C&F Financial Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 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 operations. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / December 31, 2011 |
|---|---|---|
| Net income | $3.78 million | $2.97 million in Q1 2011 |
| Net income available to common shareholders | $3.63 million; diluted EPS $1.11 | $2.68 million; diluted EPS $0.85 in Q1 2011 |
| Net interest income | $15.92 million GAAP; $16.54 million taxable-equivalent | $14.57 million GAAP; $15.20 million taxable-equivalent in Q1 2011 |
| Net interest margin | 7.63% taxable-equivalent, annualized | 7.29% in Q1 2011 |
| Provision for loan losses | $2.73 million | $2.82 million in Q1 2011 |
| Total assets | $945.5 million | $928.1 million |
| Loans held for investment, gross | $660.8 million; allowance $34.8 million | $650.7 million; allowance $33.7 million |
| Deposits | $660.6 million | $646.4 million |
| Borrowings | $158.4 million, including trust preferred notes | $161.2 million |
| Shareholders’ equity | $99.5 million | $96.1 million |
| Cash and cash equivalents | $26.4 million | $11.5 million |
| Operating cash flow | $14.9 million | $45.0 million in Q1 2011 |
Annualized ROA and ROE were 1.60% and 16.73%, respectively, compared with 1.19% and 14.51% in Q1 2011. Common dividends declared were $0.26 per share, versus $0.25 a year earlier.
Material changes and management commentary
- Net income rose 27% year over year. Management attributed the improvement to stronger results across the principal businesses, particularly Consumer Finance, alongside higher mortgage loan-sale gains and lower funding costs in retail banking.
- Mortgage originations increased 39.7% to $173.3 million; loan sales were $179.6 million versus $163.1 million. Gains on loan sales increased to $4.10 million from $3.80 million.
- Consumer Finance loans grew to $252.3 million from $246.3 million at year-end. The segment earned $3.3 million, up from $3.0 million.
- Retail Banking reported income of $307,000 versus a loss of $124,000. Management cited lower deposit costs, lower loan-loss provision and FDIC costs, partly offset by weak loan demand, competition and higher technology-related occupancy costs.
- Noninterest income rose 14.3% to $7.38 million; noninterest expense increased 7.9% to $15.06 million, primarily due to higher personnel and occupancy costs.
- Nonperforming assets in Retail and Mortgage Banking were $19.3 million, or 4.65% of their loans and OREO, versus $16.7 million and 4.07% at year-end. Retail nonaccrual loans increased mainly because one commercial relationship secured by undeveloped residential property moved to nonaccrual status. OREO declined to $5.2 million from $6.1 million.
- Total troubled debt restructurings were $16.7 million, including $8.6 million on nonaccrual, compared with $17.1 million and $8.4 million, respectively, at year-end. The allowance for loan losses was 5.26% of gross loans overall; the Consumer Finance allowance was 7.94% of that segment’s loans.
Liquidity, capital, outlook and risks
- Liquid assets totaled $64.5 million, compared with $49.2 million at year-end. Management reported $221.7 million of available borrowing capacity across disclosed facilities and considered liquidity adequate for operations and contractual obligations.
- At March 31, the Bank’s total capital ratio was 16.5%, Tier 1 risk-based capital ratio 15.2%, and Tier 1 leverage ratio 11.5%; each exceeded the disclosed “well capitalized” thresholds.
- On April 11, 2012, after quarter-end, the Corporation redeemed its remaining $10.0 million Treasury preferred stock and paid $78,000 of accrued dividends. It expects to incur approximately $151,000 of preferred-stock discount accretion in Q2, reducing common earnings, while eliminating future preferred dividends and accretion. Management said the redemption was funded without raising capital.
- The Corporation intended to negotiate repurchase of the Treasury warrant for 167,504 common shares. The purchase price and any resulting capital reduction were not specified.
- No numerical earnings or revenue guidance was provided. Management cautioned that retail banking margins could be pressured if loan and deposit growth is redeployed into lower-yielding assets. Consumer Finance margins may face competition from auto lenders. Economic weakness, unemployment, interest rates, collateral values, used-car prices, mortgage-market demand, regulation, competition and counterparty performance were identified as risks.
- The filing reported no material change in previously disclosed risk factors, off-balance-sheet arrangements, contractual obligations or market-risk disclosures. Mortgage loan sales carry indemnification and repurchase exposure for specified defaults, misrepresentation, fraud or underwriting issues; the reserve was $1.83 million.
Most important facts for investors to verify
- Whether rising commercial nonaccruals and nonperforming assets—especially the undeveloped-property relationship—are adequately reserved and recoverable at current collateral values.
- Whether Consumer Finance loan growth, charge-offs and the 7.94% allowance remain consistent with management’s assumptions, particularly if unemployment rises or used-car values weaken.
- Whether mortgage origination and gain-on-sale levels can be sustained as interest rates, refinancing demand and secondary-market conditions change.
- The Q2 effect of the preferred-stock redemption and the eventual cost and capital impact of any Treasury warrant repurchase.
- Whether cash-flow comparability is distorted by mortgage loan sales and originations: Q1 operating cash flow fell to $14.9 million from $45.0 million, while these mortgage-related flows were substantial.