C&F Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 7, 2015. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net income | $4.10 | $3.74 | $6.75 | $6.64 |
| Diluted EPS | $1.21 | $1.09 | $1.98 | $1.91 |
| Net interest income, GAAP | $19.17 | $19.57 | $37.95 | $38.65 |
| Provision for loan losses | $2.16 | $3.27 | $5.67 | $6.78 |
| Noninterest income | $5.52 | $5.35 | $10.62 | $10.00 |
| Noninterest expense | $16.65 | $16.23 | $33.40 | $32.32 |
| Annualized net interest margin, taxable-equivalent | 6.27% | 6.58% | 6.25% | 6.56% |
Q2 net income rose about 10%; first-half net income increased about 2%. Management attributed the quarterly improvement to higher earnings across all three principal segments. First-half growth in retail and mortgage banking was partly offset by lower consumer finance earnings. First-half annualized ROA was 1.00% (unchanged year over year) and ROE was 10.83% versus 11.37%.
Financial position, liquidity and capital
- At June 30, 2015, total assets were $1.373 billion, up $34.7 million from year-end 2014. Gross loans held for investment were $862.2 million, up $26.4 million; loans held for sale increased $37.2 million to $65.5 million.
- Total deposits were $1.043 billion, up $16.7 million. Noninterest-bearing demand deposits rose $26.0 million, while time deposits declined $18.7 million.
- Cash and cash equivalents were $139.3 million, down $28.3 million from year-end. Liquid assets, as defined by the company, totaled $270.9 million, versus $279.1 million at year-end. Management stated liquidity was sufficient for operational needs and contractual obligations. Disclosed borrowing capacity was $411.0 million, with $266.9 million available.
- Borrowings totaled $181.7 million, up $14.6 million from year-end, primarily to finance the June purchase of a consumer auto loan portfolio. This included $144.0 million of long-term borrowings and $25.1 million of trust preferred capital notes.
- Shareholders’ equity was $126.0 million, compared with $123.6 million at year-end. The Corporation’s June 30 regulatory ratios included total capital to risk-weighted assets of 14.7%, Tier 1 of 13.4%, and common equity Tier 1 of 10.9%. The Bank’s corresponding ratios were 14.8%, 13.5%, and 13.5%.
- Six-month cash flows were $(24.0) million from operations, $(32.5) million from investing, and $28.2 million from financing. Operating cash use reflected mortgage loan originations and sales activity; investing outflows included loan growth and a loan portfolio purchase.
Material changes and business developments
- Retail banking: First-half net income rose to $2.8 million from $2.4 million. Loan growth, lower-cost deposit mix and merger-related cost savings helped; lower asset yields and higher personnel costs partly offset the gains.
- Mortgage banking: First-half net income increased to $309,000 from $239,000. Originations rose to $277.4 million from $217.5 million, and gains on loan sales increased to $3.65 million from $2.82 million. Management noted that fixed infrastructure costs make improved profitability challenging at current production levels.
- Consumer finance: First-half net income fell to $4.2 million from $4.4 million. Competition constrained loan growth and reduced average yields; lower credit-loss provisions provided a partial offset. In June, the segment bought a $19.6 million auto loan portfolio for $16.3 million, net of discount.
- The annualized first-half net charge-off ratio for consumer finance improved to 4.22% from 4.42%. Consumer finance allowance coverage declined to 8.28% of loans from 8.50%; management said the acquired portfolio’s purchase discount was considered adequate at June 30, while noting the loans will be included in future allowance assessments.
- Retail Banking nonperforming assets were $5.6 million, compared with $5.5 million at year-end. Nonaccrual loans were approximately $4.7 million, and other real estate owned increased to $977,000 from $786,000. Total troubled debt restructurings declined to $5.45 million from $5.83 million; no TDR defaults were reported in the periods presented.
- Available-for-sale securities had a fair value of $218.3 million, down from $221.9 million at year-end. Q2 unrealized securities losses reduced other comprehensive income; management attributed the losses mainly to rising market interest rates and stated it did not consider the affected securities other-than-temporarily impaired.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected low interest rates and competition to continue to pressure retail loan and securities yields, and competition in auto finance to weigh on yields and loan growth. It noted borrowings could rise in the second half following the auto portfolio purchase.
- Key risks cited include interest-rate changes, economic and real-estate conditions, loan and collateral quality, automobile values and competition, deposit flows, mortgage-market demand, mortgage loan indemnification claims, regulatory developments, and execution of the CVBK acquisition-related objectives.
- C&F Mortgage’s indemnification reserve was $2.23 million at June 30. Mortgage loan sale agreements include representations and warranties, with recourse periods varying by claim type and counterparty.
- The company reported adoption of an affordable-housing accounting standard with retrospective presentation; it said the adoption did not materially affect the financial statements. Securities portfolio unrealized losses and purchase-accounting accretion related to the CVB acquisition are notable period items.
- The Board reauthorized up to $5.0 million of share repurchases through May 2016. The company repurchased 38,759 shares under the program in the first half. A post-quarter change-in-control agreement for the C&F Finance president was disclosed.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. It reported no material changes to the risk factors from the 2014 Form 10-K.
Important facts for investors to verify
- Whether margin pressure and consumer finance competition continue, and whether purchased auto loans support growth without weakening credit performance.
- Trends in charge-offs, allowance adequacy, nonperforming assets, TDRs and collateral values, particularly in consumer finance and commercial real estate.
- Mortgage origination volumes, gain-on-sale results, fixed-cost leverage and indemnification claims or reserve needs.
- Deposit composition and funding costs, borrowing levels and availability, and liquidity as loans and mortgage activity change.
- Interest-rate sensitivity and the impact of further securities valuation changes on equity and comprehensive income.
- Capital deployment through dividends and repurchases, and continued compliance with regulatory capital requirements.