C&F Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results. C&F is a Virginia bank holding company with retail banking, mortgage banking and consumer finance businesses.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $17.1m | $16.5m | $34.1m | $32.4m |
| Provision for loan losses | $3.1m | $2.9m | $6.3m | $5.6m |
| Noninterest income | $7.0m | $4.6m | $12.1m | $9.3m |
| Noninterest expense | $14.5m | $12.1m | $27.6m | $24.4m |
| Net income | $4.2m | $4.2m | $8.2m | $8.0m |
| Diluted EPS | $1.22 | $1.22 | $2.41 | $2.33 |
- Q2 revenue (interest income plus noninterest income) was $26.2m, up from $23.7m; first-half revenue was $50.4m, versus $47.1m. Mortgage loan-sale gains drove much of the increase.
- Net interest margin was 7.67% in Q2 versus 7.87% a year earlier; first-half margin was 7.71% versus 7.75%. Lower funding costs partly offset lower earning-asset yields.
- Annualized return on average assets/equity was 1.69%/15.65% in Q2, compared with 1.77%/17.96%; first-half measures were 1.66%/15.55%, versus 1.69%/17.35%.
- Six-month operating cash flow was $28.4m, investing cash outflow $5.0m and financing cash inflow $10.8m. Cash and cash equivalents ended at $59.8m, up from $25.6m at year-end 2012.
Financial position, liquidity and capital
- Total assets were $992.7m at June 30, up from $977.0m at December 31, 2012. Gross loans were $673.3m, down from $676.2m; consumer finance loan growth partly offset weaker retail-bank lending.
- Deposits totaled $693.8m, up from $686.2m. Noninterest-bearing demand deposits rose $11.8m; time deposits fell $5.7m. Total borrowings, including trust preferred notes, were approximately $167.1m, versus $162.7m at year-end.
- Liquid assets were $94.4m. Disclosed borrowing capacity was $346.3m, of which $213.3m was available. Management said liquidity was sufficient for operational requirements and contractual obligations.
- Shareholders’ equity was $105.8m, versus $102.2m. The Corporation declared dividends of $0.29 per share for Q2 and $0.58 for the first half.
- At June 30, the Corporation’s total capital/risk-weighted-assets ratio was 17.7%, and Tier 1 capital/average-assets ratio was 11.9%. The Bank’s corresponding ratios were 17.5% and 11.7%; both exceeded the disclosed “well capitalized” thresholds.
Changes, credit quality and unusual items
- Mortgage banking gains on loan sales rose to $3.6m in Q2 from $1.6m and to $5.3m for the first half from $3.0m. C&F Mortgage began mandatory-delivery sales for some loans and elected fair-value accounting for loans held for sale and related commitments. Management attributed approximately $1.1m of pretax income in both Q2 and the first half to this accounting election, which recognizes gains earlier in the loan-origination process.
- Noninterest expense increased 19.8% in Q2 and 12.9% for the first half, reflecting higher staffing and operating costs, a loss on sale of a banking facility, and CVB merger costs. Merger transaction expenses were $581,000 in Q2 and $782,000 year to date; $430,000 of first-half costs were nondeductible.
- Nonperforming assets in retail and mortgage banking declined to $10.7m from $17.7m at year-end. The improvement largely reflected the sale of notes from one commercial relationship; the sale included a $2.1m charge-off previously covered by reserves. Retail/mortgage nonaccrual loans were $6.8m; foreclosed property was $3.9m.
- First-half net charge-offs were $7.4m versus $3.8m a year earlier, including the $2.1m commercial charge-off. Consumer finance charge-offs also increased, partly reflecting lower resale prices for repossessed vehicles. The total loan-loss provision rose to $6.3m from $5.6m.
- Available-for-sale securities had $1.959m of gross unrealized losses at June 30, versus $76,000 at year-end, as market interest rates rose. The filing attributed the declines primarily to rate movements, classified the affected debt securities as temporarily impaired, and recorded no other-than-temporary impairment. First-half other comprehensive loss was $3.7m, largely due to securities valuation changes.
Outlook, transaction and risks
- No numerical earnings or revenue guidance was provided. Management warned that ongoing Treasury-yield volatility could reduce mortgage demand, particularly refinancing, and that margin pressure could continue if loan growth remains weak, earning-asset yields fall faster than funding costs, or auto-finance competition drives down loan yields.
- On June 10, C&F agreed to acquire Central Virginia Bankshares (CVB) in an all-cash transaction valued at approximately $855,000 for common shares, and to redeem CVB’s Treasury preferred stock and warrants for $3.35m. Closing was expected in Q4 2013, subject to shareholder, regulatory and other conditions. C&F projected combined assets of about $1.35bn and deposits of about $1.0bn.
- A key closing risk: C&F may refuse to complete the merger if CVB investment-portfolio unrealized losses exceed $7.0m; C&F estimated them at $8.1m as of June 30. Failure to close could leave C&F with substantial transaction expenses and no expected acquisition benefits. Integration, customer and employee retention, regulatory conditions and management distraction are also cited risks.
- Other key risks include interest-rate and securities-value volatility, economic and real-estate conditions, loan quality and collateral values, auto resale prices, deposit flows, mortgage repurchase/indemnification claims, competition, regulation and reliance on third parties. Management considered the loan-loss and mortgage indemnification reserves adequate, while noting estimates are judgmental and could change.
- Disclosure controls were reported effective as of June 30, 2013; the filing reported no material second-quarter change in internal control over financial reporting.
Investor verification priorities
- Verify the CVB merger’s subsequent status, required approvals and resolution of the $8.1m estimated unrealized losses versus the $7.0m contractual threshold.
- Assess how much mortgage-segment earnings growth came from the $1.1m fair-value accounting effect and whether loan-sale gains and production are sustainable.
- Track consumer-finance delinquencies, charge-offs, vehicle collateral values and reserve adequacy, as well as the commercial loan portfolio after the relationship sale.
- Monitor net interest margin, excess cash deployment, deposit mix and funding costs under changing interest rates.
- Review the effect of securities valuation losses on accumulated other comprehensive income, equity and regulatory capital.