C&F Financial Corporation Announces Record Net Income for 2019

WEST POINT, Va., Jan. 24, 2020 (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 $18.9 million, or $5.47 per share, for the year ended December 31, 2019, compared to $18.0 million, or $5.15 per share, for the year ended December 31, 2018.  The Corporation reported consolidated net income of $4.4 million for the fourth quarter of 2019, or $1.27 per share, compared to $4.0 million for the fourth quarter of 2018, or $1.13 per share. 

For the year ended December 31, 2019, the Corporation's returns on average equity (ROE) and on average assets (ROA) were 12.02 percent and 1.20 percent, respectively, compared to 12.40 percent and 1.19 percent for the year ended December 31, 2018.  For the fourth quarter of 2019, on an annualized basis, the Corporation's ROE and ROA were 10.78 percent and 1.06 percent, respectively, compared to 10.59 percent and 1.05 percent for the fourth quarter of 2018, on an annualized basis.

Excluding merger related costs incurred in 2019 in connection with the Corporation's acquisition of Peoples Bankshares, Incorporated (Peoples), which was completed on January 1, 2020, adjusted net income for the year ended December 31, 2019 and the fourth quarter of 2019 was $19.5 million, or $5.65 per share, and $4.6 million, or $1.35 per share, respectively. Adjusted ROE and adjusted ROA, which exclude merger-related costs, were 12.44 percent and 1.25 percent, respectively, for the year ended December 31, 2019. Adjusted ROE and adjusted ROA, on an annualized basis, for the fourth quarter of 2019 were 11.44 percent and 1.13 percent, respectively. For more information about these financial measures, which are not calculated in accordance with generally accepted accounting principles (GAAP), please see "Use of Certain Non-GAAP Financial Measures" and "Reconciliation of Certain Non-GAAP Financial Measures," below.  There were no adjustments to these measures for the year or quarter ended December 31, 2018.

Key highlights for the year ended December 31, 2019 and the fourth quarter of 2019 are as follows.  Comparisons are to the corresponding periods in the prior year unless otherwise noted.

• Retail banking segment average gross loans increased 6.1 percent for the year ended 2019 and 6.7 percent for the fourth quarter;
• Retail banking segment operating expense was higher, primarily as a result of the addition of new talent to our commercial lending team and our investment in technology infrastructure to support continued growth;
• Mortgage banking segment gains on sales of loans increased 35.2 percent for the year ended 2019 and 60.0 percent for the fourth quarter as originations of mortgage loans for 2019 were higher than any year since 2009;
• The consumer finance segment's net charge-off ratio of 3.05 percent of average total loans for the year ended 2019 is lower than any year since 2012;
• The consumer finance segment's non-prime automobile loan portfolio grew by 3.0 percent during the year ended 2019, and non-prime automobile loans outstanding at December 31, 2019 were higher than any time since mid-2017, reversing recent declines in that portfolio;
• Loan yields at the consumer finance segment declined as it continued to expand its indirect prime lending for marine and recreational vehicles; and
• Higher deposit and short-term interest rates, as well as growth in deposit balances, resulted in higher interest expense for the retail banking and consumer finance segments.

Tom Cherry, President and Chief Executive Officer of C&F Financial Corporation, commented, "Our consolidated net income for 2019 was higher than any year in our Corporation's history, and each of our principal business segments contributed to that success.  Loan growth at the retail banking segment, mortgage loan production at the mortgage banking segment, and continuing improvement in asset quality coupled with loan growth at the consumer finance segment resulted in exceeding the previous record net income of 2018, despite higher interest costs and operating costs during 2019.  On an adjusted basis, consolidated net income increased 8.2% and 16.7% for the year and quarter ended December 31, 2019, respectively, compared to the same periods in 2018.  We are excited about our recently completed acquisition of Peoples Bankshares, Incorporated and the opportunity to serve the communities of the Northern Neck region and Fredericksburg, and are preparing for the system conversion, which we expect to be completed in April 2020."

Retail Banking Segment.  C&F Bank, which comprises the retail banking segment, reported net income of $9.9 million for the year ended December 31, 2019, compared to net income of $10.6 million for the year ended December 31, 2018.  For the fourth quarter of 2019, C&F Bank reported net income of $2.2 million, compared to $2.7 million for the fourth quarter of 2018.  Retail banking segment net income for the fourth quarter of 2019 and for the year ended December 31, 2019 included merger related expenses of $132,000 ($107,000 after income taxes) and $236,000 ($196,000 after income taxes), respectively.

For the year and quarter ended December 31, 2019, compared to the same periods in 2018, retail banking segment net income decreased primarily as a result of (1) higher operating expenses associated with C&F Bank adding new talent to its commercial lending team in the Richmond and Charlottesville markets and investing in technology infrastructure to support continued growth, as well as higher cost of providing employee health benefits, (2) higher average rates on interest-bearing deposit accounts, (3) lower interest income on certain purchased loans, as discussed below and (4) merger related expenses, which were partially offset by (1) higher average loans outstanding, which contributed to higher interest income, (2) higher interchange income, (3) proceeds from bank-owned life insurance and (4) lower expense associated with the FDIC insurance assessment as a result of credits available to banks with less than $10 billion in total assets.

The recognition of interest income on purchased credit impaired (PCI) loans is based on management's expectation of future payments of principal and interest. Certain PCI loans have paid off earlier than expected during 2019 and 2018, affecting the recognition of interest income as repayments occur. Interest income recognized on PCI loans was $3.4 million and $3.7 million for the years ended December 31, 2019 and 2018, respectively, and was $615,000 and $845,000 for the fourth quarter of 2019 and 2018, respectively.

Average loans increased $44.5 million or 6.1 percent for the year ended December 31, 2019 and $49.6 million or 6.7 percent for the fourth quarter of 2019, compared to the same periods in 2018, primarily due to growth in the commercial business lending and acquisition and development segments of the loan portfolio. C&F Bank's total nonperforming assets were $2.6 million at December 31, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at December 31, 2019 and 2018 included $1.5 million in nonaccrual loans, and included $1.1 million in other real estate owned at December 31, 2019, compared to $246,000 at December 31, 2018.  The increase in nonperforming assets since December 31, 2018 was due primarily to the balance of land and buildings of C&F Bank's Bellgrade branch in Midlothian, Virginia, which were reclassified into other real estate owned when the Bellgrade branch was consolidated into a nearby branch during 2019.  Nonaccrual loans were comprised primarily of residential mortgages and equity lines at December 31, 2019 and 2018. 

Mortgage Banking Segment.  C&F Mortgage Corporation, which comprises the mortgage banking segment, reported net income of $3.8 million for the year ended December 31, 2019, compared to net income of $1.9 million for the year ended December 31, 2018. For the fourth quarter of 2019, C&F Mortgage Corporation reported net income of $814,000, compared to net income of $199,000 for the fourth quarter of 2018.

The increase in net income of the mortgage banking segment for both the year and quarter ended December 31, 2019 compared to the same periods in 2018 was due primarily to higher gains on sales of loans, resulting from higher loan production, which was partially offset by higher compensation expense related to higher loan volume. Mortgage loan originations for the mortgage banking segment were $944.1 million and $699.0 million for the years ended December 31, 2019 and 2018, respectively, and were $271.7 million and $160.3 million for the fourth quarters of 2019 and 2018, respectively.  Loan production for the year ended December 31, 2019 was the highest reported by the mortgage banking segment for any calendar year since 2009, when home sales were supported by a federal income tax credit for first-time home buyers.  Lower interest rates on mortgage loans have contributed to an increase in volume in the broader mortgage industry in 2019 compared to 2018.

Consumer Finance Segment.  C&F Finance Company, which comprises the consumer finance segment, reported net income of $6.9 million for the year ended December 31, 2019, compared to net income of $6.7 million for the year ended December 31, 2018.  For the fourth quarter of 2019, C&F Finance Company reported net income of $1.7 million, compared to net income of $1.3 million for the fourth quarter of 2018.

The increase in net income of the consumer finance segment for the year ended December 31, 2019 compared to the year ended December 31, 2018 was due primarily to a decline in the provision for loan losses of $2.8 million as a result of lower charge-offs and improving credit quality of the portfolio, partially offset by (1) lower loan yields, (2) higher interest expense on variable-rate borrowings resulting from higher loans outstanding (which are financed by borrowings) and higher short-term interest rates during 2019 compared to 2018 and (3) higher cost of providing employee health benefits.  The increase in net income of the consumer finance segment for the fourth quarter of 2019 compared to the fourth quarter of 2018 was due primarily to a decline in the provision for loan losses of $946,000 as a result of lower charge-offs and improving credit quality of the portfolio, partially offset by lower loan yields and higher cost of providing employee health benefits.  The average yield on loans for the year and quarter ended December 31, 2019 was lower compared to the same periods in 2018 due to continued competition in the non-prime automobile loan business and the consumer finance segment's pursuing growth in higher quality, lower yielding loans, which include prime marine and recreational vehicle (RV) loans.

The net charge-off ratio for 2019 decreased to 3.05 percent from 4.14 percent for 2018. The decline reflects a lower number of charge-offs during 2019 as a result of C&F Finance Company's purchasing automobile loan contracts with higher credit metrics beginning in 2016.  At December 31, 2019, total delinquent loans as a percentage of total loans was 4.17 percent, compared to 4.76 percent at December 31, 2018.  The allowance for loan losses was $21.8 million, or 6.96 percent of total loans at December 31, 2019, compared to $23.0 million, or 7.77 percent of total loans at December 31, 2018. The decrease in the level of the allowance for loan losses as a percentage of total loans was primarily due to lower net charge-offs on non-prime automobile loans.  At December 31, 2019, compared to December 31, 2018, the higher composition within the consumer finance segment's loan portfolio of prime marine and RV loans accounted for approximately 16 basis points of the 81 basis points decrease in the ratio of the allowance for loan losses to total loans.

Acquisition of Peoples Bankshares, Incorporated.  On January 1, 2020, the Corporation completed the acquisition of Peoples and its banking subsidiary, Peoples Community Bank for an aggregate purchase price of $22.2 million of cash and stock.  With the addition of Peoples, the Corporation would have had approximately $1.8 billion in assets, $1.3 billion in total gross loans outstanding and $1.5 billion in total deposits on a combined basis at December 31, 2019.  The former Peoples Community Bank branches will continue to operate as Peoples Community Bank, a division of C&F Bank, until the systems conversion is expected to be completed in April 2020.  For the year and quarter ended December 31, 2019, the Corporation recorded merger related expenses of $709,000 ($653,000 after income taxes) and $300,000 ($264,000 after income taxes), respectively, in connection with its acquisition of Peoples, of which $236,000 ($196,000 after income taxes) and $132,000 ($107,000 after income taxes), respectively, was allocated to the retail banking segment and the remainder was recorded as a holding company expense.  The Corporation estimates that it will incur aggregate after-tax merger related costs of approximately $1.9 million, with the remaining $1.2 million expected to be recorded in the first half of 2020.

Capital and Dividends.  The Corporation declared cash dividends during the year ended December 31, 2019 totaling $1.49 per share.  The Corporation declared a quarterly cash dividend of 38 cents per share during the fourth quarter of 2019, which was paid on January 1, 2020.  This represented a 2.7 percent increase over the previous regular quarterly cash dividend of 37 cents per share.  These dividends represent a payout ratio of 27.2 percent and 29.9 percent of earnings per share for the year and quarter ended December 31, 2019, respectively.  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.

In May 2019, the Board of Directors authorized a program, effective June 1, 2019, to repurchase up to $5.0 million of the Corporation's common stock through May 31, 2020.  As of December 31, 2019, the Corporation has made aggregate common stock repurchases of $1.7 million under the share repurchase program.

In connection with the acquisition of Peoples, C&F Bank paid a dividend to the Corporation in the fourth quarter of 2019 to fund the cash portion of the purchase price and the Corporation's merger related expenses.  As a result, C&F Bank's regulatory capital ratios have decreased at December 31, 2019 compared to September 30, 2019.  Additionally, the acquisition of Peoples in the first quarter of 2020 is expected to generate goodwill and other intangible assets which will be excluded from the regulatory capital of C&F Bank.  C&F Bank expects that it will remain well-capitalized following the completion of the merger.

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 $51.80 per share on January 23, 2020.  At December 31, 2019, the book value of the Corporation was $48.07 per share.

C&F Bank operates 30 retail bank branches and three commercial loan offices located throughout the Hampton to Charlottesville corridor and the Northern Neck region in Virginia and offers full wealth management services through its subsidiary C&F Wealth Management, Inc. C&F Mortgage Corporation  and its subsidiary C&F Select LLC provide mortgage loan origination services through offices located in Virginia, Maryland, North Carolina, South Carolina and West Virginia. C&F Finance Company provides automobile, marine and RV loans through indirect lending programs offered in Alabama, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia and West Virginia through its offices in Richmond and Hampton, Virginia.

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

Use of Certain Non-GAAP Financial Measures. The accounting and reporting policies of the Corporation conform to 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 adjusted net income, adjusted earnings per share, adjusted ROE, adjusted ROA, tangible book value per share, and 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 the use of these non-GAAP measures provide meaningful information about operating performance by enhancing comparability with other financial periods, other financial institutions, and between different sources of interest income. The non-GAAP measures used by management enhance comparability by excluding the effects of (1) items that do not reflect ongoing operating performance, including non-recurring gains or charges (2) balances of intangible assets, including goodwill, that vary significantly between institutions, and (3) tax benefits that are not consistent across different opportunities for investment. 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, expected impacts of the Corporation's acquisition of Peoples, strategic business initiatives and the anticipated effects thereof, including the expansion of the indirect lending program to include marine and recreational vehicles, margin compression, technology initiatives, 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, and slowdowns in economic growth, (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 C&F Bank, (5) the effect of the Economic Growth Regulatory Relief and Consumer Protection Act of 2018 (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, technology initiatives and other strategic initiatives, (21) cyber threats, attacks or events, (22) expansion of C&F Bank's product offerings, (23) accounting principles, policies and guidelines, and elections by the Corporation thereunder, and (24) the ability of the Corporation and the Bank to realize the anticipated benefits of the acquisition of Peoples, including the ability to successfully integrate Peoples' systems into the Corporation's systems. 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, 2018, the Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, and other reports filed with the SEC.

C&F Financial Corporation

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

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*Derived from audited consolidated financial statements.

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*Derived from audited consolidated financial statements.
¹For 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.

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* Derived from audited consolidated financial statements.
¹ Acquired loans are tracked in two separate categories: "purchased performing" and "purchased credit impaired." The remaining discount for purchased performing loans was $1.4 million at 12/31/19 and $1.9 million at 12/31/18. The remaining discount for purchased credit impaired loans was $5.6 million at 12/31/19 and $7.9 million at 12/31/18.
² Total nonaccrual loans include nonaccrual TDRs of $254,000 at 12/31/19 and $166,000 at 12/31/18.
³ Includes $835,000 at 12/31/19 related to the land and buildings of the Bellgrade branch, which was consolidated into a nearby branch in 2019.

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¹ 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 Corporation, a small bank holding company under applicable regulations and guidance, is not subject to the minimum regulatory capital regulations for bank holding companies.  The regulatory requirements that apply to bank holding companies that are subject to regulatory capital requirements are presented above, along with the Corporation's capital ratios as determined under those regulations.
² All ratios at December 31, 2019 are estimates and subject to change pending regulatory filings.  All ratios at December 31, 2018 are presented as filed.
³ 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
(dollars in thousands, except for per share data)

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¹ Assuming a tax rate of 21%.