C&F Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited consolidated results. C&F is a Virginia bank holding company operating in retail banking, mortgage banking, and consumer finance. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $20.5 | $19.7 | $58.5 | $58.4 |
| Provision for loan losses | $4.1 | $4.1 | $9.8 | $10.9 |
| Noninterest income | $4.8 | $4.7 | $15.4 | $14.7 |
| Noninterest expense | $16.3 | $15.6 | $49.7 | $47.9 |
| Net income | $3.5 | $3.3 | $10.2 | $9.9 |
| Diluted EPS | $1.02 | $0.97 | $3.01 | $2.88 |
- Q3 net income increased about 5.6%; nine-month net income increased about 3.0%. Q3 annualized ROA was 1.01% and ROE 10.87%; nine-month measures were 1.00% and 10.84%, respectively.
- Taxable-equivalent net interest margin was 6.58% in Q3, unchanged year over year, and 6.35% for the first nine months, down from 6.56%. The nine-month decline reflected lower asset yields, partly offset by growth in earning assets and noninterest-bearing deposits.
- At September 30, total assets were $1.373 billion, up $35.2 million from year-end 2014. Loans, net of allowance, were $840.7 million, up $40.5 million; loans held for sale were $43.9 million, up $15.6 million.
- Deposits were $1.042 billion, up $15.7 million from year-end. Noninterest-bearing demand deposits rose $36.5 million, while time deposits fell $28.3 million. Total borrowings, including trust preferred notes, were $179.0 million, up $11.9 million.
- Cash and cash equivalents were $145.4 million, versus $167.6 million at year-end. Management reported $279.9 million of liquid assets and $265.6 million of available borrowing capacity. Nine-month operating cash flow was $7.5 million versus $19.3 million; investing cash use was $53.2 million versus $11.4 million, and financing cash flow was $23.5 million versus cash use of $10.7 million.
- Shareholders’ equity was $129.3 million, compared with $123.6 million at year-end. At September 30, the Corporation’s total risk-based capital ratio was 15.1%, Tier 1 risk-based ratio 13.8%, and common equity Tier 1 ratio 11.3%.
Material changes and operating drivers
- Q3 earnings improved due to higher Mortgage Banking and Consumer Finance earnings, partly offset by lower Retail Banking earnings. Nine-month gains were reported across all three principal segments.
- Mortgage Banking originations were $146.6 million in Q3, nearly flat year over year, and $424.0 million for nine months, up from $363.7 million. Higher production supported loan-sale gains and segment income, but management said future profitability at current volumes is challenged by fixed staffing, compliance, and technology costs.
- Consumer Finance purchased a loan portfolio with $19.6 million principal balance for $16.3 million in June, recording a $3.3 million discount to be accreted into income. The purchase contributed to earnings and was financed partly with additional borrowing.
- Commercial and other loan growth helped increase interest income, while low rates and competition reduced loan and securities yields. Q3 salaries and benefits rose to $9.1 million from $8.9 million; nine-month expense rose to $29.2 million from $27.2 million.
- Credit indicators were mixed: nonperforming assets in Retail Banking were $5.3 million, down from $5.5 million at year-end; total nonaccrual loans were $5.4 million versus $5.9 million. Nine-month net charge-offs were $9.7 million versus $10.2 million. Consumer Finance’s annualized net charge-off ratio was 5.53% in Q3 versus 5.18%; its nine-month ratio was 4.66% versus 4.68%.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management expects a low-rate environment and strong competition to continue pressuring Retail Banking yields and consumer-auto lending yields and growth. It intends to pursue mortgage originations through existing-market growth and strategic initiatives.
- Management considers the loan-loss allowance adequate, but cautions that deteriorating economic conditions or higher Consumer Finance charge-offs could require additional provision and reduce earnings. The allowance was $35.7 million; Consumer Finance allowance coverage was 8.34% of its loans, down from 8.50% at year-end, partly because the purchased portfolio lowered the ratio.
- Mortgage loan sales carry representations and warranties and potential repurchase/indemnification exposure. The indemnification reserve was $2.3 million; some fraud, misrepresentation, or underwriting-error recourse has no stated time limit. Mortgage forward-sale contracts had $102.7 million notional value.
- Interest-rate, economic, regulatory, real-estate, used-vehicle, deposit-flow, counterparty, and competition risks are identified. The company uses $25.0 million notional interest-rate swaps to fix rates on trust preferred notes; their combined fair-value liability was $534,000.
- Available-for-sale securities had $409,000 of gross unrealized losses at quarter-end, attributed primarily to interest-rate movements. Management did not consider the securities other-than-temporarily impaired and stated it did not expect to be required to sell before recovery.
- Adoption of affordable-housing accounting guidance changed presentation retrospectively: related amortization is now included in income-tax expense rather than noninterest expense. The adoption had no material overall financial-statement effect. The quarter also included a $90,000 year-to-date provision for other-real-estate-owned losses.
- The Board had authorized up to $5.0 million in share repurchases through May 2016; no shares were repurchased in Q3. The company declared $0.90 per share in dividends for the first nine months, with a 29.9% payout ratio.
- Management concluded disclosure controls were effective at September 30, 2015, and reported no material change in internal control over financial reporting during the quarter. No material changes to the prior annual-report risk factors were reported.
Important facts for investors to verify
- Whether Consumer Finance charge-offs, allowance adequacy, and performance of the recently purchased discounted portfolio evolve as expected.
- Whether loan growth and deposit mix can offset lower asset yields, rising funding costs, and competitive pressure on margins.
- Mortgage origination levels, segment profitability relative to fixed costs, and any claims under loan-sale representations and warranties.
- Liquidity and borrowing availability under changing market conditions, and the effect of additional borrowing on funding costs.
- Capital ratios and returns after dividends and any future share repurchases; the filing’s capital figures reflect Basel III requirements effective in 2015.