C&F Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted. C&F is a Virginia bank holding company operating retail banking, mortgage banking, and consumer finance businesses.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $17.6 | $17.1 | $51.7 | $49.5 |
| Provision for loan losses | $3.8 | $3.0 | $10.1 | $8.6 |
| Noninterest income | $5.6 | $6.0 | $17.7 | $15.2 |
| Noninterest expense | $14.5 | $13.4 | $42.1 | $37.8 |
| Net income | $3.4 | $4.5 | $11.6 | $12.5 |
| Diluted earnings per share | $0.97 | $1.36 | $3.37 | $3.69 |
- Quarterly net income fell about 26%; nine-month net income declined about 8%. Higher provisions and operating expenses more than offset increased net interest income.
- Net interest margin was 7.77% for Q3 and 7.73% for the first nine months, down 17 and 11 basis points, respectively, from comparable 2012 periods. The filing presents these margins on a taxable-equivalent basis.
- Annualized ROA and ROE were 1.37% and 12.58% for Q3, versus 1.88% and 18.48% a year earlier. Nine-month measures were 1.56% and 14.52%, versus 1.75% and 17.74%.
- Operating cash flow was $37.2 million for the first nine months, compared with $18.8 million in 2012. Investing used $21.5 million and financing provided $3.0 million; cash and equivalents rose $18.7 million to $44.3 million.
Financial position, liquidity, and capital
- At September 30, total assets were $983.6 million, net loans $649.3 million, deposits $685.2 million, and shareholders’ equity $109.4 million. Total assets and net loans were modestly higher than at December 31, 2012; deposits were nearly unchanged.
- Gross loans were $684.1 million, including $288.1 million in consumer finance loans. The allowance for loan losses was $34.9 million, down from $35.9 million at year-end.
- Total borrowings, including trust preferred capital notes, were approximately $167.3 million. Liquid assets were $77.7 million. The company disclosed $220.0 million of available borrowing capacity across listed funding sources.
- Regulatory capital ratios remained well above stated minimums. The Bank’s total risk-based capital ratio was 17.8%, Tier 1 risk-based ratio 16.5%, and Tier 1 leverage ratio 12.1%.
- Available-for-sale securities were $147.2 million, down from $152.8 million at year-end. Accumulated other comprehensive income fell to $0.5 million from $4.7 million, largely reflecting unrealized securities losses as interest rates rose.
Material changes and business developments
- Net interest income increased 2.9% in Q3 and 4.4% year to date, helped by lower deposit and borrowing costs. Margin pressure persisted as earning-asset yields declined and excess funds were held in low-yield bank deposits.
- Noninterest income declined 5.8% in Q3 but rose 16.2% year to date. Mortgage loan gains were lower in Q3 amid reduced originations; year-to-date results benefited from adopting fair-value accounting for loans held for sale and related commitments. A $270,000 securities gain also supported Q3 income.
- Noninterest expense rose 8.4% in Q3 and 11.3% year to date, reflecting higher staffing and other costs, including $1.1 million of acquisition transaction costs year to date.
- Retail and mortgage banking nonperforming assets declined to $8.0 million from $17.7 million at year-end, mainly following the sale and payoff of troubled commercial credits and sales of foreclosed property. Consumer finance nonaccrual loans increased to $1.3 million from $0.7 million.
- Consumer finance earnings weakened: net income was $2.4 million in Q3 versus $3.2 million, and $8.8 million year to date versus $9.8 million. Higher charge-offs and provisions, lower loan yields, and increased personnel costs offset loan growth and low funding costs.
Outlook, risks, and unusual items
- On October 1, 2013, after quarter-end, C&F completed its acquisition of Central Virginia Bankshares, Inc. CVB shareholders received approximately $853,000 in aggregate, and C&F purchased CVB’s Treasury preferred stock and warrants for $3.35 million, including accrued dividends. Purchase accounting fair values were incomplete when the filing was prepared. The filing’s CVB balance-sheet figures appear to have unclear units in the supplied text.
- Management cautioned that continued interest-rate volatility could further reduce mortgage applications and production, particularly refinancing, and pressure mortgage banking earnings and net interest margin.
- Management cited consumer-finance credit risks from economic uncertainty, lower resale values for repossessed vehicles, and competitors’ looser credit practices; these could sustain elevated charge-offs and provisions. Other risks include loan demand and credit quality, deposit flows, securities values, regulatory changes, and successful integration and expected savings from the acquisition.
- Management stated that current liquidity and loan-loss reserves were adequate, while noting that adverse economic or credit conditions could require higher provisions. No specific earnings or financial guidance was provided.
- Available-for-sale securities had $2.4 million of gross unrealized losses at September 30, versus $0.1 million at year-end. Management attributed the losses primarily to interest-rate movements and considered them temporary; it stated the company expected to hold the securities and was not likely to be forced to sell before recovery.
Important facts for investors to verify
- Post-acquisition results, integration costs, deposit retention, realized synergies, and final fair-value marks for CVB.
- Whether consumer-finance delinquencies, charge-offs, and provision expense stabilize or continue rising.
- Mortgage production, fair-value adjustments, and the effect of interest-rate movements on loan demand and margins.
- Trends in securities valuation and accumulated other comprehensive income, including management’s ability to hold affected securities through recovery.
- Allowance adequacy, troubled-credit resolutions, and the quality of collateral supporting nonperforming and restructured loans.