C&F Financial Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017 unless otherwise noted. Comparisons are with Q1 2016 for operating results and December 31, 2016 for balance-sheet changes. Dollar figures below are in millions unless stated otherwise.
Business context
C&F is a Virginia bank holding company with Retail Banking, Mortgage Banking, and Consumer Finance as its principal segments. It also operates wealth management and insurance businesses. The filing is unaudited interim reporting.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period |
|---|---|---|
| Net income | $2.731 million; $0.78 per diluted share | $2.484 million; $0.72 per diluted share in Q1 2016 |
| Net interest income | $19.751 million | $19.703 million in Q1 2016 |
| Provision for loan losses | $4.400 million | $4.600 million in Q1 2016 |
| Noninterest income | $6.146 million | $5.163 million in Q1 2016 |
| Noninterest expense | $17.845 million | $17.090 million in Q1 2016 |
| Net interest margin | 6.09% annualized | 6.28% in Q1 2016 |
| Annualized ROA / ROE | 0.76% / 7.86% | 0.71% / 7.51% in Q1 2016 |
| Total assets | $1,464.5 million | $1,452.0 million at Dec. 31, 2016 |
| Loans, net of allowance | $964.1 million | $960.2 million at Dec. 31, 2016 |
| Deposits | $1,132.5 million | $1,119.9 million at Dec. 31, 2016 |
| Cash and cash equivalents | $120.5 million | $103.2 million at Dec. 31, 2016 |
| Total borrowings, including trust preferred notes | $165.8 million | $164.6 million at Dec. 31, 2016 |
Net cash provided by operating activities was $16.5 million, compared with $25.1 million in Q1 2016. Investing activities used $11.8 million; financing activities provided $12.6 million. The quarter-end allowance for loan losses was $36.7 million. The effective tax rate was 25.2%, versus 21.8% in Q1 2016. Shareholders’ equity was $141.4 million, up from $139.2 million at year-end; the company declared a $0.33 per-share dividend.
Material changes and management commentary
- Net income increased about 10% year over year. Management attributed the improvement mainly to stronger Retail Banking results, partly offset by lower earnings in Consumer Finance and Mortgage Banking.
- Net interest margin declined 19 basis points. Management cited lower loan and securities yields; average loan growth helped offset yield pressure. Management cautioned that maintaining Retail Banking margin may be challenging and that higher short-term rates could raise funding costs faster than asset yields.
- Noninterest income increased 19%, led by mortgage loan sales and origination-related income, deposit fees, and wealth-management income. Noninterest expense increased 4.4%, reflecting staffing, technology, and expansion costs.
- Retail Banking segment net income rose to $1.8 million from $1.3 million. Mortgage Banking net income was $0.3 million versus $0.3 million (reported as $297,000 versus $322,000); mortgage originations increased 35.7% to $141.1 million. Management said continued mortgage profitability depends on increasing originations and is pursuing expansion opportunities.
- Consumer Finance net income declined to $0.9 million from $1.1 million. Management cited margin compression from competition, lower yields on higher-credit-quality purchased loans, and higher variable-rate funding costs. It expects higher-credit-quality purchases to help reduce future charge-offs, but noted that rising charge-offs could require additional provision and reduce earnings.
- Retail Banking nonperforming assets increased to $9.1 million from $4.4 million at year-end. Two commercial relationships totaling $6.5 million were the principal cause; one was restructured in Q1 and the other after quarter-end. Management said specific reserves were established and considered adequate.
- Consumer Finance annualized net charge-offs were 6.11%, compared with 6.19% in Q1 2016. Delinquencies were 3.00% of loans, down from 5.15% at year-end but up from 2.83% a year earlier. Repossessed assets were $2.1 million, down from $3.1 million at year-end.
Liquidity, capital, risks, and contingencies
- Liquid assets, including nonpledged available-for-sale securities, totaled $226.1 million, up from $199.1 million at year-end. Management believes liquidity is sufficient for operating needs and contractual obligations. Reported available borrowing capacity was $282.1 million.
- At March 31, the Corporation’s total capital ratio was 14.3%, Tier 1 risk-based capital was 13.0%, CET1 was 10.9%, and Tier 1 leverage was 10.5%. The Bank’s respective ratios were 14.4%, 13.2%, 13.2%, and 10.6%.
- The $5 million share-repurchase authorization remained unused as of March 31 and was scheduled to expire in May 2017. Shares withheld for employee tax obligations were not program repurchases.
- Mortgage loan sales carry representations and warranties, including potential repurchase or indemnification obligations. The indemnification reserve was $2.339 million; no payments were made during the quarter. Management noted that evaluating possible claims involves estimates and incomplete investor loan-performance information.
- Interest-rate and economic risks include rate changes, deposit competition and flows, loan demand and credit quality, real estate conditions, used-vehicle values, competition in nonprime auto lending, and mortgage secondary-market demand. The filing reports no material change in risk factors from the 2016 Form 10-K and no significant change in market-risk disclosures.
- Available-for-sale securities had $1.095 million of gross unrealized losses at quarter-end, which the company attributed primarily to interest-rate movements. Management did not recognize impairment, stating it intended and expected to hold the securities until recovery.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter. No material changes to off-balance-sheet arrangements or contractual obligations were reported.
Important facts for investors to verify
- Whether the two commercial relationships driving the increase in nonaccrual loans perform under their restructurings, and whether reserves remain adequate.
- Trends in Consumer Finance delinquencies, repossessions, charge-offs, and allowance needs, particularly as funding costs and competition change.
- Whether loan growth and deposit mix can offset lower asset yields and potential deposit repricing, and the resulting effect on net interest margin.
- Mortgage production, expansion costs, and the adequacy of the indemnification reserve for representations-and-warranties claims.
- Status of the repurchase authorization after its May 2017 expiration and subsequent dividend and capital decisions.