C&F Financial Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. C&F is a Virginia bank holding company with retail banking, mortgage banking, and consumer finance businesses. Comparisons are affected by the October 2013 acquisition of Central Virginia Bankshares (CVBK), whose results are included in 2014 but not in the comparable 2013 reported periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $19.7 million | $17.6 million | $58.4 million | $51.7 million |
| Noninterest income | $4.6 million | $5.6 million | $14.7 million | $17.7 million |
| Net income | $3.3 million | $3.4 million | $9.9 million | $11.6 million |
| Diluted EPS | $0.97 | $0.97 | $2.88 | $3.37 |
| Net interest margin, taxable-equivalent basis | 6.58% | 7.77% | 6.56% | 7.73% |
| Annualized ROA / ROE | 0.99% / 10.92% | 1.37% / 12.58% | 1.00% / 11.22% | 1.56% / 14.52% |
Net interest income plus noninterest income was approximately $24.3 million in Q3 and $73.1 million year to date, versus $23.2 million and $69.4 million, respectively, in 2013. Loan-loss provision was $4.1 million in Q3 and $10.9 million for nine months, up from $3.8 million and $10.1 million. Noninterest expense rose to $15.6 million in Q3 and $48.2 million year to date, from $14.5 million and $42.1 million. The effective tax rate declined to 28.7% for Q3 and 28.9% year to date, from 30.7% and 32.7%.
Financial position, cash flow and liquidity
- At September 30, 2014, total assets were $1.316 billion, net loans $792.1 million, deposits $1.001 billion, total borrowings $170.5 million, and shareholders’ equity $122.0 million. Assets and equity were $1.312 billion and $112.9 million at December 31, 2013.
- Gross loans increased to $827.7 million from $820.4 million; deposits declined to $1.001 billion from $1.008 billion, including a $32.7 million reduction in time deposits, partly offset by growth in demand deposits.
- Nine-month operating cash flow was $19.3 million, versus $37.2 million in 2013; investing activities used $11.4 million, versus $21.5 million; financing activities used $10.7 million, versus providing $3.0 million. Cash and cash equivalents ended at $145.3 million, compared with $148.1 million at year-end 2013.
- Management reported liquid assets of $261.7 million, up from $216.4 million at year-end. Available borrowing capacity was $268.6 million against $132.987 million outstanding under listed funding arrangements. Management stated liquidity was sufficient for operational needs and contractual obligations.
- Regulatory capital ratios at the Corporation were 15.3% total capital to risk-weighted assets, 14.0% Tier 1 to risk-weighted assets, and 9.5% Tier 1 to average assets. The Bank’s corresponding ratios were 15.2%, 13.9%, and 9.4%; each exceeded the stated well-capitalized thresholds.
Material changes and management commentary
- Net income declined year over year, particularly for the first nine months. Management attributed this mainly to reduced mortgage banking income and weaker consumer finance results, partly offset by improved retail banking earnings, including CVBK acquisition effects.
- Mortgage originations fell 27.4% in Q3 and 38.5% year to date. Higher mortgage rates reduced refinancing activity and purchase volumes; gains on loan sales declined to $1.2 million in Q3 and $4.0 million year to date, from $1.8 million and $7.1 million.
- Consumer finance earnings fell to $1.7 million in Q3 and $6.1 million year to date, from $2.4 million and $8.8 million. Management cited competitive pricing, declining portfolio yields, difficult economic conditions, lower repossessed-vehicle sale prices, and higher charge-offs. Its annualized net charge-off ratio was 5.18% in Q3 and 4.68% for nine months.
- Retail banking earnings improved to $1.7 million in Q3 and $4.1 million year to date. Benefits included acquisition-related fair-value accretion, lower deposit costs, improved asset quality and reduced OREO costs; higher staffing, branch, technology and integration costs partly offset these benefits.
- Retail banking nonperforming assets were $6.6 million, down from $7.2 million at year-end; nonaccrual loans rose from $4.4 million to $5.5 million while OREO declined from $2.8 million to $1.1 million. Total TDRs were approximately $5.6 million at both dates. The allowance for loan losses was $35.6 million.
- Available-for-sale securities had $1.336 million of gross unrealized losses at quarter-end, compared with $3.925 million at year-end. Management considered the loss-position securities temporarily impaired and reported no other-than-temporary impairment.
- C&F repurchased and cancelled its remaining Treasury warrant for $2.3 million, completing its exit from the TARP Capital Purchase Program. It also repurchased 2,800 shares for $33.05 per share under a $5.0 million share repurchase authorization; $4.907 million remained authorized at quarter-end. Dividends declared were $0.89 per share year to date.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management warned that continued weak mortgage demand could pressure mortgage earnings; competition and credit deterioration could further reduce consumer finance yields and increase provisions; and margin pressure could persist as earning-asset yields fall while liability costs approach rate floors. Other stated risks include interest-rate and securities valuation changes, economic and real-estate conditions, deposit flows, loan quality and collateral values, regulatory changes, competition, and realizing CVBK integration savings while retaining customers and deposits.
C&F Mortgage’s loan-sale agreements include representations and warranties that can lead to indemnification or repurchase claims. The related reserve was $2.083 million at September 30, 2014. The company disclosed no material change in off-balance-sheet arrangements or contractual obligations outside the ordinary course. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether CVBK integration produces the expected cost savings, customer retention and deposit stability, and how acquisition-related fair-value accretion changes over time.
- Trends in mortgage originations, loan-sale gains and segment profitability if mortgage demand remains weak.
- Consumer finance charge-offs, repossessed-vehicle recoveries, reserve adequacy and the effect of competitive loan pricing.
- Retail banking nonaccrual loans and criticized assets, alongside changes in OREO and the allowance for loan losses.
- Net interest margin, available liquidity and capital after the start of Basel III requirements and any further share repurchases or dividends.
- Potential mortgage repurchase and indemnification claims compared with the $2.083 million reserve.