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C&F Financial Corp. Reports Operating Results (10-Q)

August 07, 2009 | About:

C&F Financial Corp. (CFFI) filed Quarterly Report for the period ended 2009-06-30.

C&F Financial Corporation operates retail bank branches located throughout the Williamsburg to Richmond corridor in Virginia through its Citizens and Farmers Bank subsidiary and its division Citizens and Commerce Bank. They provide mortgage and title services through C&F Mortgage Corporation\'s offices and offers full investment services through its subsidiary C&F Investment Services Inc. C&F Financial Corp. has a market cap of $57 million; its shares were traded at around $18.75 with a P/E ratio of 13.9 and P/S ratio of 0.6. The dividend yield of C&F Financial Corp. stocks is 5.3%. C&F Financial Corp. had an annual average earning growth of 6.1% over the past 5 years.

Highlight of Business Operations:

Financial Performance Measures. Net income for the Corporation increased to $1.8 million for the second quarter ended June 30, 2009, compared with $1.4 million for the second quarter of 2008. Net income available to common shareholders for the second quarter of 2009 was $1.5 million, or 48 cents per common share assuming dilution, compared with $1.4 million, or 46 cents per common share assuming dilution, for the second quarter of 2008. Net income for the Corporation increased to $3.3 million for the first six months of 2009, compared to $2.8 million for the first six months of 2008. Net income available to common shareholders for the first half of 2009 was $2.7 million, or 89 cents per common share assuming dilution, compared with $2.8 million, or 93 cents per common share assuming dilution, for the first half of 2008. The difference between reported net income and net income available to common shareholders in the three months and six months ended June 30, 2009 is a result of the Series A Preferred Stock dividends and amortization of the Warrant related to the Corporations participation in the Capital Purchase Program. The Series A Preferred Stock and Warrant were issued in the first quarter of 2009 and, therefore, did not impact net income available to common shareholders for 2008. Financial results for the second quarter and first six months of 2009 were primarily affected by the positive effects of the lower interest rate environment on loan production at our Mortgage Banking segment and on the net interest margin at our Consumer Finance segment.

Retail Banking: The Retail Banking segment, which consists of the Bank, reported a net loss of $447,000 for the second quarter of 2009, compared to net income of $179,000 for the second quarter of 2008. The Banks net loss was $308,000 for the first six months of 2009, compared to net income of $788,000 for the first six months of 2008. The decline in 2009 earnings included the effects of (1) margin compression and competition for loans and deposits on net interest income, (2) a higher provision for loan losses attributable to the continued slow down in the economy and an increase in nonperforming assets, most of which are commercial relationships secured by real estate, (3) lower service charges on deposits, (4) higher assessments for deposit insurance resulting from the FDICs special assessment in the second quarter of 2009 to help restore the Deposit Insurance Fund, coupled with the effects of its amended risk-based assessment system and (5) higher nonaccrual loan and foreclosed properties expenses primarily resulting from the work-out of several commercial relationships. The decline in the Banks net interest margin was attributable to interest rate cuts by the Federal Reserve Bank throughout 2008, which reduced yields on the Banks adjustable-rate loans faster than interest rates declined on the Banks deposits, which are its largest source of funds.

Mortgage Banking: Second quarter net income for the Mortgage Banking segment, which consists of C&F Mortgage Corporation (the Mortgage Company), was $1.2 million in 2009, compared to $454,000 in 2008. Net income for the first six months of 2009 was $2.0 million, compared to $738,000 for the first six months of 2008. Earnings in 2009 included the effects of lower interest rates on loan origination volume, which increased 57.5 percent and 66.3 percent for the second quarter and first half of 2009, respectively. For the second quarter of 2009, the amount of loan originations at the

Mortgage Company for refinancings was $171.4 million compared to $54.5 million for the second quarter of 2008. Loan originations for home purchases for these two periods were $162.0 million and $157.2 million, respectively. For the first six months of 2009, the amount of loan originations at the Mortgage Company for refinancings was $391.4 million compared to $117.7 million for the second quarter of 2008. Loan originations for home purchases for these two time periods were $260.9 million and $274.5 million, respectively. Higher loan production in 2009 resulted in gains on sales of loans of $7.4 million and $13.9 million for the three months and six months ended June 30, 2009, respectively, compared to $4.7 million and $8.4 million for the three months and six months ended June 30, 2008, respectively. This increase in revenue was offset in part by (1) increases of $196,000 and $846,000 in the provisions for indemnification and foreclosed properties losses in the second quarter and first half of 2009, respectively, and (2) increases of $1.9 million and $3.6 million in personnel costs in the second quarter and first half of 2009, respectively, resulting principally from higher commission-based compensation associated with the increase in loan production. The increases in the provisions for indemnification and foreclosed properties losses resulted from increased nonperforming loans as a result of continued deterioration of the economy, especially the housing market, together with higher unemployment. While we mitigate the risk of loan repurchase and indemnification liability by underwriting to the purchasers guidelines, we cannot eliminate the possibility that a prolonged period of payment defaults and foreclosures will result in an increase in requests for repurchases or indemnifications and the need for additional indemnification and foreclosed properties loss provisions in the future.

Consumer Finance: Second quarter net income for the Consumer Finance segment, which consists of C&F Finance Company (the Finance Company), was $1.1 million in 2009, compared to $904,000 in 2008. Net income was $1.8 million for the first six months of 2009, compared to $1.6 million for the first six months of 2008. The Finance Company has benefited from growth in average consumer finance loans outstanding since the end of the second quarter of 2008, as well as the decline in its costs of borrowings throughout 2009 compared to 2008. Its fixed-rate loan portfolio is partially funded by a variable-rate line of credit indexed to LIBOR, which has resulted in an increase in its net interest margin during 2009 as short term interest rates fell throughout 2008. However, the Finance Company has experienced higher loan charge-offs in 2009 compared to 2008, which, in combination with loan growth, has resulted in increases in the provision for loan losses of $450,000 in the second quarter of 2009 and $1.5 million in the first half of 2009, compared to the same periods in 2008. We expect the ongoing effects of the economic recession will result in more delinquencies and repossessions at the Finance Company. Depending on the severity of any further downturn in the economy, decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans could result. This could weaken collateral coverage and increase the amount of loss in the event of default.

Capital Management. Total shareholders equity increased $21.4 million to $86.3 million at June 30, 2009, compared to $64.9 million at December 31, 2008. This increase primarily occurred in connection with the Corporations participation in the Treasurys Capital Purchase Program, as previously described. One means by which we manage our capital is through dividends. The Corporations board of directors reduced the Corporations quarterly dividend for the second quarter of 2009 to 25 cents per common share, which resulted in a common dividend payout ratio of 52 percent based on net income available to common shareholders for the second quarter of 2009. This compares to a 76 percent common dividend payout ratio for the first quarter of 2009. In deciding to reduce the Corporations dividend, the board of directors considered the dividend payout in relation to earnings levels and the need to maintain a strong capital position. The board of directors will continue to evaluate the Corporations dividends in light of changes in economic conditions, the Corporations capital levels and its future levels of earnings. Another means by which we historically have managed our capital is through purchases of the Corporations Common Stock. However, as a participant in the Capital Purchase Program there are limitations on the Corporations ability to repurchase Common Stock prior to the earlier of January 9, 2012 or the date on which Treasury no longer holds any of the Corporations Series A Preferred Stock.

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Rating: 1.7/5 (3 votes)

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