C&F Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Financial statement amounts are in U.S. dollars; amounts below are shown in millions unless noted. C&F operates retail banking, mortgage banking and consumer finance businesses.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net interest income | $20.6 | $20.0 | $40.3 | $40.2 |
| Provision for loan losses | $1.8 | $2.0 | $4.2 | $5.3 |
| Noninterest income | $8.2 | $7.2 | $15.3 | $13.7 |
| Noninterest expense | $19.5 | $18.8 | $39.2 | $37.3 |
| Net income attributable to C&F | $5.8 | $5.1 | $9.6 | $9.0 |
| Diluted earnings per share | $1.69 | $1.45 | $2.77 | $2.56 |
- Q2 annualized return on average assets was 1.51% and return on average equity was 15.07%, versus 1.34% and 14.16%, respectively, a year earlier. First-half figures were 1.26% and 12.54%, versus 1.19% and 12.62%.
- Taxable-equivalent net interest margin was 5.75% in Q2, up 6 basis points year over year; first-half margin was 5.71%, down 6 basis points. First-half interest expense rose faster than interest income, leaving reported net interest income nearly flat.
- Total assets were $1.568 billion, up $46.6 million from year-end. Loans held for investment were $1.090 billion before allowance, up $28.2 million; loans held for sale rose to $89.2 million from $41.9 million.
- Deposits were $1.210 billion, up $28.5 million. Short- and long-term borrowings totaled $136.4 million, with $25.3 million of trust preferred capital notes; total borrowings including those notes were approximately $161.6 million.
- Cash and cash equivalents were $94.7 million, down $20.4 million from year-end. Management reported liquid assets of $198.2 million, including nonpledged securities, and $297.7 million of additional funding capacity under listed facilities.
- First-half operating cash flow was negative $29.6 million, versus positive $15.5 million in 2018. Mortgage loan originations held for sale were $385.6 million and sales proceeds were $342.5 million. Investing cash flow was negative $15.8 million; financing cash flow was positive $25.0 million.
- Total equity was $159.4 million, up from $152.0 million at year-end. C&F repurchased $3.3 million of shares in the first half and declared dividends of $0.74 per share.
Material changes and segment performance
- Retail banking: Q2 net income increased to $3.1 million from $2.4 million; first-half income rose to $5.4 million from $4.8 million. Loan growth, higher yields and additional interest recognized on acquired credit-impaired loans contributed. Higher deposit costs, operating investment and lower deposit service charges partly offset the gains.
- Mortgage banking: Q2 net income increased to $1.2 million from $0.8 million; first-half income rose to $1.7 million from $1.2 million. First-half originations were $385.6 million, versus $347.6 million; management described Q2 production as the segment’s highest quarterly level since Q2 2009. Lower mortgage rates contributed to increased refinancing and purchase activity.
- Consumer finance: Q2 net income declined to $1.9 million from $2.2 million; first-half income declined to $3.2 million from $3.7 million. Competitive pressure and a higher mix of lower-yielding, higher-credit-quality automobile, marine and RV loans affected yields. Better credit performance and lower provision partially offset these effects.
- Consolidated net interest income benefited from loan growth and asset yields but faced higher deposit and borrowing costs. The cost of interest-bearing liabilities increased 36 basis points in Q2 and 33 basis points in the first half year over year.
- Noninterest income increased 13.3% in Q2 and 11.8% in the first half. Mortgage loan-sale gains increased; first-half other income also included $1.4 million of net unrealized gains related primarily to the nonqualified deferred compensation plan, offset by related compensation expense.
- Noninterest expenses increased 4.2% in Q2 and 5.2% in the first half, reflecting compensation, technology and data-processing costs, and expanded lending, administrative and compliance capabilities.
Credit, outlook and risks
- The allowance for loan losses was $33.4 million, down from $34.0 million at year-end. First-half net charge-offs were $4.8 million, versus $5.6 million in 2018. Consumer finance’s annualized first-half net charge-off ratio improved to 3.15% from 3.85%; delinquent consumer finance loans were 3.49% of loans, versus 4.76% at year-end.
- Retail banking nonperforming assets declined to $1.3 million from $1.7 million at year-end. Total company nonaccrual loans were $1.3 million. There was one $121,000 consumer-loan modification classified as a troubled debt restructuring in the first half; no TDR payment defaults were reported.
- Management said maintaining the current net interest margin may be challenging because of maturing time deposits repricing at market rates, consumer finance competition and lower expected accretion of acquired-loan purchase discounts. No specific earnings or revenue guidance was provided.
- Management considered liquidity sufficient for operating needs and contractual obligations. The Bank’s reported capital ratios exceeded applicable minimums; at June 30, its total capital ratio was 14.4% and common equity tier 1 ratio was 13.2%. The Bank exceeded its required capital conservation buffer.
- Key exposures include interest-rate changes, deposit flows and funding costs, economic and real-estate conditions, competition in non-prime auto lending, loan and collateral performance, mortgage origination volumes and repurchase/indemnification claims on sold loans, cybersecurity and reliance on third parties. Loan commitments were $253.1 million and standby letters of credit were $19.1 million.
- The expected-credit-loss standard (ASC 326) was still being prepared for; management had not determined its financial impact and noted it could affect the allowance, retained earnings, regulatory capital, disclosures and internal controls. The filing also reports adoption of lease accounting in 2019, with $3.5 million of lease liabilities at June 30.
- The Board authorized a new $5.0 million share repurchase program through May 31, 2020; $4.4 million remained available at quarter-end. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether loan growth and mortgage production can continue without weakening underwriting or increasing credit losses, especially in consumer finance and commercial real estate lending.
- How deposit repricing, borrowing costs, rate movements and reduced acquired-loan discount accretion affect net interest margin and earnings.
- Whether the lower consumer finance delinquency and charge-off trends persist, and whether the allowance remains adequate as portfolio mix changes.
- The eventual ASC 326 adoption date and its quantified effects on the allowance, shareholders’ equity and Bank regulatory capital.
- Mortgage loan-sale margins and the level of future repurchase or indemnification claims, alongside the company’s use of forward contracts to manage mortgage pipeline risk.
- Liquidity and deposit composition, including the shift toward time deposits, the reported funding-facility availability, and the cash-flow effect of mortgage loan originations.