C&F Financial Corporation Announces Record Third Quarter Net Income

WEST POINT, Va., Oct. 25, 2018 (GLOBE NEWSWIRE) -- C&F Financial Corporation (the Corporation) CFFI, the one-bank holding company for C&F Bank, today reported record consolidated net income of $5.1 million for the third quarter of 2018, or $1.46 per share assuming dilution, compared with $3.0 million, or $0.87 per share assuming dilution, for the third quarter of 2017. The Corporation reported consolidated net income of $14.1 million for the first nine months of 2018, or $4.02 per share assuming dilution, compared with $9.9 million, or $2.84 per share assuming dilution, for the first nine months of 2017.

The Corporation's annualized returns on average equity (ROE) and on average assets (ROA) for the third quarter of 2018 were 13.81 percent and 1.35 percent, respectively, compared to 8.26 percent and 0.82 percent, respectively, for the third quarter of 2017.  For the first nine months of 2018, on an annualized basis, the Corporation's ROE and ROA were 13.02 percent and 1.24 percent, respectively, compared to 9.25 percent and 0.91 percent, respectively, for the first nine months of 2017. The increases in ROE and ROA for the third quarter and first nine months of 2018, compared to the same periods in 2017, resulted from higher earnings.

"For the second consecutive quarter, we are reporting the highest quarterly net income in our Corporation's history," said Tom Cherry, President of C&F Financial Corporation, "as each of our major business segments reported higher net income for the third quarter of 2018 compared to the third quarter of 2017. Consolidated net income for the third quarter of 2018 increased 69% over the third quarter of 2017, driven primarily by lower net charge-offs at the consumer finance segment, higher interest income from loans at the retail banking segment and the lower federal corporate income tax rate. Consolidated net income for the first nine months of 2018 increased 42% over the first nine months of 2017."

Retail Banking Segment.  C&F Bank, which comprises the retail banking segment, reported net income of $3.2 million for the third quarter of 2018, compared to net income of $2.1 million for the third quarter of 2017. For the first nine months of 2018, C&F Bank reported net income of $7.9 million, compared to $6.0 million for the first nine months of 2017.

In addition to the favorable effect of the lower federal corporate income tax rate, positive factors influencing net income of C&F Bank for the third quarter of 2018 included: (1) higher interest income from loans, primarily due to (a) improvement in the performance of certain Central Virginia Bank (CVB) loans acquired in 2013, as discussed below, (b) higher yields on variable rate loans resulting from rising interest rates and (c) loan growth and (2) higher yields on excess cash balances. Partially offsetting these factors were (1) higher operating expenses associated with C&F Bank continuing to (a) strengthen its technology infrastructure, (b) expand its product offerings and (c) promote brand awareness and (2) an increase in average rates on interest-bearing customer deposits. In addition to these factors that affected net income for the third quarter of 2018, net income of C&F Bank for the first nine months of 2018 was negatively affected by (1) lower yields on securities resulting from continued purchasing in 2018 of securities with lower yields than the overall portfolio and shorter expected durations than the original durations of securities that have been called or have matured and (2) higher operating expenses associated with C&F Bank expanding its market presence in Charlottesville, Virginia and enhancing compliance processes.

The recognition of interest income on purchased credit impaired (PCI) loans is based on our expectation of future payments of principal and interest. Expectations of the timing and amount of future payments on certain CVB loans acquired in 2013 that are PCI loans have improved during 2018, resulting in an acceleration of the recognition of interest income in the third quarter of 2018 compared to the third quarter of 2017. Interest income recognized on PCI loans was $1.5 million and $2.9 million for the third quarter and first nine months of 2018, respectively, compared to $0.5 million and $2.2 million for the third quarter and first nine months of 2017, respectively.

Average loans, excluding loans to affiliates, increased $22.6 million or 3.2 percent during the third quarter of 2018 and $32.3 million or 4.6 percent during the first nine months of 2018, compared to the same periods in 2017. C&F Bank's total nonperforming assets were $2.9 million at September 30, 2018, compared to $5.4 million at December 31, 2017. Nonperforming assets at September 30, 2018 consisted primarily of $2.7 million in nonaccrual loans, compared to $5.3 million at December 31, 2017. The decline in nonaccrual loans since December 31, 2017 resulted primarily from a partial repayment of one commercial relationship.

Mortgage Banking Segment.  C&F Mortgage Corporation, which comprises the mortgage banking segment, reported net income of $490,000 for the third quarter of 2018, compared to net income of $454,000 for the third quarter of 2017. For the first nine months of 2018, C&F Mortgage Corporation reported net income of $1.7 million, compared to net income of $1.4 million for the first nine months of 2017.

In addition to the favorable effect of the lower federal corporate income tax rate, the increase in net income of the mortgage banking segment for the third quarter and first nine months of 2018 was due primarily to a decrease in operating expenses compared to the same periods in 2017, resulting from operational efficiencies and management of personnel costs, partially offset by lower gains on sales of loans resulting from lower loan production.  Loan production decreased by 7.7 percent and 3.3 percent in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, reflecting mortgage industry trends.

Consumer Finance Segment.  C&F Finance Company, which comprises the consumer finance segment, reported net income of $1.8 million for the third quarter of 2018, compared to net income of $713,000 for the third quarter of 2017. For the first nine months of 2018, C&F Finance Company reported net income of $5.4 million, compared to net income of $3.3 million for the first nine months of 2017.

In addition to the favorable effect of the lower federal corporate income tax rate, positive factors influencing net income of C&F Finance Company for the third quarter and first nine months of 2018 included (1) a decline in the provision for loan losses of $2.0 million and $4.0 million for the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, as a result of lower charge-offs and improving credit quality of the portfolio, as discussed below, and (2) lower personnel and operating expenses resulting from underwriting efficiencies and the purchase of loan contracts with higher credit metrics. Partially offsetting these factors were (1) lower loan yields resulting from competition in the non-prime automobile loan business and the acquisition of loan contracts with higher credit metrics, as well as relatively lower yields on boat and recreational vehicle (RV) loans and (2) higher-cost variable-rate borrowings resulting from increases in short-term interest rates since the first quarter of 2017.

The annualized net charge-off ratio for the first nine months of 2018 decreased to 3.84 percent from 5.49 percent for the first nine months of 2017. The decline reflects a lower number of charge-offs during the first nine months of 2018. At September 30, 2018, total delinquent loans as a percentage of total loans was 4.30 percent, compared to 5.17 percent at December 31, 2017 and 4.64 percent at September 30, 2017. At September 30, 2018, repossessed vehicles available for sale totaled $331,000, compared to $250,000 at December 31, 2017 and $580,000 at September 30, 2017. The allowance for loan losses was $23.6 million, or 7.86 percent of total loans at September 30, 2018, compared to $24.4 million, or 8.34 percent of total loans at December 31, 2017. If factors influencing the consumer finance segment result in a higher net charge-off ratio in the future, or if the consumer finance segment's loan portfolio should grow, the segment may need to increase the level of its allowance for loan losses, which would negatively affect future earnings.

During the first quarter of 2018, C&F Finance Company began the expansion of its indirect lending programs to include boats and RVs. These contracts are for prime loans made to individuals with higher credit scores and are priced at rates substantially lower than its non-prime automobile portfolio. While these loans may contribute to net interest margin compression, management expects they will require both a lower provision for loan losses and allowance for loan losses than the consumer finance segment's non-prime automobile loans, contributing to a decrease in the overall level of the consumer finance segment's allowance for loan losses as a percentage of total loans. At September 30, 2018, compared to December 31, 2017, the higher composition within the consumer finance segment's loan portfolio of boat and RV loans accounted for 25 basis points of the 48 basis points decrease in this ratio.

Other Segments. Other segments, which principally includes the Corporation's holding company operations and wealth management subsidiary, reported aggregate net losses of $316,000 and $978,000 for the third quarter and first nine months of 2018, compared to net losses of $251,000 and $784,000 for the third quarter and first nine months of 2017.  The higher net loss during 2018, compared to 2017, was primarily due to the lower federal corporate income tax rate, resulting in a lower federal income tax benefit at the holding company.

Capital and Dividends.  The Corporation declared a quarterly cash dividend of 36 cents per share during the third quarter of 2018, which was paid on October 1, 2018, and cash dividends of $1.38 per share during the four quarters ended September 30, 2018.  The third quarter dividend, which represented an increase of 2 cents per share, or 5.9, percent compared to the prior quarter's dividend, equated to a payout ratio of 24.7 percent of third quarter earnings per share. Dividends declared for the four quarters ended September 30, 2018 equated to 45 percent of net income during the same period, which included a $6.6 million reduction in net income due to the remeasurement of deferred income taxes during the fourth quarter of 2017.  The Board of Directors of the Corporation continually reviews the amount of cash dividends per share and the resulting dividend payout ratio in light of changes in economic conditions, current and future capital requirements, and expected future earnings.

About C&F Financial Corporation.  C&F Financial Corporation's common stock is listed for trading on The Nasdaq Stock Market under the symbol CFFI.  The common stock closed at a price of $49.72 per share on October 24, 2018.  At September 30, 2018, the book value of the Corporation was $42.72 per share.

C&F Bank operates 26 retail bank branches and three commercial loan offices located throughout the Hampton to Charlottesville corridor in Virginia and offers full investment services through its subsidiary C&F Wealth Management, Inc. C&F Mortgage Corporation provides mortgage loan origination services through offices located in Virginia, Maryland, North Carolina, South Carolina and West Virginia. C&F Finance Company provides automobile, boat and RV loans through indirect lending programs offered in Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia and West Virginia through its offices in Richmond and Hampton, Virginia, and in Nashville, Tennessee.

Additional information regarding the Corporation's products and services, as well as access to its filings with the Securities and Exchange Commission, are available on the Corporation's web site at http://www.cffc.com.

Use of Certain Non-GAAP Financial Measures. The accounting and reporting policies of the Corporation conform to generally accepted accounting principles (GAAP) in the United States and prevailing practices in the banking industry. However, certain non-GAAP measures are used by management to supplement the evaluation of the Corporation's performance. These include the following fully-taxable equivalent (FTE) measures: interest income on loans-FTE, interest income on securities-FTE, total interest income-FTE and net interest income-FTE.

Management believes that FTE measures provide users of the Corporation's financial information a presentation of the performance of interest earning assets on a basis that is comparable within the banking industry. Management reviews interest income of the Corporation on an FTE basis. In this non-GAAP presentation, interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures the comparability of net interest income arising from both taxable and tax-exempt sources.

These non-GAAP financial measures should not be considered an alternative to GAAP-basis financial statements, and other bank holding companies may define or calculate these or similar measures differently. A reconciliation of the non-GAAP financial measures used by the Corporation to evaluate and measure the Corporation's performance to the most directly comparable GAAP financial measures is presented below.

Forward-Looking Statements.  Statements in this press release which express "belief," "intention," "expectation," "potential" and similar expressions, identify forward-looking statements. These forward-looking statements are based on the beliefs of the Corporation's management, as well as assumptions made by, and information currently available to, the Corporation's management. These statements are inherently uncertain, and there can be no assurance that the underlying assumptions will prove to be accurate. Actual results could differ materially from those anticipated or implied by such statements. Forward-looking statements in this release may include, without limitation, statements regarding expected future financial performance, strategic business initiatives and the anticipated effects thereof, including the expansion of the indirect lending program to include boats and RVs, margin compression, development of our digital platform, asset quality, adequacy of allowances for loan losses and the level of future charge-offs, capital levels, the effect of future market and industry trends and the effects of future interest rate fluctuations. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: (1) interest rates, such as volatility in yields on U.S. Treasury bonds and increases or volatility in mortgage rates, (2) general business conditions, as well as conditions within the financial markets, (3) general economic conditions, including unemployment levels, (4) the legislative/regulatory climate, regulatory initiatives with respect to financial institutions, products and services, the Consumer Financial Protection Bureau (CFPB) and the regulatory and enforcement activities of the CFPB, and the application of the Basel III capital standards to the Corporation and C&F Bank, (5) the effect of the Tax Cuts and Jobs Act (the Act) and changes in the effect of the Act due to issuance of interpretive regulatory guidance or enactment of corrective or supplemental legislation, (6) monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, and the effect of these policies on interest rates and business in our markets, (7) the value of securities held in the Corporation's investment portfolios, (8) the quality or composition of the loan portfolios and the value of the collateral securing those loans, (9) the inventory level and pricing of used automobiles, including sales prices of repossessed vehicles, (10) the level of net charge-offs on loans and the adequacy of our allowance for loan losses, (11) the level of indemnification losses related to mortgage loans sold, (12) demand for loan products, (13) deposit flows, (14) the strength of the Corporation's counterparties and the economy in general, (15) competition from both banks and non-banks, including competition in the non-prime automobile finance markets, (16) demand for financial services in the Corporation's market area, (17) reliance on third parties for key services, (18) the commercial and residential real estate markets, (19) demand in the secondary residential mortgage loan markets, (20) the Corporation's branch and market expansions and technology initiatives, (21) cyber threats, attacks or events, (22) expansion of C&F Bank's product offerings and (23) accounting principles, policies and guidelines, and elections by the Corporation thereunder. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this release.  For additional information on risk factors that could affect the forward-looking statements contained herein, see the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017 and other reports filed with the Securities and Exchange Commission.

Contact: 

Tom Cherry, President
Jason Long, Chief Financial Officer

(804) 843-2360

C&F Financial Corporation

Selected Financial Information
(in thousands, except for share and per share data)

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*Derived from audited consolidated financial statements.

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*For more information about these non-GAAP financial measures, please see "Use of Certain Non-GAAP Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures."

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*      Derived from audited consolidated financial statements.
¹ The loans acquired from CVB are tracked in two separate categories: "purchased performing" and "purchased credit impaired." The remaining discount for the purchased performing loans was $2.0 million at 9/30/18, $2.3 million at 12/31/17 and $2.5 million at 9/30/17. The remaining discount for the purchased credit impaired loans was $8.1 million at 9/30/18, $9.8 million at 12/31/17 and $9.9 million at 9/30/17.
² Total nonaccrual loans include nonaccrual TDRs of $1.2 million at 9/30/18, $3.9 million at 12/31/17 and $6.6 million at 9/30/17.
³ Accruing loans past due for 90 days or more include purchased credit impaired loans of $78 thousand at 9/30/18, $90 thousand at 12/31/17 and $151 thousand at 9/30/17.

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^*       Derived from audited financial statements.
¹ All ratios at September 30, 2018 are estimates and subject to change pending regulatory filings.  All ratios at September 30, 2017 are presented as filed.
² The ratios presented for minimum capital requirements are those to be considered adequately capitalized.

C&F Financial Corporation
Reconciliation of Certain Non-GAAP Financial Measures
(in thousands)

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1. Assuming a tax rate of 21% for the quarter and nine months ended September 30, 2018 and 34% for the quarter and nine months ended September 30, 2017.