WEST POINT, Va., Oct. 24 /PRNewswire-FirstCall/ -- C&F Financial Corporation (Nasdaq: CFFI), the one-bank holding company for C&F Bank, today reported net income of $3.14 million, or $1.04 per share assuming dilution, for the first nine months of 2008, compared with net income of $6.76 million, or $2.12 per share assuming dilution, for the first nine months of 2007. The corporation's net income was $299,000, or 10 cents per share assuming dilution, for the third quarter of 2008, compared with $2.28 million, or 73 cents per share assuming dilution, for the third quarter of 2007.

Net income for the first nine months and third quarter of 2008 included a $1.52 million other-than-temporary impairment charge related to the corporation's investments in perpetual preferred stock of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Excluding this impairment charge, the corporation's earnings were $4.67 million, or $1.54 per share assuming dilution, for the first nine months of 2008 and $1.82 million, or 61 cents per share assuming dilution, for the third quarter of 2008. The impairment in the corporation's holdings of these government-sponsored entities (GSEs) resulted from the decline in market value of these shares in connection with the federal government's takeover of Fannie Mae and Freddie Mac in September 2008, along with the elimination of dividends on these shares. As a result of the Emergency Economic Stabilization Act of 2008 (EESA), which provides tax relief to banking organizations that have suffered losses on preferred holdings of Fannie Mae and Freddie Mac by changing the character of these losses from capital to ordinary for federal income tax purposes, the corporation will record approximately $578,000 of deferred income tax benefit and a deferred tax asset in the fourth quarter of 2008, the period of enactment of the new law. The aggregate charge to income net of income taxes related to the other-than-temporary impairment of the preferred stock holdings in Fannie Mae and Freddie Mac over the third and fourth quarters of 2008 will be $942,000. The market value of the corporation's preferred shares of Fannie Mae and Freddie Mac at September 30, 2008 after the other-than-temporary impairment charge was $36,000 and $44,000, respectively. We will continue to evaluate the carrying value of these shares as part of our overall review each quarter of our investment portfolio.

The corporation's return on average equity and return on average assets, on an annualized basis, were 6.38 percent and 0.52 percent (9.47 percent and 0.77 percent, adjusted to exclude the effect of the impairment charge), respectively, for the first nine months of 2008, compared to 13.82 percent and 1.22 percent, respectively, for the first nine months of 2007. For the third quarter of 2008, on an annualized basis, the corporation's return on average equity was 1.82 percent and its return on average assets was 0.14 percent (11.07 percent and 0.87 percent, adjusted to exclude the effect of the impairment charge), respectively, compared with a 14.21 percent return on average equity and a 1.21 percent return on average assets for the third quarter of 2007. The decline in these measures resulted from lower earnings in 2008, coupled with asset growth.

'The corporation's financial results reflected the escalating turbulence in the financial sector and the economic slowdown experienced in the third quarter of 2008,' said Larry Dillon, president and chief executive officer of C&F Financial Corporation. 'While we are not immune to the historic challenges facing the financial markets, we remain a strong and financially-sound company.'

'The corporation's earnings were negatively affected by the $1.52 million impairment charge on the corporation's investment in Fannie Mae and Freddie Mac,' continued Dillon. 'Had it not been for this charge, our earnings and return on equity would have been $4.67 million and 9.47 percent, respectively, for the first nine months of 2008 and $1.82 million and 11.07 percent, respectively, for the third quarter of 2008, despite a decline in net interest margin and a higher provision for loan losses in 2008. The decline in the net interest margin was attributable to the earlier interest rate cuts by the Federal Reserve Bank and the strong competition for deposits resulting from the reduction in liquidity throughout the financial markets. The 50 basis point interest rate cut by the Federal Reserve on October 8, 2008 will have an immediate effect of reducing our bank's net interest margin because our cost of deposits and fixed rate borrowings will not decline in tandem with the decline in yields on our adjustable-rate loans.'

'Our provision for loan losses for the first nine months and the third quarter of 2008 was $8.72 million and $3.15 million, respectively, compared with $4.69 million and $1.80 million for the same periods in 2007,' said Dillon. 'These increases are indicative of the overall condition of the housing and economic environment in the United States and our market areas. The increase in the Bank's provision for loan losses was attributable in part to our evaluation of our overall loan portfolio in light of general economic conditions, as well as two commercial relationships, both secured by real estate, that have been placed on nonaccrual status. One of these relationships has resulted in $1.86 million in foreclosed properties, which were written down to net realizable value at the time they were transferred to real estate owned. C&F Mortgage Corporation has repurchased several loans in 2008 resulting in nonaccrual loans and foreclosed properties for which loan loss provisions or write downs to fair market value were necessary. C&F Finance Company has experienced higher loan charge-offs in 2008, which in combination with loan growth, resulted in a higher provision for loan losses. Our loan loss reserves continue to grow and, when appropriate, we are charging off any expected deficient balances. While we feel our current reserves are adequate to provide for potential loan losses, we constantly monitor the situation and will increase reserves if it is deemed prudent.'

'The capital and liquidity positions at the Bank remain strong,' concluded Dillon. 'The impairment charge previously discussed had no effect on the Bank's regulatory capital ratios because the GSE stock is owned by the holding company. The Bank continues to be well-capitalized under all regulatory guidelines and the Bank and the corporation have adequate sources of financing and liquidity. While the corporation's earnings have declined this year, we maintained our quarterly dividend at 31 cents per share for the third quarter of 2008. We believe that our diversified business strategy and our strong balance sheet will allow us to continue to invest in and grow our company.'

Retail Banking Segment. Third quarter net income for C&F Bank was $787,000 in 2008 compared to $1.19 million in 2007. Net income for the first nine months of 2008 was $1.58 million compared to $3.28 million for the first nine months of 2007. The decline in 2008 earnings included the effects of (1) margin compression and competition for loans and deposits on net interest income, (2) a year-to-date 2008 provision for loan losses of $1.16 million, of which $500,000 was recognized in the third quarter of 2008, attributable to credit issues resulting from the general slow down in the economy, and more specifically the two commercial relationships mentioned above and loan growth, compared to $160,000 and $120,000 for the first nine months and third quarter of 2007, respectively, (3) higher assessments for deposit insurance resulting from the FDIC's implementation of its amended risk-based assessment system, (4) higher expenses associated with the enhancement of our internet banking services, and (5) higher loan and foreclosed properties expenses primarily resulting from the work-out of one of the commercial relationships mentioned above. The Bank continues to evaluate all overhead expenses, including but not limited to personnel and technology costs, to determine any areas for cost savings.

The Bank's nonperforming assets have increased to $14.10 million at September 30, 2008 and consist of $12.13 million of nonaccrual loans and $1.97 million of foreclosed properties. The largest component of the Bank's nonaccrual loans is an $11.2 million commercial relationship, which is secured by residential and commercial real estate. Management believes the Bank has provided adequate loan loss reserves based on current appraisals of the collateral. The largest component of the Bank's foreclosed properties is $1.86 million of residential properties associated with one commercial relationship. These properties have been written down to their estimated fair value based upon current appraisals less selling costs. Additional properties securing loans associated with this relationship have yet to be conveyed to the Bank and appropriate loan loss reserves have been established.

Mortgage Banking Segment.