CFFI - C&F Financial Corporation Announces Record Net Income for Second Quarter and First Six Months

WEST POINT, Va., July 23, 2019 (GLOBE NEWSWIRE) -- C&F Financial Corporation (the Corporation) (NASDAQ:CFFI), the one-bank holding company for C&F Bank, today reported record consolidated net income of $5.8 million, or $1.69 per share, for the second quarter of 2019, compared to $5.1 million, or $1.45 per share, for the second quarter of 2018.  The Corporation reported record consolidated net income of $9.6 million for the first six months of 2019, or $2.77 per share, compared with $9.0 million, or $2.56 per share, for the first six months of 2018.  Returns on average equity for the second quarter and first six months of 2019 were 15.07 percent and 12.54 percent, respectively, compared to 14.16 percent and 12.62 percent in the same periods in 2018.  Returns on average assets for the second quarter and first six months of 2019 were 1.51 percent and 1.26 percent, respectively, compared to 1.34 percent and 1.19 percent in the same periods in 2018.

Key highlights for the second quarter and first six months of 2019 are as follows.  Comparisons are to the corresponding periods in the prior year.

• Retail banking segment average gross loans increased 5.8 percent for the second quarter and 5.7 percent for the first six months;
• Retail banking segment loan yields were higher, due in part to interest income resulting from repayments in the second quarter of 2019 of certain purchased loans;
• Mortgage banking segment gains on sales of loans increased 22.7 percent for the second quarter and 9.6 percent for the first six months as originations of mortgage loans reached their highest quarterly level in the second quarter of 2019 since 2009;
• The consumer finance segment’s annualized net charge-off ratio of 3.15 percent of average total loans for the first six months of 2019 is lower than the first six months of any year since 2012;
• The consumer finance segment’s non-prime automobile loan portfolio grew by 2.4 percent during the first six months of 2019, reversing most of the decline in that portfolio that occurred during 2018;
• 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 resulted in higher interest expense for each of our segments.

Tom Cherry, President and Chief Executive Officer of C&F Financial Corporation, commented, “The second quarter marks the highest net income for any quarter in our Corporation’s history, surpassing the previous record set in the third quarter of 2018. It also marks the highest net income for the first six months of any year in our history.  Even as we faced higher costs of deposits and borrowings, consolidated net income increased 15.2 percent for the second quarter of 2019 and 7.3 percent for the first six months of 2019 compared to the same periods in 2018. This was a result of strong performance at all of our primary business segments, including growing average loans outstanding at the retail banking segment, increasing loan production at the mortgage banking segment, and continuing improvement in asset quality while also growing loans outstanding at the consumer finance segment.”

Retail Banking Segment.  C&F Bank, which comprises the retail banking segment, reported net income of $3.1 million for the second quarter of 2019, compared to net income of $2.4 million for the second quarter of 2018.  For the first six months of 2019, C&F Bank reported net income of $5.4 million, compared to $4.8 million for the first six months of 2018.

The increase in net income of C&F Bank for the second quarter and first half of 2019 compared to the same periods in 2018 was primarily due to higher interest income, which resulted from (1) improvement in the performance of certain purchased loans, as discussed below, (2) higher loan yields, especially on variable rate loans and (3) higher average loans outstanding. These factors were partially offset by (1) an increase in average rates on interest-bearing customer deposits, (2) higher operating expenses associated with C&F Bank (a) strengthening its technology infrastructure and (b) expanding its lending capabilities and administrative and compliance functions, and (3) lower service charges on deposit accounts resulting from fewer overdraft fees charged.

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 in the first six months of 2019, resulting in the recognition of additional interest income in 2019 compared to 2018. Interest income recognized on PCI loans was $1.3 million and $1.8 million for the second quarter and first six months of 2019, respectively, compared to $446,000 and $1.4 million for the second quarter and first six months of 2018, respectively.

Average loans increased $42.3 million or 5.8 percent for the second quarter of 2019 and $42.0 million or 5.7 percent for the first half of 2019, compared to the same periods in 2018, primarily due to growth in the commercial business lending, commercial real estate, and land acquisition and development segments of the loan portfolio. C&F Bank’s total nonperforming assets were $1.3 million at June 30, 2019, compared to $1.7 million at December 31, 2018. Nonperforming assets at June 30, 2019 consisted primarily of $991,000 in nonaccrual loans, compared to $1.5 million at December 31, 2018.

Mortgage Banking Segment.  C&F Mortgage Corporation, which comprises the mortgage banking segment, reported net income of $1.2 million for the second quarter of 2019, compared to net income of $779,000 for the second quarter of 2018. For the first six months of 2019, C&F Mortgage Corporation reported net income of $1.7 million, compared to net income of $1.2 million for the first six months of 2018.

The increase in net income of the mortgage banking segment for the second quarter and first half of 2019 compared to the same periods in 2018 was due primarily to higher gains on sales of loans, resulting from higher loan production. Mortgage loan originations for the mortgage banking segment were $246.9 million and $385.6 million in the second quarter and first six months of 2019, compared to $203.7 million and $347.6 million for the same periods in 2018, respectively. Loan production for the second quarter of 2019 was the highest reported by the mortgage banking segment for any fiscal quarter since the second quarter of 2009 when home sales were supported by the federal first-time home buyers’ tax credit.  Lower interest rates on mortgage loans have contributed to an increase in volume in the mortgage industry in the second quarter and first six months of 2019 compared to the same periods in 2018.

Consumer Finance Segment.  C&F Finance Company, which comprises the consumer finance segment, reported net income of $1.9 million for the second quarter of 2019, compared to net income of $2.2 million for the second quarter of 2018.  For the first six months of 2019, C&F Finance Company reported net income of $3.2 million, compared to net income of $3.7 million for the first six months of 2018.

Factors contributing to the decrease in net income of C&F Finance Company for the second quarter and first half of 2019 compared to the same periods in 2018 included (1) lower loan yields resulting from competition in the non-prime automobile loan business and the acquisition of automobile loan contracts with higher credit metrics, as well as relatively lower yields on prime marine 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 2018.  Partially offsetting these factors were a decline in the provision for loan losses of $300,000 and $1.2 million for the second quarter and first six months of 2019, respectively, compared to the same periods in 2018, as a result of lower charge-offs and improving credit quality of the portfolio, as discussed below.

The annualized net charge-off ratio for the first half of 2019 decreased to 3.15 percent from 3.85 percent for the first half of 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 June 30, 2019, total delinquent loans as a percentage of total loans was 3.49 percent, compared to 4.76 percent at December 31, 2018 and 4.18 percent at June 30, 2018.  The allowance for loan losses was $22.4 million, or 7.26 percent of total loans at June 30, 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 June 30, 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 10 basis points of the 51 basis points decrease in the ratio of the allowance for loan losses to total loans.

Capital and Dividends.  The Corporation declared a quarterly cash dividend of 37 cents per share during the second quarter of 2019, which was paid on July 1, 2019.  This dividend represents a payout ratio of 21.9 percent of earnings per share for the second quarter of 2019.  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.

During the second quarter of 2019, the Corporation repurchased 32,779 shares of its common stock at an average price of $49.40 per share, and the Board of Directors authorized a new program, effective June 1, 2019, to repurchase up to $5.0 million of the Corporation’s common stock through May 31, 2020. Under the previous repurchase program, between November 2018 and May 2019, the Corporation made aggregate common stock repurchases of $3.8 million.  As of June 30, 2019, the Corporation has made aggregate common stock repurchases of $604,000 under the new share repurchase program.

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 $51.00 per share on July 22, 2019.  At June 30, 2019, the book value of the Corporation was $46.41 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  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, 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, 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 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 the use of these non-GAAP measures provide meaningful information about performance on a basis that is comparable for interest income 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 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 the Corporation and C&F Bank, (5) the effect of the Dodd-Frank Wall Street Reform and Consumer Protection 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, 2018 and other reports filed with the Securities and Exchange Commission.