CFFI

Business Context and Reporting Period

C & F Financial Corp (a Virginia bank holding company) filed its Form 10-Q for the quarterly period ended March 31, 2011. The company operates through three principal segments: Retail Banking, Mortgage Banking, and Consumer Finance. As of May 5, 2011, 3,132,616 shares of common stock were outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 71.6% year-over-year, driven primarily by the Consumer Finance segment, which reported net income of $2.96 million compared to $2.06 million in Q1 2010.
• Segment Performance:
  • Consumer Finance: Benefited from a 17% increase in average loans, improved net interest margin, and lower charge-offs.
  • Mortgage Banking: Reported net income of $337,000 (up from $158,000) due to higher gains on loan sales and a significant reduction in the provision for indemnification losses ($231k vs $458k) following a settlement with a major investor.
  • Retail Banking: Reported a net loss of $124,000, an improvement from the $361,000 loss in Q1 2010, aided by reduced write-downs on foreclosed properties.
• Asset Quality: Nonperforming assets for Retail and Mortgage Banking totaled $19.1 million (up from $18.4 million at year-end), with nonaccrual loans rising to $9.3 million. However, accruing loans past due 90+ days decreased significantly to $297,000 from $1.03 million.
• Liquidity: Cash and cash equivalents surged to $44.3 million from $9.7 million at year-end, reflecting deposit growth and reduced loan demand in the retail segment.

Outlook, Risks, and Management Commentary

• Capital Management: The company remains "well-capitalized" under regulatory standards. It continues to participate in the Treasury's Capital Purchase Program (CPP), which restricts common stock repurchases and limits dividend increases until January 2012 or until the Treasury divests its preferred stock.
• Dividends: The board maintained the quarterly cash dividend at $0.25 per share. The payout ratio was 29.1% of net income available to common shareholders.
• Key Risks:
  • Economic Conditions: Continued weakness in the housing market and general economic conditions could impact loan demand and asset quality.
  • Asset Quality: While the Consumer Finance segment remains strong, the Retail Banking segment faces ongoing challenges with commercial and residential real estate loans. Management notes that if unemployment rises or auto values decline, the Consumer Finance provision for loan losses may need to increase.
  • Regulatory Environment: Increased compliance costs and the impact of the Dodd-Frank Act are noted as ongoing factors affecting expenses.
• Unusual Items: A $300,000 charge to the provision for loan losses was recorded in Q1 2011 related to the settlement of a lawsuit involving tax credits transferred by a customer prior to bankruptcy.

Investor Verification Checklist

• Consumer Finance Concentration: Verify the sustainability of the Consumer Finance segment's growth and low charge-off rates given its high yield and risk profile (36% of total loans).
• Retail Asset Quality: Monitor the trend of nonaccrual loans in the Retail Banking segment, which increased to $9.3 million, and the adequacy of the specific reserves ($1.9 million) established for these loans.
• Indemnification Reserves: Confirm the stability of the Mortgage Banking segment's indemnification reserve ($1.5 million) following the settlement with the major investor.
• Capital Purchase Program: Review the timeline and conditions for potential repayment of the Treasury's Series A Preferred Stock to assess future flexibility for dividends or buybacks.
• Liquidity Position: Assess the utilization of the $201 million in available funding sources and the strategy for deploying the significant increase in cash balances.