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EX-32 - EX-32 - C & F FINANCIAL CORPcffi-20160630xex32.htm
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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, 2016

 

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 4, 2016, the latest practicable date for determination,  3,457,302 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, 2016 (unaudited) and December 31, 2015

 

3

 

 

 

 

 

 

 

   Consolidated Statements of Income (unaudited) - Three and six months ended June 30, 2016 and 2015

 

4

 

 

 

 

 

 

 

   Consolidated Statements of Comprehensive Income (unaudited) – Three and six months ended June 30, 2016 and 2015

 

5

 

 

 

 

 

 

 

   Consolidated Statements of Shareholders' Equity (unaudited) – Six months ended    June 30, 2016 and 2015

 

6

 

 

 

 

 

 

 

   Consolidated Statements of Cash Flows (unaudited) - Six months ended   June 30, 2016 and 2015

 

7

 

 

 

 

 

 

 

   Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

 

Item 2. 

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

 

31

 

 

 

 

 

 

Item 3. 

   Quantitative and Qualitative Disclosures About Market Risk

 

56

 

 

 

 

 

 

Item 4. 

   Controls and Procedures

 

56

 

 

 

 

 

 

PART II - Other Information 

 

 

 

 

 

 

 

 

Item 1A. 

   Risk Factors

 

57

 

 

 

 

 

 

Item 2. 

   Unregistered Sales of Equity Securities and Use of Proceeds

 

57

 

 

 

 

 

 

Item 6. 

   Exhibits

 

58

 

 

 

 

 

 

 

   Signatures

 

59

 

 

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, 

 

 

    

2016

    

2015

  

Assets

 

 

(unaudited)

 

 

*

 

Cash and due from banks

 

$

10,944

 

$

9,679

 

Interest-bearing deposits in other banks

 

 

81,565

 

 

143,264

 

Total cash and cash equivalents

 

 

92,509

 

 

152,943

 

Securities—available for sale at fair value, amortized cost of
$204,321 and $214,105, respectively

 

 

212,086

 

 

219,476

 

Loans held for sale, at fair value

 

 

61,573

 

 

44,000

 

Loans, net of allowance for loan losses of $36,734 and $35,569, respectively

 

 

924,450

 

 

865,892

 

Restricted stocks, at cost

 

 

3,403

 

 

3,345

 

Corporate premises and equipment, net

 

 

36,283

 

 

36,533

 

Other real estate owned, net of valuation allowance of $97 and $56, respectively

 

 

579

 

 

942

 

Accrued interest receivable

 

 

7,000

 

 

6,829

 

Goodwill

 

 

14,425

 

 

14,425

 

Core deposit intangible, net

 

 

1,219

 

 

1,618

 

Bank-owned life insurance

 

 

14,814

 

 

14,988

 

Other assets

 

 

45,887

 

 

44,085

 

Total assets

 

$

1,414,228

 

$

1,405,076

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

218,271

 

$

197,909

 

Savings and interest-bearing demand deposits

 

 

525,614

 

 

535,992

 

Time deposits

 

 

334,574

 

 

339,732

 

Total deposits

 

 

1,078,459

 

 

1,073,633

 

Short-term borrowings

 

 

12,868

 

 

12,093

 

Long-term borrowings

 

 

133,029

 

 

140,029

 

Trust preferred capital notes

 

 

25,157

 

 

25,139

 

Accrued interest payable

 

 

711

 

 

698

 

Other liabilities

 

 

26,285

 

 

22,425

 

Total liabilities

 

 

1,276,509

 

 

1,274,017

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,452,342 and 3,437,787 shares issued and outstanding, respectively, includes 143,015 and 137,200 of unvested shares, respectively)

 

 

3,309

 

 

3,301

 

Additional paid-in capital

 

 

10,959

 

 

10,420

 

Retained earnings

 

 

121,125

 

 

116,167

 

Accumulated other comprehensive income, net

 

 

2,326

 

 

1,171

 

Total shareholders’ equity

 

 

137,719

 

 

131,059

 

Total liabilities and shareholders’ equity

 

$

1,414,228

 

$

1,405,076

 


*     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, 

 

    

2016

    

2015

  

2016

    

2015

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

20,636

 

$

19,603

 

$

40,842

 

$

38,621

Interest on interest-bearing deposits and federal funds sold

 

 

143

 

 

86

 

 

320

 

 

186

Interest and dividends on securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

 

85

 

 

118

 

 

186

 

 

246

Mortgage-backed securities

 

 

312

 

 

299

 

 

646

 

 

599

Tax-exempt obligations of states and political subdivisions

 

 

954

 

 

1,047

 

 

1,935

 

 

2,126

Taxable obligations of states and political subdivisions

 

 

45

 

 

50

 

 

91

 

 

92

Corporate bonds and other

 

 

128

 

 

147

 

 

248

 

 

283

Total interest income

 

 

22,303

 

 

21,350

 

 

44,268

 

 

42,153

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Savings and interest-bearing deposits

 

 

267

 

 

274

 

 

559

 

 

549

Time deposits

 

 

802

 

 

790

 

 

1,611

 

 

1,471

Borrowings

 

 

861

 

 

817

 

 

1,739

 

 

1,603

Trust preferred capital notes

 

 

288

 

 

295

 

 

571

 

 

584

Total interest expense

 

 

2,218

 

 

2,176

 

 

4,480

 

 

4,207

Net interest income

 

 

20,085

 

 

19,174

 

 

39,788

 

 

37,946

Provision for loan losses

 

 

3,600

 

 

2,155

 

 

8,200

 

 

5,670

Net interest income after provision for loan losses

 

 

16,485

 

 

17,019

 

 

31,588

 

 

32,276

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

Gains on sales of loans

 

 

2,552

 

 

2,002

 

 

4,282

 

 

3,647

Service charges on deposit accounts

 

 

1,041

 

 

1,076

 

 

2,004

 

 

2,091

Other service charges and fees

 

 

2,363

 

 

1,759

 

 

4,047

 

 

3,200

Net gains on calls and sales of available for sale securities

 

 

44

 

 

2

 

 

45

 

 

3

Investment services income

 

 

315

 

 

328

 

 

591

 

 

705

Other

 

 

1,408

 

 

348

 

 

1,917

 

 

970

Total noninterest income

 

 

7,723

 

 

5,515

 

 

12,886

 

 

10,616

Noninterest expenses

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,522

 

 

9,938

 

 

20,693

 

 

20,102

Occupancy

 

 

2,365

 

 

2,220

 

 

4,699

 

 

4,380

Other

 

 

4,760

 

 

4,496

 

 

9,345

 

 

8,922

Total noninterest expenses

 

 

17,647

 

 

16,654

 

 

34,737

 

 

33,404

Income before income taxes

 

 

6,561

 

 

5,880

 

 

9,737

 

 

9,488

Income tax expense

 

 

1,818

 

 

1,779

 

 

2,570

 

 

2,742

Net income

 

$

4,743

 

$

4,101

 

$

7,167

 

$

6,746

Net income per share - basic

 

$

1.37

 

$

1.21

 

$

2.08

 

$

1.98

Net income per share - assuming dilution

 

$

1.37

 

$

1.21

 

$

2.08

 

$

1.98

Weighted average number of shares outstanding - basic

 

 

3,451,746

 

 

3,394,236

 

 

3,450,188

 

 

3,404,204

Weighted average number of shares outstanding - assuming dilution

 

 

3,453,136

 

 

3,394,291

 

 

3,451,438

 

 

3,404,415

 

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, 

 

 

    

2016

    

2015

    

2016

    

2015

  

Net income

 

$

4,743

 

$

4,101

 

$

7,167

 

$

6,746

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in defined benefit plan assets and benefit obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in net gain (loss) arising during the period1

 

 

38

 

 

(29)

 

 

76

 

 

(58)

 

Tax effect

 

 

(13)

 

 

11

 

 

(26)

 

 

22

 

Amortization of prior service cost arising during the period1

 

 

(15)

 

 

14

 

 

(30)

 

 

28

 

Tax effect

 

 

5

 

 

(5)

 

 

10

 

 

(10)

 

Net of tax amount

 

 

15

 

 

(9)

 

 

30

 

 

(18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains on cash flow hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (losses) gains arising during the period

 

 

(134)

 

 

166

 

 

(672)

 

 

18

 

Tax effect

 

 

53

 

 

(59)

 

 

241

 

 

(7)

 

Net of tax amount

 

 

(81)

 

 

107

 

 

(431)

 

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

755

 

 

(2,794)

 

 

2,439

 

 

(2,271)

 

Tax effect

 

 

(264)

 

 

978

 

 

(853)

 

 

795

 

Reclassification adjustment for gains included in net income2

 

 

(44)

 

 

(2)

 

 

(45)

 

 

(3)

 

Tax effect

 

 

15

 

 

1

 

 

15

 

 

1

 

Net of tax amount

 

 

462

 

 

(1,817)

 

 

1,556

 

 

(1,478)

 

Other comprehensive income (loss)

 

 

396

 

 

(1,719)

 

 

1,155

 

 

(1,485)

 

Comprehensive income

 

$

5,139

 

$

2,382

 

$

8,322

 

$

5,261

 


1

These items are included in the computation of net periodic benefit cost. See Note 6, 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance December 31, 2015

 

$

3,301

 

$

10,420

 

$

116,167

 

$

1,171

 

$

131,059

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

7,167

 

 

 —

 

 

7,167

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

1,155

 

 

1,155

 

Share-based compensation

 

 

 —

 

 

615

 

 

 —

 

 

 —

 

 

615

 

Restricted stock vested

 

 

10

 

 

(10)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

2

 

 

72

 

 

 —

 

 

 —

 

 

74

 

Common stock purchased

 

 

(4)

 

 

(138)

 

 

 —

 

 

 —

 

 

(142)

 

Cash dividends declared – common stock ($0.64 per share)

 

 

 —

 

 

 —

 

 

(2,209)

 

 

 —

 

 

(2,209)

 

Balance June 30, 2016

 

$

3,309

 

$

10,959

 

$

121,125

 

$

2,326

 

$

137,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Accumulated Other

   

   

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

 

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 purchased

 

 

(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, 

 

 

    

2016

    

2015

  

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

7,167

 

$

6,746

 

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

 

 

 

 

 

 

 

Depreciation

 

 

1,275

 

 

1,337

 

Provision for loan losses

 

 

8,200

 

 

5,670

 

Provision for indemnifications

 

 

140

 

 

139

 

Provision for other real estate owned losses

 

 

70

 

 

90

 

Share-based compensation

 

 

615

 

 

576

 

Net accretion of certain acquisition-related fair value adjustments

 

 

(748)

 

 

(1,300)

 

Accretion of discounts and amortization of premiums on securities, net

 

 

856

 

 

747

 

Realized gains on sales and calls of securities

 

 

(45)

 

 

(3)

 

Net realized gains on sales of other real estate owned

 

 

(98)

 

 

(226)

 

Net realized gains on sale of corporate premises and equipment

 

 

(183)

 

 

(7)

 

Income from bank-owned life insurance

 

 

(664)

 

 

(175)

 

Origination of loans held for sale

 

 

(280,047)

 

 

(277,393)

 

Proceeds from sales of loans held for sale

 

 

266,756

 

 

243,851

 

Gains on sales of loans held for sale

 

 

(4,282)

 

 

(3,647)

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(171)

 

 

(233)

 

Other assets

 

 

(1,676)

 

 

(1,185)

 

Accrued interest payable

 

 

13

 

 

(33)

 

Other liabilities

 

 

3,048

 

 

1,030

 

Net cash provided by (used in) operating activities

 

 

226

 

 

(24,016)

 

Investing activities:

 

 

 

 

 

 

 

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

 

 

31,530

 

 

16,891

 

Purchases of securities available for sale

 

 

(22,381)

 

 

(16,130)

 

Net (redemptions) issuance of restricted stocks

 

 

(58)

 

 

97

 

Purchase of loan portfolio

 

 

 —

 

 

(16,258)

 

Net increase in loans

 

 

(65,975)

 

 

(16,872)

 

Other real estate owned improvements

 

 

(20)

 

 

 —

 

Proceeds from sales of other real estate owned

 

 

805

 

 

332

 

Purchases of corporate premises and equipment, net

 

 

(885)

 

 

(560)

 

Net cash used in investing activities

 

 

(56,984)

 

 

(32,500)

 

Financing activities:

 

 

 

 

 

 

 

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

 

 

9,984

 

 

35,455

 

Net decrease in time deposits

 

 

(5,158)

 

 

(18,403)

 

Net (decrease) increase in borrowings

 

 

(6,225)

 

 

14,612

 

Issuance of common stock

 

 

74

 

 

67

 

Purchase of common stock 

 

 

(142)

 

 

(1,479)

 

Cash dividends

 

 

(2,209)

 

 

(2,037)

 

Net cash (used in) provided by financing activities

 

 

(3,676)

 

 

28,215

 

Net decrease in cash and cash equivalents

 

 

(60,434)

 

 

(28,301)

 

Cash and cash equivalents at beginning of period

 

 

152,943

 

 

167,616

 

Cash and cash equivalents at end of period

 

$

92,509

 

$

139,315

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest paid

 

$

4,449

 

$

4,547

 

Income taxes paid

 

 

1,230

 

 

339

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale

 

$

2,394

 

$

(2,274)

 

Transfers from loans to other real estate owned

 

 

394

 

 

2,308

 

Pension adjustment

 

 

46

 

 

(30)

 

Unrealized (losses) gains on cash flow hedging instruments

 

 

(672)

 

 

18

 

 

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, 2015.

 

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.

 

The Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation and Subsidiary (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 Finance, acquired on September 1, 2002, is a finance company providing automobile loans through indirect lending programs. C&F Wealth Management, organized in April 1995 as C&F Investment Services, Inc. and renamed in May 2015, is a full-service brokerage firm offering a comprehensive range of investment services and insurance products through an alliance with an independent broker/dealer. 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 8.

 

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, 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. 

 

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 may include (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market on a best efforts basis and the related forward commitments to sell mortgage loans, (2) the fair value of interest

8


 

rate swaps with certain qualifying commercial loan customers and dealer counterparties and (3) interest rate swaps that qualify as cash flow hedges on the Corporation’s trust preferred capital notes. Because the IRLCs, forward sales commitments and interest rate swaps with loan customers and dealer counterparties are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of these instruments are reported 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: Shared-based compensation expense for the second quarter of 2016 and the first six months of 2016 included expense, net of forfeitures, of $310,000  ($192,000 after tax) and $615,000 ($381,000 after tax) for restricted stock granted during 2011 through 2016. As of June 30, 2016, there was $2.83 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 2016 and 2015 is presented below:

 

 

 

 

 

 

 

 

 

 

2016

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2015

 

137,200

 

$

36.50

 

Granted

 

17,265

 

 

38.39

 

Vested

 

(10,500)

 

 

31.04

 

Forfeited

 

(950)

 

 

38.88

 

Unvested, June 30, 2016

 

143,015

 

$

37.11

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2014

 

135,600

 

$

34.34

 

Granted

 

16,650

 

 

37.72

 

Vested

 

(12,600)

 

 

25.78

 

Forfeited

 

(1,275)

 

 

37.58

 

Unvested, June 30, 2015

 

138,375

 

$

35.50

 

 

Stock option activity during the six months ended June 30, 2016 and 2015 and stock options outstanding at June 30, 2016 and 2015 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 December 31, 2015

 

24,000

 

$

38.39

 

 

0.8

 

$

22

Expired

 

(12,000)

 

$

39.60

 

 

 

 

 

 

Options outstanding and exercisable at June 30, 2016

 

12,000

 

$

37.17

 

 

0.8

 

$

91

 

9


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

Unexercised

 

 

 

 

 

 

 

 

Remaining

 

In-The

 

 

 

 

 

 

 

 

Contractual

 

Money

 

 

 

 

Exercise

 

 

Life

 

Options

 

 

Shares

 

Price*

 

 

(in years)*

 

(in 000’s)

Options outstanding and exercisable at December 31, 2014

 

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

 

Recent Significant Accounting Pronouncements:

 

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The amendments in ASU 2016-01 require, among other things, equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). It also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Corporation is currently assessing the effect that ASU 2016-01 may have on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Corporation is currently assessing the effect that ASU 2016-02 may have on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Corporation does not expect the adoption of ASU 2016-05 to have a material effect on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to improve the accounting for employee share-based payments.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, such as accounting

10


 

for income taxes, classification of excess tax benefits on the Statement of Cash Flows, accounting for forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the Statement of Cash Flows.  For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Corporation is currently assessing the effect that ASU 2016-09 may have on its financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as part of its project on financial instruments. ASU 2016-13 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.    For public business entities that are SEC filers, the new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.   Early adoption will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Corporation is currently assessing the effect that ASU 2016-13 may have on its financial statements.

 

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

 

 

 

 

 

NOTE 2: Securities

 

Debt and equity securities, all of which are classified as available for sale are summarized as follows: