C&F Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. C&F is a Virginia bank holding company operating retail banking, mortgage banking and consumer finance businesses. Unless stated otherwise, dollar amounts are in millions.
Financial performance
- Net income: $4.01, up 6.0% from $3.78 in Q1 2012. Diluted EPS was $1.19 versus $1.11; 2012 common earnings were reduced by preferred-stock charges that did not recur in 2013.
- Net interest income: $16.98 on the income statement, up from $15.92. On a taxable-equivalent basis, management reported $17.57 versus $16.54. Taxable-equivalent net interest margin rose to 7.75% from 7.63%; annualized ROA was 1.64% versus 1.60%, while ROE declined to 15.46% from 16.73%.
- Revenue and expenses: Noninterest income increased 11.0% to $8.19, including $4.80 of mortgage-loan sale gains. Noninterest expense rose 7.1% to $16.13, led by personnel and other operating costs. The provision for loan losses was $3.18 versus $2.73; the effective tax rate was 31.7%.
- Cash flow: Operating activities provided $34.38, compared with $14.86 in Q1 2012; investing used $3.10 and financing provided $13.82. Cash and cash equivalents increased $45.11 to $70.73. Operating cash flow reflects the high-volume origination and sale of mortgage loans.
- Balance sheet and funding: Assets were $993.38, up from $977.02. Net loans were $641.20; available-for-sale securities were $150.52. Deposits totaled $696.46, up from $686.18. Borrowings, including trust preferred notes, were $167.22, versus $162.75.
- Liquidity and capital: Management reported $102.3 of liquid assets, including nonpledged securities, and $198.0 of available borrowing capacity. Shareholders’ equity was $104.91. The Bank’s total risk-based capital ratio was 17.1% and Tier 1 leverage ratio 11.4%; it exceeded the disclosed “well capitalized” thresholds.
Changes and business drivers
- Consumer Finance remained the largest earnings contributor, with segment net income of $3.05 versus $3.26 a year earlier. Loan growth and low variable-rate funding costs were offset by higher credit losses, lower loan yields amid competition, and expansion-related costs.
- Mortgage Banking net income increased to $0.55 from $0.42. Loan sales volume rose to $205.5 from $179.6, while originations increased to $178.2 from $173.3.
- Retail Banking net income improved to $0.70 from $0.31, supported by lower deposit costs, lower provision expense and higher overdraft fees. Management cited weak loan demand and intensified competition.
- Net charge-offs rose to $5.17 from $1.65. A $2.1 charge-off followed the sale of $10.9 in notes from one commercial relationship; management said prior reserves covered the charge-off and did not anticipate similar large-relationship charge-offs during the rest of 2013.
- Nonperforming assets in Retail and Mortgage Banking declined to $11.65 from $17.70, mainly reflecting the note sale and dispositions of foreclosed properties. The allowance for loan losses ended at $33.92, down from $35.91.
- Common dividends declared were $0.29 per share, up from $0.26. Comprehensive income was $3.51 versus $3.92, as unrealized securities losses reduced other comprehensive income.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected short-term interest rates to remain low and noted that further deposit-cost reductions would have less effect on margins than in 2012. Excess liquidity invested in lower-yielding assets, asset-yield compression, and competition in automobile lending could pressure margins.
- Credit risks include elevated consumer-finance charge-offs, lower resale prices of repossessed vehicles, economic weakness, and potential deterioration in commercial or residential real estate. Management considered reserves adequate but said worsening conditions could require higher provisions.
- C&F Mortgage’s loan-sale agreements include representations and warranties and potential repurchase or indemnification claims. The indemnification reserve was $2.08, after a $0.23 provision and $0.24 in payments during the quarter.
- Available-for-sale securities had $0.23 of gross unrealized losses; management attributed these primarily to interest-rate movements and did not recognize an impairment. Securities fair value declined to $150.52 from $152.82.
- Risk factors were reported as not materially changed from the 2012 Form 10-K. Management identified interest rates, economic and market conditions, regulation, loan quality, deposit flows, mortgage demand, and counterparty strength among the factors that could affect results. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether consumer-finance credit costs and net charge-offs stabilize, and whether the $33.92 loan-loss allowance remains adequate.
- Whether reported improvement in nonperforming assets persists after accounting for the commercial-note sale and related $2.1 charge-off.
- Whether mortgage origination and loan-sale gains are sustainable as interest rates, refinancing demand and secondary-market conditions change.
- How low rates, deposit repricing, competition and deployment of excess liquidity affect net interest margin and earnings.
- The terms and future regulatory treatment of $20.62 in trust preferred capital notes, which were included in reported regulatory capital.