C&F Financial Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. Comparatives are the corresponding 2015 periods. C&F is a Virginia bank holding company operating retail banking, mortgage banking and consumer finance businesses.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $22.3m | $21.4m | $44.3m | $42.2m |
| Net interest income, reported | $20.1m | $19.2m | $39.8m | $37.9m |
| Provision for loan losses | $3.6m | $2.2m | $8.2m | $5.7m |
| Noninterest income | $7.7m | $5.5m | $12.9m | $10.6m |
| Noninterest expense | $17.6m | $16.7m | $34.7m | $33.4m |
| Net income | $4.7m | $4.1m | $7.2m | $6.7m |
| Diluted earnings per share | $1.37 | $1.21 | $2.08 | $1.98 |
- Annualized return on assets and return on equity were 1.35% and 14.11% in Q2 2016, versus 1.20% and 13.12% a year earlier. First-half 2016 figures were 1.02% and 10.75%, versus 1.00% and 10.83%.
- Taxable-equivalent net interest margin was 6.36% for Q2 and 6.32% for the first half, up from 6.27% and 6.25%, respectively.
- At June 30, total assets were $1.414bn; gross loans held for investment were $961.2m ($924.5m net of allowance); deposits were $1.078bn; and shareholders’ equity was $137.7m. The allowance for loan losses was $36.7m.
- Cash and cash equivalents were $92.5m, down from $152.9m at December 31, 2015. Six-month cash flow was $0.2m provided by operations, $57.0m used in investing and $3.7m used in financing; cash declined $60.4m overall.
- Borrowings totaled $171.1m, down from $177.3m at year-end. Management reported $270.1m in liquid assets and $270.1m of available borrowing capacity, and stated it believed liquidity was sufficient.
- Regulatory capital ratios remained above minimums: Corporation total capital/risk-weighted assets was 14.3% and CET1 was 10.7%; Bank ratios were 14.3% and 13.0%, respectively.
Material changes versus prior periods
- Net income increased 15.7% year over year in Q2 and 6.2% for the first half. Higher retail and mortgage banking earnings more than offset lower consumer finance earnings.
- Loan growth supported interest income and margin, but average loan yields declined amid low rates and competition. Noninterest income rose 40.0% in Q2 and 21.4% in the first half; expenses increased 6.0% and 4.0%, respectively.
- Credit costs rose: provision increased to $8.2m for the first half from $5.7m. Consumer Finance’s annualized first-half net charge-off ratio rose to 4.88% from 4.22%; management attributed pressure to charge-offs, portfolio growth, and economic and competitive conditions in nonprime auto lending.
- Nonperforming assets in Retail Banking declined to $6.1m from $7.1m at year-end, mainly due to loan payoffs and sales of foreclosed properties. Total nonaccrual loans were $5.9m versus $7.0m at year-end.
- First-half loan originations in Mortgage Banking were $280.0m versus $277.4m; segment earnings improved, supported by higher loan sales gains and origination fees.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management’s stated objectives are profitable growth, earnings growth and maintaining strong regulatory capital.
- Q2 earnings included one-time after-tax contributions identified by management: $237,000 from a debit-card program contract amendment, $493,000 associated with the bank-owned life insurance program, and $92,000 from a bank-property sale.
- Management considered loan-loss allowances adequate, while noting that worsening economic conditions, higher charge-offs or continued consumer finance growth could require additional provisions and reduce future earnings. The consumer finance allowance-to-loans ratio was 8.35%, up from 8.21% at year-end.
- Key stated risks include interest-rate and securities-value movements, loan demand and credit quality, real estate and used-car markets, mortgage secondary-market demand and indemnification claims, deposit flows, competition, regulation, and reliance on third-party services. Management discussed the sensitivity of earnings and asset/liability values to interest rates.
- Mortgage loans sold carry representations and warranties; the company maintains a $2.5m indemnification allowance for potential repurchase or loss claims. Recourse periods for early-payment defaults vary by counterparty; fraud, misrepresentation and underwriting claims may have no stated time limit.
- The board reauthorized a share repurchase program of up to $5m through May 2017; no program repurchases were reported in the quarter. The company reported no material changes to previously disclosed risk factors or off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher consumer finance provision and 4.88% first-half charge-off ratio persist, and how they affect earnings and reserve adequacy.
- How much reported earnings growth is sustainable after separating the identified one-time items and the declining accretion from the 2013 CVB acquisition.
- Whether loan growth can continue without further deterioration in yields, credit quality or funding costs, particularly in commercial construction and consumer finance.
- The composition and availability of liquidity, including reliance on borrowing facilities and the effect of continued loan growth on cash balances.
- Potential mortgage repurchase and indemnification exposure, and the timing and magnitude of any claims.