C&F Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Virginia-based bank holding company with retail banking, mortgage banking, and consumer finance businesses. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless stated otherwise. Dollar amounts below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total interest and noninterest income | $26.06 | $25.56 | $74.63 | $72.59 |
| Net interest income, reported | $15.99 | $14.40 | $45.96 | $41.66 |
| Provision for loan losses | $4.08 | $3.72 | $10.29 | $10.22 |
| Net income | $3.51 | $2.59 | $9.57 | $5.73 |
| Net income available to common shareholders | $3.06 | $2.30 | $8.53 | $4.87 |
| Diluted earnings per common share | $0.96 | $0.74 | $2.69 | $1.57 |
| Net interest margin, taxable-equivalent, annualized | 7.84% | 7.24% | 7.64% | 7.09% |
- Cash flow: Nine-month operating cash flow was $49.68 million, investing cash flow was negative $30.31 million, and financing cash flow was negative $5.41 million. Cash and cash equivalents rose $13.95 million to $23.63 million.
- Balance sheet and funding: Total assets were $908.90 million versus $904.14 million at year-end 2010. Deposits were $637.37 million versus $625.13 million. Borrowings, including trust preferred capital notes, totaled $159.42 million versus $164.14 million.
- Liquidity and capital: Liquid assets were $68.2 million. Reported available borrowing capacity was $221.83 million. Shareholders’ equity was $93.27 million. The Bank’s total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 16.0%, 14.7%, and 11.1%, respectively; the filing states the Bank exceeded well-capitalized standards.
- Credit quality: Gross loans held for investment were $655.51 million, with an allowance of $32.59 million (4.97% of gross loans overall). Retail and mortgage nonperforming assets were $14.96 million, down from $18.44 million at year-end; TDRs increased to $15.53 million from $9.77 million. Substandard loans rose to $30.51 million from $23.82 million. Consumer finance loans grew to $247.75 million from $220.75 million.
Material changes and management commentary
- Net income rose 36% in Q3 and 67% for the first nine months. Management attributed improvement chiefly to Consumer Finance growth, higher loan yields from a shift toward that segment, and lower funding costs.
- Consumer Finance net income increased to $3.37 million for Q3 and $9.48 million for nine months. Average loans grew 17.3% and 16.9%, respectively; lower charge-offs and recoveries also helped.
- Retail Banking remained loss-making: Q3 net loss was $217,000 and nine-month net loss was $495,000. Management cited weak loan demand, elevated credit provisions, compliance-related personnel costs, and technology spending. It warned that margin could face pressure if repayments and deposit growth cannot be redeployed into loans.
- Mortgage Banking earned $477,000 in Q3, down from $656,000, while nine-month income improved to $1.05 million from a $124,000 loss. Q3 originations fell to $154.6 million from $201.8 million; nine-month originations fell to $427.7 million from $545.2 million. Lower loan-sale gains were partly offset by lower compensation and indemnification provisions.
- Noninterest income declined 8.7% in Q3 and 5.7% year to date, mainly from lower mortgage loan-sale gains. Noninterest expense declined 6.0% and 6.7%, largely because mortgage indemnification expense was lower and OREO costs fell.
- Nonperforming assets declined mainly through OREO sales, but TDRs and substandard loans increased. Two commercial relationships totaling approximately $5.35 million were restructured and remained on nonaccrual, although borrowers were making payments under modified terms.
Outlook, risks, contingencies, and unusual items
- The filing provides no numerical earnings or revenue guidance. Management expects mortgage income, particularly gains on loan sales, to remain pressured while housing conditions and mortgage demand are weak. It cautions that continued or worsening economic conditions could raise nonperforming loans and required provisions.
- Key disclosed risks include interest-rate changes, economic and employment conditions, real estate and used-car values, loan and indemnification losses, deposit flows, competition, regulatory developments, and demand for mortgage and other loan products. Management also flags possible margin pressure from reinvesting excess funds at lower yields.
- On July 27, 2011, the company redeemed $10.0 million, or half, of Treasury CPP preferred stock, paying $10.1 million including accrued dividends from existing resources. Accelerated discount accretion reduced Q3 income available to common shareholders by about $213,000; annual preferred dividends are expected to fall by $500,000. CPP restrictions generally limit common dividends above $0.31 per share and share repurchases until the earlier of January 9, 2012 or Treasury ceasing to hold the preferred stock.
- A September 30 consent order with the Department of Justice concerning alleged fair-lending violations requires policy, procedure, and monitoring measures and a $140,000 borrower settlement fund; court approval was pending. The company denied wrongdoing and said the matter was not expected to materially adversely affect results or financial condition.
- A separate tax-credit lawsuit settlement in April resulted in a $300,000 first-quarter 2011 loan-loss provision; a further $200,000 expense had been accrued in 2010. The company said no additional settlement expense would be accrued.
- Management reported effective disclosure controls at September 30, 2011, no material changes in internal control over financial reporting, and no material changes to previously disclosed risk factors or market-risk disclosures.
Most important facts for investors to verify
- Whether rising TDRs, substandard loans, and nonaccrual balances lead to higher charge-offs or provisions, especially in commercial real estate and residential second liens.
- Whether Consumer Finance growth and credit performance remain strong, including the impact of unemployment and used-car prices on collateral and losses.
- Whether mortgage originations and loan-sale gains stabilize, and whether indemnification claims remain manageable.
- Whether deposit growth, available borrowing capacity, and capital remain adequate while the company continues CPP repayment and observes related dividend and repurchase limits.
- Whether the DOJ consent order receives court approval and required compliance measures are implemented; the filing states approval was pending.