Business Context and Reporting Period
C & F Financial Corp (C&F) is a financial holding company operating through three principal segments: Retail Banking, Mortgage Banking, and Consumer Finance. This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine months ended on that date. The company is an accelerated filer and is not a shell company. As of November 3, 2009, 3,047,241 shares of common stock were outstanding.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Income | $1,658 | $299 | $4,916 | $3,144 |
| Net Income Available to Common Shareholders | $1,367 | $299 | $4,077 | $3,144 |
| Diluted EPS | $0.45 | $0.10 | $1.34 | $1.03 |
| Total Assets (Period End) | $874,936 | $846,474 | $874,936 | $846,474 |
| Total Deposits (Period End) | $575,405 | $550,725 | $575,405 | $550,725 |
| Net Interest Income | $12,898 | $11,067 | $36,287 | $31,818 |
| Provision for Loan Losses | $4,363 | $3,145 | $12,863 | $8,717 |
| Allowance for Loan Losses (Period End) | $22,916 | $18,086 | $22,916 | $18,086 |
| Net Interest Margin (Annualized) | 6.71% | 5.90% | 6.21% | 5.88% |
| Return on Average Assets (ROA) | 0.63% | 0.14% | 0.62% | 0.52% |
| Return on Average Equity (ROE) | 8.14% | 1.82% | 8.21% | 6.38% |
Material Changes vs. Prior Period
- Profitability Surge: Net income for Q3 2009 increased significantly to $1.66 million from $299,000 in Q3 2008. This improvement is largely due to the absence of a $1.52 million other-than-temporary impairment charge on Fannie Mae and Freddie Mac preferred stock that occurred in Q3 2008.
- Capital Injection: In January 2009, the company participated in the U.S. Treasury's Capital Purchase Program, issuing Series A Preferred Stock and a warrant for $20.0 million. This increased total shareholders' equity from $64.9 million at year-end 2008 to $89.5 million at September 30, 2009.
- Asset Quality Deterioration: Nonperforming assets in the Retail and Mortgage Banking segments rose to $21.3 million (4.54% of total loans and OREO) from $20.6 million at year-end 2008. This includes a significant increase in Other Real Estate Owned (OREO) to $12.8 million, driven by foreclosures on three commercial relationships.
- Provision Increases: The provision for loan losses increased to $4.36 million in Q3 2009 (up from $3.15 million in Q3 2008) and $12.86 million for the nine months ended September 30, 2009 (up from $8.72 million in 2008), reflecting higher charge-offs and economic uncertainty.
- Segment Performance: The Mortgage Banking and Consumer Finance segments were profitable, offsetting a net loss in the Retail Banking segment ($347,000 loss in Q3 2009 vs. $787,000 income in Q3 2008) caused by margin compression and higher nonperforming asset expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects ongoing effects of the economic recession to result in more delinquencies and repossessions, particularly in the Consumer Finance segment. The Retail Banking segment faces continued pressure from nonperforming loans and higher FDIC assessments.
- Capital Constraints: Due to the Capital Purchase Program, the company is restricted from repurchasing common stock and is limited in paying cash dividends exceeding 31 cents per share (the pre-October 2008 rate) until the Treasury no longer holds the preferred stock or until January 9, 2012.
- Risks: Key risks include the quality of the loan portfolio, the value of collateral (particularly real estate), rising unemployment, and the potential for further deterioration in the housing market. The company notes that if economic conditions worsen, higher provisions for loan losses may be necessary.
- Liquidity: The company maintains diverse liquidity sources, including federal funds lines, FHLB advances, and Federal Reserve Bank lines. Liquid assets totaled $85.9 million at September 30, 2009.
Investor Verification Checklist
- Nonperforming Asset Concentration: Verify the status and recovery potential of the three commercial relationships totaling $5.8 million in nonaccrual loans and $12.0 million in foreclosed properties.
- Consumer Finance Charge-offs: Monitor the trend of net charge-offs in the Consumer Finance segment, which increased significantly in 2009 due to economic conditions.
- FDIC Assessments: Confirm the impact of ongoing FDIC special assessments and risk-based premium increases on noninterest expenses.
- Capital Restrictions: Review the specific terms of the Capital Purchase Program regarding dividend limitations and stock repurchase restrictions.
- Allowance Adequacy: Assess whether the current allowance for loan losses ($22.9 million) is sufficient given the rising nonperforming asset ratios and economic outlook.