C&F Financial Corporation — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter report. C&F is a Virginia bank holding company with three principal activities: retail banking, residential mortgage banking, and non-prime auto consumer finance.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total assets, year-end | $928.1 million | $904.1 million |
| Total loans, before allowance, year-end | $650.7 million | $635.6 million |
| Deposits, year-end | $646.4 million | $625.1 million |
| Interest income | $73.8 million | $69.8 million |
| Net interest income | $61.9 million; $64.5 million taxable-equivalent | $56.6 million; $59.0 million taxable-equivalent |
| Net interest margin, taxable-equivalent | 7.66% | 7.17% |
| Provision for loan losses | $14.2 million | $15.0 million |
| Noninterest income | $27.0 million | $29.7 million |
| Noninterest expense | $56.1 million | $60.3 million |
| Net income | $13.0 million | $8.1 million |
| Net income available to common shareholders | $11.8 million | $7.0 million |
| Diluted earnings per common share | $3.72 | $2.24 |
| Cash and cash equivalents, year-end | $11.5 million | $9.7 million |
| Operating cash flow | $28.0 million | $(13.4) million |
| Total shareholders’ equity, year-end | $96.1 million | $92.8 million |
Net interest income, margin and earnings improved as loan yields rose and deposit costs fell, with the higher-yielding consumer finance portfolio contributing to the loan-mix shift. Net cash used in investing activities was $31.2 million; financing activities provided $5.0 million. Liquid assets, as defined by the company, were $49.2 million at year-end. Available borrowing capacity was approximately $221.9 million against $135.9 million outstanding across the listed funding sources.
Material changes and segment results
- Consumer Finance: net income rose to $12.6 million from $9.4 million. Average loans increased 15.9%; lower net charge-offs and low-cost variable-rate funding supported results. Non-prime auto lending remains exposed to borrower defaults and used-car collateral values.
- Mortgage Banking: net income increased to $1.3 million from $782,000, mainly as indemnification provisions declined. Originations fell to $616.4 million from $748.3 million and loan-sale gains declined to $16.1 million from $18.6 million.
- Retail Banking: the segment reported a $432,000 net loss, improved from a $1.5 million loss. Weak loan demand, elevated credit costs and technology-related expenses remained pressures.
- Nonperforming assets in Retail and Mortgage Banking were $16.7 million, down from $18.4 million; foreclosed property fell to $6.1 million, while nonaccrual loans rose to $10.6 million. Troubled debt restructurings increased to $17.1 million from $9.8 million.
- The allowance for loan losses rose to $33.7 million from $28.8 million. Net charge-offs were $9.3 million, versus $10.1 million.
- Deposits increased $21.3 million, mainly through noninterest-bearing demand and money-market accounts. Year-end borrowings were $161.2 million, including $20.6 million of trust preferred notes.
Outlook, risks, contingencies and unusual items
Management said it was well positioned for continued strong earnings in 2012, but provided no specific earnings guidance. It anticipated limited Retail Banking loan growth and continued asset-quality and compliance costs; subdued mortgage demand and regulatory implementation costs; and strong Consumer Finance results if short-term rates remained low, tempered by renewed competition and possible deterioration in credit performance.
- Capital and dividends: the company redeemed $10.0 million, or half, of its Treasury CPP preferred stock in July 2011 using existing resources; $10.0 million remained at year-end. Management’s stated goal was to redeem the balance subject to regulatory approval. The 2011 common dividend was $1.01 per share, and the quarterly dividend rose to $0.26 in the fourth quarter.
- Capital and liquidity: the Corporation’s total risk-based, Tier 1 risk-based and Tier 1 leverage ratios were 16.4%, 15.1% and 11.5%, respectively; the Bank was classified as well capitalized. The ratios included eligible trust preferred securities and CPP preferred stock. Basel III and Dodd-Frank implementation could change capital requirements and raise costs.
- Interest-rate sensitivity: a modeled immediate 200-basis-point rate decline reduced projected 12-month net interest income by 4.63%; a 200-basis-point increase raised it by 0.32%. The filing notes model assumptions and uncertainty.
- Mortgage legal/regulatory matter: following FDIC findings of alleged fair-lending violations at C&F Mortgage, the DOJ investigated and the company settled in September 2011 without factual findings or adjudication. The settlement included policy and monitoring measures and a $140,000 borrower fund. The FDIC upgraded the Bank’s CRA rating to “Satisfactory” in January 2012, removing certain statutory activity restrictions.
- Other exposures: mortgage loan sale agreements can require repurchase or indemnification for specified claims; the year-end allowance was $1.7 million. Off-balance-sheet commitments included $83.5 million of loan commitments and $9.3 million of standby letters of credit. A $10.0 million interest-rate swap hedge had a fair value liability of $515,000.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective as of year-end.
Most important facts for investors to verify
- Whether the $17.1 million of TDRs and rising nonaccrual loans stabilize, and whether the $33.7 million loan-loss allowance remains adequate.
- Whether Consumer Finance growth and low credit losses persist as competition returns and economic or used-car conditions change.
- Whether mortgage originations recover and whether indemnification or repurchase claims exceed the $1.7 million reserve.
- The timing and regulatory approval for redemption of the remaining $10.0 million CPP preferred stock, and its effect on common dividends and capital.
- How new capital, consumer-protection and mortgage regulations affect compliance costs, profitability and business activity.