Table of Contents

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


(Mark One)

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2020 

 

or

 

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________ to _________

 

Commission File Number 000-23423

 


 

C&F FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

 

 

Virginia

54-1680165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

802 Main Street West Point, VA

23181

(Address of principal executive offices)

(Zip Code)

 

(804) 843-2360

(Registrant’s telephone number, including area code)

 

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value per share

CFFI

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No   

 

At May 7, 2020, the latest practicable date for determination,  3,647,673 shares of common stock, $1.00 par value, of the registrant were outstanding.

 

 


 

 

Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I - Financial Information 

    

Page

 

 

 

 

 

 

Item 1. 

Financial Statements

 

 3

 

 

 

 

 

 

 

Consolidated Balance Sheets –  March 31, 2020 (unaudited) and December 31, 2019

 

 3

 

 

 

 

 

 

 

Consolidated Statements of Income (unaudited) – Three months ended March  31, 2020 and 2019

 

 4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) – Three months ended March 31, 2020 and 2019

 

 5

 

 

 

 

 

 

 

Consolidated Statements of Equity (unaudited) – Three months ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2020 and 2019

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 33

 

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

 58

 

 

 

 

 

 

Item 4. 

Controls and Procedures

 

 58

 

 

 

 

 

 

PART II - Other Information 

 

 

 

 

 

 

 

 

Item 1A. 

Risk Factors

 

58

 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 59

 

 

 

 

 

 

Item 6. 

Exhibits

 

61

 

 

 

 

 

 

 

Signatures

 

 62

 

 

 

 

2

Table of Contents

 

Part I – FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

   March 31,    

 

December 31, 

 

 

    

2020

    

2019

  

Assets

 

 

(unaudited)

 

 

*

 

Cash and due from banks

 

$

37,006

 

$

21,148

 

Interest-bearing deposits in other banks

 

 

111,003

 

 

144,285

 

Total cash and cash equivalents

 

 

148,009

 

 

165,433

 

Securities—available for sale at fair value, amortized cost of
$230,245 and $187,759, respectively

 

 

234,424

 

 

189,733

 

Loans held for sale, at fair value

 

 

125,667

 

 

90,500

 

Loans, net of allowance for loan losses of $33,298 and $32,873, respectively

 

 

1,204,171

 

 

1,082,318

 

Restricted stock, at cost

 

 

3,209

 

 

3,257

 

Corporate premises and equipment, net

 

 

38,731

 

 

35,261

 

Other real estate owned, net of valuation allowance of $88 and $88, respectively

 

 

1,103

 

 

1,103

 

Accrued interest receivable

 

 

7,253

 

 

6,776

 

Goodwill

 

 

25,117

 

 

14,425

 

Other intangible assets, net

 

 

2,540

 

 

912

 

Bank-owned life insurance

 

 

19,749

 

 

16,044

 

Net deferred tax asset

 

 

12,737

 

 

11,219

 

Other assets

 

 

54,582

 

 

40,451

 

Total assets

 

$

1,877,292

 

$

1,657,432

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

334,648

 

$

296,985

 

Savings and interest-bearing demand deposits

 

 

641,976

 

 

572,209

 

Time deposits

 

 

507,750

 

 

422,056

 

Total deposits

 

 

1,484,374

 

 

1,291,250

 

Short-term borrowings

 

 

18,391

 

 

16,360

 

Long-term borrowings

 

 

116,254

 

 

119,529

 

Trust preferred capital notes

 

 

25,289

 

 

25,281

 

Accrued interest payable

 

 

1,508

 

 

1,291

 

Other liabilities

 

 

52,232

 

 

38,442

 

Total liabilities

 

 

1,698,048

 

 

1,492,153

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,648,658 and 3,438,126 shares issued and outstanding, respectively, includes 139,820 and 142,020 of unvested shares, respectively)

 

 

3,509

 

 

3,296

 

Additional paid-in capital

 

 

20,710

 

 

9,503

 

Retained earnings

 

 

156,438

 

 

154,248

 

Accumulated other comprehensive loss, net

 

 

(1,955)

 

 

(2,249)

 

Equity attributable to C&F Financial Corporation

 

 

178,702

 

 

164,798

 

Noncontrolling interest

 

 

542

 

 

481

 

Total equity

 

 

179,244

 

 

165,279

 

Total liabilities and equity

 

$

1,877,292

 

$

1,657,432

 


*     Derived from audited consolidated financial statements.

 

See notes to consolidated financial statements.

3

Table of Contents

 

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2020

    

2019

  

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

22,897

 

$

20,920

 

 

Interest on interest-bearing deposits and federal funds sold

 

 

598

 

 

589

 

 

Interest and dividends on securities

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

 

126

 

 

101

 

 

Mortgage-backed securities

 

 

520

 

 

611

 

 

Tax-exempt obligations of states and political subdivisions

 

 

496

 

 

583

 

 

Taxable obligations of states and political subdivisions

 

 

92

 

 

93

 

 

Other

 

 

49

 

 

54

 

 

Total interest income

 

 

24,778

 

 

22,951

 

 

Interest expense

 

 

 

 

 

 

 

 

Savings and interest-bearing deposits

 

 

586

 

 

602

 

 

Time deposits

 

 

2,299

 

 

1,306

 

 

Borrowings

 

 

1,001

 

 

1,111

 

 

Trust preferred capital notes

 

 

289

 

 

285

 

 

Total interest expense

 

 

4,175

 

 

3,304

 

 

Net interest income

 

 

20,603

 

 

19,647

 

 

Provision for loan losses

 

 

2,650

 

 

2,395

 

 

Net interest income after provision for loan losses

 

 

17,953

 

 

17,252

 

 

Noninterest income

 

 

 

 

 

 

 

 

Gains on sales of loans

 

 

3,676

 

 

2,136

 

 

Mortgage banking fee income

 

 

1,305

 

 

769

 

 

Interchange income

 

 

1,089

 

 

958

 

 

Service charges on deposit accounts

 

 

1,002

 

 

918

 

 

Wealth management services income, net

 

 

585

 

 

449

 

 

Other service charges and fees

 

 

375

 

 

299

 

 

Net gains on sales, maturities and calls of available for sale securities

 

 

 4

 

 

 4

 

 

Other

 

 

993

 

 

1,570

 

 

Total noninterest income

 

 

9,029

 

 

7,103

 

 

Noninterest expenses

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,817

 

 

11,907

 

 

Occupancy

 

 

2,327

 

 

2,190

 

 

Other

 

 

9,222

 

 

5,580

 

 

Total noninterest expenses

 

 

22,366

 

 

19,677

 

 

Income before income taxes

 

 

4,616

 

 

4,678

 

 

Income tax expense

 

 

977

 

 

907

 

 

Net income

 

 

3,639

 

 

3,771

 

 

Less net income attributable to noncontrolling interest

 

 

61

 

 

 —

 

 

Net income attributable to C&F Financial Corporation

 

$

3,578

 

$

3,771

 

 

Net income per share - basic and diluted

 

$

0.98

 

$

1.08

 

 

 

See notes to consolidated financial statements.

4

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2020

    

2019

  

Net income

 

$

3,639

 

$

3,771

 

Other comprehensive income:

 

 

 

 

 

 

 

Defined benefit plan:

 

 

 

 

 

 

 

Reclassification of recognized net actuarial losses into net income1

 

 

42

 

 

42

 

Related income tax effects

 

 

(9)

 

 

(9)

 

Amortization of prior service credit into net income1

 

 

(17)

 

 

(17)

 

Related income tax effects

 

 

 4

 

 

 4

 

Defined benefit plan, net of tax

 

 

20

 

 

20

 

 

 

 

 

 

 

 

 

Cash flow hedges:

 

 

 

 

 

 

 

Unrealized holding losses arising during the period

 

 

(1,974)

 

 

(108)

 

Related income tax effects

 

 

508

 

 

28

 

Amortization of hedging gains into net income2

 

 

(3)

 

 

 —

 

Related income tax effects

 

 

 1

 

 

 —

 

Cash flow hedges, net of tax

 

 

(1,468)

 

 

(80)

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

2,209

 

 

1,826

 

Related income tax effects

 

 

(464)

 

 

(383)

 

Reclassification of net realized gains into net income3

 

 

(4)

 

 

(4)

 

Related income tax effects

 

 

 1

 

 

 1

 

Securities available for sale, net of tax

 

 

1,742

 

 

1,440

 

Other comprehensive income, net of tax

 

 

294

 

 

1,380

 

Comprehensive income

 

 

3,933

 

 

5,151

 

Less comprehensive income attributable to noncontrolling interest

 

 

61

 

 

 —

 

Comprehensive income attributable to C&F Financial Corporation

 

$

3,872

 

$

5,151

 


1

These items are included in the computation of net periodic benefit cost and are included in “Noninterest income – Other” on the Consolidated Statements of Income. See “Note 8: Employee Benefit Plans,” for additional information.

2

These items are included in “Interest expense – Trust preferred capital notes” on the Consolidated Statements of Income.

3

These items are included in “Net gains on sales, maturities and calls of available for sale securities” on the Consolidated Statements of Income.

See notes to consolidated financial statements.

5

Table of Contents

 

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE THREE MONTHS ENDED MARCH  31, 2020 AND 2019

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to C&F Financial Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Other

   

 

 

 

 

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

Stock

 

Capital

 

Earnings

 

Loss, Net

 

Interest

 

Equity

 

Balance December 31, 2019

 

$

3,296

 

$

9,503

 

$

154,248

 

$

(2,249)

 

$

481

 

$

165,279

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

3,578

 

 

 —

 

 

61

 

 

3,639

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

294

 

 

 —

 

 

294

 

Share-based compensation

 

 

 —

 

 

389

 

 

 —

 

 

 —

 

 

 —

 

 

389

 

Restricted stock vested

 

 

16

 

 

(16)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Acquisition of Peoples Bankshares, Incorporated

 

 

210

 

 

11,402

 

 

 —

 

 

 —

 

 

 —

 

 

11,612

 

Common stock issued

 

 

 1

 

 

36

 

 

 —

 

 

 —

 

 

 —

 

 

37

 

Common stock purchased

 

 

(14)

 

 

(604)

 

 

 —

 

 

 —

 

 

 —

 

 

(618)

 

Cash dividends declared ($0.38 per share)

 

 

 —

 

 

 —

 

 

(1,388)

 

 

 —

 

 

 —

 

 

(1,388)

 

Balance March 31, 2020

 

$

3,509

 

$

20,710

 

$

156,438

 

$

(1,955)

 

$

542

 

$

179,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attributable to C&F Financial Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Other

   

 

 

 

 

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

Stock

 

Capital

 

Earnings

 

Loss, Net

 

Interest

 

Equity

 

Balance December 31, 2018

 

$

3,358

 

$

12,752

 

$

140,520

 

$

(4,672)

 

$

 —

 

$

151,958

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

3,771

 

 

 —

 

 

 —

 

 

3,771

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

1,380

 

 

 —

 

 

1,380

 

Issuance of noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

490

 

 

490

 

Share-based compensation

 

 

 —

 

 

457

 

 

 —

 

 

 —

 

 

 —

 

 

457

 

Restricted stock vested

 

 

15

 

 

(15)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

 1

 

 

35

 

 

 —

 

 

 —

 

 

 —

 

 

36

 

Common stock purchased

 

 

(37)

 

 

(1,867)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,904)

 

Cash dividends declared ($0.37 per share)

 

 

 —

 

 

 —

 

 

(1,288)

 

 

 —

 

 

 —

 

 

(1,288)

 

Balance March 31, 2019

 

$

3,337

 

$

11,362

 

$

143,003

 

$

(3,292)

 

$

490

 

$

154,900

 

 

See notes to consolidated financial statements.

 

 

 

6

Table of Contents

 

C&F FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2020

    

2019

  

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

3,639

 

$

3,771

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

885

 

 

916

 

Provision for loan losses

 

 

2,650

 

 

2,395

 

Share-based compensation

 

 

389

 

 

457

 

Pension expense

 

 

172

 

 

141

 

Accretion of certain acquisition-related discounts, net

 

 

(1,259)

 

 

(365)

 

Amortization of intangible assets

 

 

83

 

 

78

 

Net realized gains on sales, maturities and calls of securities available for sale

 

 

(4)

 

 

(4)

 

Accretion of discounts and amortization of premiums on securities, net

 

 

370

 

 

410

 

Income from bank-owned life insurance

 

 

(103)

 

 

(83)

 

Proceeds from sales of loans held for sale

 

 

227,422

 

 

146,701

 

Origination of loans held for sale

 

 

(253,868)

 

 

(138,705)

 

Gains on sales of loans held for sale

 

 

(3,676)

 

 

(2,136)

 

Other losses (gains), net

 

 

257

 

 

(10)

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(47)

 

 

169

 

Other assets

 

 

4,455

 

 

3,508

 

Accrued interest payable

 

 

(43)

 

 

246

 

Other liabilities

 

 

(3,100)

 

 

(3,322)

 

Net cash (used in) provided by operating activities

 

 

(21,778)

 

 

14,167

 

Investing activities:

 

 

 

 

 

 

 

Acquisition of Peoples Bankshares, Incorporated

 

 

19,101

 

 

 —

 

Disposition of assets related to business combination

 

 

8,004

 

 

 —

 

Proceeds from sales, maturities and calls of securities available for sale and payments on mortgage-backed securities

 

 

39,063

 

 

15,657

 

Purchases of securities available for sale

 

 

(64,746)

 

 

(8,338)

 

Repayments on loans held for investment by non-bank affiliates

 

 

32,448

 

 

30,599

 

Purchases of loans held for investment by non-bank affiliates

 

 

(29,305)

 

 

(36,854)

 

Net increase in retail banking loans held for investment

 

 

(4,911)

 

 

(9,250)

 

Proceeds from sales of other real estate owned

 

 

281

 

 

 —

 

Purchases of corporate premises and equipment

 

 

(1,548)

 

 

(753)

 

Changes in collateral posted with other financial institutions, net

 

 

(8,270)

 

 

(2,370)

 

Other investing activities, net

 

 

199

 

 

 3

 

Net cash used in investing activities

 

 

(9,684)

 

 

(11,306)

 

Financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in demand and savings deposits

 

 

12,632

 

 

(11,057)

 

Net increase in time deposits

 

 

8,745

 

 

31,590

 

Net increase in short-term borrowings

 

 

2,030

 

 

2,107

 

Repayments of long-term borrowings

 

 

(7,519)

 

 

 —

 

Repurchases of common stock

 

 

(355)

 

 

(1,667)

 

Cash dividends paid

 

 

(1,388)

 

 

(1,288)

 

Other financing activities, net

 

 

(107)

 

 

(108)

 

Net cash  provided by financing activities

 

 

14,038

 

 

19,577

 

Net (decrease) increase in cash and cash equivalents

 

 

(17,424)

 

 

22,438

 

Cash and cash equivalents at beginning of period

 

 

165,433

 

 

115,013

 

Cash and cash equivalents at end of period

 

$

148,009

 

$

137,451

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

Interest paid

 

$

4,175

 

$

3,049

 

Income taxes paid

 

 

 3

 

 

 8

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

Value of shares withheld at vesting for employee taxes

 

$

246

 

$

237

 

Liabilities assumed to acquire right of use assets under operating leases

 

 

204

 

 

821

 

Issuance of noncontrolling interest

 

 

 —

 

 

490

 

 

See notes to consolidated financial statements.

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C&F FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1: Summary of Significant Accounting Policies

 

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2019.

 

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) and its direct wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank) and indirect subsidiaries that are wholly-owned or controlled. Subsidiaries that are less than wholly owned are fully consolidated if they are controlled by the Corporation or one of its subsidiaries, and the portion of any subsidiary not owned by the Corporation is reported as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns all of the common stock of C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as liabilities of the Corporation.  The accounting and reporting policies of the Corporation conform to U.S. GAAP and to predominant practices within the banking industry.

 

Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, C&F Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.

 

C&F Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, was formed to originate and sell residential mortgages and through its subsidiary, Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Mortgage owns a 51 percent interest in C&F Select LLC, which was organized in January 2019 and is also engaged in the business of originating and selling residential mortgages. C&F Finance, acquired in September 2002, is a finance company purchasing automobile, marine and recreational vehicle (RV) loans through indirect lending programs. C&F Wealth Management, organized in April 1995, is a full-service brokerage firm offering a comprehensive range of wealth management services and insurance products through third-party service providers. C&F Insurance Services, Inc., was organized in July 1999, for the primary purpose of owning an equity interest in an independent insurance agency that operates in Virginia and North Carolina. CVB Title Services, Inc. was organized for the primary purpose of owning an equity interest in a full service title and settlement agency. Business segment data is presented in Note 10.

 

Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

 

The outbreak of the novel coronavirus and the resulting COVID-19 illness has caused a significant disruption in economic activity worldwide, and the Corporation expects that it will have a significant impact on businesses and consumers in its market areas and on its results of operations.  It is unknown how long these conditions will last and what the ultimate financial impact will be to the Corporation.

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Business Combination: On January 1, 2020, the Corporation completed the acquisition of Peoples Bankshares, Incorporated (Peoples) and its banking subsidiary, Peoples Community Bank for an aggregate purchase price of $22.19 million of cash and stock.  Additional information about the acquisition is presented in Note 2.

 

Reclassification: Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.  None of these reclassifications are considered material.

 

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the Consolidated Balance Sheets. The Corporation’s derivative financial instruments include (1) interest rate swaps that qualify and are designated as cash flow hedges on the Corporation’s trust preferred capital notes, (2) interest rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate contracts arising from mortgage banking activities, including interest rate lock commitments (IRLCs) on mortgage loans and related forward sales of mortgage loans and mortgage backed securities. The gain or loss on the Corporation’s cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period(s) during which the hedged transactions affect earnings. IRLCs, forward sales contracts and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, and therefore changes in the fair value of these instruments are reported as noninterest income or noninterest expense, as applicable. The Corporation’s derivative financial instruments are described more fully in Note 12.

 

Share-Based Compensation: Share-based compensation expense, net of forfeitures, for the three months ended March 31, 2020 was $389,000 ($217,000 after tax) for restricted stock granted during 2015 through 2020. As of March 31, 2020, there was $3.73 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

 

A summary of activity for restricted stock awards during the three months ended March 31, 2020 and 2019 is presented below:

 

 

 

 

 

 

 

 

 

 

2020

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2019

 

142,020

 

$

48.88

 

Granted

 

14,650

 

 

53.22

 

Vested

 

(16,230)

 

 

39.97

 

Forfeited

 

(620)

 

 

53.46

 

Unvested, March 31, 2020

 

139,820

 

 

50.39

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2018

 

139,455

 

$

45.75

 

Granted

 

16,100

 

 

51.73

 

Vested

 

(15,490)

 

 

41.31

 

Forfeited

 

(70)

 

 

60.95

 

Unvested, March 31, 2019

 

139,995

 

 

46.92

 

 

Recently Adopted Accounting Pronouncements:

 

On January 1, 2020, the Corporation adopted Accounting Standards Update (ASU) 2018-13,  “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” These amendments modified the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains

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and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. The applicable amendments of ASU 2018-13 were applied prospectively and did not have a material effect on the Corporation’s consolidated financial statements.

 

Recent Significant Accounting Pronouncements:

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as part of its project on financial instruments. Subsequently, this ASU was amended when the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses,” ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief,” ASU 2019-10, “Financial Instruments—Credit losses (Topic 326), Derivatives and hedging (Topic 815), and Leases (Topic 842)—Effective dates,” ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” ASU 2020-02, “Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842)” and ASU 2020-03, “Codification Improvements to Financial Instruments” (collectively, ASC 326).  ASC 326 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.  The new standard will be effective for the Corporation beginning on January 1, 2023.  Early adoption of the new standard is permitted.

 

The amendments of ASC 326, upon adoption, will be applied on a modified retrospective basis, with the cumulative effect of adopting the new standard being recorded as an adjustment to opening retained earnings in the period of adoption. The Corporation has established a working group to prepare for and implement changes related to ASC 326 and has gathered historical loan loss data for purposes of evaluating appropriate portfolio segmentation and modeling methods under the standard.  The Corporation has performed procedures to validate the historical loan loss data to ensure its suitability and reliability for purposes of developing an estimate of expected credit losses under ASC 326. The Corporation has engaged a vendor to assist in modeling expected lifetime losses under ASC 326, and is continuing to develop and refine an approach to estimating the allowance for credit losses. The adoption of ASC 326 will result in significant changes to the Corporation’s consolidated financial statements, which may include changes in the level of the allowance for credit losses that will be considered adequate, a reduction in total equity and regulatory capital of C&F Bank, differences in the timing of recognizing changes to the allowance for credit losses and expanded disclosures about the allowance for credit losses. The Corporation has not yet determined an estimate of the effect of these changes. The adoption of the standard will also result in significant changes in the Corporation’s internal control over financial reporting related to the allowance for credit losses.

 

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements regarding the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted.  The Corporation does not expect the adoption of ASU 2018-14 to have a material effect on its consolidated financial statements.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not currently expected to have a material effect on the Corporation’s financial position, results of operations or cash flows.

 

 

 

 

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NOTE 2:  Business Combination

 

On January 1, 2020, the Corporation completed its acquisition of Peoples.  Peoples shareholders received 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples common stock, with cash paid in lieu of any fractional shares of the Corporation’s common stock.  In connection with the transaction, the Corporation paid aggregate cash consideration of $10.58 million and issued 209,871 shares of its common stock to the shareholders of Peoples. 

 

The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the acquisition and the common stock of the Corporation issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.  During the measurement period, the acquirer shall adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.  Measurement period adjustments are recognized in the reporting period in which they are determined.  The measurement period may not exceed one year from the acquisition date.  

 

The following table presents as of January 1, 2020 the total consideration paid by the Corporation in connection with the acquisition of Peoples, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

Purchase price:

 

 

 

 

Cash paid

 

$

10,579

 

Common stock issued

 

 

11,612

 

Total purchase price

 

$

22,191

 

 

 

 

 

 

Identifiable assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

29,680

 

Securities available for sale