C & F FINANCIAL CORP quarterly report, Q3 FY2017

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C&F Financial Corporation — Q3 2017 Form 10-Q

Business context and reporting period. Virginia-based bank holding company with retail banking, mortgage banking and consumer finance businesses. This unaudited quarterly report covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow amounts are generally shown in millions.

Key financial results

  • Q3: Net income was $3.02 million ($0.87 per diluted share), versus $3.19 million ($0.92) a year earlier. Income before taxes was $4.25 million versus $4.32 million.
  • First nine months: Net income was $9.89 million ($2.84 per diluted share), versus $10.38 million ($3.00) in 2016.
  • Net interest: Q3 net interest income was $20.21 million versus $20.45 million; nine-month net interest income was $60.04 million versus $60.23 million. The taxable-equivalent net interest margin was 6.05% in both 2017 periods, down from 6.37% for Q3 2016 and 6.34% for the first nine months of 2016.
  • Credit provision and charge-offs: Provision for loan losses was $4.44 million in Q3 and $11.94 million for nine months, compared with $4.93 million and $13.13 million, respectively. Nine-month net charge-offs were $12.67 million, up from $11.62 million.
  • Noninterest income and expenses: Q3 noninterest income was $6.73 million, essentially unchanged; nine-month income rose 2.8% to $20.16 million. Noninterest expense rose 1.8% in Q3 to $18.26 million and 3.2% for nine months to $54.38 million.
  • Returns: Annualized Q3 ROA and ROE were 0.82% and 8.26%; nine-month measures were 0.91% and 9.25%. All were below the comparable 2016 periods.

Financial position, liquidity and capital

  • Total assets were $1.485 billion at September 30, up $32.7 million from year-end 2016. Loans held for investment were $1.023 billion, up $25.9 million; net loans were $986.8 million after a $36.3 million allowance.
  • Deposits totaled $1.143 billion, up $22.7 million since year-end. Noninterest-bearing demand deposits increased $40.0 million, partly offset by lower savings and interest-bearing demand deposits and time deposits.
  • Cash and cash equivalents were $110.5 million. Management reported liquid assets of $220.5 million, including nonpledged available-for-sale securities, and $271.1 million of available borrowing capacity. Management said liquidity was sufficient for operating requirements and contractual obligations.
  • Total borrowings were $165.9 million, compared with $164.6 million at December 31, 2016. This includes $18.7 million short-term borrowings, $122.0 million long-term borrowings and $25.2 million in trust preferred capital notes.
  • Shareholders’ equity was $147.0 million, versus $139.2 million at year-end. The company declared $0.99 per share in dividends for the first nine months. Its $5 million repurchase authorization remained unused at quarter-end.
  • Regulatory capital ratios were above stated minimum requirements: Corporation total capital 14.6%, Tier 1 13.4%, CET1 11.2%; Bank total capital 14.7%, Tier 1 13.4%, CET1 13.4%. The Bank met the “well capitalized” thresholds shown in the filing.
  • Operating cash flow was $26.4 million for the first nine months, versus $2.2 million in 2016; investing cash outflow was $39.7 million and financing cash inflow was $20.6 million. Cash and cash equivalents increased $7.3 million to $110.5 million.

Material changes and business performance

  • Retail Banking nine-month net income was $6.02 million, slightly above $5.98 million. Loan growth and deposit service charges helped, while lower securities yields, credit costs and increased investment in technology, branches and lending teams offset gains.
  • Mortgage Banking nine-month net income declined to $1.36 million from $1.58 million. Production rose 14.7%, but margin pressure, fixed costs from expansion and lower Q3 loan-sale gains weighed on earnings. Management emphasized the need for higher originations to improve profitability.
  • Consumer Finance nine-month net income declined to $3.29 million from $3.65 million. Lower average balances, competition, lower yields on higher-credit-quality purchased loans and higher-cost variable-rate funding contributed. The segment’s nine-month net charge-off ratio rose to 5.52% from 5.28%.
  • Q3 and nine-month 2016 earnings included $822,000 after tax of one-time items: debit-card contract amendment revenue, BOLI proceeds and a property-sale gain. These items affect year-over-year comparisons.
  • Nonaccrual loans rose to $9.0 million from $4.8 million at year-end 2016. The increase was primarily related to two commercial relationships totaling approximately $6.5 million, restructured during 2017; management said specific reserves had been established. Total troubled debt restructurings were $11.9 million, compared with $5.8 million at year-end.

Outlook, risks and unusual items

  • No quantified earnings or revenue guidance is provided. Management cautioned that maintaining Retail Banking’s current net interest margin could be challenging: deposit costs may reprice faster than loans and investments as rates rise. Consumer Finance remains exposed to competition, lower loan yields and rising variable-rate borrowing costs.
  • Management cited interest-rate movements, economic and real-estate conditions, loan demand and credit quality, used-car and repossessed-vehicle values, deposit flows, mortgage market demand, competition, regulation, third-party service providers and execution of expansion and technology initiatives as risks.
  • Mortgage loan sales carry representations-and-warranties and indemnification exposure. The indemnification allowance was $2.44 million at September 30; the filing notes that loss estimates are subjective and may change.
  • Available-for-sale securities had $655,000 of gross unrealized losses at quarter-end. Management attributed these primarily to interest-rate fluctuations and reported no other-than-temporary impairment, stating it did not expect to be required to sell before recovery.
  • Management was assessing new accounting standards, including expected-credit-loss requirements effective for the company after 2019; the effect of the leases standard had not yet been determined. The filing reported no material changes in risk factors, market-risk disclosures, off-balance-sheet arrangements or contractual obligations from the prior annual report, and no material internal-control changes.

Important facts for investors to verify

  • Whether the increase in commercial nonaccrual loans and TDRs leads to further losses; review collateral, repayment performance and reserve adequacy.
  • Consumer Finance charge-off trends, repossessed-vehicle resale values and portfolio balances, particularly given the segment’s elevated loss ratio.
  • Whether loan growth and deposit pricing can offset asset-yield compression and rising funding costs, and whether mortgage expansion generates adequate origination volume and margins.
  • How much of earnings comparisons reflects the absence of 2016 one-time items and lower acquisition-related accretion.
  • Liquidity and capital capacity under changing deposit, borrowing and credit conditions; the filing’s stated borrowing capacity and capital ratios are point-in-time measures.