C&F Financial Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net interest income | $16.5 | $15.4 | $32.4 | $30.0 |
| Provision for loan losses | $2.9 | $3.4 | $5.6 | $6.2 |
| Noninterest income | $7.7 | $6.4 | $15.1 | $12.8 |
| Noninterest expense | $15.2 | $14.0 | $30.3 | $27.9 |
| Net income | $4.2 | $3.1 | $8.0 | $6.1 |
| Net income available to common shareholders | $4.0 | $2.8 | $7.7 | $5.5 |
| Diluted earnings per common share | $1.22 | $0.88 | $2.33 | $1.73 |
- Taxable-equivalent net interest margin was 7.87% for Q2 and 7.75% for the first half, up from 7.71% and 7.55%, respectively. Management attributed the improvement chiefly to lower deposit costs.
- Annualized return on assets and return on equity were 1.77% and 17.96% for Q2, versus 1.24% and 14.41% a year earlier.
- Mortgage loan originations rose 38.7% to $206.7 million in Q2 and 39.1% to $379.9 million in the first half. First-half gains on loan sales increased to $8.8 million from $7.5 million.
Financial position, liquidity and credit
- Total assets were $949.7 million, up from $928.1 million at year-end. Gross loans held for investment were $670.1 million, versus $650.7 million; consumer finance loans grew to $263.8 million from $246.3 million.
- Deposits were $657.4 million, up from $646.4 million. Short- and long-term borrowings totaled $155.4 million; including $20.6 million of trust preferred capital notes, total borrowings were $176.0 million, compared with $161.2 million at year-end.
- Shareholders’ equity was $93.9 million, down from $96.1 million, principally reflecting the $10 million preferred-stock redemption, partly offset by earnings. The Bank’s total risk-based capital ratio was 15.4%, and its Tier 1 leverage ratio was 10.8%.
- Cash and cash equivalents were $10.9 million, versus $11.5 million at year-end. Six-month operating cash flow was $3.9 million, down from $35.5 million; investing activities used $19.0 million and financing activities provided $14.6 million. Higher mortgage-loan originations and sales affected operating cash flows.
- Management reported liquid assets of $52.8 million and $194.2 million of available funding capacity at June 30. Available capacity declined from $221.9 million at year-end, mainly due to federal funds used for mortgage banking needs; management said liquidity remained sufficient.
- The allowance for loan losses was $35.5 million, up from $33.7 million. First-half net charge-offs were $3.8 million, down from $4.8 million. Combined retail and mortgage nonperforming assets were $16.6 million, compared with $16.7 million at year-end; troubled debt restructurings were $15.8 million, down from $17.1 million.
Changes, outlook and risks
- Year-over-year earnings improved, supported by consumer finance loan growth and low funding costs, higher mortgage production and loan-sale gains, and lower loan-loss provisions. Expense growth, particularly personnel costs, partly offset those gains.
- Retail banking reported net income of $0.6 million for Q2 versus a $0.2 million loss a year earlier; mortgage banking earned $0.4 million versus $0.2 million; consumer finance earned $3.3 million versus $3.2 million.
- On April 11, 2012, the company redeemed the remaining $10 million of Treasury CPP preferred stock and paid $78,000 in accrued dividends. It will have no future preferred dividends; accelerated discount accretion reduced Q2 income available to common shareholders by about $151,000.
- No specific earnings or financial guidance was provided. Management cautioned that margins could be pressured if loan and deposit growth cannot be deployed in higher-yielding assets, and cited competition from lenders re-entering auto finance. Risks also include economic and real-estate conditions, interest rates, loan quality and collateral values, unemployment, mortgage-loan repurchase/indemnification claims, deposit flows and regulatory changes.
- Management said loan-loss reserves were adequate, but a deterioration in economic conditions could increase nonperforming loans and required provisions. Consumer finance credit losses could rise if unemployment remains elevated or vehicle collateral values decline.
- The company reported no material changes to previously disclosed risk factors or off-balance-sheet arrangements. Disclosure controls were deemed effective; no material internal-control changes were reported.
Key facts for investors to verify
- Whether commercial real-estate credit deterioration, including the identified undeveloped-property relationship, results in further nonaccruals, charge-offs or reserve needs.
- Whether consumer finance loan growth can continue without higher charge-offs, given increased competition and the segment’s 7.92% allowance-to-loans ratio.
- Whether mortgage production, loan-sale margins and indemnification claims remain supportive of mortgage banking earnings.
- How deposit mix, borrowing needs and available funding capacity evolve, and whether liquidity remains adequate as mortgage banking grows.
- The effects of persistently low rates, including on net interest margin, reinvestment yields and competitive loan pricing.