C & F FINANCIAL CORP annual report, FY2014

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C&F Financial Corporation — FY 2014 Form 10-K

Reporting period: Year ended December 31, 2014; this is an annual filing, not a standalone fourth-quarter report. C&F is a Virginia bank holding company operating retail banking, mortgage banking and non-prime auto finance. The comparison is affected by the October 2013 acquisition of Central Virginia Bankshares (CVBK), whose bank was merged into C&F Bank in March 2014.

Financial performance and condition

  • Profit: Net income was $12.35 million, down 14.3% from $14.40 million in 2013. Diluted EPS was $3.59, versus $4.18. Return on average assets fell to 0.93% from 1.35%; return on average common equity fell to 10.34% from 13.39%.
  • Revenue and margins: Interest income was $86.50 million and net interest income was $77.97 million, up from $80.21 million and $71.59 million, respectively. On a taxable-equivalent basis, net interest income was $80.29 million, while net interest margin narrowed to 6.55% from 7.44%. Noninterest income declined 11.9% to $19.57 million, mainly due to lower mortgage production and loan-sale gains.
  • Credit costs: Provision for loan losses rose to $16.33 million from $15.09 million. Net charge-offs were $15.58 million, including $19.02 million of consumer-finance charge-offs, offset by $4.27 million of recoveries. The allowance for loan losses was $35.61 million; C&F Finance’s allowance was 8.50% of its loans.
  • Segment results: Retail Banking net income increased to $5.58 million from $3.31 million; Mortgage Banking fell to $0.41 million from $1.95 million; Consumer Finance fell to $6.94 million from $10.54 million. Retail benefited partly from CVBK purchase-accounting accretion and improved asset quality. Mortgage originations declined to $478.6 million from $721.3 million; consumer finance earnings were pressured by lower yields and higher credit costs.
  • Balance sheet and liquidity: Total assets were $1.333 billion, loans net of allowance $800.2 million, deposits $1.026 billion and shareholders’ equity $123.4 million at year-end. Liquid assets totaled $279.1 million. Reported available borrowing capacity was $281.4 million, against $127.5 million outstanding under listed funding sources.
  • Debt and capital: Short- and long-term borrowings totaled $142.0 million, with an additional $25.1 million in trust preferred capital notes. Corporation capital ratios were 13.3% Tier 1 risk-based, 14.5% total risk-based and 9.2% Tier 1 leverage; the Bank was categorized as well capitalized. Basel III rules took effect January 1, 2015, with the capital conservation buffer phasing in through 2019.
  • Cash flow: Operating activities provided $34.2 million; investing activities used $24.4 million; financing activities provided $9.7 million. Cash and cash equivalents increased $19.5 million to $167.6 million.

Changes, outlook and significant items

  • Net income declined despite higher net interest income: lower mortgage revenue, weaker consumer-finance results and higher noninterest expenses outweighed retail banking improvement. Noninterest expenses rose 11.3% to $64.14 million, reflecting CVBK integration, additional staffing and technology costs, partly offset by lower OREO and mortgage production costs.
  • Management expected 2015 earnings to face lower CVBK-related accretion, continued weak mortgage demand and potentially higher rates, and elevated consumer-finance charge-offs and competition. Retail loan growth and deployment of excess cash were also identified as important challenges. The filing provides no numerical earnings guidance.
  • CVBK acquisition-related loan and deposit fair-value adjustments contributed $3.0 million of pretax net accretion in 2014. Management expects lower accretion income in 2015. Acquisition accounting also involved estimates of purchased credit-impaired loan cash flows; changes in estimates could affect provisions or future interest income.
  • Key risks include commercial real estate and non-prime auto credit concentration, borrower and collateral deterioration, used-car resale values, interest-rate changes, mortgage repurchase/indemnification claims, regulatory costs, cybersecurity and third-party service risks. The mortgage indemnification reserve was $2.09 million; 2014 payments were $566,000. Ordinary-course litigation was not expected by management to have a material adverse effect.
  • Management reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls. The company repurchased its Treasury warrant for $2.3 million in May 2014 and thereby completed its exit from TARP. The board declared $1.19 per share in 2014 dividends.

Investor verification priorities

  1. Track consumer-finance delinquency, charge-off and recovery trends, allowance adequacy, underwriting competition and repossessed-vehicle values.
  2. Assess whether mortgage originations and gains recover, and whether the $2.09 million indemnification reserve adequately covers investor claims.
  3. Separate recurring earnings from CVBK purchase-accounting accretion and confirm the expected pace of its decline.
  4. Review net interest margin sensitivity, liquidity deployment, funding costs and compliance with Basel III capital requirements.
  5. Verify CVBK integration savings, ongoing integration costs and the quality and performance of acquired loans.