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

November 06, 2009 | About:
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10qk

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C&F Financial Corp. (CFFI) filed Quarterly Report for the period ended 2009-09-30.

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 $57.8 million; its shares were traded at around $18.99 with a P/E ratio of 11.2 and P/S ratio of 0.6. The dividend yield of C&f Financial Corp. stocks is 5.2%. 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 was $1.7 million for the third quarter of 2009, compared with $299,000 for the third quarter of 2008 ($1.8 million, adjusted to exclude the impairment charge taken in the third quarter of 2008 related to the Corporations investments in perpetual preferred stock of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)). Net income available to common shareholders for the third quarter of 2009 was $1.4 million, or 45 cents per common share assuming

dilution, compared with $299,000, or 10 cents per common share assuming dilution, ($1.8 million, or 60 cents per common share assuming dilution, adjusted to exclude the effect of the impairment charge) for the third quarter of 2008. The Corporations net income was $4.9 million for the first nine months of 2009, compared with $3.1 million for the first nine months of 2008 ($4.7 million, adjusted to exclude the effect of the impairment charge). Net income available to common shareholders for the first nine months of 2009 was $4.1 million, or $1.34 per common share assuming dilution, compared with $3.1 million, or $1.03 per common share assuming dilution ($4.7 million, or $1.52 per common share assuming dilution, adjusted to exclude the effect of the impairment charge), for the first nine months of 2008 The difference between reported net income and net income available to common shareholders in 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 affect net income available to common shareholders for 2008. Financial results for the third quarter and first nine months of 2009 were 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. The favorable performance of these segments in 2009 offset the quarterly and year-to-date 2009 losses at our Retail Banking segment, which principally resulted from the effect of nonperforming loans on interest income, lower overdraft charges on deposit accounts, higher expenses associated with nonaccrual loans and foreclosed properties for which loan loss provisions or write downs to fair market value were necessary, and higher assessments for FDIC deposit insurance, including the special assessment recognized in the second quarter of 2009 to help replenish the Deposit Insurance Fund.

Retail Banking: The Retail Banking segment, which consists of the Bank, reported a net loss of $347,000 for the third quarter of 2009, compared to net income of $787,000 for the third quarter of 2008. The Banks net loss was $655,000 for the first nine months of 2009, compared to net income of $1.6 million for the first nine 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, (3) lower overdraft charges on deposit accounts, (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 Banks net interest margin began compressing as a result of the combination of rapidly declining short-term interest rates and increased competition for deposits during 2008. With interest rates stabilizing more recently, deposit repricing in the lower interest rate environment and the implementation of interest rate floors on adjustable rate loans at the Bank upon origination or renewal have begun to mitigate the effects of the lower interest rate environment, and margins at the Bank have begun to improve and rebound from their lows.

Mortgage Banking: Third quarter net income for the Mortgage Banking segment, which consists of C&F Mortgage Corporation (the Mortgage Company), was $755,000 in 2009, compared to $401,000 in the third quarter of 2008. Net income for the first nine months of 2009 was $2.8 million, compared to $1.1 million for the first nine months of 2008. Earnings in 2009 included the effects of lower interest rates on loan origination volume, which increased 8.4 percent and 46.9 percent for the third quarter and first nine months of 2009, respectively. For the third quarter of 2009, the amount of loan originations at the Mortgage Company for refinancings was $51.5 million compared to $37.6 million for the third quarter of 2008. Loan originations for home purchases for these two periods were $163.1 million and $160.4 million, respectively. For the first nine months of 2009, the amount of loan originations at the Mortgage Company for refinancings was $442.9 million compared to $155.3 million for the first nine months of 2008. Loan originations for home purchases for these two time periods were $424.0 million and $434.9 million, respectively. Higher loan production in 2009 resulted in gains on sales of loans of $5.5 million and $19.4 million for the three months and nine months ended September 30, 2009, respectively, compared to $4.5 million and $12.9 million for the three months and nine months ended September 30, 2008, respectively. This increase in revenue was offset in part by (1) increases of $224,000 and $1.1 million in the combined provisions for indemnification and foreclosed property losses in the third quarter and first nine months of 2009, respectively, and (2) increases of $406,000 and $4.0 million in personnel costs in the third quarter and first nine months of 2009, respectively, resulting principally from higher variable compensation associated with the increase in loan production and net income. The increases in the provisions for indemnification and foreclosed property losses resulted from increased nonperforming loans due to recourse resulting from borrower fraud and the continued deterioration of the U.S. economy, especially in the housing markets, 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 property loss provisions in the future.

Consumer Finance: Third quarter net income for the Consumer Finance segment, which consists of C&F Finance Company (the Finance Company), was $1.4 million in 2009, compared to $826,000 in 2008. Net income was $3.2 million for the first nine months of 2009, compared to $2.5 million for the first nine months of 2008. The Finance Company has benefited from growth in average consumer finance loans outstanding since the end of the third 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 $330,000 in the third quarter of 2009 and $1.8 million in the first nine months of 2009, compared to the same periods in 2008. We expect the ongoing effects of the economic recession will result in more delinquencies and

Capital Management. Total shareholders equity increased $24.7 million to $89.5 million at September 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 Corporation maintained its quarterly dividend for the third quarter of 2009 at 25 cents per common share, which resulted in a common dividend payout ratio of 56 percent based on net income available to common shareholders for the third quarter of 2009. 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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