C&F Financial Corporation — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2012; it was filed November 7, 2012. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses. Amounts below are in millions unless noted.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income, reported | $17.1 | $16.0 | $49.5 | $46.0 |
| Provision for loan losses | $3.0 | $4.1 | $8.6 | $10.3 |
| Noninterest income | $9.6 | $7.1 | $24.7 | $19.7 |
| Noninterest expenses | $17.0 | $13.9 | $47.3 | $41.6 |
| Net income | $4.5 | $3.5 | $12.5 | $9.6 |
| Net income available to common shareholders | $4.5 | $3.1 | $12.2 | $8.5 |
| Diluted EPS | $1.36 | $0.96 | $3.69 | $2.69 |
| Annualized net interest margin | 7.94% | 7.84% | 7.84% | 7.64% |
| Annualized ROA / ROE | 1.88% / 18.48% | 1.42% / 15.86% | 1.75% / 17.74% | 1.28% / 14.92% |
Net interest income and margin are also presented on a taxable-equivalent basis in the filing: $17.7 million and 7.94% for Q3 2012, versus $16.6 million and 7.84%; $51.4 million and 7.84% for the first nine months, versus $47.9 million and 7.64%.
Financial position, liquidity and capital
- At September 30, total assets were $961.8 million, up from $928.1 million at December 31, 2011. Gross loans held for investment were $681.2 million, up from $650.7 million; loans held for sale were $78.1 million.
- Deposits were $664.2 million, versus $646.4 million. Noninterest-bearing demand deposits grew to $116.6 million from $95.6 million, while time deposits declined to $292.6 million from $307.9 million.
- Borrowings totaled $171.0 million, compared with $161.2 million at year-end, including $17.4 million of short-term borrowings, $133.0 million of long-term borrowings and $20.6 million of trust preferred capital notes.
- Cash and cash equivalents were $13.7 million. Management reported $54.5 million of liquid assets and $185.1 million of available funding capacity at quarter-end, down from $221.9 million at year-end, primarily because of mortgage-banking funding use and reduced FHLB collateral.
- Nine-month operating cash flow was $18.8 million, versus $49.7 million in 2011; investing cash use was $32.3 million and financing cash provided was $15.8 million. Cash increased $2.2 million over the period. The filing’s cash-flow statement reflects substantial mortgage-loan originations and sales.
- Shareholders’ equity was $98.5 million, up from $96.1 million. The Bank’s actual capital ratios were 15.8% total capital to risk-weighted assets, 14.5% Tier 1 to risk-weighted assets and 11.0% Tier 1 to average assets; each exceeded the stated well-capitalized thresholds.
- The Corporation redeemed its remaining $10 million of Treasury CPP preferred stock in April 2012, ending future preferred dividends. Common dividends declared were $0.27 per share in Q3 and $0.79 per share for the first nine months.
Material changes and operating trends
- Net income and diluted EPS improved year over year in both the quarter and nine-month period. Management attributed the improvement to consumer-finance earnings, stronger mortgage production and gains on loan sales, and lower deposit funding costs and loan-loss provisions in retail banking.
- Mortgage originations rose 54.9% to $239.5 million in Q3 and 44.8% to $619.5 million for the first nine months. Gains on loan sales increased to $6.2 million in Q3 and $15.0 million year to date.
- Consumer-finance loans grew to $270.9 million from $246.3 million at year-end. Segment earnings were $3.2 million in Q3 and $9.8 million year to date; however, loan-loss provisions and charge-offs increased, with management citing repossessed-vehicle resale values and economic conditions.
- Noninterest expenses rose 22.0% in Q3 and 13.6% year to date, primarily from higher staffing and compensation tied to mortgage production, branch initiatives and consumer-finance expansion, as well as mortgage-loan indemnification provisions.
- Asset quality weakened in parts of retail banking: retail/mortgage nonperforming assets were $19.4 million versus $16.7 million at year-end, and nonaccrual loans in those segments rose to $14.8 million from $10.6 million. The increase primarily reflected two commercial relationships secured by undeveloped residential property. Total TDRs were $17.9 million, including $11.4 million on nonaccrual.
- The total allowance for loan losses was $35.0 million, up from $33.7 million. Nine-month net charge-offs were $7.2 million versus $6.5 million in 2011. The consumer-finance allowance was $21.4 million, or 7.90% of that portfolio.
Outlook, risks and contingencies
- No specific earnings or financial targets are provided. Management expected the Federal Reserve’s September 2012 quantitative-easing measures to sustain a low-rate environment, potentially supporting mortgage activity. It cautioned that reinvestment at lower yields could pressure retail-banking margins and that competition and loan pricing could affect consumer-finance margins.
- Management said current loan-loss reserves were adequate, but warned that continued or worsening economic conditions could increase nonperforming loans and require higher provisions. Consumer-finance losses are also exposed to unemployment and vehicle collateral values.
- C&F Mortgage maintains an indemnification reserve for repurchase or other claims on loans sold to investors. The reserve was $2.0 million at quarter-end, after $1.0 million of nine-month provision; potential claims include early defaults, misrepresentation, fraud and underwriting errors.
- The Corporation’s $10 million-notional interest-rate swap hedged a portion of its trust-preferred notes through September 2015; its quarter-end fair value was a $566,000 liability. Securities available for sale had $9.2 million of gross unrealized gains and $60,000 of gross unrealized losses; management considered the securities in loss positions temporarily impaired, not other-than-temporarily impaired.
- Management disclosed no material changes to previously reported risk factors, off-balance-sheet arrangements, contractual obligations or market-risk disclosures. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Investor verification points
- Track commercial real-estate and land-development credit performance, nonaccrual loans, TDRs, charge-offs and reserve adequacy.
- Assess whether elevated mortgage originations and loan-sale gains are sustainable, alongside rising mortgage compensation and indemnification claims.
- Monitor consumer-finance growth, vehicle collateral values, charge-offs and competitive loan pricing.
- Review liquidity and funding capacity as available borrowing capacity declined, and confirm the continued availability of pledged collateral and credit facilities.
- Evaluate sensitivity of net interest margin and securities values to persistently low or changing interest rates, and the treatment of trust-preferred securities under future capital rules.