C&F Financial Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. C&F is a Virginia bank holding company operating retail banking, mortgage banking and non-prime automobile finance businesses.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets, year-end | $1.452 billion | $1.405 billion |
| Loans, net, year-end | $960.2 million | $865.9 million |
| Deposits, year-end | $1.120 billion | $1.074 billion |
| Net interest income | $80.5 million | $78.4 million |
| Net interest margin, taxable-equivalent | 6.30% | 6.35% |
| Provision for loan losses | $18.0 million | $15.5 million |
| Noninterest income | $25.6 million | $20.7 million |
| Noninterest expense | $70.1 million | $66.2 million |
| Net income | $13.5 million | $12.5 million |
| Diluted earnings per share | $3.89 | $3.68 |
| Return on average assets / common equity | 0.96% / 9.90% | 0.92% / 9.87% |
Net income rose about 7%; net interest income increased about 2.7%, while the provision for loan losses increased about 16%. Net interest income after provision was $62.4 million, down from $62.8 million. Net interest margin contracted five basis points as asset yields declined. Net cash provided by operating activities was $27.2 million; investing activities used $106.2 million, mainly reflecting loan growth, and financing activities provided $29.2 million. Cash and cash equivalents fell to $103.2 million from $152.9 million.
Year-end shareholders’ equity was $139.2 million. Regulatory capital ratios were 10.5% CET1, 12.6% Tier 1 risk-based, 13.9% total risk-based and 10.3% Tier 1 leverage. The Bank was categorized as well capitalized. Total borrowings were $139.4 million, plus $25.2 million of trust preferred capital notes. Liquid assets were $199.1 million; reported available borrowing capacity was $277.4 million.
Material changes and segment performance
- Loan growth drove balance-sheet expansion: loans, net, increased about 10.9%. Retail Banking average loans grew 12.6%; commercial and real estate construction lending contributed to growth.
- Retail Banking net income rose to $8.2 million from $5.6 million. Results benefited from loan growth and lower borrowing costs, as well as approximately $822,000 in identified after-tax one-time items: a debit-card contract amendment, bank-owned life insurance income and a property-sale gain.
- Mortgage Banking net income increased to $1.7 million from $677,000. Originations rose to $674.3 million from $549.3 million, supporting higher loan-sale gains and fees.
- Consumer Finance net income declined to $4.5 million from $7.2 million. Its provision increased to $18.0 million; the net charge-off ratio rose to 5.59% from 5.50%. The allowance was 8.40% of segment loans at year-end, versus 8.21% a year earlier.
- Retail Banking nonperforming assets declined to $4.4 million from $7.1 million; nonaccrual loans were $4.2 million. C&F Finance reported $3.1 million of repossessed assets, up from $2.1 million.
- Dividends declared increased to $1.29 per share from $1.22; the payout ratio was 33.1%. The company reported no repurchases under its $5.0 million authorization during 2016, apart from shares withheld for taxes.
Outlook, risks and unusual items
- Management expected 2017 earnings to face lower accretion income from the CVBK acquisition, an uncertain rate environment that could affect mortgage production, and elevated charge-offs and competition in consumer finance. It provided no numerical earnings guidance.
- Management planned to pursue retail loan growth and digital investment, expand mortgage production while managing fixed costs and compliance, and use its consumer-finance scorecard and market staffing to support growth and credit quality.
- Key risks include non-prime auto credit losses and used-car collateral values; commercial real estate and construction concentrations; competition and pressure on loan yields and net interest margin; mortgage origination levels and secondary-market access; deposit funding and interest-rate sensitivity; regulatory/compliance costs; and cybersecurity and third-party service-provider risks.
- A 200-basis-point rate decline was modeled to reduce next-12-month net interest income 4.94% and economic value of equity 12.73%; a 200-basis-point rise was modeled to increase them 2.22% and 5.76%, respectively. These are scenario estimates, not forecasts.
- Adoption of share-based compensation accounting guidance reduced 2016 income tax expense by $229,000, including $163,000 in the fourth quarter. The fourth quarter also included the acquisition of a wealth-management business with about $91.4 million in assets under management; C&F recorded $1.4 million of amortizable intangibles and $685,000 of contingent consideration.
- C&F Mortgage had $2.3 million in its indemnification reserve at year-end and paid $350,000 under a 2016 agreement resolving claims for loans sold to one counterparty before August 2016. Management said ordinary-course litigation was not expected to have a material adverse effect. The auditor issued an unqualified opinion and reported effective internal control over financial reporting.
Investor verification priorities
- Assess whether consumer-finance charge-offs and repossessed-vehicle balances are stabilizing, and whether the allowance remains adequate as the portfolio grows.
- Separate recurring earnings from the 2016 one-time revenue items and the share-based-compensation tax benefit; examine the expected decline in CVBK-related accretion.
- Verify the sustainability of mortgage originations, loan-sale gains and indemnification reserves under changing rates and housing conditions.
- Review funding costs, loan/deposit trends, borrowing-line covenants and the sensitivity of margins and capital to rate changes.
- Track commercial real estate and construction exposure, criticized loans and the effects of continued loan growth on regulatory capital.