C&F Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The unaudited consolidated results cover the bank holding company and its subsidiaries, including retail banking, mortgage banking and consumer finance. Financial statement amounts below are in U.S. dollars; millions are used unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Interest income | $18.37m | $17.36m | $36.00m | $33.95m |
| Net interest income, reported | $15.40m | $14.04m | $29.97m | $27.26m |
| Provision for loan losses | $3.39m | $3.30m | $6.21m | $6.50m |
| Noninterest income | $6.36m | $7.19m | $12.82m | $13.08m |
| Noninterest expenses | $13.97m | $16.21m | $27.92m | $29.80m |
| Net income | $3.08m | $1.42m | $6.05m | $3.15m |
| Net income available to common shareholders | $2.79m | $1.13m | $5.47m | $2.57m |
| Diluted EPS | $0.88 | $0.36 | $1.73 | $0.83 |
- Taxable-equivalent net interest margin was 7.71% for Q2 and 7.55% for the first half, compared with 7.16% and 7.01% in 2010. Annualized Q2 ROA was 1.24% and ROE 14.41% (0.51% and 6.51% in Q2 2010).
- At June 30, total assets were $906.57m, net loans $620.95m, deposits $625.85m, total borrowings including trust preferred notes $161.49m, and shareholders’ equity $99.11m. The allowance for loan losses was $30.21m.
- Six-month operating cash flow was $35.53m, versus cash used of $24.00m in 2010; investing activities used $26.23m and financing activities used $3.86m. Cash and cash equivalents ended at $15.12m, up $5.44m from year-end.
- Liquid assets, including nonpledged available-for-sale securities, totaled $62.48m. Disclosed borrowing capacity was $350.89m, of which $215.92m was available.
- At June 30, the Corporation’s total capital/risk-weighted assets ratio was 17.2% and Tier 1/risk-weighted assets was 15.9%; the Bank’s ratios were 17.0% and 15.7%. Management stated the Corporation and Bank exceeded applicable well-capitalized standards.
Material changes and drivers
- Q2 net income more than doubled year over year. Higher net interest income and sharply lower other expenses—especially mortgage-loan indemnification provisions—were key contributors. Lower mortgage gains and higher income tax expense partly offset these benefits.
- Consumer Finance was the principal earnings engine: Q2 net income rose to $3.15m from $2.43m, supported by loan growth, low-cost funding and improved first-half credit performance. Consumer finance loans grew to $243.77m from $220.75m at year-end.
- Retail Banking recorded a Q2 net loss of $154,000 and a first-half net loss of $278,000. Management cited weak customer loan demand, elevated credit provisions, lower-yielding intercompany lending and increased compliance and regulatory costs. Average customer loans in the segment fell year over year.
- Mortgage Banking returned to profit: Q2 net income was $232,000 versus a $938,000 loss. However, originations fell to $148.99m from $208.88m, and Q2 loan-sale gains declined to $3.70m from $4.68m. Lower indemnification provisions and compensation costs helped earnings.
- Total loans held for investment increased to $651.16m from $635.58m, principally due to consumer finance growth; commercial and construction balances declined. Deposits were nearly flat, while the mix shifted toward noninterest-bearing demand deposits and away from time deposits. Borrowings declined modestly.
Outlook, risks and unusual items
- Management identified weak loan demand and a challenging housing and economic environment. It warned that retail banking margins could compress if deposit growth and loan repayments cannot be redeployed into new loans, and that mortgage income may remain pressured while housing and mortgage demand are subdued.
- Credit indicators were mixed: nonperforming assets in Retail Banking and Mortgage Banking declined to $17.00m from $18.44m at year-end, largely due to foreclosed-property sales, but nonaccrual loans increased to $8.82m from $7.77m. Troubled debt restructurings rose to $12.47m from $9.77m, including a modified $2.29m commercial relationship. Special-mention loans increased to $34.71m from $27.29m.
- Management considered loan-loss reserves adequate but noted that a worsening economy could increase nonperforming loans and require higher provisions. Consumer Finance is exposed to unemployment, auto-loan delinquencies and collateral-value declines; retail credit is exposed to commercial and residential real estate conditions.
- Mortgage loan sales carry indemnification/repurchase exposure for specified defaults, fraud, misrepresentation or underwriting issues. The indemnification allowance was $1.54m at June 30; management’s estimate is subject to uncertainty.
- On July 27, 2011, after quarter-end, the Corporation redeemed $10.00m (half) of its Treasury CPP preferred stock for $10.10m, using existing resources. Annual preferred dividends are expected to fall by $500,000, while accelerated discount accretion is expected to reduce common earnings by about $213,000 in Q3. CPP restrictions on dividends and common-stock repurchases remained relevant.
- Management cited interest-rate, economic, regulatory, credit, liquidity, competition, technology and third-party-service risks. It provided no specific earnings or revenue guidance. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether rising TDRs, nonaccrual loans and special-mention balances lead to higher charge-offs or loan-loss provisions.
- Whether Consumer Finance growth and credit performance remain sufficient to offset weakness in Retail Banking and Mortgage Banking.
- Mortgage origination volumes, loan-sale gains and adequacy of the indemnification reserve as housing-market conditions evolve.
- The post-redemption effects on capital ratios, preferred dividends, common earnings and CPP-related restrictions.
- Whether liquidity and net interest margin withstand changes in rates, deposit mix, loan demand and funding costs.