C&F Financial Corporation — Q2 2017 Form 10-Q
Business context and reporting period. Virginia-based bank holding company with retail banking, mortgage banking and consumer finance businesses. This unaudited filing covers the quarter and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016.
Financial performance and position
- Profit: Q2 net income was $4.14 million ($1.19 diluted EPS), down from $4.71 million ($1.36) in Q2 2016. First-half net income was $6.87 million ($1.97 diluted EPS), compared with $7.19 million ($2.08) a year earlier.
- Revenue and expenses: Q2 net interest income was $20.08 million, essentially unchanged year over year; noninterest income fell 5.6% to $7.29 million, while noninterest expense rose 3.6% to $18.28 million. For the first half, net interest income was $39.83 million, noninterest income increased 4.3% to $13.44 million, and noninterest expense increased 4.0% to $36.13 million.
- Margins and returns: Annualized net interest margin was 6.06% in Q2 versus 6.36% a year earlier, and 6.08% for the first half versus 6.32%. Q2 annualized ROA and ROE were 1.14% and 11.63%; first-half figures were 0.95% and 9.76%.
- Credit costs: Provision for loan losses was $3.10 million in Q2 and $7.50 million in the first half, down from $3.60 million and $8.20 million, respectively, in 2016. First-half net charge-offs were $8.07 million versus $7.04 million, driven primarily by consumer-finance auto loan losses.
- Cash flow: Operating cash flow was $16.91 million for the first half, compared with $0.23 million in 2016. Cash and cash equivalents increased $15.70 million to $118.90 million. Investing activities used $8.05 million and financing activities provided $6.83 million.
- Balance sheet and liquidity: Total assets were $1.464 billion; loans, net, were $957.07 million; and deposits were $1.128 billion. Liquid assets were $227.3 million. Disclosed borrowing capacity was $392.88 million, of which $127.03 million was outstanding and $265.85 million available.
- Debt and capital: Borrowings totaled $165.46 million, including $13.24 million short-term and $127.03 million long-term borrowings, plus $25.19 million of trust preferred capital notes. Shareholders’ equity was $144.91 million. At June 30, the Corporation’s total capital, Tier 1 capital, CET1 and Tier 1 leverage ratios were 14.8%, 13.5%, 11.3% and 10.7%, respectively.
Material changes versus comparable periods
- Management attributed lower reported earnings mainly to the absence of $822,000 after-tax in one-time 2016 revenue: a debit-card contract amendment, BOLI-related proceeds and a gain on sale of property. Management said Retail Banking earnings would have increased absent those items.
- Loan growth supported interest income, but lower loan and securities yields and rising funding costs compressed net interest margin. Average Retail Banking loans increased 8.4% in Q2 and 10.0% in the first half year over year.
- Nonperforming assets rose to $8.85 million from $4.43 million at year-end 2016. Nonaccrual loans increased to $8.57 million, primarily due to two commercial relationships totaling $6.5 million; both were restructured and classified as TDRs. Total TDRs increased to $11.87 million from $5.83 million.
- Consumer Finance net charge-offs increased: the first-half annualized ratio rose to 5.34% from 4.88%, which management linked to lower resale values for repossessed vehicles amid higher dealer inventories. Delinquent consumer-finance loans as a share of that portfolio declined to 4.40% from 5.15% at year-end.
- Mortgage loan production rose 18.6% in Q2 and 25.0% in the first half, but lower margins on loans sold and expansion costs weighed on segment earnings. Consumer Finance earnings also declined, reflecting competitive loan pricing, higher-cost borrowings and a shift toward higher-credit-quality, lower-yield loans.
- Deposits increased $8.3 million from year-end, including $21.0 million more noninterest-bearing demand deposits, partly offset by a $16.9 million decline in savings and interest-bearing demand deposits.
Outlook, risks and other notable items
- No specific earnings or financial guidance was provided. Management said it expects maintaining Retail Banking’s current margin to be challenging; deposit costs may reprice faster than loans and investments as rates rise. Consumer Finance margins remain exposed to competition, loan yields and variable-rate funding costs.
- Key stated risks include interest-rate and market volatility; economic and real-estate conditions; loan demand, credit quality and collateral values; used-car inventory and resale prices; deposit flows; mortgage secondary-market demand and indemnification claims; competition; regulation; and reliance on third-party service providers.
- C&F Mortgage’s reserve for potential loan-sale indemnification claims was $2.39 million. Claims may involve borrower misrepresentation, fraud, early defaults or underwriting issues; management notes that loss estimates are subjective. No indemnification payments were made in the first half.
- The Corporation reauthorized a share repurchase program for up to $5 million through May 2018; none had been used by June 30. The first-half dividend declared was $0.66 per share. Management stated liquidity was sufficient for operational and contractual needs.
- Management reported disclosure controls were effective as of June 30, 2017, with no material changes to internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Progress and recoveries on the two $6.5 million commercial relationships, related TDRs and specific reserves; monitor nonperforming assets and commercial real-estate credit grades.
- Consumer Finance charge-offs, delinquency trends, allowance adequacy and repossessed-vehicle resale values.
- Net interest margin sensitivity to interest rates, deposit repricing, loan yields and borrowing costs.
- Whether mortgage production growth offsets lower sale margins and expansion expenses, and whether indemnification reserves remain adequate.
- Actual use of the repurchase authorization and sustainability of dividends, alongside capital and liquidity levels.