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EX-32 - EX-32 - C & F FINANCIAL CORPcffi-20150630xex32.htm
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EX-31.1 - EX-31.1 - C & F FINANCIAL CORPcffi-20150630ex3117ac890.htm

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 June 30, 2015

 

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)

 


 

 

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

 

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

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

 (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

 

At August 6, 2015, the latest practicable date for determination, 3,394,862 shares of common stock, $1.00 par value, of the registrant were outstanding.

 

 

 


 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I - Financial Information 

    

Page

 

 

 

 

 

 

Item 1. 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets - June 30, 2015 (unaudited) and December 31, 2014

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income (unaudited) - Three and six months ended June 30, 2015 and 2014

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) - Three and six months ended June 30, 2015 and 2014

 

5

 

 

 

 

 

 

 

Consolidated Statements of Shareholders' Equity (unaudited) - Six months ended June 30, 2015 and 2014

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2015 and 2014

 

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

 

59

 

 

 

 

 

 

Item 4. 

Controls and Procedures

 

59

 

 

 

 

 

 

PART II - Other Information 

 

60

 

 

 

 

 

 

Item 1A. 

Risk Factors

 

60

 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

 

Item 5. 

Other Information

 

61

 

 

 

 

 

 

Item 6. 

Exhibits

 

62

 

 

 

 

 

 

 

Signatures

 

63

 

 

2


 

 

Part I – FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

   June 30,    

 

December 31, 

 

 

    

2015

    

2014

  

Assets

 

 

(unaudited)

 

 

*

 

Cash and due from banks

 

$

11,459

 

$

10,749

 

Interest-bearing deposits in other banks

 

 

127,856

 

 

156,867

 

Total cash and cash equivalents

 

 

139,315

 

 

167,616

 

Securities—available for sale at fair value, amortized cost of $213,163 and $214,437, respectively

 

 

218,349

 

 

221,897

 

Loans held for sale, at fair value

 

 

65,468

 

 

28,279

 

Loans, net of allowance for loan losses of $35,571 and $35,606, respectively

 

 

826,623

 

 

800,198

 

Restricted stocks, at cost

 

 

3,345

 

 

3,442

 

Corporate premises and equipment, net

 

 

36,525

 

 

37,295

 

Other real estate owned, net of valuation allowance of $90 and $29, respectively

 

 

977

 

 

786

 

Accrued interest receivable

 

 

6,654

 

 

6,421

 

Goodwill

 

 

14,425

 

 

14,425

 

Core deposit intangible, net

 

 

2,072

 

 

2,583

 

Bank-owned life insurance

 

 

14,681

 

 

14,484

 

Other assets

 

 

44,502

 

 

40,761

 

Total assets

 

$

1,372,936

 

$

1,338,187

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

187,814

 

$

161,839

 

Savings and interest-bearing demand deposits

 

 

507,235

 

 

497,755

 

Time deposits

 

 

347,779

 

 

366,507

 

Total deposits

 

 

1,042,828

 

 

1,026,101

 

Short-term borrowings

 

 

12,507

 

 

14,436

 

Long-term borrowings

 

 

144,029

 

 

127,488

 

Trust preferred capital notes

 

 

25,121

 

 

25,103

 

Accrued interest payable

 

 

707

 

 

740

 

Other liabilities

 

 

21,746

 

 

20,709

 

Total liabilities

 

 

1,246,938

 

 

1,214,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,393,915 and 3,418,750 shares issued and outstanding, respectively, includes, 138,375 and 135,600 of unvested shares, respectively)

 

 

3,256

 

 

3,283

 

Additional paid-in capital

 

 

8,647

 

 

9,456

 

Retained earnings

 

 

112,494

 

 

107,785

 

Accumulated other comprehensive income, net

 

 

1,601

 

 

3,086

 

Total shareholders’ equity

 

 

125,998

 

 

123,610

 

Total liabilities and shareholders’ equity

 

$

1,372,936

 

$

1,338,187

 


*

Derived from audited consolidated financial statements.

 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

  

2015

    

2014

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

19,603

 

$

19,849

 

$

38,621

 

$

39,316

 

Interest on interest-bearing deposits and federal funds sold

 

 

86

 

 

115

 

 

186

 

 

196

 

Interest and dividends on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

 

118

 

 

190

 

 

246

 

 

384

 

Tax-exempt obligations of states and political subdivisions

 

 

1,047

 

 

1,059

 

 

2,126

 

 

2,140

 

Taxable obligations of states and political subdivisions

 

 

50

 

 

46

 

 

92

 

 

92

 

Corporate bonds and other

 

 

446

 

 

453

 

 

882

 

 

878

 

Total interest income

 

 

21,350

 

 

21,712

 

 

42,153

 

 

43,006

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings and interest-bearing deposits

 

 

274

 

 

248

 

 

549

 

 

520

 

Time deposits

 

 

790

 

 

780

 

 

1,471

 

 

1,621

 

Borrowings

 

 

817

 

 

878

 

 

1,603

 

 

1,748

 

Trust preferred capital notes

 

 

295

 

 

235

 

 

584

 

 

472

 

Total interest expense

 

 

2,176

 

 

2,141

 

 

4,207

 

 

4,361

 

Net interest income

 

 

19,174

 

 

19,571

 

 

37,946

 

 

38,645

 

Provision for loan losses

 

 

2,155

 

 

3,265

 

 

5,670

 

 

6,775

 

Net interest income after provision for loan losses

 

 

17,019

 

 

16,306

 

 

32,276

 

 

31,870

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains on sales of loans

 

 

2,002

 

 

1,646

 

 

3,647

 

 

2,815

 

Service charges on deposit accounts

 

 

1,076

 

 

1,116

 

 

2,091

 

 

2,178

 

Other service charges and fees

 

 

1,759

 

 

1,615

 

 

3,200

 

 

2,996

 

Net gains on calls and sales of available for sale securities

 

 

2

 

 

3

 

 

3

 

 

3

 

Investment services income

 

 

328

 

 

323

 

 

705

 

 

606

 

Other income

 

 

348

 

 

642

 

 

970

 

 

1,398

 

Total noninterest income

 

 

5,515

 

 

5,345

 

 

10,616

 

 

9,996

 

Noninterest expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,938

 

 

9,149

 

 

20,102

 

 

18,308

 

Occupancy

 

 

2,220

 

 

2,183

 

 

4,380

 

 

4,315

 

Other

 

 

4,496

 

 

4,900

 

 

8,922

 

 

9,699

 

Total noninterest expenses

 

 

16,654

 

 

16,232

 

 

33,404

 

 

32,322

 

Income before income taxes

 

 

5,880

 

 

5,419

 

 

9,488

 

 

9,544

 

Income tax expense

 

 

1,779

 

 

1,677

 

 

2,742

 

 

2,909

 

Net income

 

$

4,101

 

$

3,742

 

$

6,746

 

$

6,635

 

Net income per share - basic

 

$

1.21

 

$

1.10

 

$

1.98

 

$

1.95

 

Net income per share - assuming dilution

 

$

1.21

 

$

1.09

 

$

1.98

 

$

1.91

 

Weighted average number of shares outstanding - basic

 

 

3,394,236

 

 

3,405,245

 

 

3,404,204

 

 

3,403,042

 

Weighted average number of shares outstanding - assuming dilution

 

 

3,394,291

 

 

3,442,468

 

 

3,404,415

 

 

3,467,054

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

2015

    

2014

  

Net income

 

$

4,101

 

$

3,742

 

$

6,746

 

$

6,635

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in defined benefit plan assets and benefit obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in net loss arising during the period1

 

 

(29)

 

 

(8)

 

 

(58)

 

 

(16)

 

Tax effect

 

 

11

 

 

3

 

 

22

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service cost arising during the period1

 

 

14

 

 

17

 

 

28

 

 

34

 

Tax effect

 

 

(5)

 

 

(6)

 

 

(10)

 

 

(12)

 

Net of tax amount

 

 

(9)

 

 

6

 

 

(18)

 

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on cash flow hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gain arising during the period

 

 

166

 

 

46

 

 

18

 

 

86

 

Tax effect

 

 

(59)

 

 

(19)

 

 

(7)

 

 

(34)

 

Net of tax amount

 

 

107

 

 

27

 

 

11

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

(2,794)

 

 

1,943

 

 

(2,271)

 

 

5,113

 

Tax effect

 

 

978

 

 

(680)

 

 

795

 

 

(1,781)

 

Reclassification adjustment for gains included in net income2

 

 

(2)

 

 

(3)

 

 

(3)

 

 

(3)

 

Tax effect

 

 

1

 

 

1

 

 

1

 

 

1

 

Net of tax amount

 

 

(1,817)

 

 

1,261

 

 

(1,478)

 

 

3,330

 

Other comprehensive (loss) income:

 

 

(1,719)

 

 

1,294

 

 

(1,485)

 

 

3,394

 

Comprehensive income

 

$

2,382

 

$

5,036

 

$

5,261

 

$

10,029

 

 


1

These items are included in the computation of net periodic benefit cost. See Note 7, Employee Benefit Plans, for additional information.

2

Gains are included in “Net gains on calls and sales of available for sale securities" on the consolidated statements of income.

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Accumulated Other

   

   

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

 

Equity

 

Balance December 31, 2013

 

$

3,269

 

$

10,686

 

$

99,492

 

$

(266)

 

$

113,181

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

6,635

 

 

 —

 

 

6,635

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

3,394

 

 

3,394

 

Common stock warrant repurchased

 

 

 —

 

 

(2,303)

 

 

 —

 

 

 —

 

 

(2,303)

 

Share-based compensation

 

 

 —

 

 

487

 

 

 —

 

 

 —

 

 

487

 

Restricted stock vested

 

 

7

 

 

(15)

 

 

 —

 

 

 —

 

 

(8)

 

Common stock issued

 

 

2

 

 

64

 

 

 —

 

 

 —

 

 

66

 

Cash dividends declared – common stock ($0.59 per share)

 

 

 —

 

 

 —

 

 

(2,009)

 

 

 —

 

 

(2,009)

 

Balance June 30, 2014

 

$

3,278

 

$

8,919

 

$

104,118

 

$

3,128

 

$

119,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Balance December 31, 2014

 

$

3,283

 

$

9,456

 

$

107,785

 

$

3,086

 

$

123,610

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

6,746

 

 

 —

 

 

6,746

 

Other comprehensive loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,485)

 

 

(1,485)

 

Share-based compensation

 

 

 —

 

 

576

 

 

 —

 

 

 —

 

 

576

 

Restricted stock vested

 

 

13

 

 

(13)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

2

 

 

65

 

 

 —

 

 

 —

 

 

67

 

Common stock repurchased

 

 

(42)

 

 

(1,437)

 

 

 —

 

 

 —

 

 

(1,479)

 

Cash dividends declared – common stock ($0.60 per share)

 

 

 —

 

 

 —

 

 

(2,037)

 

 

 —

 

 

(2,037)

 

Balance June 30, 2015

 

$

3,256

 

$

8,647

 

$

112,494

 

$

1,601

 

$

125,998

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2015

    

2014

    

  

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

6,746

 

$

6,635

 

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

1,337

 

 

1,461

 

 

Provision for loan losses

 

 

5,670

 

 

6,775

 

 

Provision for indemnifications

 

 

139

 

 

109

 

 

Provision for other real estate owned losses

 

 

90

 

 

 —

 

 

Share-based compensation

 

 

576

 

 

479

 

 

Net accretion of certain acquisition-related fair value adjustments

 

 

(1,300)

 

 

(1,722)

 

 

Accretion of discounts and amortization of premiums on securities, net

 

 

747

 

 

629

 

 

Realized gains on sales and calls of securities

 

 

(3)

 

 

(3)

 

 

Net realized gains on sales of other real estate owned

 

 

(226)

 

 

(227)

 

 

Net realized gains on sale of corporate premises and equipment

 

 

(7)

 

 

(38)

 

 

Increase in bank-owned life insurance cash surrender value

 

 

(175)

 

 

(188)

 

 

Origination of loans held for sale

 

 

(277,393)

 

 

(217,466)

 

 

Proceeds from sales of loans held for sale

 

 

243,851

 

 

222,557

 

 

Gains on sales of loans held for sale

 

 

(3,647)

 

 

(2,815)

 

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(233)

 

 

105

 

 

Other assets

 

 

(1,185)

 

 

(3,590)

 

 

Accrued interest payable

 

 

(33)

 

 

(36)

 

 

Other liabilities

 

 

1,030

 

 

(2,378)

 

 

Net cash (used in) provided by operating activities

 

 

(24,016)

 

 

10,287

 

 

Investing activities:

 

 

 

 

 

 

 

 

Proceeds from maturities, calls and sales of securities available for sale

 

 

16,891

 

 

21,545

 

 

Purchases of securities available for sale

 

 

(16,130)

 

 

(15,981)

 

 

Net redemptions of restricted stocks

 

 

97

 

 

646

 

 

Purchase of loans

 

 

(16,258)

 

 

 —

 

 

Net increase in loans

 

 

(16,872)

 

 

(12,870)

 

 

Proceeds from sales of other real estate owned

 

 

332

 

 

4,274

 

 

Purchases of corporate premises and equipment, net

 

 

(560)

 

 

(1,218)

 

 

Net cash used in investing activities

 

 

(32,500)

 

 

(3,604)

 

 

Financing activities:

 

 

 

 

 

 

 

 

Net increase in demand, interest-bearing demand and savings deposits

 

 

35,455

 

 

51,555

 

 

Net decrease in time deposits

 

 

(18,403)

 

 

(19,532)

 

 

Net increase (decrease) in borrowings

 

 

14,612

 

 

(245)

 

 

Repurchase of common stock warrant

 

 

 —

 

 

(2,303)

 

 

Issuance of common stock

 

 

67

 

 

66

 

 

Repurchase of common stock 

 

 

(1,479)

 

 

 —

 

 

Cash dividends

 

 

(2,037)

 

 

(2,009)

 

 

Net cash provided by financing activities

 

 

28,215

 

 

27,532

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(28,301)

 

 

34,215

 

 

Cash and cash equivalents at beginning of year

 

 

167,616

 

 

148,139

 

 

Cash and cash equivalents at end of period

 

$

139,315

 

$

182,354

 

 

Supplemental disclosure

 

 

 

 

 

 

 

 

Interest paid

 

$

4,547

 

$

4,942

 

 

Income taxes paid

 

 

339

 

 

2,041

 

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

 

Unrealized (losses) gains on securities available for sale

 

$

(2,274)

 

$

5,110

 

 

Transfers between loans, other real estate owned and repossessed assets

 

 

2,308

 

 

1,980

 

 

Pension adjustment

 

 

(30)

 

 

18

 

 

Unrealized gain on cash flow hedging instruments

 

 

18

 

 

86

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7


 

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, 2014.

 

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) and its wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns 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 a liability of the Corporation.

 

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. On October 1, 2013, the Corporation acquired Central Virginia Bankshares, Inc. (CVBK) and its wholly-owned subsidiary, Central Virginia Bank (CVB), which was an independent commercial bank chartered under the laws of the Commonwealth of Virginia.  On March 22, 2014, CVBK was merged with and into C&F Financial Corporation and CVB was merged with and into C&F Bank.

 

The Bank has five wholly-owned active subsidiaries: C&F Mortgage Corporation and Subsidiary (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (formerly C&F Investment Services, Inc.), 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 Finance, acquired on September 1, 2002, is a finance company providing automobile loans through indirect lending programs. C&F Wealth Management Corporation, organized in April 1995 and renamed in May 2015, is a full-service brokerage firm offering a comprehensive range of investment services. C&F Insurance Services, Inc., organized in July 1999, owns an equity interest in an insurance agency that sells insurance products to customers of C&F Bank, C&F Mortgage and other financial institutions that have an equity interest in the agency. CVB Title Services, Inc., was organized for the primary purpose of owning membership interests in two insurance-related limited liability companies. Business segment data is presented in Note 9.

 

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, the allowance for indemnifications, impairment of loans, projected cash flows of purchased credit impaired loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, fair value measurements 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.

 

Reclassification: Certain reclassifications have been made to prior period amounts to conform to the current period presentation. None of these reclassifications are considered material.  See Note 2 for additional information about reclassifications related to the adoption of new accounting standards.

8


 

 

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Corporation’s derivative financial instruments as of June 30, 2015 and December 31, 2014 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market and the related forward commitments to sell mortgage loans and (2) interest rate swaps that qualified as cash flow hedges on the Corporation's trust preferred capital notes. Because the IRLCs and forward sales commitments are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are classified as noninterest income. The effective portion of 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 or period(s) during which the hedged transactions affect earnings.

 

Share-Based Compensation: Compensation expense for the second quarter of 2015 and the first six months of 2015 included expense, net of forfeitures, of $312,000 ($193,000 after tax) and $576,000 ($357,000 after tax), respectively, for restricted stock granted during 2010 through 2015. As of June 30, 2015, there was $2.79 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 first six months of 2015 and 2014 is presented below:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, January 1, 2015

 

135,600

 

$

34.34

 

Granted

 

16,650

 

 

37.72

 

Vested

 

(12,600)

 

 

25.78

 

Forfeitures

 

(1,275)

 

 

37.58

 

Unvested, June 30, 2015

 

138,375

 

$

35.50

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, January 1, 2014

 

120,183

 

$

31.18

 

Granted

 

15,750

 

 

41.38

 

Vested

 

(8,100)

 

 

18.77

 

Forfeitures

 

(700)

 

 

33.96

 

Unvested, June 30, 2014

 

127,133

 

$

33.22

 

 

9


 

Stock option activity during the six months ended June 30, 2015 and 2014 and stock options outstanding at June 30, 2015 and 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

Unexercised

 

 

 

 

 

 

 

 

 

Remaining

 

In-The

 

 

 

 

 

 

 

 

 

Contractual

 

Money

 

 

 

 

 

Exercise

 

 

Life

 

Options

 

 

 

Shares

 

Price*

 

 

(in years)*

 

(in 000’s)

 

Options outstanding and exercisable at January 1, 2015

 

100,762 

 

$

37.75

 

 

0.9

 

$

 —

 

Expired

 

(12,000)

 

$

35.20

 

 

 

 

 

 

 

Options outstanding and exercisable at June 30, 2015

 

88,762 

 

$

38.10

 

 

0.7

 

$

 


*

Weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

Unexercised

 

 

 

 

 

 

 

 

 

Remaining

 

In-The

 

 

 

 

 

 

 

 

 

Contractual

 

Money

 

 

 

 

 

Exercise

 

 

Life

 

Options

 

 

 

Shares

 

Price*

 

 

(in years)*

 

(in 000’s)

 

Options outstanding and exercisable at January 1, 2014

 

164,150

 

$

38.21

 

 

1.7

 

$

1,224

 

Expired

 

(12,000)

 

$

37.50

 

 

 

 

 

 

 

Options outstanding and exercisable at June 30, 2014

 

152,150 

 

$

38.27

 

 

1.3

 

$

9

 


*

Weighted average

 

Recent Significant Accounting Pronouncements:

 

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-01, Investments-Equity Method and Joint Ventures - Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU became effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of ASU 2014-01 did not have a material effect on the Corporation’s financial statements.  The adoption of ASU 2014-01 is described further in Note 2.

 

In June 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Revenue Recognition-Topic 605, most industry-specific guidance, and some cost guidance included in Revenue Recognition-Construction-Type and Production-Type Contracts-Subtopic 605-35. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including:

10


 

identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation.  Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement.  The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Corporation does not expect the adoption of ASU 2014-09 to have a material effect on its financial statements.

 

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.  The amendments in this ASU became effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted.  The adoption of ASU 2014-11 did not have a material effect on the Corporation’s financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.  Existing guidance in Compensation - Stock Compensation (Topic 718), should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis.  The Corporation does not expect the adoption of ASU 2014-12 to have a material effect on its financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period.  If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice.  The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted.  The Corporation does not expect the adoption of ASU 2014-15 to have a material effect on its financial statements.

 

In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815):  Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.  The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic

11


 

characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.  The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features.  The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Corporation does not expect the adoption of ASU 2014-16 to have a material effect on its financial statements.  

 

In January 2015, the FASB issued ASU No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.  The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions.  Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item.  If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.  The Corporation does not expect the adoption of ASU 2015-01 to have a material effect on its financial statements

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.”  The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).  In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification (ASC) and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.  The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated.  The Corporation does not expect the adoption of ASU 2015-02 to have a material effect on its financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.”  The amendments in this ASU are intended to simplify the presentation of debt issuance costs.  These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued.  The Corporation does not expect the adoption of ASU 2015-03 to have a material effect on its financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.”  The amendments in this ASU provide guidance to customers regarding cloud computing arrangements that include a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not

12


 

change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.  The amendments in this ASU are effecti