Cash and cash equivalents were $148.1 million; reported liquid assets, including nonpledged securities, totaled $216.4 million. Available borrowing capacity was $263.4 million. Operating cash flow was $63.6 million for 2013.
The allowance for loan losses was $34.9 million against $820.4 million of loans held for investment. Net charge-offs increased to $16.1 million from $10.2 million; the consolidated allowance was 4.25% of loans at year-end. C&F Bank’s nonperforming assets fell to $6.0 million from $17.7 million, while C&F Finance’s allowance ratio rose to 8.32% from 7.96%.
The Corporation’s capital ratios remained above then-applicable minimums: Tier 1 risk-based capital 13.5%, total risk-based capital 14.8% and Tier 1 leverage 8.9%. Both banks were classified as well capitalized. The annual common dividend was $1.16 per share, up from $1.08.
Material changes and unusual items
- CVBK was acquired on October 1 for approximately $4.2 million in aggregate consideration, including $846,000 for common shares and $3.35 million for Treasury-held preferred stock and warrants. The acquired entity contributed $615,000 of net income from acquisition through year-end. The purchase added approximately $365.0 million of assets at acquisition-date fair value and generated $5.9 million of goodwill; purchase accounting valuations remained preliminary.
- Total assets grew from $977.0 million to $1.312 billion, largely due to the acquisition. Year-end deposits increased from $686.2 million to $1.008 billion, also primarily acquisition-related.
- Net income declined 12% and diluted EPS fell from $4.86 to $4.18. Management cited $1.2 million of pretax acquisition transaction costs, lower consumer finance earnings as charge-offs rose, and lower mortgage production; these were partly offset by acquired earnings and improved C&F Bank credit quality.
- Mortgage originations decreased to $721.3 million from $840.1 million, mainly as higher mortgage rates reduced refinancing activity. Consumer Finance net income declined to $10.5 million from $12.6 million; its provision for loan losses increased to $14.0 million from $9.8 million.
- Cash flow from investing activities was $90.8 million, including the acquisition’s cash effects; the acquisition statement reported $59.8 million of acquired cash. Available-for-sale securities recorded a $5.0 million net decrease in other comprehensive income as rates rose.
Outlook, risks and contingencies
Management expected 2014 performance to face integration and expansion costs, continued sluggish mortgage demand, and elevated consumer-finance charge-offs. Retail loan growth and the ability to redeploy deposits into earning assets were uncertain; management cautioned that margin could be pressured if excess funds were invested in lower-yielding assets. Mortgage earnings were vulnerable to further rate increases and reduced refinancing. Auto-finance losses could remain elevated amid unemployment, lower repossession values and competitive pricing.
The CVBK/CVB integration and planned legal mergers were expected late in Q1 2014, subject to approvals. CVB remained subject to a 2010 regulatory written agreement restricting dividends and capital distributions; management anticipated its termination after the mergers. The Corporation said CVB was in substantial compliance.
Other key risks include commercial real estate and non-prime auto credit exposure, loan-loss and acquired-loan valuation estimates, potential mortgage loan repurchase or indemnification claims, interest-rate sensitivity, deposit competition, evolving consumer and capital regulations, and integration execution. The mortgage indemnification reserve was $2.4 million; management considered it adequate, but future claims could exceed estimates. Ordinary-course litigation was not expected by management to have a material adverse effect.
Basel III capital requirements were scheduled to begin implementation in 2015, with certain provisions phased in through 2019. Management expected to remain above well-capitalized requirements based on year-end 2013 balances, while noting that future rules could affect growth, earnings retention or dividends. The company reported that its financial statements received an unqualified audit opinion and internal controls were effective; the CVBK acquisition was excluded from the internal-control assessment and auditor’s control audit.
Important facts for investors to verify
- Final CVBK acquisition-date fair values, acquired-loan cash-flow assumptions, goodwill and expected integration savings and costs.
- Whether consumer-finance delinquencies, charge-offs and repossession values improve, and whether the $23.1 million segment allowance remains sufficient.
- Mortgage origination trends, secondary-market access and adequacy of the $2.4 million indemnification reserve.
- Post-merger status of CVB’s regulatory written agreement and completion of the planned mergers.
- Liquidity and funding after deployment of acquired excess cash, including the durability of deposit balances and available borrowing facilities.
- Effects of interest-rate changes on net interest margin, securities values and capital; management’s model estimated net interest income down 3.80% under an immediate 200-basis-point decline and up 0.93% under a 200-basis-point increase.