C&F Financial Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses. The October 2013 acquisition of Central Virginia Bankshares (CVBK) was integrated into C&F in March 2014, so year-over-year comparisons reflect a larger company and are not fully like-for-like.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 or prior balance date |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $23.9 million | $22.1 million |
| Net interest income | $19.1 million | $17.0 million |
| Net income | $2.9 million | $4.0 million |
| Diluted earnings per share | $0.83 | $1.19 |
| Net interest margin, taxable-equivalent, annualized | 6.53% | 7.75% |
| Operating cash flow | $12.1 million | $34.4 million |
| Total assets | $1.340 billion | $1.312 billion at Dec. 31, 2013 |
| Total loans, gross | $818.8 million | $820.4 million at Dec. 31, 2013 |
| Total deposits | $1.027 billion | $1.008 billion at Dec. 31, 2013 |
| Total shareholders’ equity | $117.2 million | $112.9 million at Dec. 31, 2013 |
Net income fell about 28% year over year. Pre-tax income was $4.0 million versus $5.9 million; noninterest expense rose to $16.4 million from $13.0 million, while provision for loan losses was $3.5 million versus $3.2 million. Annualized return on average assets was 0.88% and return on average equity was 10.01%, compared with 1.64% and 15.46%, respectively.
Cash and cash equivalents ended the quarter at $192.9 million, up $44.8 million from year-end. Management reported $323.1 million of liquid assets and $249.8 million of available borrowing capacity. Borrowings totaled $173.6 million, including $15.5 million short-term borrowings, $133.0 million long-term borrowings and $25.1 million trust preferred notes. The allowance for loan losses was $34.9 million, or approximately 4.3% of gross loans.
Material changes versus comparable periods
- Net interest income increased, principally because average earning assets grew following the CVBK acquisition. The net interest margin nevertheless contracted 122 basis points; management cited lower asset yields and a larger balance of low-yielding cash and bank deposits.
- Mortgage Banking net income declined to $15,000 from $546,000. Originations fell 48.7%; higher mortgage rates reduced refinancing activity, with winter weather, low housing inventories and loan-officer turnover also cited.
- Consumer Finance net income declined to $2.1 million from $3.1 million. Lower average balances and an 84-basis-point decline in portfolio yield reduced net interest income; elevated charge-offs increased the provision.
- Retail Banking net income rose to $985,000 from $696,000, including $830,000 of net purchase-accounting accretion related to CVBK. Higher staffing, integration and technology costs partly offset these benefits.
- Noninterest income decreased 5.6%, largely from lower mortgage loan gains and fees. Noninterest expense increased 25.5%, reflecting the acquired operation, increased staffing, integration-related costs, higher data processing and core deposit intangible amortization.
- Retail Banking nonperforming assets declined to $5.3 million from $7.2 million, mainly after sales of foreclosed properties. Company-wide nonaccrual loans were $5.7 million, compared with $5.6 million at year-end.
Outlook, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management expects CVBK purchase-accounting accretion to benefit future Retail Banking results and anticipates additional cost savings and efficiencies, but cautions that results depend on integration and customer and deposit retention.
- Management warned that mortgage demand may remain weak if higher rates and low housing inventories persist. Consumer Finance faces competitive pricing, weaker yields and elevated charge-off risk; sustained unemployment or further credit deterioration could require higher provisions.
- Retail Banking margin could be pressured if loan repayments and deposit growth are reinvested in lower-yielding assets or asset yields fall faster than funding costs. Management also identified interest-rate, economic, real-estate, used-vehicle, regulatory, counterparty and securities-valuation risks.
- Net securities unrealized gains improved materially: accumulated other comprehensive income was $1.8 million at quarter-end versus a $266,000 loss at year-end, primarily due to higher securities values. The filing attributed temporary unrealized losses to interest-rate movements and recorded no other-than-temporary impairment.
- Mortgage loan sales carry representations and warranties, including potential repurchase or indemnification claims. The related reserve was $2.46 million, up from $2.42 million at year-end. The company also had $10 million of interest-rate swaps hedging part of its trust preferred notes.
- Regulatory capital ratios were above stated minimums: the Corporation’s total risk-based capital ratio was 15.7% and Tier 1 leverage ratio 9.3%; the Bank’s corresponding ratios were 15.4% and 9.2%. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower mortgage originations and mortgage-segment profitability persist, and whether demand or housing inventory improves.
- Consumer Finance charge-offs, provision needs, loan yields and portfolio growth; management’s adequacy assessment of the allowance is an estimate.
- The amount, timing and realization of expected CVBK integration savings and the continued contribution of purchase-accounting accretion.
- Net interest margin trends, the deployment of excess liquidity and the sensitivity of funding costs and asset yields to interest-rate changes.
- Credit quality and valuation assumptions for acquired loans, impaired loans, foreclosed property and mortgage-sale indemnification exposures.